Australia has re-opened to international visitors after being closed for almost two years. The recent lift of the international travel ban was a critical breakthrough in the recovery of the country’s tourism and hotel sectors. However, the cumulative losses have been catastrophic. The travel industry faced the harsh reality of the pandemic. From March 2020 to the end of 2021, Australia lost $147 billion in domestic and international tourism expenditure.
It is clear that since the re-opening in February, we have seen a rebound in the industry which means that the demand and the need to travel persists. This has persuaded businesses across the sector to remain resilient in the face of adversity over the last two years.
While the world has adapted to the new normal of living with COVID-19, we have seen a progressive return to the pre-pandemic level of activity, although there is evidence that not all consumers are yet ready to travel again. New economic risks are looming, such as inflation and the cost of living. However, on a positive note, these concerns do not yet drastically impact consumers’ intentions to spend on travel.
We expect to witness a continuing recovery of the domestic travel market to the pre-COVID era for the second half of the year into 2023. The rebound of the travel industry will be driven by the inbound market, which we anticipate to take place between 2023 and 2024.
The travel industry in Australia will continue to face significant obstacles along its recovery path, such as global economic uncertainties and negative consumer sentiment. These two factors are driven by the conditions of the global economy, higher and more persistent inflation and energy costs, a further escalation of geopolitical tensions and the risk of new variants. These catalysts represent further downside risks to the recovery of global tourism, with the flow on impacts on the Australian tourism market.
Australia’s Travel Industry highly affected by the macro context
After more than two years of lockdowns and border closure, Australia is now re-opening to international visitors. Domestic travellers are now able to move freely within the country as well. As the travel industry is progressively regaining its pre-COVID level of activity, the path to recovery might not be a walk in the park with the ongoing armed conflict in Ukraine, inflation and rising interest rates placing greater pressure on the cost of living. Furthermore, the effectiveness of current COVID-19 vaccines remains questionable vis-à-vis the lingering problem of new variants. The tourism sector recovery is strongly underway yet will remain highly uncertain.
New challenges are popping up post-COVID
The Covid-19 recovery is accelerating in Australia and around the world. The growing vaccination rates and the implementation of booster shots allowed to keep the pandemic under control and, importantly, led to greater confidence in governments to lift restrictions for economic activity to resume. As the world is progressively recovering from the pandemic, it is now facing new challenges. The world is now facing inflation and rising energy prices, putting pressure on the cost of living. We also have uncertainties around the extent of the war in Ukraine and the challenge of addressing the impacts of climate change. This could mean that tourism recovery will likely face headwinds as consumers are transitioning to cope with these new issues, some of which will directly impact their financial ability to spend on leisure and travel.
It is important to note that the recovery of the travel industry is highly dependent on the underlying macroeconomic drivers, which are the ramp-up of economic activity related to income growth, demographic growth, inflation, and international trade.
Geopolitical instability and inflation are threats to global growth
The main catalyst of the economic growth in the world remains its recovery from COVID-19. However, the Russian invasion of Ukraine adds an unfortunate overlay. These two macro-events induced an economic trend that led to a decline in growth and increased inflation. In 2020, the global economic growth dropped by 3.3% and rebounded by 5.9% in 2021. This was the fastest growth seen in the past 30 years. But this growth has been unequal, and differential vaccine access suggests it will remain that way. Vaccination inequality will continue to pose a risk to the overall economic outlook as it opens the door for new variants to develop and spread across the globe.
China’s economic slowdown could weigh on Australia’s growth
The sharp slowdown in the Chinese economy means the global economic backdrop is less supportive for the Australian economy than in 2021. Thus, the deterioration of the Chinese property and utility industries will most likely be negative for the global economy, particularly impacting commodity-exporting nations such as Australia. Moreover, the global economic recovery is set to slightly decelerate in the second half of 2022 amid supply chain disruptions, higher input costs, rising interest rates and ongoing pressure from new Covid-19 infections. Although we believe these risks might be limited.
