Travel

It will come as no surprise that the global travel sector has been hit extremely hard by the ongoing COVID-19 pandemic. Planes everywhere are grounded, beaches and restaurants sit empty, and people everywhere wonder when things may return to normal.

According to the World Travel & Tourism Council, the global travel and tourism sector accounts for 10.3% of global gross domestic product and supports 330 million jobs worldwide. From car rental companies to hotels, there is no corner of the travel sector that has been untouched by the pandemic.

Even though countries around the world are beginning to ease lockdowns and discuss how to reopen responsibly, COVID-19’s impact on the global travel sector has been staggering. The U.S. Travel Association expects a $519 billion decline in travel spending in the U.S. in 2020, with travel-related job losses reaching eight million by the end of April alone.

These projections, though undeniably bleak, do not capture the long-term trajectory of the travel sector.

In the short-term, travel-related businesses are going to suffer mightily. In the long-term, however, the pandemic will end and people will start traveling again. The pandemic will not erase the essential need for travel, but it will change how we travel. Industry experts anticipate that technology will play an increasingly important role in helping to limit physical contact between people and surfaces.

Airports, for instance, are likely going to increasingly implement new technologies that provide for a less crowded and more touchless travel experience. Airports were already moving in this direction, but the painful lessons of COVID-19 will accelerate the transition. 

Amid all the doom and gloom, it is important to note that massive disruptions, though terribly painful, ultimately ignite innovation and drive creative problem solving.

Airbnb was founded in 2008, in the depths of the Great Recession, and became a wildly popular solution to the problem of soaring rent prices. By 2018, Airbnb owned about 20% of the entire U.S. consumer lodging market.

The global travel sector is down, but not out. New companies will emerge from this crisis and disrupt the sector in ways we cannot anticipate, and established companies will need to innovate, streamline, and modernize in order to draw customers back. In this space, there may be opportunities for intrepid investors. 

For those interested in the investment potential of this crucial sector, there are a few key points to understand.

What Makes up the Travel Industry?

The travel sector is vast and contains many industries, including transportation, lodging, food and beverage, entertainment, and more. Travel may be domestic (within one’s home country) or international (outside of one’s home country), and may be for pleasure (tourism) or business.

The economic significance of the travel sector is enormous. For example, international and domestic travelers in the U.S. directly spent about $1.1 trillion in 2019. This spending supported 15.8 million jobs and generated $179.7 billion in tax revenue.

In comparison, in 2019, U.S. consumers spent about $400 billion on consumer technology and about $460 billion on new vehicles.

As a percentage of gross domestic product (GDP), the travel sector’s weight varies significantly from country to country. For example, 2.9% of the U.S.’s GDP is attributed to travel, while 15% of Spain’s GDP and 13% of Italy’s GDP are attributed to travel.

The immediate economic impacts of the pandemic lockdown will be most acutely felt in countries where travel spending represents a large portion of overall GDP, and governments around the world are scrambling to develop recovery plans to prevent layoffs and bankruptcies. In mid-April, U.S. airlines agreed to a deal with the federal government for about $25 billion in assistance in exchange for airlines continuing to pay employees through September 30th. 70% of this federal assistance comes in the form of a one-time cash grant that does not need to be repaid, while the remaining 30% comes in the form of low-interest loans that must be repaid over 10 years.

The Treasury secretary, Steven Mnuchin, said in a statement that the agreement would “help preserve the strategic importance of the airline industry while allowing for appropriate compensation to the taxpayers.”

Why Invest in Travel?

The travel sector is in survival mode at the moment. The name of the game at this point is to maximize efficiency and raise enough money to cover costs while the pandemic runs its course.

Government assistance will help in the short-term, but in the long-term people will need to start traveling again in order for businesses to stay afloat. Looking at the situation pessimistically, it is possible that a prolonged shutdown will lead to a recession, and people travel less during recessions.

On the other hand, if the pandemic is brought under control in the near future, it is also possible that demand for travel will increase sharply. Another possibility is one in which demand for domestic travel increases while demand for international travel stays low.

There is some evidence that this last possibility may be the most likely. After easing lockdowns and reopening the economy, domestic air travel in China has doubled over the past two months. 

After weeks (and in some places, months) of lockdown, people everywhere are eager to leave their homes. One recent survey of 2,000 travelers found that for 82% of respondents, travel was only temporarily paused, and 42% would be ready to make travel reservations if there were no deposits required or cancellation fees.

There is still enthusiasm and demand for travel, but the timing of when and how travelers can make their plans a reality remains to be seen. For investors interested in capitalizing on a resurgent travel market, it will be crucial to stay informed and keep a close eye on public sentiment, easing or tightening of government travel restrictions, and the market’s ability to meet demand when it returns. 

How to Invest in Travel

Naturally, investing in an industry in crisis can be risky, but travel-related ETFs and mutual funds allow investors to access the space without tying them to any one company. A search on Magnifi suggests there are a number of ways to gain access to the travel segment via these funds.

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The information and data are as of the April 30, 2020  (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.