FTSE 350 Review: A long haul back despite positive travel trends

Figures from the United Nations World Tourism Organisation show that international tourist arrivals were down 83 per cent in the first quarter of 2021 compared with a year earlier, and it’s been a tortuous road back for sector constituents. 

Even though social-distancing provisions now seem like a bad dream, the burden of runaway inflation has raised doubts over whether traveller volumes will fully revive as rapidly as anticipated. Nevertheless, there are signs that airlines and tourism will continue in recovery mode over the coming months.

In keeping with its initial estimate, the International Air Transport Association (IATA) expects a return to profitability for the global airline industry in 2023. That equates to an aggregate net profit of $4.7bn (£3.88bn) on a wafer-thin margin of 0.6 per cent. It would represent the first industry profit since 2019, when the airlines collectively booked a $26.4bn net return.

Meanwhile, analysis from the Economist Intelligence Unit points to an increase in global tourism arrivals, although it also suggests that the industry recovery will be hobbled to an extent by the economic downturn and sanctions on Russia. To make matters worse, labour shortages, wage demands, and increased food and energy prices will make travelling more expensive. 

By contrast, the relaxation of China’s zero-Covid strategy should have a positive bearing on global traveller numbers. And there is anecdotal evidence to suggest that people are keen to reschedule trips they were forced to cancel. This is supported by Q4 2022 research from travel industry events business World Travel Market, which showed that 64 per cent of people in the UK had already booked or planned a holiday for this year.

It’s easy to underestimate the importance of travel and tourism to the global economy, possibly because of the relatively modest weightings on public indices. Yet according to the World Travel & Tourism Council, in the year prior to the pandemic the global tourism industry generated $9.6tn, amounting to an astonishing 10 per cent of global gross domestic product. It also accounted for one-in-four of all new jobs created.

The propensity to fly is intertwined with the growth of discretionary incomes and other demographic factors. In the decade prior to the arrival of Covid-19, the growth in global passenger numbers was largely attributable to emerging market economies. China, Indonesia, India and Brazil all witnessed strong proportional growth in the number of flyers in the years leading up to 2020. This is doubly significant because, in aggregate, they account for 41 per cent of the global population.

Closer to home, airlines have implemented remedial measures to mitigate operational difficulties that followed in the wake of the pandemic, with aircraft heading towards load factors sufficient to generate profits. This is borne out by a recent update from easyJet (EZJ) detailing a 36 percentage point year-on-year increase in revenue per seat in the three months to 31 December. 

Ever since the 1990s, companies dependent on recreational and business travel have been forced to dramatically expand their balance sheets. The level of net debt and the ability of companies to service the borrowings have been central to investment considerations, particularly given the trajectory of interest rates. That will continue to be the case even if volumes return – and eventually exceed – pre-pandemic levels. As with the retail sector, profitability in travel and tourism is linked to the level of discounting, so inflationary pressures could undermine net returns even if traveller statistics head in the right direction.