This report is part of the “New normal, new opportunities” series, in which we examine secular trends in a post-COVID-19 world. The series will cover a range of themes that are emerging as a result of social distancing, the work-from-home imperative, health care developments, corporate implications, and broader societal change. We believe identifying these trends and understanding their investment implications will be critical to navigating the road ahead. Additional reports will be released over the following weeks.
If we had to select a business model that exemplifies the devastating impact of the pandemic on revenue trends, the travel industry is likely at the top of the list. For the quarter ending June 2020, the two largest online travel agencies both posted year-over-year revenue declines of approximately 90 percent. RBC Capital Markets, LLC Internet Analyst Mark Mahaney believes this marks the low in revenue trends, but he only expects a modest improvement through year-end, with bookings down 70 percent and 50 percent year over year in Q3 and Q4, respectively.
The forced closure of economies and restrictions on travel have decimated global tourism. According to the UN World Tourism Organization, the pandemic cost $320 billion in lost tourism revenue between January and May 2020, a loss three times greater than that of the global financial crisis of 2009. Tourist numbers fell 56 percent year over year over that five-month period. While we expect global tourism to rebound over time, some areas may fare better than others, and we expect the hardest-hit areas will take longer to recover.
Ultimately, we believe the travel industry will survive, but some of the demand trends evident before the pandemic may take a while to reappear. At the end of the last economic expansion, consumers were increasingly favoring spending on experiences rather than tangible goods. This trend may resurface, but only if the experience can be enjoyed in relative isolation from throngs of tourists. This may favor “bespoke” travel agencies.
Get me off this boat ... I’ll take the RV instead
Relative stock price performance
Source - RBC Wealth Management, Refinitiv I/B/E/S
There are parallels between the current slowdown in demand for travel and that caused by the terrorist attacks in 2001. The 9/11 tragedies also created an existential crisis for the travel industry, but eventually it bounced back, albeit with more restrictions and higher costs.
If we examine the rebound in travel demand since the spring lows, we notice that lower-end hotel chains have fared better than their glitzier peers. This was also a trend seen after 2001, when local and car travel recovered ahead of air trips and corporate travel. According to our national research partners, revenue per available room during the pandemic fell by 24 percent through July 31 for economy hotel chains versus 51 percent for the broad U.S. hotel industry.
We expect these budget chains to recover to 2019 demand levels by 2021. Beyond that, higher-end business-focused hotel chains and online travel agencies should recover by 2022, with industries that might struggle in a social-distancing world, such as casinos and cruise lines, set to recover their pre-COVID-19 revenue levels by 2023, in our view.
From a geographical perspective, developing nations that derive significant revenue from tourist dollars, together with companies that operate in growth tourist destinations, may struggle for longer.
But while we’re waiting for normal service to resume, there are areas of leisure-related businesses that may pick up the slack. For those unwilling to venture too far afield, the home fitness trend may fill the leisure gap. And for those that crave a more controlled travel experience, the recreational vehicle (RV) lifestyle appears to be making a comeback, with RV manufacturers and companies that offer RV resort facilities reporting a surge in demand.