As the effects of the pandemic wind down, investing in travel stocks and shares is gaining quite a bit of popularity amongst investors. The travel industry went through one of the worst phases in its history when borders were closed to slow the spread of Covid-19. So much so that the UN World Tourism Organisation reported the sector suffered an approximate $2.4trn loss in 2020 alone.

Therefore, there is no denying that the lift of the travel ban made travel stocks and their investors sigh with relief. With the worst of the storm seemingly now over and travel spending on the rise, let’s explore this stock market sector in more detail looking at the risks and potential rewards.

What are Travel Stocks?

The travel industry provides transportation services to consumers as well as businesses. And as the name suggests, travel stocks consist of any company providing some form of these services.

Shares of travel companies can be categorised into one of four primary categories:

• Airlines – Companies that provide air transport services for people and freight. A few popular names are American Airlines, British Airway (International Airlines Group), and Delta Airlines.
• Hotels – Firms providing hotel services to accommodate travellers on the road, out for business or on holiday. Some popular include Intercontinental Hotels Group, Marriott International, Starwood Hotels & Resorts Worldwide, and Wyndham Worldwide Corporation.
• Cruiselines – Cruiseliners are amongst the most popular shares in the travel industry. A few leading names are Royal Caribbean and Carnival Corporation.
• Bookings – Online travel and trip services have recently emerged in the industry. These groups provide convenience to travellers by arranging all the details of a trip online. A few popular names are Priceline and Expedia Group.

The Risks and Challenges Faced by Travel Shares

Despite the challenges, the travel industry continues to grow. But there is no denying that managing the challenges is key to succeeding within any industry.

Let’s discuss some of the main challenges travel stocks are facing today.

• Taxation – The travel industry is one of the highly taxed industries. And this could be getting worse as Europe seeks to reverse the carbon emission tax exemptions these companies currently benefit from.
• The Fall of Business Travel – The rise in globalisation and novel communication technologies has almost ended the era of international business travel compared to 30 years ago. Replacing this lost revenue has proven challenging for most airliners and continues to damper performance even today.
• Novel Platforms – In the post-Covid era, creativity is the key to attracting travellers to return to vacations and luxury travels. Therefore, how the travel stocks make use of the available resources is a huge challenge, especially with comparison websites enabling consumers to find the best possible deals quickly. As such, travel shares like Airlines and Cruiselines struggle to retain any pricing power making them a less desirable investing target for some investors.
• Digitalisation – The rampant use of technology in every field of life is raising the bar of challenges for travel stocks also. This is somewhat forcing travel shares to adopt digitalisation into their operations. While this may lead to superior margins in the future, it does create a lot of headaches for the business and its customers if not implemented correctly.

Key Financial Metrics to Consider Before Investing in Travel Stocks

Investing in travel stocks should be based on an informed decision. I believe that understanding the financial well-being of these companies is essential before putting any of my money at stake. So let’s explore some of the key financial metrics I tend to study when analysing shares of a travel company.

• Quick Ratio – It measures an airline’s short-term liquidity and cash flow. This financial ratio is particularly useful for analysing airline companies because they are capital-intensive and have significant amounts of debt.
• Return on Assets (ROA) – Since travel companies own substantial assets, even a relatively low ROA could represent significant profits.
• Degree of Financial Leverage – This measures a company’s ability to meet its long-term debt obligations. A large amount of debt is used to finance assets such as planes, hotels, or large bus fleets. That’s why making sure a company can afford its financial obligations is a vital step.
• Operating Leverage– This ratio indicates the company’s ability to pay off its cost of capital.

Key Terms to Know Before Investing in Travel shares

The travel industry isn’t the most complicated of stock market sectors. But there is still a bit of jargon that is important to understand.

• ADT – Atlantic Daylight Time
• Air Mile – A measure of distance travelled. This is often used as a basis for reward programmes offered by travel stocks to customers.
• Air Traffic Control – The control tower is found at almost all airports to ensure planes take off and land safely.
• APEX – Advance purchase excursion fare.
• ARC – Airline Reporting Corporation is the agency that regulates ticket sales and reports to the airlines for travel agencies.
• B&B – A bed and breakfast home or guest house that a proprietor has converted into accommodation(s) for the public.
• Duty-free Imports – Item amounts and categories specified by a government that is a fee of tax or duty charges when brought into the country.
• Electronic Ticket – a paperless airline ticket allowing someone to check-in and fly with just a proper photo ID.
• ETA – estimated time of arrival.
• International Air Transport Association (IATA) – International airline industry trade group,

Market size and Forecasted Growth of the Travel Industry

The travel sector has seen some significant changes in its trends. And consequently, the analyst forecasts have started to adapt to the latest observations being made in the industry.

Current trends driving the market include:

• Bookings on mobile are continuously increasing boosting international travel.
• Online customer reviews are critical.
• Having a dedicated mobile app for travel companies is a must.
• Last-minute flight bookings have given a massive surge in revenue.
• Solo-travelling has increased.
• A touch of personalisation from travel companies is highly valued amongst customers.

As per the International Air Transport Association, the below chart shows the share of each continent in the global travel industry at the end of 2021.

With the pandemic royally messing up the sector, a lot of emphases is being placed on restoring it to its former glory. Current forecasts predict that the number of travellers won’t make a full recovery until 2024, resuming growth thereafter. However, this could result in lucrative returns for those investing in travel stocks today.

Top Travel Stocks in the UK by Market Capitalisation

Top Travel Stocks in the US by Market Capitalisation

Should I Invest in Travel Shares?

Investing in travel stocks and shares offers a variety of investment opportunities. As an investor, I am personally very optimistic about the rebound of the travel industry. Moreover, the huge jump in the number of travellers from 2020 to 2021 indicates the recovery of travel stocks has already begun, despite share prices remaining low.

There are no guarantees of recovery for every business, of course. And that does add an extra element of risk making travel shares unsuitable for some investors. But for my portfolio, I believe this sector offers some attractive buying opportunities.

Saima Naveed does not own shares in any of the companies mentioned. The Money Cog does not have a position in any of the companies mentioned at the time of publishing. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.