Bright outlook for travel stocks in 2023, headwinds beyond

Travel sector outlook

After the lockdowns of 2020 and 2021, Mr Hewitt says the tourism sector is gaining momentum, which is good for the airlines and other travel stocks.

“Demand is outstripping supply for air travel … We've got full planes, high ticket prices and really good profitability for the airlines as well,” he says.

“But there is a risk that demand wanes amid rising cost-of-living pressures as air travel capacity returns, putting downward pressure on pricing,” he said.

He noted staff shortages and delays in recommissioning mothballed aircraft are limiting air travel capacity growth in the near-term, at a time of soaring demand.

As air travel demand continues to outstrip supply, the “elevated profits” for airlines Qantas (QAN) and Air New Zealand (AIZ) are sustainable in the medium term, according to Morningstar's first quarter outlook.

But over the longer term, Hewitt says conditions will be more challenging for the airlines as supply lifts, and "neither stock looks particularly cheap".

Qantas shares have gained 29% over the 12 months to 17 January, easily outperforming the Australian share market, which has fallen 0.5% over the same period, as measured by the S&P/ASX 200.

While stringent Australian entry requirements for international arrivals and departures during the Covid-19 pandemic and non-permanent resident arrivals decimated passenger revenue and led to big losses for Qantas in 2021 and 2022, many analysts see better times over the next 12 months.

Data from the ABS shows overseas travel is back to pre-pandemic levels, with nearly 1.2 million international departures in November 2022, an increase of 162,610 trips compared to October.

Provisional data for December - which is subject to change - shows overseas travel has surged at the fastest pace so far this year.

Overseas visitor arrivals to Australia are still lagging below pre-pandemic levels.

With still stronger passenger numbers expected this year, UBS, Morgans and Credit Suisse have add ratings on Qantas, forecasting a significant upside for its share price. Morgans sees Qantas at $8.50, Credit Suisse at $7.15 and UBS at $7.60 compared to Qantas’s market price of $6.47.

However, Morningstar’s Hewitt doesn’t see much value in the stock after its very strong run in 2022 and he says Qantas shares are fairly valued at $5.90.

Opportunities abound with travel rebound

But other opportunities exist in the travel sector. Despite a slowing economy, there is upside for other service-exposed businesses, where spending is still normalising after the Covid-19 pandemic.

Travel agents, casino operators and restaurants are expected to maintain momentum and in these subsectors, Flight Centre (FLT), Star Entertainment (SGR) and Domino’s (DMP) screen as undervalued, according to Morningstar.

According to Brian Han, director of equity research at Morningstar, Flight Centre’s fair value is trading at a 14% discount to its current price of around $15.50.

“Corporate travel is again leading the recovery, driven by recent account wins and strong retention of existing clients whose business employees are returning to the air,” says Han.

“Gradually improving capacity, especially flights out of Australia, soak up still considerable pent-up demand, especially for leisure outbound from Australia.”

While Flight Centre operates in a cyclical industry that is leveraged to consumer and corporate spending, Han says looking through these cyclical factors on a sustainable earnings basis, Flight Centre’s fair value estimate is $18.00.

However, investors still need to be cautious if the global economy falls into recession, he notes.

“Any recession, domestic or global, would hit Flight Centre because around 60% of its earnings are from outside Australia and New Zealand,” he says.

Consumers planning to spend up on travel

For the moment, consumer spending is robust as are travel intentions.

According to a recent survey from investment bank UBS, domestic and international travel spending intentions remained positive in the fourth quarter of 2022. UBS surveyed around 1,000 Australian adults between 22 November and 8 December for its December quarter consumer survey and found the results are surprisingly bullish.

^{Travel intentions remain high despite rising inflation. Picture: AP}

“The fourth quarter survey showed a moderation in high-income earners' euphoric spending intentions seen in this quarter, however, they still remain at strong levels. [Companies] with a customer base skewed towards this group include ASG, Breville, Qantas, Scentre, Select Harvest and Treasury Wine Estates,” said a UBS Australian Equity Strategy report.

“We see a positive read through for the following buy-rated stocks: Qantas, Corporate Travel, Webjet, Kelsian Group as well as Neutral-rated Flight Centre,” the report said, noting that household savings will be used to support consumption, with 63% of funding for travel still expected to be drawn from savings.

Consumers continue to cite high levels of income stability and job security as the key positive supports for spending, the report notes.

Recent ABS data supports the bullish nature of retail spending in Australia, with retail turnover rising 1.4% in November 2022, to a new record high of $35.9 billion.

	Last	$ Change	% Change
Air New Zealand Ltd AIZ	$0.49	0.01	+1.03%
Domino's Pizza Enterprises Ltd DMP	$38.28	0.35	-0.91%
Flight Centre Travel Group Ltd FLT	$20.50	0.03	+0.15%