Travel winners & losers

Leisure travel has returned to pre-Covid levels, despite sharp price increases in airplane ticket and hotels. Vengeance travel continues to rule since it began last year, and now China’s middle class will satiate its travel appetite this year. American tourists will spend 33% of their travel money outside the U.S. (a jump from 21% in 2022) while Europeans will spend 32% of their Euros off the continent.

What about inflation? Recent data suggest that the poor won’t be traveling, but those who can afford it definitely will. About a quarter of Americans cite inflation, gas prices and personal finances as deterrants from traveling.

Meanwhile, Deloitte concludes that business travel will continue to climb, but with limited upside because companies aim to meet 2030 sustainability targets by limiting business trips by 20%. That said, the direction is up. Corporate travel spending in the US and Europe is projected to be 57% of 2019 levels in the first half of 2023, but reach nearly 75% by year’s end. A full 100% could happen by the end of 2024.

The wider macro issue remains inflation. The April 12 CPI number from the US signals that inflation is cooling. Also, the Bank of Canada did not raise rates again, citing that inflation is significantly declining. Employment remains stubbornly high, though, so there remain shortages in new planes which means limited flights. The price of crude has returned to $80 a barrel, but it’s doubtful it will go much higher, given supply and demand.

The macro picture also points to a recession in Q3, which follows the travel high season. Looking ahead, how long can revenge travel last? It’s too late to invest in the obvious—airlines and hotels—but associated stocks still offer upside. Consider these travel winners & losers for the short term as trades.

American Express (AXP-N)

More than Visa or Mastercard, AmEx skews to the high-end, international traveller, particularly in business. Its peers are also worthy stocks, but there’s a reason why AmEx is a long-term core holding for Warren Buffett.

AmEx reported Q1 on April 20 that revenue rose 22% year-over-year to achieve a quarterly record. Notably, Card Member spending climbed 16% on an FX-adjusted basis while shared Travel and Entertainment spending jumped 39%. U.S. consumer services revenue jumped 25% YOY while commercial services revenue added 15%. International card services revenue increase 22% and global merchant and network services revenue rose 23%.

All impressive numbers that auger well for the tourism space this summer. AmEx’s outlook warned of slowing growth, but expects consumers to remain resilient and spend and doesn’t see a deep recession. The company affirmed full-year guidance of 15-17% revenue growth, and EPS of $11.00-11.40.

However, the market was a little jittery that the company set asde $1.1 billion in loan loss provisions, which was higher than expected. Not a dealbreaker, but rather it’s AmEx being cautious and diligent in this economy. Also, AmEx missed earnings which clocked in at $2.40 instead of the expected $2.65. The cause were higher total expenses, namely customer engagement costs, increasing 22% YOY.

Higher costs are no surprise, but gains in revenues should balance that going forward. The summer looks positive for AmEx and shares quickly recovered from the modest decline immediately following that quarter.

Uber (UBER-N)

The ride-sharing platform is about to release its latest earnings on May 2. We’ll see if it matches its estimates, made in early February, of gross bookings jumping 20-24% YOY in Q1. It certainly beat its Q4 to cap a strong year. Q4 EPS came in at $0.29 which beat $-0.18, while revenue of $8.6 billion beat $8.49. Monthly active users climbed 11& YOY to 131 million.

The pandemic is clearly in the rear-view mirror by then, and gas prices have stabilized as WTI crude flutters around $80 a barrel. The CEO notes that around 70% of its drivers say that inflation is a factor in them coming onto the platform. Look to see if this trend continues, but if it does, it will help driver supply.

Where does Uber fits into travel? A June 2022 survey by the Global Business Travel Association states that 82% of companies “frequently” use rental cars to get around when they travel followed by 70% using rideshare apps. Company travel policies allow chauffeured vehicles (74%) followed by premium rideshares (70%) such as Uber Black and UberXL.

Environmental concerns drive this usage, with 50% of companies saying that sustainability is “very or extremely important” and 84% feeling “somewhat” important. And consider leisure tourists who use the app abroad for rides cheaper and safer than taxis.

Uber has incredibly grown in recent years with 2022 net revenues of $31.87 billion, which nearly doubled 2021’s number and outpaced any other year. However, Uber also lost $9.14 billion last year and the street keeps asking, When will Uber turn a profit? Next year, says the company to the tune of $1.4 billion after posting another loss in 2023. Can Uber turn around in time? That’s an open question.

Short-term, shares enjoy momentum, currently surpassing its 200-day moving average and rubbing against its 50-day. Shares gained 27% in Q1 while the Nasdaq rose 16%. Note that shares popped nearly 48% year-to-date when that earnings surprise happened in early-February though have pared back that gain to 25% by the end of April.

It’s too early to consider Uber a long-term investment, but it’s worth considering as a short-term trade. Again, watch the May 2 earnings.

Air Canada (AC-T)

Air Canada enjoys a monopoly in Canadian air travel. Yes, there’s Westjet and some discount carriers, but realistically, AC is the only ballgame here. In the first four months of 2023, AC-T sunk 2.2% while leading U.S. carrier, American Airlines, climbed over 7%. AC trades at a nosebleed 2.41 beta and $-4.88 EPS. Its P/E is a N/A, meaning its stratospheric, and it offers a one-year return of -17.6% and -21.16% over five years.

How does a monopoly screw up this badly? Oh, yeah, Air Canada doesn’t pay a dividend. Airlines are an unpredictable space to begin with. For instance, American Airlines on April 12 issued a profit forecast that fell short of street expectations though has started to recover. The sector is too risky.