Will Zoom kill corporate travel? Or at least wound it?
This is arguably the biggest unknown for travel stocks in the post-Covid world, because corporate travellers are higher-yielding than leisure tourists.
“People had thought there would be a permanent loss of corporate travel demand because of video conferencing platforms like Zoom. But I think it will come back pretty strong with just a bit of a lag,” says Pendal Australian equities analyst Sondal Bensan.
“We always thought leisure would come back strong and business would be a bit of a drag. But it looks like there hasn’t been any permanent damage.
“Before Covid, demand for the sector was growing at a couple of per cent per annum. Now we’ve had two years of interruptions, but the post-Covid starting point should be a trend line above the previous level.
“That reflects both natural growth and a phenomenal wave of pent-up demand.”
A rebound in corporate travel has not been fully priced into some travel stocks, including Qantas, he says.
“The market is pricing in part of the revenue recovery but it’s not pricing in the margin outcome from that recovery.
“The profitability post-Covid from domestics and international travel could be significant. Investors have priced in domestic re-opening but not international.”
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Bensan says margins will be higher both because of stronger-than-expected demand from corporate travel and also because airlines in particular have done a very good job at maintaining pricing, even during the pandemic.
“We’ve seen it in the US, New Zealand and here. That’s been a big surprise — the industry’s ability to manage prices.”
Some travel and tourism stocks tumbled when Covid hit, then experienced a massive adjustment period and emerged more efficient. Bensan expects some airlines, including Qantas, will do the same.
No sector has been hit harder by the pandemic than travel and tourism.
But the best operators have been able to withstand the tumbling revenue and restructure. And as the economy heads towards a post-Covid phase, there are other kickers that will substantially help the sector.
Throughout the Covid period there has been glimpses of what might be for the sector.
“If you look at late last year and then the June quarter, the recovery in travel was quite remarkable. It ramped back up a lot quicker than many people thought.”
There are other factors helping travel and tourism stocks.
Many will have tax losses they can carry forward. Also working capital should benefit balance sheets in the short term, based on the experience of the industry during the June quarter, when travel and tourism re-opened ahead of the most recent lockdowns.
“There will be the initial surge in cash from people starting to make bookings again,” Bensan says, and he expects travellers will make plans further in advance, elongating the gap between payment and travel.
“People’s attitudes will change. They will book in school holidays well in advance. Booking international travel will be longer duration that it ever used to be.”
Sondal Bensan is an Australian equities investment analyst with more than 19 years of experience covering the retail, telecom, media and transport sectors. Sondal holds a Bachelor of Commerce (Finance) and a Bachelor of Science (Maths and Statistics).
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