Date : 19/11/2020

Tourism Sector

Introduction

The tourism sector is one of the largest service-oriented sectors not just in Australia, but globally. Tourism brings a lot of smaller and more specific industries into play. Transportation, hotel, food & beverage, education, retail, etc. are some of the larger industries that the tourism sector depends on for sustainability. In Australia, the tourism sector is valued at $115 billion and contributes to about 3% of its GDP. The sector had been stagnant during the past 5 years, but it has performed at all-time highs during the same period. 2019 was a remarkable year and it accounted for the most visitors and most revenues during the last 5 years. In this report, firstly, we will take a look at what factors Australia’s tourism sector is dependent on – both domestic and international travel, the effect Covid-19 has had on it, and determine the outlook. Finally, based on the data discussed, we shall touch briefly on how some of the dependant industries have fared during this period and how rocky the road to recovery is.

Setting the Scene

Australia is a net exporter in the tourism sector. Estimates suggest international travellers to Australia spend about $40 billion every year. While Australians travelling internationally spend $45 billion every year. The ban on international travel has been a direct consequence of restrictions that have been forced by the novel coronavirus. Hotels, travel agencies, and retail stores such as souvenir shops have been hit the hardest during this period. The below chart shows the % spend by both international and domestic travellers in Australian cities and it is clear that the metropolitan cities such as Sydney and Melbourne rely heavily on international visitor spending even before the economic uncertainty we are thrown in now. The top tourist destination in Australia that has a relatively stable climate – such as the Gold Coast, Whitsundays, and North Queensland attracts domestic travellers every year. Australian were put under lockdown for several weeks and domestic travel is just starting to open. Human interaction is key to the tourism industry. Hence, the damage has been severe and the recovery to pre-Covid levels even for domestic travel is long and hard.

International Travel & Domestic Travel

The best-case scenario for the tourism sector would be if Australian international travellers spent the average $45 billion that they spend on international travel every year, in the domestic market. With Australia ahead of most other countries in the battle against the virus, and the domestic travel industry opening up, this would restore a balance in the short-term.

2020 has been a year to forget for everybody. The tourism sector was plagued by the bushfires of during the early months of January and February even before the pandemic brought the entire sector to a standstill. International visitor numbers in January declined by 5% compared to the corresponding period last year due to the bushfires.

The travel bubble with New Zealand is good news. We do not expect to see the high travel numbers that we saw in 2019. While the data above shows NZ travellers to be one of the highest visitors to Australia, the spending charts of visitors by country paint a different picture for NZ. New Zealand residents spent just $2.6 billion on their travels to Australia last year. This is in sharp contrast to Chinese travellers spending close to $12 billion during the same period and with almost the same number of travellers. Given the political tensions between the countries and with no quick resolution expected, the tourism industry will have to bear the loss of the very lucrative Chinese travellers at least in the short and medium-term. The outlook for USA and UK visitors is also bleak. Both countries, especially the USA still have a growing number of Covid19 cases, and the road is very rocky to make predictions without knowing all the details of the vaccine’s performance.

These data points go to show that despite the successful resumption of travel between Australia and New Zealand, the revenues and earnings that will be generated by all the participants in the tourism sector will be 6.5% of the entire $40 billion that the international travel accounts for. Realistically, this number will be far lesser and our models suggest about 2%-3% given that the recovery to even ANZ travel will be only partial and come with a caveat of travellers spending a smaller percentage of their usual spending due to change in dynamics in the economy.

Tourism Australia’s data showed that Australia had 92 million domestic visitors that spent $63 billion in FY2020. Each traveller spent $685 on average per trip. Holiday was the top reason for these travels, while business and family visitation also contributed handsomely. The closure of state borders and extended lockdown in Melbourne has severely impacted the domestic travel industry. New South Wales and Victoria account for half of the revenue generated by domestic travel. and Queensland accounts for $15 billion – boosted by the recovery of the state ahead of NSW and Victoria. Sydney and Melbourne remain the top destinations for both – domestic and international travel. Based on the percentage of domestic spending in top Australian travel destinations we discussed earlier, we have estimated how much domestic travellers spent in those cities in 2019.

There is growing confidence that a complete lifting of domestic travel restrictions will drive demand in the sector as Australians are ready to travel after being locked down. This spike, however, is not sustainable. The overall performance and outlook of the economy determine what percentage of the population is employed and job security is extremely important for the travel industry to recover and bounce back to high levels of 2019. The government’s policies to put more money in the pockets of Australians by reducing taxes looks like it will relieve some of the stress the tourism sector is put under in the short-term.

Outlook

At the end of June 2020, data showed that the international tourism market contracted by 32% overall compared to June 2019. The contraction has been mainly affected by the months in the calendar year 2020. Visitor data showed Chinese, NZ and American travellers decrease by 37%, 26%, and 28%, respectively. While the spending data for these travellers showed that revenues have dropped in the range of 25%-30% during the same period.

The data and estimates of the domestic tourism sector should be taken with a grain of salt as they show the performance before the pandemic. The full extent of the damage is still unknown. Our estimates show that the domestic tourism sector contraction is around the 20%-35% range for FY2020. The full extent of the pressure Covid19 has brought is still unknown as even in a best-case scenario, Australia is still a few months away from the complete opening of state borders and the free movement of people without quarantine periods.

