Pent-up demand drives travel despite inflation, fuel prices, and Ukraine war pressures

The April 2020 low of 90,000 people a month moving through U.S. airports increased to 2.2-million this February.JEENAH MOON/Reuters

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Canadians who booked last-minute March Break vacations learned quickly that airplanes, hotels and resorts are full again – and prices are on the rise.

With the Omicron wave receding, people want to get moving after two years of pandemic restrictions. That pent-up demand is good news for the travel industry, but the question for investors is whether now is a good time to jump in.

Those who did that last year haven’t been rewarded. The Dow Jones U.S. Travel & Leisure Index, which tracks U.S.-based hotels, airlines and restaurants, is down 8 per cent year-to-date and 9 per cent in the past 12 months.

Russia’s invasion of Ukraine has created a new uncertainty. Oil prices have jumped, which is increasing the cost of fuel for airlines, and that, in turn, is flowing through to the price of airline tickets.

“Through January and mid-February, all the travel indicators started to click and trend higher, getting closer to pre-pandemic 2019 levels,” says Paul MacDonald, chief investment officer and portfolio manager at Harvest Portfolios Group Ltd. in Oakville, Ont.

Things changed when Russia invaded Ukraine. Now, we have inflation and commodity price spikes. How long do they last? It’s yet to be determined. But I think everybody would agree we’re starting to feel those pressures,” he says.

Harvest Travel & Leisure Index ETF TRVL-T was launched last year and tracks the 30 largest global travel-related companies by market capitalization. Hotels and resorts are the largest component, followed by airlines, casinos and gaming. The exchange-traded fund (ETF) also holds booking sites and cruise lines.

A more focused ETF that hopes to cash in on a travel rebound is U.S. Global Jets ETF JETS- A, the only North American-traded airline ETF. About 40 per cent of the holdings are in four U.S. airlines – Southwest Airlines Co. LUV-N, United Airlines Holdings Inc. UAL-Q, Delta Air Lines DAL-N and American Airlines Group AAL-Q – that carry 65 per cent of U.S. passenger traffic. Air Canada AC-T and Cargojet Inc. CJT-T are components and the ETF includes publicly-traded airports, aircraft support and services, and booking companies.

Both U.S. Global Jets ETF and Harvest Travel & Leisure Index ETF have followed the broader travel selloff. Harvest Travel & Leisure Index ETF has fared better, falling 10 per cent in the past 12 months. U.S. Global Jets ETF is down 20 per cent in the same time period.

Frank Holmes, chief executive officer and chief investment officer at U.S. Global Investors Inc. in San Antonio, Tex., which manages U.S. Global Jets ETF, said the travel industry was hopeful in 2021 as conditions improved gradually.

The April 2020 low of 90,000 people a month moving through U.S. airports increased to 2.2-million this February. Mr. MacDonald sees it rising to 2.3-million in March, which is closing in on the pre-pandemic peak of 2.7-million.

Mr. Holmes says even before the Russian invasion of Ukraine, higher demand was pushing up the price of a U.S. airline ticket. He says the average ticket rose 18 per cent between January and early March to US$480 from US$406.

For airlines, that’s good news. However, most of the increase is in leisure travel, which is less profitable and more price-sensitive than business travel. Even with price increases for holidaymakers, the overall average airfare is still less than in 2019.

Mr. MacDonald believes the pandemic has changed travel economics because the business traveller can do a lot more with technology and, therefore, not have to travel as much. The leisure traveller, on the other hand, recognizes how much they missed it and wants to travel more.

Business travel picking up

Nevertheless, he says business travel is showing signs of reawakening with bookings via corporate travel agencies through the end of February at the highest levels since the start of the pandemic.

“We’re starting to see more conferences,” he says. “We’re seeing a return to the office, which directly correlates to in-person client meetings. That would be the next leg up.”

Mr. Holmes is as optimistic. He is executive chairman of Hive Blockchain Technologies Ltd., a TSX Venture Exchange-listed company that is a crypto miner. He is attending the Bitcoin 2022 conference in Miami in early April, which is expected to have 35,000 people attending in person.

“Everyone wants to get out,” he says.

Mr. MacDonald says it’s hard to tell which area of the travel industry is in the best position in the short run.

“Airlines are more exposed to commodity prices than cruise lines,” he says. “On the flip side, hotels and resorts are well positioned to benefit from pent-up leisure demand and an uptick in corporate travellers. When I put that together, having exposure in all these sectors makes for a smoother ride.”

Mr. MacDonald and Mr. Holmes both say that consumers are feeling better as high vaccination rates proved effective against the Omicron variant. In Canada, sentiment is improving as mask restrictions have eased and PCR testing for air travel is no longer required as of April 1.

“COVID-19 hasn’t gone away but it is no longer dominating our day-to-day lives,” says Mr. Macdonald.

In the meantime, longer-term trends favour the industry. An aging developed world demographic means more leisure travel. Rising incomes in developing markets mean greater demand there. Technology is making it easier to book online.

The wild card is the conflict in the Ukraine.

“The longer this war persists, the greater the impact,” Mr. MacDonald says. “But in the long term, the bigger trends are absolutely intact.”

Adam Mayers is a contributing editor to the Internet Wealth Builder investment newsletter.

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