Investing in ASX travel shares

What are ASX travel shares?

'Travel shares' is an umbrella term for stocks in companies that operate in the leisure, travel, or tourism sectors. Fundamentally, travel companies sell goods and services that help people get from one place to another – be it for business or pleasure. 

But this broad market sector does much more than just sell plane tickets. It includes companies that help people get the most out of their holidays and business trips by offering tourist packages, luxury hotel stays, unique experiences, and other add-ons.

As you can imagine, this is an extensive group, ranging from major airlines and travel agents to caravan and motorhome companies. 

Why invest in ASX travel stocks?

Travel, tourism, and other related sectors have contributed significantly to the Australian economy – particularly in the years just before the COVID-19 pandemic. For many Australians, travel is a way of life, with gap years spent pouring pints in London pubs or backpacking through India accepted rites of passage. We have simply come to expect that we can travel long distances for holidays or business with relative ease.

This has historically made travel shares pretty sound investments. In the long bull market that preceded the COVID-19 pandemic, shares in companies like Qantas Airways Limited (ASX: QAN) and Webjet Limited (ASX: WEB) soared in value. With the economy booming and low interest rates, households (and businesses) had more disposable income to spend on travel.

However, COVID-19 has wiped billions off the values of travel and tourism companies – with many still yet to even come close to recovering. Some optimistic investors see this as a prime buying opportunity, thinking the sector might be due for a rebound now that countries have fully relaxed their pandemic restrictions.

Top travel stocks on the ASX

Travel shares can include companies from various market sectors. For example, Australia's flagship carrier Qantas is grouped into Industrials, along with other airlines and airports. However, other travel shares, like travel agents, fall under the consumer discretionary category. 

Travel shares encompass a diverse group of companies.  Many analysts group airports into "travel stocks", which would make Auckland International Airport Limited (ASX: AIA) the largest travel share on the ASX (with a market capitalisation of around $11.5 billion). 

Other companies some analysts may include under the umbrella of travel stocks are real estate investment firms that focus on hotel and hospitality venues, like the Elanor Commercial Property Fund (ASX: ECF), as well as hotel managers like micro-cap Alloggio Group Limited (ASX: ALO)  

However, for our list below, we'll focus more exclusively on airline and travel agent shares, which makes airline Qantas our biggest ASX travel stock (with a market cap a shade over $11 billion).  

Here are our three top ASX travel stocks ranked by market cap from high to low.

Qantas

Qantas is Australia's flagship carrier and one of the oldest airlines still operating anywhere in the world. It is the largest airline in Australia by some measure, with a market share of more than 60%. The next best is Virgin Australia with around 30%¹.

Border closures hit the airline especially hard early in the pandemic, and investors heavily sold off Qantas shares (like many other travel stocks). While the Qantas share price has made significant gains since then, it is still short of pre-pandemic levels. 

In a recent investor day presentation, Qantas stated that, despite unprecedented changes to the industry caused by the pandemic, consumer intent to travel remains above pre-COVID levels. This means that (after years of being stuck at home) people may prioritise travel even as they cut back on other expenses.

Flight Centre

This ASX share is an Australian travel agency with an extensive network of brick-and-mortar retail outlets. The company's focus on face-to-face customer service was one of its strengths before the pandemic, but Flight Centre's extensive network of physical stores became a cost burden when lockdowns hit.

Like Qantas, investors sold off Flight Centre shares early in the pandemic. Despite the recent rebound in tourism activity, they are still trading at around half their pre-pandemic prices. 

Flight Centre's underlying performance is beginning to return to pre-COVID levels (even if its share price isn't). It recently upgraded its FY23 guidance for underlying earnings before interest, tax, depreciation and amortisation expenses (EBITDA) to between $295 million and $300 million, a potential $483 million turnaround on its FY22 loss. 

Total transaction value (the total amount of money collected by the travel from customers, including amounts to be passed on to third parties, like airlines) was the second strongest in the company's history, behind only FY19 — the last full year before the pandemic. 

