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Factors Driving the Recovery of the Travel Industry

Learn more about our Travel Industry ETF

 

Below we discuss the factors influencing the companies in our travel industry ETF.

Factors Driving the Recovery

In the short run, the demand for travel services will be driven by:

  • The speed and extent of the COVID-19 vaccine rollout
  • The resulting relaxation of government-imposed travel restrictions
  • “Overhang” of extra pent-up demand from resulting trips not taken during the pandemic
  • Growth of disposable income and savings
  • Size and pace of the economic recovery

 

Vaccine rollout

The ongoing rollout of several COVID-19 vaccines has been welcome news for would be travelers and the industries that serve them. The vaccine rollout has coincided with a significant decline in infection rates, which has led to governments relaxing some travel restrictions, as well as a growing public belief that it is safe to travel again.

Source: https://ourworldindata.org/explorers/coronavirus-data-explorer

 

At least 191 countries and territories have administered about 1.2 billion doses of a Covid-19 vaccine as of early May 2021.[1] The number of vaccine doses administered daily has increased steadily, as shown in the chart on the left. 

Progress towards vaccinating enough of an individual country’s population to significantly limit the spread of COVID-19 gas been uneven, as the figure to the right illustrates.  The figure shows the top 10 countries in terms of their vaccination rates.

Source: Official data collated by Our  World in Data

 

Israel is the global leader, with nearly 60% of the population fully vaccinated.  The United States ranks third, with 34.2% of the population fully vaccinated.[2]  Outside of the top 10 countries, progress has been very uneven, down to as low as 9.1% in some advanced countries such as Germany, 2.5% in India, and 0,1% in Trinidad and Tobago.[3] 

 

Relaxation of travel restrictions

It is also becoming easier to cross some international and internal boundaries.  Some countries have relaxed their restrictions on international travel over the last year.  In April 2020, 95% of 215 destination countries worldwide had completely or partially closed their border to international travel.[4]  By February 2021, the percentage had shrunk to 66%, with most other countries relying on a combination of testing and mandatory quarantines to control the spread of COVID-19.[5]  A scant 2% of all countries had lifted all travel restrictions by February 2021.[6] 

Evolution of Global Travel Restrictions, April 2020 to Feb. 2021

Source: UN World Tourism Organization 

 

While international travel was till severely restricted when this report was written, there has been a clear trend towards relaxing restrictions, and it is expected that this trend will continue as the vaccine rollout continued and the COVID-19 infection rate comes down in more countries.

In addition to closing their international frontiers, many larger countries responded to the pandemic by imposing restrictions on domestic movements.  For example, as of March 2020, an estimated 17 U.S. states had restrictions on visitors entering from other states.[7]  By April 2021, the list had shrunk to only five states. 

 

Pent-up demand

In 2020, the American Society of Travel Advisors (ASTA) participated in a survey which asked respondents,  “If the pandemic suddenly ended tomorrow, what one large discretionary purchase would you make”? Of those who said they would make a large purchase, 46% said they would take a trip, with the next-highest responses being remodel their home (20%) and purchase a new vehicle (19%). [8]

The desire to travel, to visit with family and friends, to experience other environments, is obviously deeply-rooted.  The risk of COVID-19 infection appears to be declining in many countries, due to a combination of public-health measures and vaccines. Now that quarantine requirements and travel bans are gradually being relaxed, people and businesses are looking forward to being able to travel again.

In China, an estimated 230 million Chinese travelled during May 1-5, and spent three times as much on flights, hotels, and other travel as they did during the same period a year before and 30% more than they spent in 2019.[9]  In the United States, jet fuel consumption is expected to increase by 30% in summer 2021 compared to the previous quarter as a growing number of Americans start to take the trips they have been forced to postpone since the pandemic started.[10]  Other countries are also experiencing upticks in domestic leisure travel. 

Domestic travel has substituted for foreign travel as quarantine requirements and travel bans have kept most people from traveling outside their own country.  Meanwhile, business travel remains severely depressed, as fiscal austerity, health concerns and the availability of virtual meeting platforms like Zoom have combined to keep most employees at home.  To get the travel industry truly moving again, the recent surge in domestic leisure trips will have to turn into a recovery for international and business travel, developments which seem further away.

