On the face of things, the travel sector looks as though it could come through the biggest ever threat to its existence relatively unscathed.
A pandemic which began for millions around the world by watching Carnival's (US:CCL) Diamond Princess quarantined at a port in Yokohama as the virus spread among more than 700 passengers and crew looks to be ending with airline, cruise and tourism industry bosses reporting strong forward booking numbers. Budget airline Jet2 (JET2) has even dispensed with the requirement for customers to wear masks, setting the stage for others to follow in the months ahead.
However, the scars inflicted on the industry by Covid-19 could take years to heal. Millions of jobs of have been lost, at least 90 airlines have gone bankrupt, and the billions of dollars of extra debt taken on by cruise liners means credit ratings have been trashed and balance sheets remain under pressure.
According to the World Travel & Tourism Council, the sector’s contribution to the global economy shrank from £7.2tn (or 10.4 per cent of global GDP) in 2019 to £3.7tn (5.5 per cent) in 2020, before recovering slightly to an estimated £4.7tn last year.
In the UK, travel and tourism’s GDP contribution shrank by two-thirds from £237.6bn (10.1 per cent of GDP) in 2019 to just £89.6bn (4.2 per cent) in 2020, before picking up to £191.7bn last year.
“Although the sector has not yet achieved full recovery, the world is beginning to move again,” said WTTC president Julia Simpson. “There is pent-up demand and where countries withdraw restrictions bookings are strong.”
The WTTC predicts that if booster rollout programmes continue and governments either ease or completely remove restrictions, a further £2tn could be added this year, leaving the industry just 7 per cent below pre-pandemic levels in monetary terms. Still more encouragingly, it expects 58mn jobs to return, bringing the total to 330mn globally – just below the 334mn employed in 2019.
Yet the recovery in the UK is estimated to be more muted, with the sector forecast to contribute £191.7bn to GDP in 2022 – almost a fifth lower than in 2019.
London not calling
There are two reasons for this. One is that the number of inbound visitors is going to take longer to recover than the outbound market.
The number of international visitors to Britain fell to just 7.4mn last year, according to tourism body VisitBritain’s estimate – less than a fifth of the 40.9mn that visited in 2019.
Although the organisation estimates a near-trebling of visitors this year, to 21.1mn, overseas visitor spending will only recover to 60 per cent of pre-pandemic levels. Cities – most notably London – have been hardest-hit, VisitBritain deputy chief executive Patricia Yates said.
Figures from consultancy STR show the occupancy rate in London hotels for February was just 38 per cent – less than half the 77.9 per cent for the corresponding month in 2019. Heathrow Airport last week said that passenger numbers in February remained at half of pre-pandemic levels.
VisitBritain recently launched a £10m campaign encouraging tourists to return, with spend targeted towards the US and Europe as these are the markets it expects to bounce back first.
“We know there is appetite for people to travel – particularly from America,” Yates said.
Visitors from the US were the highest pre-pandemic spenders, with those from China in second place. It is the replacing the latter that will represent a particular challenge in the short term. Chinese tourists spent £1.7bn in 2019 but are unlikely to travel in any great numbers this year, given China’s continued ‘zero Covid’ policies and restrictions on travel.
The other issue for UK tourism is the benefits from ‘staycation’ trends enjoyed over the past couple of years are likely to dissipate more quickly than the return of overseas visitors.
The desire for people to holiday abroad this summer can be witnessed through the “very strong trading announcements from companies such as On The Beach (OTB) and Jet2”, said Tim Barrett, head of travel and leisure research at Numis Securities.
On The Beach said last month that it had experienced “a significant strengthening of traffic and booking volumes” since the government first reduced and then all but removed travel restrictions in January. TUI (TUI) said last month that summer bookings were up 19 per cent on 2019 in the time since the government removed testing requirements.
Low-cost airline heads have been typically bullish about travel demand, and their own airlines’ ability to fill it. Ryanair (IE:RYA) boss Michael O’Leary has said the company will offer 115 per cent of its pre-Covid capacity this summer.
Even after removing flights to Kyiv, Lviv and St Petersburg following the invasion of Ukraine by Russia, Wizz Air (WIZZ) said it expects its capacity for the three months ending in June to be 30 per cent higher than the same period in 2019 and for the three months to September to be 40 per cent higher.
While the low-cost carriers haven’t exactly had it easy – Ryanair declared a pre-tax loss of more than €1.1bn (£921mn) in its last financial year, Wizz Air €567mn and easyJet (EZJ) over £1bn – this part of the market is much healthier than most, as inter-European routes have recovered much more quickly than any other major international market.
