ASX travel shares were among the first victims of the COVID-19 pandemic, and may be some of the last to recover.
Reporting in the latest earnings season laid bare the economic impacts of the pandemic on the travel sector. Many major players reported substantial losses, as border closures and lockdowns wreaked havoc on the industry.
But hope is on the horizon as the vaccine rollout gathers pace and the border openings become more likely.
Australia closed international borders in March 2020 in a bid to control the pandemic's spread. The states rapidly followed, closing borders on each other.
The result drained the travel industry of both international and domestic customers. Since then, intermittent state border openings have seen strong demand for interstate travel, with Sydney Airport Holdings Ltd (ASX: SYD) reporting strong rebounds in passenger numbers when borders were open during FY21.
A full recovery appears some way off yet for the travel industry, although many are predicting pent-up demand will see a boom in business when borders open.
In the meantime, key ASX travel shares such as Qantas Airways Limited (ASX: QAN) and Flight Centre Travel Group Ltd (ASX: FLT) have restructured operations to adjust for the change in demand.
How have ASX travel shares performed against the market?
Travel share prices have been volatile this year but buoyed by investor hopes for reopening.
The Qantas share price is up 9.1% year-to-date, while shares in Flight Centre have lifted more than 13%. The Webjet Limited (ASX: WEB) share price has also gained ground since January, up 17.5%.
In comparison, the All Ordinaries Index (ASX: XAO) is 12.5% higher over the same period.
The Sydney Airport share price was largely flat in the first half of the year, but received a boost in July in the form of a takeover bid.
Who are the winners this earnings season?
It is difficult to declare any ASX travel share a winner this reporting season — all have seen business significantly disrupted by the ongoing pandemic.
Sydney Airport reported a loss before income tax expense of $97.4 million for the half year to 30 June. The airport's half year results revealed a 36.4% decline in passenger numbers compared to the prior corresponding period. International passengers were down 91% with domestic passengers down 3.1%.
The Sydney Airport share price, however, has been boosted by the takeover bid. Sydney Airport rejected a bid priced at $8.25 cash per stapled security in July. The consortium of bidders returned to the table last month with an offer of $8.45 cash per stapled security.
The board concluded the bid was not in the best interests of shareholders, but the Sydney Airport share price remains elevated, trading at around $7.70 compared to closer to $6 before the initial takeover bid was made.
Webjet released its results for the nine months to March 2021 in May, moving to a new March financial year end.
The travel company revealed a loss of $156 million for the period, but has since confirmed it will be cash flow positive for 1H22 (excluding investing and debt repayments). Webjet says it stands to benefit from consumers shifting to buy travel online.
Initiatives are underway to expand market share and reduce costs by at least 20% once the company gets back to scale. Strong demand for travel is reported, with business rebounding in markets that have reopened, such as the United States.
And the losers?
Qantas reported the largest loss of the ASX travel shares this earnings season, with an underlying loss before tax of $1.83 billion.
The airline suffered a $12 billion revenue impact from the COVID-19 crisis in FY21, but says it is in a better position to manage its recovery compared to 12 months ago. Net debt was reduced to $5.9 billion in the second half, with total liquidity of $3.8 billion providing a buffer against uncertainty.
The airline said periods of open domestic borders saw Qantas and Jetstar generate significant cash which helped reduce debt from $6.4 billion in February 2021. A record performance by the freight division assisted in offsetting the cost of the idling international operations.
Qantas has been undertaking a sizing and restructuring program which is largely completed. The program will give the company the ability to better manage costs in the face of sudden border closures, providing cost benefits of $650 million in FY21. Qantas is targeting at least $1 billion in permanent annual savings from FY23 onwards.
Flight Centre likewise undertook a drastic cost reduction program in response to COVID-19, recording an underlying loss of $507 million for FY21.
Flight Centre reports that its priorities have evolved from emergency cost cutting at the beginning of the crisis to maintaining those significantly reduced expenses. The travel company says recovery is gaining momentum, particularly in the United States.
Strong and immediate rebounds have been noted in markets where travel restrictions have been lifted, although ongoing lockdowns are impacting the Australian and New Zealand markets.
The company is targeting a return to monthly corporate and leisure profitability during FY22, with corporate volumes tracking at 40% of pre-COVID volumes in FY21.
What is the outlook for ASX travel shares?
Qantas says that recent COVID-19 outbreaks and border closures are expected to have an impact of around $1.4 billion on the company's underlying EBITDA in the first half of FY22. The airline is anticipating a recovery in the travel market as vaccination targets are reached later this year.
A surge in domestic travel demand is anticipated followed by a gradual return of international travel. The airline is currently estimating domestic capacity will rise to 110% in 2H22, with international border closures and quarantine restrictions eased from December.
Flight Centre declined to provide FY22 guidance, citing the lack of clarity around government timeframes for border re-openings and removal of other travel restrictions. Nonetheless, the company says its leaner and more productive structure means it is well placed to benefit as the travel industry globally starts to take off again.
Webjet has flagged strong pent-up demand for travel, particularly leisure travel, but says the environment remains inherently uncertain.
