A recent McKinsey report suggests that travel is on its way to a full recovery to pre-pandemic levels by the end of 2024.
Another fun fact from the report is that travel is roughly 9% of global GDP. For investors, this sector is difficult to ignore.
Domestic travel represents about 75% of global travel spending, above the pre-pandemic level of 70%. The world is still recovering from borders being closed, suggesting there is further upside for businesses focused on attracting visitors from across the world rather than within the same country.
The world’s largest domestic travel markets are the US and China, followed by Japan, Mexico and India. When you read the list of most popular destinations for international travel, you’ll see places such as China, France, Turkey, Thailand and even Saudi Arabia.
Often driven by airline network infrastructure and levels of government support, countries are effectively competing with one another for market share in this sector. This is why South African tourism businesses are so beholden to the broader trends in the country. We have gorgeous attractions, but our infrastructure needs to work and tourists need to feel safe; crime is of particular concern.
The report highlights other important trends, such as growth in travel in Asia and particularly in intraregional travel, with more Asian travellers behaving the way European travellers do and focusing on neighbouring countries vs travelling across the globe.
Southeast Asia is expected to become an increasingly important source of outbound travellers, as are places such as India and Eastern Europe. For South African tourism to grow, there cannot just be a focus on attracting UK visitors with sunshine and Germans with wine.
And, of course, don’t forget generational trends. The Instagram generation absolutely loves travel, with spending on “experiences” being prioritised over “things” — perhaps a direct result of the sustainability-driven thinking that has been beaten into Gen Z. Houses are increasingly unaffordable and fancy cars aren’t very cool among these consumers, with trends such as working vacations and digital nomad lifestyles being far more desirable to 20-somethings.
The growth in a business like Neighbourgood in Cape Town, which has been built entirely around digital nomads, is a testament to how important this trend is. Covid changed how people think about the viability of remote working.
As another example, Thailand has just introduced a visa aimed at digital nomads and remote workers that will be valid for five years. Tourism authorities are responding to these trends and tourism businesses would do well to do the same.
This doesn’t mean that traditional tourism is being ignored. Far from it, in fact.
From old-fashioned travel to new-age platforms, no consideration of the hospitality sector is complete without Airbnb
Carnival Corp’s share price chart may have a profile reminiscent of the type of waves that lead to seasickness, but the underlying story is one of records in the latest quarter: record revenues, bookings and customer deposits in the March earnings release, with the next quarter’s numbers due for release soon. On that basis, investors might be forgiven for thinking that the share price has sailed past pre-pandemic levels. Alas, it remains 70% down over five years, as does the share price of competitor Norwegian Cruise Line Holdings. The charts are so closely correlated that there’s no reason to pick between the two.
The problem can be found on the balance sheet, where Carnival Corp moved from debt of $9.7bn at the end of November 2019 to almost $32bn at the end of November 2022. The enterprise value, which is the market cap plus net debt, has been ahead of pre-pandemic levels for a few years. In other words, the underlying assets are being valued above pre-pandemic levels. The issue lies in how the pie is split between debt and equity holders, with the banks laying claim to far more of the economic value than before.
The journey to investment-grade credit at Carnival Corp is expected to take until 2026, so it’s going to be difficult regain more of the economic value from the banks. These asset-heavy tourism models were hurt so severely by the pandemic that a full recovery isn’t guaranteed over any reasonable period.
Investors may be licking their wounds here, but it’s possible to still use the company as a way to identify underlying trends like mid-single-digit price increases and growth in occupancies, suggesting that old-school travel experiences such as cruises are still on the list for those who are excited to get back out there after the pandemic.
It’s also rather funny to read a comment from the Carnival Corp management that North American brand customers “naturally spend more on board than their European counterparts”. Clearly, if you’re going to sell a cruise, you should be targeting Americans who arrive with strong gees, ready to party.
Speaking of Americans, it’s worth touching on the parks and experiences business in Disney. Though it has operations in many countries these days, the underlying driver of growth is content creation in Disney that produces the characters used in the theme parks. There are exceptions, like Pirates of the Caribbean, which was actually based on a ride at Disney rather than the other way around.