Corporate Travel Management (CTM)

This ASX share exposes investors to the Australian corporate travel market. CTM provides business travel solutions to corporate clients, focusing on larger enterprises with a global reach where employees need to travel regularly for work.

Despite servicing a different market segment, CTM's sales are driven by similar factors to retail travel. Border closures throughout the pandemic caused revenues to plunge, but they have rebounded as restrictions have eased. And now that interest rates are rising and inflation is stubbornly high, businesses are again having to re-think their need for travel — especially as employees are now so used to communicating virtually. 

Nonetheless, CTM recently upgraded its profit guidance, stating that it now expects underlying EBITDA from $165 million to $170 million. This gives the company good momentum leading into FY24, especially as fourth-quarter revenues were more than 90% of pro-forma FY19 levels.

What might the future hold for Australia's travel industry?

In 2019, before the coronavirus pandemic, tourism contributed $60 billion to the Australian economy and made up more than 3% of the total national gross domestic product (GDP). However, the sector was hit especially hard by COVID-19, and through 2020-2021, tourism's contribution to the Australian economy dropped to just $32 billion, the lowest level in at least 17 years.

So, it's no wonder investors sold off travel shares during the pandemic. However, as life returns to some semblance of normality following years of COVID-19 restrictions and border closures, there could be a significant investment opportunity in the beaten-down travel sector.

But there are risks to weigh up, too. It remains a particularly uncertain time for travel companies, even if some of the more immediate impacts of the global pandemic have started to lessen.

The travel sector tends to do especially well when consumer confidence is high and people have lots of disposable income to spend on luxury items like holidays. 

But as rising interest rates and inflation start to bite, and households must pay more for everyday items like food and petrol, they will have less money to splurge on fancy holidays. Unfortunately, this might mean the travel and tourism sectors continue to struggle, even without pandemic restrictions holding them back.

The travel sector also relies heavily on corporate customers who frequently travel for business to generate sales. However, with people now accustomed to working (often entirely) remotely, demand from business travellers may have permanently reduced following the pandemic.

Benefits of investing in travel shares

Vested government interest: As discussed, travel significantly contributes to the Australian economy. And, worldwide, many nations rely heavily on their travel and tourism industries to sustain their economies. This means many governments are vested in seeing their travel and tourism sectors performing well. This has generally made travel shares good long-term investments, even if they tend to be more volatile over the short term. 

Ability to leverage a strong economy: Travel shares are particularly good to own in a booming economy when consumer confidence is high, and could help boost the overall performance of your portfolio.

And the cons

Subject to economic strength: Of course, the opposite is also true: travel shares tend to perform especially badly when the economy is in a recession, which could compound losses elsewhere in your portfolio. This can make them terrible stocks to own in a bear market. 

This is because the market considers travel and tourism shares to be cyclical stocks. When interest rates are low and inflation is under control, people can borrow more freely, and their costs are lower. This leaves them with more disposable income for luxe purchases like expensive holidays. 

This can translate to higher earnings for travel companies, likely resulting in higher share prices. However, when the economy is contracting and household costs are higher, people have less money available for discretionary purchases, particularly travel and holidays. 

Commodity prices: Airline stocks are particularly sensitive to oil prices, as jet fuel is often these companies' most significant expense. Rising costs without rising revenue eats into profits, which can lead to reduced dividends and, potentially, falling share prices. 

Are ASX travel stocks a good investment?

After suffering through two horrible years of the pandemic, the travel and tourism sectors are among those with the most to gain as countries around the world open up. However, significant risks remain, with inflation and rising interest rates likely to harm consumer confidence and reduce household discretionary spending.

Before investing in ASX travel shares, you should understand and weigh the risks against potential returns. Consider whether an investment in travel shares aligns with your investing goals. If you do invest, always maintain a well-diversified portfolio with exposure to multiple sectors of the economy.