Travel Stocks Soar After Pandemic Struggles

The CEO of Delta Air Lines Inc. said: Last month: "I've never seen a more constructive backstory for this industry." Ed Bastian after the pandemic.

Stock and bond markets rebounded at the start of the year, while speculative assets rose faster as investors argued that the Fed's rate hike campaign was nearing completion. However, according to industry executives and strategists, travel companies see a strong business outlook that is in line with stock performance.

The good times have come with increased travel demand from customers seeking to escape the pandemic. An average of 1.953 million passengers per day traveled from US airports in January, down 1% from January before the 2020 pandemic. Indicators last month were up 32% year-on-year, and have more than doubled since 2021. Calls for government aid have come from airports and industry a thing of the past.

However, capacity has not grown as fast as demand. Passenger revenue per available seat mile, a measure of how efficiently airlines use their capacity, was 16.15 cents at United Airlines last year. This represents an increase of 13.9 cents from 2019.

Airlines are also working to generate free cash flow and pay off outstanding debt during the pandemic.

"When demand picks up and growth dampens, airfares go up," said Helen Baker, weather analyst at Cowen & Co. He cited several factors limiting airlines' ability to add flights, including infrastructure issues and supply chain issues at major US airports. Boeing Aircraft Corporation. and a shortage of qualified pilots.

Marriott, which is due to report fourth-quarter results on February 14, said a similar measure of last year's hotel efficiency also exceeded 2019 levels.

Not all industries recover quickly. This year, Southwest Airlines Co. A stock that rose nearly 8% as the company suffered financial losses stemming from a slump in operations during the holiday season.

China only started lifting Covid restrictions in November and travel has not yet resumed. Las Vegas Sands said total visits to China 's Macau Games Center reached 1.2 million in the fourth quarter. In a recent presentation to investors. This number was only 14% of all visits in the fourth quarter of 2019. Business travel has recovered more slowly than leisure travel, although it has rebounded more recently.

Bulls say these delays point to more bullishness for the sector. Travel could be one of the many industries that will benefit from opening up China.

"Business travel and conferences are making a comeback," said Dan Ahrens, who manages the hospitality ETF at AdvisorShares. "A lot of people were hooked and ready to get back out there and willing to pay for it."

Sector valuations fell as profitability rose. Marriott stock is trading at about 23.4 times forward earnings over the next 12 months, up from 30 times last year. Shares of Expedia are trading at about 12.6 times earnings, compared to about 25 times a year ago, according to FactSet.

Lower prices in the industry will hurt profitability, so investors will be watching to see if that continues throughout the year. Ahrens said mid-range hotels may face a decline as budget-conscious customers opt for more budget-friendly options.

There are signs of slowing consumer spending. Retail purchases have fallen in three of the past four months, while purchases of larger items such as homes and cars have declined.

But for now, travel expenses remain flat. American Express announced last month that spending on travel and entertainment on the company's credit cards rose 34% year-over-year in the fourth quarter.

"These premium customers are spending now, even if they are not immune to the economic downturn," CEO Stephen Square said on a conference call with analysts.

Email Charlie Grant at charles.grant@wsj.com