Tourism stocks shine despite Britain's slow recovery

The recovery of the UK’s tourism industry is proving to be slower and more complicated than envisaged, with visitor numbers unlikely to reach pre-pandemic levels until the end of next year. While US arrivals have flocked across the pond as the weak pound has made trips more affordable, numbers of Chinese tourists and European school groups coming to the country are still far lower than before the pandemic and Brexit, respectively. 

For investors, the question is largely whether hotels and airline stocks can keep climbing, with 20 per cent share price increases seen across the sectors in the first half. 

There were 31.2mn overseas visitors to the UK last year – a near-fivefold increase on 2021 but a 24 per cent reduction on the 40.9mn tourists who visited in 2019, new government figures show. The amount spent by overseas tourists was just 7 per cent lower, though, at £26.5bn, and is expected to reach pre-pandemic levels this year.

Visits from US citizens were 2 per cent higher than pre-pandemic levels, but the number of tourists entering from Europe and Asia remains stubbornly lower. 

Bargain hunt

“Americans are prioritising spend on travel,” said Patricia Yates, chief executive of tourism body VisitBritain. Many US travellers who had booked trips prior to the pandemic were given vouchers as opposed to refunds and were keen to spend them, she added.

The favourable rate of the US dollar to the pound for most of last year also helped, said Chris Tate, head of accountancy firm RSM’s hotels practice.

“I hear a lot of my clients saying the UK is almost on sale, because suddenly everything is so much cheaper [for US tourists],” he said.

A slow recovery in tourism from China and Hong Kong is expected this year after both markets loosened Covid-related travel restrictions. Chinese tourists were the second-most valuable source market pre-pandemic, making up 6 per cent of inbound UK expenditure in 2019, according to the Department for Culture, Media and Sport.

Lockdowns meant visitor numbers from China, Hong Kong and Taiwan were 89 per cent lower than pre-pandemic levels last year. Although routes are now reopening – British Airways owner International Airlines (IAG) reported an eightfold increase in Asia and Pacific passenger numbers in the first quarter – flight bookings are only 20 per cent of what they were in 2019, Yates said.

The UK also lost its “approved destination status” during the pandemic, which means that Chinese tour operators cannot currently sell group trips into the country. Worsening relations between China, the US and its UK and Australian allies make re-establishing such links tricky, but Yates said that consumer sentiment surveys show a continued appetite and willingness among Chinese tourists to come to the UK.

Another measure that could improve things would be to reintroduce VAT refunds for tourists. The recent decision to scrap these made the UK “the least attractive shopping destination in Europe”, Burberry (BRBY) chief executive Gerry Murphy told prime minister Rishi Sunak at a government meeting with business leaders in April.

“We are actively exporting business as a result of that policy to our continental competitors,” he said.

Shopping is an important consideration for Chinese tourists when planning visits, said Yates. “As the Chinese market starts to come back to Europe, I think that’s when we will see the difference. We will see more Chinese visitors go to Paris than to London," he said. 

More than Big Ben

VisitBritain forecasts an 18 per cent increase in overseas visitor numbers this year to 35.1mn, which is still only 86 per cent of pre-pandemic levels. However, inflationary pressures mean spending will be higher – up 4 per cent on 2019, to £29.5bn.

The tourism body has been drumming up trade in the US, Europe and the Gulf, with a focus on destinations beyond London and the south-east. The English capital currently dominates tourism activity, accounting for 52 per cent of UK overnight stays and 56 per cent of international visitor spend in 2019.

But areas outside London appear to be recovering more quickly than the capital – nationwide occupancy rates stood at 72.1 per cent in the year to April, up from 71.6 per cent in the first four months of 2019. Although overall occupancy in London was higher at 73.6 per cent, it is well below the 77.9 per cent achieved four years earlier, according to data provider STR. Intercontinental Hotels Group (IHG) said in a recent trading update that its UK revenues are up 12 per cent on pre-pandemic levels. Premier Inn owner Whitbread (WTB) said higher occupancy and room rates meant total accommodation sales in the year to March were 37 per cent higher in the UK than in 2019-20.

Supply is also an issue – some hotel owners have taken capacity off the market. Quieter trading and an acute labour shortage meant some owners implemented partial closures to complete refurbishments that had been put on hold during the pandemic, Tate said.

Painful staff shortages are also gradually easing. Industry vacancies peaked at 15 per cent of available roles as hotels reopened and have now fallen to 9 per cent, although this is still twice as high as pre-Covid levels, said UKHospitality chief executive Kate Nicholls.