Hey Influence Traders,
For the past few weeks I’ve been on the road, (safely) hanging on planes and in hotels, and eating out/ordering takeout.
It’s been great!
That got me thinking about travel and leisure … and when they might return on a broad scale.
Clearly, the industry has been ravaged.
In the past year, airline stocks were down an average of over 27%.
Likewise, the Dow Jones U.S. Hotel and Lodging REITs Index was down more than 28%.
Now, though, the stage is being set for the release of pent-up demand.
Falling COVID cases, the vaccine rollout, rillions in stimulus money, growing personal savings and desire to get out, could be the perfect storm.
In particular, consumer savings and a desire to break cabin fever could unleash a torrent of cash on hotels, restaurants and airlines
About 70,000 COVID cases are being reported daily, down from 250,000 in mid-January.
Almost 44 million people have received at least one vaccine dose.
This bodes well for DC and local governments allowing more access to travel and leisure services.
The counterpoint is that vaccine rollout delays and new strains could dampen the desire to travel or cause DC to hold off giving an all-clear to do so.
In the past month, I have been on eight packed flights. I took advantage of tickets being dirt cheap.
While good for me, that does not mean high revenue for the airlines.
After a bleak 2020, airlines stocks have been ticking up in 2021, with most up double digits.
Will that trend last?
Stuffed inside the $1.9 trillion stimulus proposal that House Democrats premiered last week was a substantial amount of relief unrelated to the pandemic (more on that in a future issue), including another $15 billion for the airline industry.
Remember, the airline industry had received a controversial bailout last year in the first COVID relief bill.
While travel is increasing to certain destinations, business travel that is vital to airline revenue because of higher prices is not. Meanwhile, new COVID strain fears are limiting international travel.
Some doubt that business travel will ever fully recover.
On top of that, Boeing just recommended grounding its 777 jets with certain engine models after a plane leaving Denver suffered a failure that sent debris throughout a neighborhood.
The Pratt & Whitney 4000 series engines are under the microscope.
Fortunately, no one in the air or on the ground was hurt.
United, which ran the plane out of Denver, announced on Sunday that it would ground its 777 jets.
Also, rising oil prices will hurt profits since airlines rely heavily on fuel arbitrage.
Overall, the stimulus money is going to give airlines the time they need to weather the storm, increase routes, increase price — and increase profits.
But in the end, it could depend on the carrier.
Option Pit CEO Mark Sebastian and I were recently discussing Delta (TICKER: DAL) …
We think it is a good play, although it will not be a quick one.
Delta CEO Ed Bastian recently said the past year, “the toughest year in Delta’s history.”
Makes sense … Delta reported a loss of more than $12 billion.
But Delta has handled this crisis differently from other carriers. Not only has it avoided layoffs, which make rebounding easier, but it turned down bailout money in favor of raising money through its loyalty program.
It is a well-run airline.
The hotel industry is split into two main categories – C-Corp hotels such as Marriott International (TICKER: MAR) and Hilton Worldwide Holdings Inc. (TICKER: HLT), and hotel real estate investment trusts like Park Hotels & Resorts Inc. (TICKER: PK).
When tourism opens back up, this sector should do well, although it could see regionalized impact as explained below.
While the C-Corp hotels managed to weather the storm of 2020 and finish the year flat, REITs took a double-digit hit.
These companies focus on real estate and management and there are competing factors.
The commercial real estate market is depressed, which does not help.
But changes in the tax code, particularly raising the corporate rate, could make tax shelters like REITs more attractive.
The restaurant industry will be a tougher call.
New York City, for example, has seen more than 1500 restaurants permanently close.
A push for unionization and a $15 minimum wage will also put a hit on revenue.
Some prognosticators are arguing that tipping will come to an end, which will put the onus to meet wage demands squarely on employers’ shoulders.
Restaurant employees have typically been carved out of minimum wage laws, but this time could be different.
This bodes well for large retail chain stores and not so well for local establishments. (It also bodes poorly for my eating enjoyment.)
Broad vs. Local Recovery – A Tale of Two States
I tend to discuss the impact of federal policies on markets, but state policies are also impactful.
The Feds alone are not going to fix the economy. Local policy has had a tremendous impact on businesses and will need to assist in the recovery.
Some states are moving to help … others not so much.
Take the travel sector … People are longing to travel. They have savings to do so. Companies can capture market share — but they need to stay in business long enough to do so.
This is where local policy can have an impact.
Some governments have made it very difficult for hotels and restaurants to survive.
While Florida has declared itself “open for business,” New York City has a restaurant closure epidemic.
And with little fanfare, the 600-room Times Square Hilton recently — and permanently — shut its doors.
NYC hotels have asked Mayor Bill de Blasio to forgive the 18% interest they must pay when they are late on their property-tax bills, and why wouldn’t they …
Big Apple hotel rooms had a 36% occupancy rate in December 2020, down from 88% the previous year
Moreover, average room rates dropped from an average of $303 to just $130 a night.
The de Blasio administration hasn’t responded — but it did initiate a tax-funded program to bring back the arts through … street dancing. (Can’t make this up.)
It will be an uphill battle for NYC to forego tax revenue given the challenges in balancing NYC’s $92 billion budget.
The reduced inventory of hotels and restaurants will mean that demand for both will be high — and businesses that survive will charge a premium for that demand.
This will obviously abate as new providers arrive, but that will take time.
While federal policy and personal spending might align to promote travel, local policy could dictate how profitable that travel is to the hotel industry.
The Impact of Sports
Speaking of local impact, I saw a report that the NCAA will permit limited amounts of attendees to the NCAA men’s and women’s basketball tournaments.
I am a HUGE NCAA basketball fan – GO VILLANOVA and DUKE! (What? I’m a DC and Wall Street insider.)
That bodes well for the hotel and restaurant scenes in Indianapolis and San Antonio, the cities that will host every game of the tournaments.
It will also help the transportation industries, since people will travel from all over the country to attend those games.
Crowds of up to 25% capacity will be allowed to watch the 68-team men’s tournament, which begins on March 18, in person.
That means that as many as 17,500 fans could watch games at Lucas Oil Fieldhouse, a venue that normally seats 70,000.
The semifinals and championship of the 64-team women’s tournament will be played at San Antonio’s Alamodome, with 17% of its 31,900 capacity permitted.
Many are crying foul that large gatherings will be allowed just as pandemic numbers are dropping.
But the tournaments could be a test to see if vaccines are making a difference.
If they do not cause spreads, it could be the proof needed that more travel and events should be allowed.
It will be a slow recovery, but I’ve got high hopes for travel and tourism late into the year.
Cutting Through the Noise for You.