International and business travel are recovering more slowly than domestic leisure travel.  International tourist arrivals dropped by 900 million or 72% in the first nine months of 2020 compared to the same period of 2019, and have stayed there ever since.[11]  Now there is guarded optimism that international leisure travel will start to grow significantly in the second half of 2021, as more governments feel their countries’ progress in combatting COVID-19 justifies relaxing. 

While domestic leisure traffic is nearly back to 2019 levels for many airlines, U.S. business traffic remains nearly 80% below pre-pandemic levels, holding back a broader rebound.  Unfortunately for the airlines, it is not yet clear when, or even whether, business travel will rebound.

Source: https://www.cnbc.com/2020/12/17/will-business-travel-return-with-covid-vaccine-executives-are-split.html

 

Microsoft founder Bill Gates generated a lot of attention in November 2020 when he predicted that over 50% of business travel will not come back after the pandemic. Southwest Airlines CEO Gary Kelly has predicted it could take 10 years for business travel to bounce back.   CNBC surveyed a group of technology company executives, 20% of whom said they did not expect their company’s employee travel budget to ever return to pre-pandemic levels.[12] 

Another CNBC survey, this one of chief financial officers, found that more than half  of US and Europe-based CFOs believe that their business travel budgets will “never” return to a pre-pandemic level. Asia-Pacific-based CFOs alone expected a rebound to pre-pandemic levels of business travel within three years.[13] 

 

Growth of disposable income and savings

During the pandemic, millions of people lost their jobs and income.  Somewhat paradoxically, total personal income in the United States and other countries actually increased during the same period, due to government stimulus payments, enhanced unemployment compensation and publicly provided benefits.

The US government sent out three rounds of stimulus checks (for up to $1,200, $600, and $1,400 ) in 2020-2021 and chipped in to enable states to offer much higher-than-normal unemployment benefits.  Other countries that sent money to all their citizens included Hong Kong ($1,280 equivalent per adult), Japan ($930 per adult) and Singapore ($422 per adult).[14]  European nations largely avoided the one-time payments, instead boosting funding for social services, but many countries enhanced unemployment offerings. 

Percent Change in Disposable Income Q1-Q3 2020 and Breakdown of Use

Source: Federal Reserve Bank of New York, “What is behind the Global Jump in Personal Saving during the Pandemic?”, Liberty Street Economics, April 14, 2021.

 

h limited opportunities for consumers to spend money in their locked-down coronavirus economies, the government transfer payments boosted personal savings.  As a result, many consumers and coming out of the pandemic with more money to spend on big-ticket items like travel.  This increase was not evenly distributed across the population, of course, but has had the greatest proportional impact on the personal incomes of people with the highest propensity to travel.

 

Size and pace of the economic recovery

2020 was a turbulent year for the global economy, with lockdowns, sharp trade contraction, accelerated job losses, and supply-chain disruptions.  The first, tentative signs of a recovery began to appear in the second half of the year with the easing of COVID-19 restrictions, but the global economy contracted by an estimated -3.3% in 2020.[15] 

The recovery should accelerate in 2021 with the vaccine rollout, the relaxation of social and economic restrictions, and reviving demand.  The International Monetary Fund (IMF) is projecting an economic growth of rate 6.0% in 2021, moderating to 4.4% in 2022 and 3.3% in 2023-2024, raising incomes and boosting the demand for travel services.[16]

Projected Annual GDP Growth,  2020-2024 (%)

Source: IMF, World economic Outlook, April 2021 https://www.imf.org/en/Publications/WEO/Issues/2021/03/23/world-economic-outlook-april-2021

 

The pace of the recovery will be uneven among different counties and regions.  Among the advanced economies, the United States is expected to surpass its pre-COVID GDP in 2021, while many others in the group will return to their pre-COVID levels only in 2022.  Among emerging market and developing economies, China had already returned to pre-COVID GDP in 2020, whereas many others are not expected to do so until well into 2023.[17] 

 

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