By contrast, international passenger traffic in Asia Pacific currently stands at just 3.2 per cent of the global total – down from 18.9 per cent in January 2019, according to the International Air Transport Association (Iata). Asia Pacific's total share (including domestic travel) of the market stands at 27.5 per cent, down from 34.5 per cent.
Estimates for the industry’s recovery have been subject to continual revisions as the pandemic proved both more enduring and expensive than previous forecasts. And having dealt with the successive impact of a series of new coronavirus variants, Russia's invasion of Ukraine presents another serious issue for airlines still grappling with the long-term effects of the past two years.
Airlines are expected to lose a further $11.6bn (£8.9bn) this year – an estimate that does not incorporate the latest surge in fuel costs. That would bring the cumulative loss suffered by the industry since 2020 to $201bn, according to Iata.
The debts racked up by the industry during this period have increased by $200bn to $650bn, with many flag carriers, such as Air France-KLM (FR:AF) and Lufthansa (DE:LHA) having to rely on government bailouts with various strings attached.
Lufthansa has subsequently refinanced to repay its €9bn government loan, and thereby remove restrictions related to merger activity, as it reportedly looks to take a stake in Alitalia’s successor, Air Italy. But for many the effect of increased debt will continue to weigh them down even as passenger numbers recover.
The effects of the pandemic “will be felt long into the decade”, said Richard Maslen, head of analysis at CAPA – Centre for Aviation.
“The bigger problem will not necessarily be now, but in the years ahead when debts need to be repaid. Simply servicing that additional debt we have seen added over the course of the pandemic will likely cost more than the industry has on average generated in profits.”
Thus far, 90 airlines have failed, although four of these have been reincarnated and 89 new airlines have started up since March 2020, according to Iata. It could have been worse: Maslen said it is surprising that more have not gone out of business.
“Some are certainly hanging on for dear life and the recovery will likely not come soon enough for them.”
Much of the debt incurred during the pandemic falls due from next year and unless trading conditions improve, affected companies will struggle to service these bills – particularly as interest rates rise and fuel costs soar, Maslen noted.
Analysts at Davy said last week that fuel costs have risen by about a fifth since war in Ukraine broke out, to $975 per metric tonne. These costs will be partially hedged, but not fully. With the price of oil still rising, and likely to stay elevated in the absence of an improbable change of heart by Russia, this is another stark challenge for the sector.
Structurally speaking, another major issue for airlines to grapple with is the decline of business travellers. This is significant, because for some businesses travel can account for up to a third of revenue, Maslen said.
Air France-KLM’s chief financial officer Stephen Zaat said on the company's fourth-quarter earnings call that the load factor in its business travel cabins on long-haul flights is around the same as in economy, which is currently about 71 per cent.
“Of course, there is less corporate traffic,” he said. “But we see that it's filled actually by leisure passengers who will take a business seat.”
The problem for airlines is that leisure passengers travelling in business are more price-sensitive.
“I personally don’t believe the same level of corporate business travel will return to travelling in premium cabins,” said John Strickland, owner of airline consulting company JLS Consulting.
“Many companies have seen the ability to economise budgets through Zoom and Teams, and I think with the issue of the environment companies either have pressure on them to show their green credentials, or they want to show them.”
Microsoft founder Bill Gates made the bold prediction in 2020 that more than 50 per cent of business travel could disappear forever.
In retrospect, this looks overly pessimistic. The organisers of the world’s biggest international property conference, MIPIM, have said they expect the same number of exhibitors this year as in 2019 when its annual flagship event takes place this week.
“There is an argument that nothing beats face-to-face and deals get done at those kinds of conventions,” Numis’s Barrett said.
However, for many executives, “jumping on a Zoom call is a lot more efficient”.
“Take the example of a corporate roadshow – going around 20 meetings in New York and then coast-to-coast via Chicago. That’s so time-consuming for a CEO or CFO that they’d definitely prefer doing ad-hoc meetings on a more efficient basis,” Barrett said.
In an era of smartphones and high-speed data “we’re potentially always at the ready to jump onto a cross-border video call”, said Wei-Weng Chen, director of industrials research at RBC Capital Markets.
The companies that will be most affected by any decline in business travel will be those with high fixed cost bases, such as airlines or brick and mortar travel agencies. Hotel owners and operators with properties in central business districts that serve international travellers will also continue to suffer, he said.
The ability to target more leisure travellers and staycation guests meant the pandemic was easier on the global hotel giants than the airlines. Although Marriott (US:MAR), Hilton (US:HIL) and InterContinental Hotels (IHG) posted losses in the hundreds of millions in 2020 as revenue halved, swingeing cost cuts meant they were all back in profit last year.
Lower numbers of bookings through corporate travel accounts is also likely to have affected hoteliers’ margins and led to a greater reliance on online travel agencies like Booking.com (US:BKNG) and Expedia (US:EXPE) serving leisure travellers seeking last-minute deals.