Australia is set for another strong year of growth
In 2021 and early 2022, the Delta strain took hold, and a lot of progress through the year became quickly undone. However, this time, vaccines have been widely deployed, eventually allowing the country to re-open. We have witnessed a solid rebound as the Australian economy grew by 3.4% over Q4-2021. The economic activity was the strongest in the previously locked-down states, with New South Wales, Victoria, and ACT, growing the fastest. The rebound was facilitated by increased household spending. Despite the Omicron variant and the floods in Queensland and NSW, the Australian economy grew by a further 0.8% over the March 2022 quarter. This was supported by strong government and household consumption. The main concerns for the continuation of growth are now inflationary pressures.
Positively, we project inflation to be near its peak, and we expect inflation in Australia to begin to diminish as supply chain issues and global events recede by Q4-2022.
Australia GDP Annual Growth Rate
Source: Tradingeconomics & Australian Bureau of Statistics
The Gross Domestic Product (GDP) in Australia expanded by 3.3% in the first quarter of 2022 on PCP. We anticipate Australia’s GDP Annual Growth Rate to reach 4% by the end of this quarter.
Australia’s domestic tourism remains the key contributor
While many Australians travelled in their state or interstate when travel restrictions permitted, the domestic segment of the tourism industry suffered a total loss of $72 billion over the period, corresponding to a 67% loss compared to 2019 domestic tourism expenditure levels. Some states and territories were less severely impacted, which varied based on their reliance on international and interstate travel. In 2020, states and territories experienced a 35% to 60% decline in domestic visitor expenditure. The situation improved in 2021, with declines of 20% to 55% compared to 2019. Jurisdictions such as Western Australia and South Australia, whose usual visitor includes a high proportion of intrastate visitors, experienced less significant losses by tapping into local residents’ demand for travel.
Most travel demand comes from the domestic market. The steady signs of recovery in domestic travel from the September 2020 quarter to the June 2021 quarter were interrupted by the spread of the Delta variant, which resulted in widespread lockdowns, mainly in New South Wales and Victoria. Nationwide and more localised lockdowns had led to significantly lower levels of domestic visitor spending across 2020 and 2021. However, as of today, states and territories achieved their targeted vaccination rates during the December quarter of 2021, and restrictions were gradually lifted, including the re-opening of state borders to interstate travel. City residents are looking for getaways outside of cities for holidays, which led to the share of visitor spending in these destinations increasing to 65%.
The return of international tourism
For most of 2020 and 2021, international arrivals into Australia were largely non-existent other than for returning Australian citizens, residents, and essential travellers. Australia re-opened its borders to fully vaccinated visitors from New Zealand and Singapore in late November 2021. Eligible visa holders such as skilled workers, students and working holidaymakers were also allowed to enter, in part to help address the country’s skill shortage as a large number of temporary migrants left the country in the last two years.
While Australia welcomed almost 90,000 international visitors in the December quarter last year, who contributed around $760 million in visitor spending to the economy, this was ten times less than the pre-pandemic levels. The international travel ban has also had serious consequences for the international education sector, which consequently affected the tourism sector. The number of international students in Australia in 2021 has declined by half compared to 2019. While education is the primary reason for their stay in Australia, students are also likely to be motivated by the travel opportunities available during their studies. Besides contributing to domestic tourism, international students also motivate visits from their friends and relatives back home, an important segment of Australia’s international leisure tourism market. With borders re-opening, a full recovery in international student numbers is expected.
Since the borders re-open up for vaccinated travellers, international tourism has started to resume progressively. Several of Australia’s key markets, most notably China and Japan, have remained closed or under travel restrictions. Although, these countries indicate their intention to fully re-open onward the second half of the year. On a positive note, in most of Australia’s key international source markets, outbound travel is now largely permitted.
We expect international tourism to Australia to continue to recover, although at a slow but steady pace, with arrivals reaching around 3.2 million by the end of 2022, which is just about 35% of the pre-COVID levels. In our opinion, 2023 will be the year where travel will see its strongest rebound, with near to 6 million visitors expected, reaching 65%-plus of the pre-pandemic level. The key catalyst for the strong rebound will come from the pent-up demand from China, leading to a return to 2019 levels by the end of 2024.
