The travel industry was one of the worst-hit parts of the economy when the coronavirus pandemic pushed countries into lockdown and sparked a dramatic slump in international travel, but many investors are now viewing it as a key re-opening trade. 
While some firms were able to pivot during the pandemic, through means such working from home, embracing e-commerce or broadening out their product, most travel companies were unable to adapt like this and had no option but to watch their revenues collapse as business and leisure travel ground to a halt.
The below chart covers 19 February 2020 (the market’s peak before the coronavirus crash) and 8 November 2020 (the day before the first vaccine was announced).
Performance of UK travel & leisure stocks between 19 Feb and 8 Nov 2020
Source: FE Analytics
The UK travel & leisure sub-index plummeted some 55 per cent in the early days of the crisis and ended the period down 35 per cent – one of the worst results of the UK sub-sectors.
However, since the vaccine announcements – a day now known as ‘Pfizer Monday’ – the market has rallied significantly. Travel & leisure stocks have been some of the main beneficiaries of this, as investors expect a return to normality and pent-up demand for holidays and other recreational activities.
Performance of UK travel & leisure stocks since 9 Nov 2020
Source: FE Analytics
Fidelity Personal Investing’s Toby Sims said: “Like their planes, cruise ships and customers tied to the ground, travel stocks are just itching to take off this summer. Seen as the definitive ‘re-opening’ buy, nowhere are investors more hopeful for the correlation between normality and returns.
“Their logic isn’t hard to grasp. It’s clear that, once allowed, travellers will waste little time staying at home. A reopening economy spells good news for companies’ balance sheets and, presumably, their share prices.”
However, Sims pointed out that travel stocks encompass a wide range of different companies, such as airlines, hotels, railway companies and cruise liners.
While there could be investment opportunities among these, each kind of travel company will have its own strengths and weakness. And there is no guarantee that it will be business as usual once eventually restrictions ease, as there may be lasting changes to travellers’ behaviour.
“The good news for travel companies is that there’s clear evidence of pent-up demand,” Sims added.
“Airlines have consistently reported a surge in bookings off the back of any positive pandemic news - in February, for instance, easyJet saw UK bookings jump 337 per cent and package holiday bookings up 630 per cent compared with a week earlier after the prime minister laid out his ‘roadmap’ out of lockdown.”
Of course, the delay to the UK’s roadmap out of the pandemic has pushed back expectations of when travel might return to normality. But Sims highlighted a number of other concerns, such as business travel being replaced in large part by video conferencing.
Which UK travel stocks could investors consider?
Sims highlighted the possibility that most travellers will be staying domestic this year as being damaging to travel companies that rely on corporate and long-distance journeys.
But budget, domestic-focused providers could benefit from this and he pointed to Ryanair. Chief executive Michael O’Leary has been relatively bullish over the past year and the firm is awaiting a fleet of Boeing 737-MAX aircrafts, which offer higher capacity and more efficient fuel consumption.
“It’s had it fair share of trouble - an 82 per cent fall in revenue in the third quarter of the fiscal year 2021 is pretty staggering - but it’s acted well over the period. The company said it could come close to breaking even this financial year, subject to vaccine rollouts and the easing of European travel restrictions, even as it reported a record annual loss,” Sims said.
He also pointed out that EasyJet has struggled over the last year, but might be in “prime position” to benefit if easing restrictions send travellers rushing for tickets. And unlike Ryanair, EasyJet’s shares are still looking cheap relative to where they were before the pandemic.
Performance of airline stocks since the start of 2020
Source: FE Analytics
IAG is also still trading well below its pre-pandemic peak, owing to the fact that it is more internationally focussed.
“The company’s profits and share price were decimated by the pandemic, but, like Ryanair, its balance sheet is relatively strong and it was able to secure financing last year to keep its cash position stable. IAG could enjoy a sizable upswing if a US-UK travel corridor opens,” Sims said.
Moving away from the airlines themselves, another way to play the recovery story could be through Rolls-Royce. The firm makes a significant chunk of revenues from servicing aircraft engines and was hit hard by the slump in demand during the pandemic.
It has also recovered more slowly than the likes of Ryanair in 2021, but Fidelity attributes this to the fact that it will take some time for increased travel demand to translate into increased engine production and maintenance.
“Similar structural drivers behind airlines apply here, if less overtly. For investors with a long-term approach, this is one alternative option,” Sims said.
Investors looking the trend for ‘staycations’ could consider coach firm National Express. “Though its coaches’ close seating arrangements may put off cautious travellers, the company has seen a recent spike in bookings from fully vaccinated over-65s (who previously formed the vast bulk of National Express’ holiday customers),” the Fidelity commentator explained.
He identified a similar narrative among hotel chains.
Premier Inn owner Whitbread could benefit from an increase in domestic holidays, while its restaurant and café brands like Beefeater and Costa are slightly less exposed to lockdown disruptions than its hotel chains.
InterContinental Hotels Group might have a similar appeal. It owns brands like Holiday Inn and Crowne Plaza, which have reported significant increases in bookings.
When it comes to hotels, however, investors will have to see how changing trends such as the recent preference for rural locations over cities and private serviced apartments and B&Bs over chains play out.
Sims finished with an outside call: cruise lines. He highlighted P&O-owner Carnival is a classic pick in this space.
Carnival suffered during the pandemic, posting a $10.2bn net loss over 2020. There are challenges for the firm to face in the future, like all travel businesses.
“The company was successful in raising plenty of cash to see it through the pandemic, but that does come at the cost of share dilutions and mounting debt levels which aren’t attractive to investors,” Sims said.
“At the same time, Carnival is a massive company that dominates the industry. It would be first to benefit from an uptick in demand. It’s also used the period to streamline, laying off 16 of its less efficient liners.”