The news on the resumption of domestic travel and the travel bubble boosted the equity markets and stocks that are reliant on travel surged. The news of a potential vaccine took the gains higher. But the data points we touched on paint a different picture – one where stock prices have surged, but the revenues and earnings will not return just yet to justify those high prices in the medium to long term. The 30% contraction the international travel sector has seen at the end of June 2020 will get worse and a much larger contraction is expected in the second half of the calendar year 2020. Domestic travel will recover 1.5 to 2 years ahead of international travel and if the positivity around a vaccine and Australia’s management of the pandemic is anything to go by, another sharp contraction is looking less likely. However, the highs of 2019 are still a long way away even for the domestic travel sector.

Supporting Industries

The vastness of the tourism sector has resulted in several industries (both large and small) being affected by Covid19 in the short-term and long-term. Consumer behaviour changes look to have shaped and changed the long-term outlook for small markets such as business travel. The pandemic has also resulted in some of the bigger players who are able to sustain the impacts be in a position to emerge out of the pandemic stronger than they were before as their competitors have been wiped out or severely damaged.

Transportation

The transportation industry includes airlines, airports, car rentals, etc. and all these industries have been impacted by Covid19 restrictions. The business models of players in these industries (both, big and small) require large amounts of capital for operations and they are also characterised by huge levels of debt. These industries have also furloughed a lot of staff – contributing massively to the huge rise in unemployment.

The airline industry is in tatters due to the huge operating costs of their business model. The founder of Virgin Group – Richard Branson has a famous quote that goes – “If you want to be a millionaire, start with a billion dollars and launch a new airline”. Profit margins have been getting thinner for a while in the airline industry, especially in international flights. Due to the pandemic, the airline industry is distressed as never before. Aircrafts in excess of 16,000 have been grounded globally and firms are finding it hard to find space to ground their fleet and maintain them. Airplane parking charges, maintenance of aircrafts to always keep it in flying condition are just a few of the incredibly high fixed costs airline companies have to fork out. Airline firms such as Qantas have been undergoing restructuring in order to reduce costs and tinker their business model to suit a post Covid environment. The demand for business travel is estimated to be low as fears over permanent changes in consumer behaviour has crept in. While we may see a surge in travel as restrictions are eased, sustainability is still uncertain as firms will look to reduce business travel due to the cost benefits they have seen over the better part of this year.

Qantas is the only firm that has had a silver lining during the crisis. The impact of the pandemic has wiped out or caused havoc to their competitors. Qantas received a rescue package by the government in a bid to save the national carrier from going under, and it will thus, surely emerge out of the crisis in a stronger position relative to its competitors. The stock markets reflected the same. However, with the surge in stock prices that came with the positive news of a vaccine, it now looks like the markets may have got ahead of itself and priced stocks to levels that the revenues and earnings may not back it up with.


Source: Tradingview.com

It is a similar story with the rest of the transportation industries where the current stock prices may not be backed up enough revenues and earnings to facilitate a recovery in the short and medium term. Other players such as Webjet and Flight Centre have also seen strong increases in stock prices recently. The above chart compares the stock prices of Qantas, Webjet, Flight Centre, Sydney Airport, and Auckland International Airport for the past 1 month. All of these stocks have painted the same picture – a sudden rise in volumes as investors jumped on them as news of a vaccine broke out.

Hotel and Resorts Industry

The hotel industry in Australia is another juggernaut, valued close to $10 billion. Accommodation, Food & Beverage, and services fall under this bracket. The performance in the accommodation segment had already been disrupted with the emergence of Airbnb during the last financial crisis the world faced. Hotels and resorts have been put under immense pressure in both – the leisure travel and business travel space. The smaller vacation homes have also done better than most resorts and luxury hotels in the recent past as international travellers arriving in Australia for long periods of stay preferred the low-cost option. However, with travel at a stand-still, the entire hotel industry has seen massive lay-offs of staff in order to restructure their costs to stay afloat.

A resurgence of domestic travel will not be enough to revive most of the businesses in this industry as competition from Airbnb will only grow given the endless list of low-cost options traveller are spoilt with. Low cost will also be a necessity as the road to recovery for the economy is still long and hard. IBIS World suggests that the industry has contracted by close to 4% over the past 5 years even before the impact of Covid19.

With these infrastructure heavy businesses being much more impacted by Airbnb, the unicorn start-ups have decided to go public and list on the NASDAQ – indicating that they are in a position of strength over all their competitors in the accommodation segment of the hotel industry.

Summing-up

All the participants of the tourism industry have been adversely impacted by the coronavirus. Australia’s brilliant management of the pandemic provides hope of a partial recovery as domestic travel is set to see a spike once all inter-state restrictions are lifted. In the medium term, the outlook is grim. The demand spike we are likely to see is not sustainably as the entire sector as a whole is cyclical and depends on the overall performance of macro-economic factors such as unemployment rate, inflation, etc. In the long-term, many industries within the tourism sector will undergo massive changes as the debt heavy, capital intensive business models would have to be restructured. Qantas looks like a winner coming out of the crisis in the airline department. Airbnb is set to wipe out most of its competitors and will always restrict the growth of the hotel industry. The news of a vaccine has been received positively, maybe almost too positively as stocks from these industries are trading higher than what their revenues and earnings can match up to as a lot of headwinds still persist for the sector and the economy to recover.

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