How’s the market reacting to the pent-up demand for travel?
The recovery of the travel industry will mainly depend on global economic conditions and consumer confidence. Positively, there is solid evidence of pent-up demand for travel from Australia’s key source markets, with travel intentions increasing over the past six months in most markets.
However, the world is now focused on the rapid increase in inflation, which weighs on consumers’ confidence and leads to consumers reconsidering the necessity to travel.
Source: Tradingview: ASX200 compared to top ASX travel stocks
Despite being heavily impacted by the pandemic and global events, market participants remain confident in the travel industry’s positive outlook. Thus, in the last 12-month period, the ASX200 index lost -9.38%, while top ASX travel stocks, Flight Centre Travel Group (ASX: FLT), and Webjet (ASX: WEB), returned 20% and 9.9%, respectively.
Summary: Time to jump on the bandwagon
We are convinced that ASX travel stocks could be in for a solid year of recovery as these businesses are expected to return to full-year profitability. In our view, FY23 is looking bright for ASX travel shares. Thus, we believe that a few market favourites are expected to report substantial earnings growth after the last disastrous two years for the industry. When we think about market favourites, we think about these four top travel stocks:
- Flight Centre Travel Group (ASX: FLT)
- Webjet (ASX: WEB)
- Qantas (ASX: QAN)
- Corporate Travel Management (ASX: CTD)
Flight Centre Travel Group (ASX: FLT)
Flight Centre provides travel retailing services for the leisure and corporate sectors. The Company is well diversified and has a presence in Australia, New Zealand, and internationally. We like Flight Centre because of its branch-out business structure offering leisure travel services for the niche sectors, as well as mass, youth, premium, and cruise markets. In addition, the Company also has a corporate travel service division for organisations of various sizes across industries. Flight Centre has several travel brands, such as Student Flights, Travel Associates, Liberty Travel, Infinity Holidays, GOGO Vacations, FC, Travel Solutions, and Corporate Traveller, to name a few.
Flight Centre shares have struggled to break their trend, moving in a sideways channel since the COVID crash in March 2020. However, since March 2020 lows, FLT share prices have regained more than 97% of their value. We believe FLT’s slight price upswing could happen in early FY23, as the travel industry recovers from COVID-19 while remaining resilient against recent macroeconomics events. In the past 12 months, the Flight Centre share price has been up 20%.
Turning to FY23, we think it will be the year where we will see a strong rebound for the Company and eventually witness FLT’s shares regaining momentum back to their pre-COVID high at the $40 level. This is supported by Flight Centre’s latest trading update, which was particularly positive, reporting very strong activity levels in March 2022. However, we must remain cautious of external factors impacting the current economic climate, such as extreme inflationary movements, which could dampen the Company’s earnings.
Regarding FLT’s valuation, its multiples returned to their COVID-19 lows in March 2020, while its share price has appreciated by about 97%. This makes FLT shares quite attractive, considering its current EV/EBITDA of 11.8x and its estimated P/E ratio of 13.1x.
FLT is currently trapped in a horizontal channel which defines the near-term support level at $16.50 and the near-term resistance level at $18. The $16.50 support level could offer an optimum risk-reward ratio for a buying opportunity. Although, we should consider strong resistance at the $18, which could continue to maintain pressure on FLT’s share price. On the other hand, a breakout of the $18 – $25 price range could be an extremely bullish momentum that could propel FLT shares back to their pre-COVID-19 high at $40.
Webjet (ASX: WEB)
Webjet is an online travel booking services Company well-established in Australia, New Zealand, the United Arab Emirates, and the United Kingdom. The Company also has a presence in other countries. The main activity of Webjet is to operate its Business to Consumer Travel and Business to Business Travel segments. Webjet has a few well-known brands, including GoSee, Trip Ninja, Rezchain, Roomdex, LockTrip.com, JacTravel, and Sunhotels, to name a few.
