Travel & Leisure - Overall: On the road to recovery but it will still take time

About the author:

Author name:

By Belinda Moore

Job title:

Senior Analyst

Date posted:

07 July 2022, 11:00 AM

Sectors Covered:

Agriculture, Food & Beverage, Travel and Chemicals

• We have reviewed our forecasts across our travel coverage in light of ANZ international airline capacity taking longer than expected to return, Asia lagging most regions (due largely to China’s restrictions), the reduction in airline commissions and business mix factors which means margins may take longer to recover.
• Our FY22 forecasts remain unchanged but we have downgraded FY23 and FY24 for CTD, FLT and HLO, while WEB remains unchanged.
• Despite travel demand recovering strongly, in recent months the travel sector globally has derated due to concerns about a weak macro outlook. We think share price weakness represents a buying opportunity and see the quarterly reporting season in the US and Europe during July and then the Australian reporting season in August as a catalyst for a rerating.
• Our key picks in order of preference are Corporate Travel Management (ASX:CTD), Webjet Limited (ASX:WEB) and Helloworld Travel (ASX:HLO).

Travel demand is strong but there are a number of issues to overcome

While travel demand is recovering strongly as restrictions/testing is removed in most major markets except Asia, several factors may impact the extent of the earnings recovery in FY23, albeit we still expect strong growth.

These include:

1. TTV growth is stronger than volume growth given higher airfares.
2. Volumes are skewed to lower margin domestic travel as against higher margin international travel.
3. A higher proportion of travellers are visiting friends and relatives (VFR) compared to leisure/tourism, meaning less higher-margin attachment sales.
4. In ANZ, limited international airline capacity (currently at 40-50% vs 2019) is holding back volume growth and this along with higher fuel prices is resulting in more expensive airfares.
5. High airfares may limit some consumers’ willingness to travel.
6. The airlines’ front end international commission cuts (from 5% to 1%) will impact margins.
7. Companies with operations in Asia will be impacted by China’s zero-COVID policy.
8. Staffing shortages across the industry means that companies can't keep up with strong demand. Wage inflation is also an issue.

The unknown on travel demand is whether inflationary pressures and recession fears affect household and corporate budgets. While these factors may affect the shape of the travel recovery over 2022/23, IATA has always forecast travel demand to exceed pre-COVID-19 levels (103% of the 2019) not until 2024.

Corporate Travel Management (ASX:CTD)

We have lowered our FY23 EBITDA forecast by 10.7% due to ANZ international airline capacity being slower than expected to return, China’s travel restrictions and the need to rehire staff, particularly with the Helloworld Corporate acquisition given HLO was run on a very lean cost base during COVID. Our new FY23 EBITDA forecast is A$175m (below Factset consensus of A$199.6m).

Flight Centre Travel Group (ASX:FLT)

We have reduced our FY23 EBITDA forecast by 8.5% to A$324.9m (consensus is A$330.4m) due to limited ANZ international airline capacity, China’s strict travel restrictions and the need to rehire and train staff. In ANZ, we have reduced our revenue margins due to greater domestic travel (lower margin vs international), fewer higher-margin attachments and land product sales (VFR has less upsell opportunities) and for the reduced international commissions.

Helloworld Travel Ltd (ASX:HLO)

We have revised our FY23 EBITDA forecast by 33% due to lower than expected ANZ international airline capacity, a more conservative New Zealand travel recovery (reopening lagged Australia), Cruise will take time to recover (TTV was A$1.2bn pre-COVID), a higher proportion of VFR ticket sales compared to leisure/tourism (less higher margin attachment sales), its need to rehire staff and China’s travel restrictions will have some impact on its Inbound business.

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