Recovery of the travel industry: can it last?

Due to customers' preference for travel experiences above material possessions, travel sector pricing and occupancy levels have remained robust. Economic growth and inflation headwinds are expected to be more than offset by industry tailwinds: people's inherent drive to travel, customers' increasing financial investment in services, and flexibility in remote employment.

Although it decreased from 8.5% in July to 7.1% in November, inflation is still high, averaging 8% for the six months leading up to November compared to the 2.9% 10-year historical average. According to Morningstar, in 2023, inflation will be less than 3%.

The number of customers traveling has increased despite greater inflation. The volume handled by the Transportation Security Administration has hovered around the 2.2 million mark in recent months, bringing the passenger count for November to 95% of 2019's level from 89% in June.

Travel-related businesses stand to gain from the reallocation of discretionary expenditure away from products and toward services. In the past six months, expenditure on services has increased by an average of 4% while spending on products has decreased by an average of 1%. In the third quarter of 2022, occupancy levels at the hotels and cruise lines in consideration increased by almost 20 points, or 75% on average, thanks to the spending on services. In contrast, the second quarter saw a 30-point rise year over year.

Although Sabre SABR and Amadeus AMS' third-quarter air booking volume was flat to down compared to the second quarter, this was mostly caused by transient logistical issues. Volume increased significantly over the same period last year, boosted by the continued slow rebound in corporate travel.

In the third quarter of 2022, advance ticket sales at the four publicly listed cruise operators increased to $11 billion from $7 billion in the third quarter of 2021. Compared to the previous quarter before the pandemic, when those four operators had $10 billion in advance ticket purchases, this shows a greater commitment to cruising.

In 2023, a solid demand is anticipated. Barring a catastrophic recession, industry tailwinds will more than outweigh economic growth obstacles (which are unlikely). Since April 2020, domestic leisure and road travel have driven the industry's recovery. However, business travel and leisure cruises will now increase this demand. Investors are now well-compensated for taking on risk in undervalued firms.

When the economy is growing steadily, Carnival's CCL are likely to raise prices, and it seems that the days of capital hikes that destroy value are behind us. Investor worries about a prospective recession and its potential effects on discretionary spending are the key reason why the shares are still at a low level.

Worries about Sabre's SABR financial health and competitive positioning, along with a decline in corporate travel demand as a result of the pandemic, have created an opportunity to acquire a business with network, efficient scale, and switching cost advantages at a tempting margin of safety.

Expedia EXPE shares are undervaluing the company's recent investments and continuing travel demand, which should sustain the company's network effect and support rising operational margins and sales growth.

Accor AC shares are undervaluing the company's strong brand intangible asset, which is demonstrated by its pricing power, as well as the stable European travel demand. Given that 60% of its hotels are located in Europe, Accor is ideally positioned to capitalize on the region's growing tourism demand.