Webjet’s share price has jumped by 7% in a month, and at the time of writing, the Company’s share price is consolidating in a tight range of $5 and $5.50. However, we believe WEB’s current price consolidation will not last and that a price breakout is imminent. The last two and a half years have been quite difficult for the business, with the Company suffering from COVID-19 impacts. Although Webjet has demonstrated resilience despite the challenging trading environment. On a positive note, COVID lockdowns are now fading into history for much of the world, and we think Webjet’s shares now look like an opportunity.
Webjet’s valuation multiples returned to reasonable levels, while its share price has appreciated by about 138% from its COVID-19 lows. This makes WEB shares quite attractive, considering its current EV/EBITDA of 17.4x and its estimated P/E ratio of 36.9x, down from excessive triple-digit multiples experienced during the last two years.
After the COVID-19 selloff in March 2020, WEB’s share prices remain capped under the $6 – $7 range. WEB has formed a horizontal channel pattern in the last two years, restricting its shares from moving beyond a $1 tight range. The near-term support level sits at $5 and the resistance at $6. The 5$ – $5.5 price range offers an optimum risk-reward ratio for a potential “buy”. A breakout of the $6 – $7 price range could be an extremely positive signal that could build significant momentum for WEB shares to retest their pre-COVID levels.
Qantas (ASX: QAN)
The Qantas share price has continued to climb by about 3.4% since last month despite a few negative market events. When we talk about market events, we think about elevated oil prices impacting the airline industry and the recent London Heathrow Airport chaos. However, a few important events support Qantas, such as the removal of vaccine requirements for international travellers and the Federal Government’s work in progress for the recognition of Australia’s COVID-19 vaccine certificate internationally. These events are long-term positive catalysts. The recent event at London Heathrow caused Qantas shares to be topped below the key price level of $5.5. Heathrow is one of the world’s busiest airports, and it has implemented passenger caps to deal with the recent surge in travel demand. As a result, Qantas has been forced to adjust two of its flights. Furthermore, the Company could not sell more seats on its London services until 11 September. We are convinced that this bottleneck is temporary as we believe the pent-up demand for travel will offset this unfortunate event.
Qantas’ current EV/EBITDA is estimated at 8.6x. It remains slightly elevated relative to its pre-COVID value at 4.2x. However, since the recent share prices pullback, Qantas is now trading at a reasonable level compared to the February 2022 EV/EBITDA of 12.9x.
Like its travel stocks counterparts, Qantas share prices have been consolidating in a range since April 2020. The formed horizontal channel defines QAN’s near-term support and resistance at $4.2 and $6, respectively. Qantas shares are currently trading at an optimum level between $4.2 and $4.5, which could be an attractive price for a long-term “buy”. We expect the support to act as a springboard for the next rally and retest the upper range at $6 per share, which is about 33% above the market price.
Corporate Travel Management (ASX: CTD)
CTD is a travel management solutions Company that manages the purchase and delivery of travel services for the corporate market. The Group operates through four segments: Australia and New Zealand, North America, Asia, and Europe. In our opinion, CTD’s businesses look quite attractive right now after its shares pulled back from their upper range and resistance at $26 per share. CTD shares have fallen around 15% year-to-date, yet the business is on track towards a full recovery from the pandemic impacts. At 100% recovery, we are anticipating the Company to realise $265 million of EBITDA and rebound from the negative FY21 EBITDA.
There are a few factors that make us like CTD. Thus, we think the Company is ahead of many of its peers and has a much better value proposition, global scale, and financial strength. Furthermore, CTD has made transformational acquisitions during the COVID-19 period, which we are convinced will bolster the Company’s profit in the long term. CTD is targeting $265 million for its EBITDA at a full recovery, representing 76% more than its pre-COVID EBITDA.
At the time of writing, CTD is trading at $18.75 per share. The near-term support is at $17, which could be an optimum entry level for a long-term “buy”. As the travel sector recovers, we expect CTD to retest its April 2022 high at $26, a 38% upside potential.
Companies from the travel industry could face tremendous headwinds due to the tough trading environment, but we still anticipate strong growth from the sector. Hence, travel demand has recovered strongly in recent months. However, the industry has also faced concerns about global events and weak consumer confidence. However, from a long-term perspective, we think the current market pullback in travel shares represents a buying opportunity.