“They try not to allocate too much through online travel agents because OTAs take a big commission and [hoteliers’] loyalty programme are critical to how they own the customer. I suspect there’s been an increase in OTAs by necessity but that’s just part of adopting to the new normal,” Barrett said.
Not all pandemic trends have been negative for hoteliers, though. Hybrid and remote working is likely to spur more company-wide get-togethers, Barrett said. Marriott’s chief executive Tony Capuano flagged a recent event held in New York by Salesforce, which generated 25,000 room night bookings across 11 of its hotels.
Corporate bookings in its fourth quarter picked up by 11 percentage points but remain 33 per cent below pre-pandemic levels, he said. But unlike the airlines, many of whose share prices remain well below pre-pandemic levels for some of the reasons mentioned above, major hoteliers like Marriott, Hilton and IHG have now seen their own shares either regain or comfortably surpass those 2019 peaks.
All at sea
Given the way in which the pandemic unfolded, it is understandable that the major cruise lines are among the last to witness any tangible signs of revival. What is surprising, though, is how optimistic the industry is about its recovery.
The biggest operator, Carnival, which owns the Carnival, Princess, Cunard and P&O cruise lines, had to endure passenger traffic numbers that were still 90 per cent lower than pre-pandemic levels last year, having fallen to 1.2mn passengers compared with 12.9mn in 2019.
It had to raise more than $20bn from bondholders and billions more through equity issues in its attempts to stay afloat. The company’s total debt soared from $11.6bn in 2019 to nearly $34bn at the end of last year.
Over the same period, Royal Caribbean’s (US:RCL) total debt more than doubled to $21.5bn, while Norwegian Cruise Line’s (US:NCLH) rose by 70 per cent to $11.6bn. All three have had their credit ratings downgraded to junk status by S&P Global.
Carnival had 67 per cent of its capacity back on the water as of January and the company said it expects to move back into profit by the second half of this year. Bookings for the second half of this year and the first half of next are “at the higher end of historical ranges and at higher prices” than 2019, chief financial officer David Bernstein said in the company's last earnings call.
The Cruise Lines Industry Association is similarly bullish, saying in its 2022 outlook that it expects industry capacity to be back up to 100 per cent by June and that passenger numbers will be at 95 per cent of pre-pandemic levels by the end of this year, rising to 108 per cent next year.
Others are more circumspect. Analysts from Berenberg said in an outlook for the leisure market in 2022 that the consensus view of the industry “is too optimistic”, despite a 15 per cent downgrade in expectations for 2022 over the past 12 months.
It also estimates that the major cruise lines all need to make significant investments to replacing ageing vessels, equating to an annual cost of $1.2bn for Carnival, $800mn for Royal Caribbean and $400mn for Norwegian over the next decade.
S&P Global analyst Melissa Long said it retains its negative outlook on the major cruise operators given that they will continue to burn cash as they return vessels to the water.
“They need to increase their cash flow base to a level that’s able to service the amount of debt they’ve incurred given the amount of leverage that they have.”
If cruise lines – or indeed airlines – reduce capital expenditure to pay down debt and allow their fleet to get older, this will have a knock-on effect for the major shipyards and plane makers.
This is not a given, though. Both industries have the luxury of multi-year order books that smooth out market volatility. Italy’s Fincantieri (IT:FCT), one of the world’s biggest builders of cruise ships, has actually seen its backlog increase since the start of the pandemic – to €36bn by September 2021, from €33bn at the end of 2019.
Orders for plane makers have dipped, although in Boeing’s (US:BA) case it is difficult to judge how much of this is pandemic-related and how much is self-inflicted, given the issues around both its 737 Max and 787 models.
Yet in every crisis there is opportunity. As Iata’s figures show, there have been almost as many new airline start-ups since the pandemic began as there have been failures. With incumbents weighed down by debt and a high cost base, “conditions are perfect for new entry”, Maslen said.
“Money is cheap, there is a glut of skills, and of cheap aircraft; even airport slots are opening up.”
Any repeat of images of cruise ships quarantined at ports might make such a view seem foolhardy. But the world is more experienced at handling the spread of infectious diseases than it was two years ago. And despite the war in Ukraine, most central banks are more concerned about “needing to pump the brakes on overheating economies” than a deep recession, RBC’s Chen said. For some consumers, pent-up demand will have to be weighed against cost of living concerns. But the combination of affluent travellers in need of a good holiday, and a corporate world that is looking forward not back, do at least give the travel sector something to work with this year. As Chen notes: "companies are in growth mode – the 2020 mindset of cutting corporate travel costs to save money is behind us.”