Though the troubles in the content creation side of Disney could eventually affect attendance at the parks, the good news is that the parks are able to trade off a long-standing content slate that draws crowds based on movies and characters that have been around for decades. For now, this is where Disney is making its money.
Financial performance varies across the various parks due to factors such as the cost of delivering the experiences, but the common thread is that pricing increases are being put through across the board. In most cases, the hospitality sector doesn’t need to absorb cost pressures. There is sufficient demand among travellers for the price increases to go through without too much trouble at Disney’s parks. This is in line with what we’ve seen at Carnival Corp.
From old-fashioned travel to new-age platforms, no consideration of the hospitality sector is complete without Airbnb. The group may have a presence across 220 countries, but the trick with these platforms is that they can always focus on growing market penetration, not just reach. There are still many travellers who haven’t even tried Airbnb, let alone used it multiple times.
At an investor conference at the end of May, Airbnb CFO Ellie Mertz commented that 2024 is the first year since the pandemic that is looking like a return to normal. Within this normality, there are Covid-related trends that have stuck, like demand for non-urban travel and long-term stays, both of which talk directly to the digital nomad trend.
The pricing trend at Airbnb for the properties on the platform isn’t in line with what we’ve seen at the cruise ships and theme parks, or at most hotels, for that matter. By its very design, Airbnb attracts properties to the platform and creates an increasingly competitive market within an area, which is great for travellers and not so great for property owners.
The dynamic pricing tools to assist property owners will often lead to downward moves in pricing in an effort to drive occupancy. That is, of course, how free markets work, but hotel groups tend to be stickier on pricing and manage to get away with it because of the strength of their brands and the feeling of security that travellers get by booking a hotel rather than an Airbnb.
As commendable as the efforts by City Lodge have been, the reality for investors is that Southern Sun has a far easier time of things
An element of travel normality that is highly applicable to hotels is, of course, business travel. Companies have realised that Teams meetings only get you so far, which is why business travel is making quite the comeback.
At Hyatt Hotels Corp, business travel was up 21% year on year in April. Along with solid growth in leisure travel, the group is feeling confident about the industry outlook. This is evidenced by a record pipeline of 129,000 rooms, representing about 40% of the existing room base. And in case you’re wondering, the Hyatt share price is well ahead of pre-pandemic levels, with the same being true for Hilton and Marriott.
In fact, comparing those three hotel groups with the share price performance of Airbnb since the start of 2021 (shortly after the IPO), investors were way better off in the hotel groups. Hyatt has doubled over that period and Airbnb has returned exactly nothing. This is a cautionary tale about valuations.
So, a whirlwind overview of some global names in travel suggests solid pricing power in traditional travel businesses and excellent demand coming through to support the pricing increases. Though there are exciting new trends to respond to, there is also plenty going on in both leisure and business travel.
This is useful context for the local players such as Southern Sun and City Lodge. South Africa cannot rest on its laurels as a country because tourism is a globally competitive market. But South Africa remains a highly appealing destination for international tourists. Domestic travel is also encouraged by rand weakness and inflation offshore, as global destinations are simply unaffordable for most South Africans. These are great tailwinds for growth.
City Lodge has generated plenty of interest from the market with hopes of a strong uptick in the share price, but even management’s best efforts haven’t given post-capital raise punters what they were hoping for. In stark contrast, Southern Sun is now trading above pre-pandemic levels, having delivered a return of 13% in the past year alone.
Though the return of business travel will do wonders for City Lodge, it’s likely that pricing pressure in that form of travel will always be an issue. With a Teams call as a viable alternative for all but the most important trips, this is a completely different purchasing decision vs taking the family on that dream local holiday.
Southern Sun is perfectly positioned for the less price-sensitive form of travel: leisure. South Africans who might have gone to Europe or Asia are in many cases taking a sho’t left and enjoying local alternatives, with most of Southern Sun’s properties being luxury or full service in nature rather than cheap.
And, of course, for international travellers coming here with strong currencies, City Lodge won’t be on the radar compared to the more upmarket offerings at Southern Sun.
As commendable as the efforts by City Lodge have been, the reality for investors is that Southern Sun has a far easier time of things. The massive jump in adjusted headline earnings of 88% in the latest period might reflect the base effect of the hangover from the pandemic, but there are also good reasons to believe that the share price can keep growing from here along with earnings.
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