Why Global Travel Will Not Recover Anytime Soon

Investors may want to rethink their outlook for the hospitality industry. Rather than a not-to-be-missed recovery story for the cycle ahead, we see prospects as riddled with caveats and uncertainties. One challenge is realigning the conventional view that the sector is almost always a workhorse for portfolio and direct investors.

There assuredly will be a recovery in some corners of world. We look to the Caribbean, certain Gulf markets, and selected US states, such as Nevada and Hawaii. We are tempted to add Australia to the list. But a lumpy recovery in a handful of destinations is a far cry from the sort of broad-based global recovery that the industry was commonly anticipating six months ago.

The crux of the problem is the backdrop in those nations that traditionally see the highest number of arrivals globally. Take a closer look at selected, top-ranked markets:

France. The allure of Paris consistently puts this nation at the top of most hospitality league tables, but like Italy and Spain, there are material questions about whether a mature tourist infrastructure can meet post-Covid traveller expectations.

China. For tourists, this destination heavyweight is a de facto no-fly zone. Arrivals are subject to invasive health protocols; they are likely to experience random lockdowns.

Turkey. This market, ranked sixth in arrivals in 2019, is too close to Russia and Ukraine to be a realistic magnet for tourists at this time.

Thailand. The country is now bereft of visitors, unless you count the volume of stranded Russian travellers. The recovery forecast is poor, given heavy reliance on China-based arrivals.

United Kingdom. This industry stalwart expects to see at best a 50%-to-60% recovery to pre-2019 levels in 2022. Oddly, in a scramble for optimism, VisitBritain, the national tourist authority, reports that the average spend per visitor will increase—because of inflation.

Forecasting at this time remains difficult, given the fast-moving situation and the unique circumstances.

VisitBritain, 2022 Tourism Forecast

The other problem is the macro perspective. Economic fundamentals are not offering the sort of strong, smooth uplift that was once reasonable to expect in the wake the pandemic. Static analysis has turned dynamic. Consider these points:

Zero-Covid Policies. Beijing is determined to stamp out Covid-19 because of the potential social impact of an overtaxed healthcare system. Prior to the coronavirus onslaught, the Chinese dominated international travel worldwide. We do not expect outbound restrictions to change until after President Xi Jinping ascends to his third term in 2023.

Ukraine-Russia War. The ricochet effect is enormous. Free-spending Russians are no longer booking overseas destinations. Lingering high oil prices will impact the cost of airfares and hotel rooms. Flight times are materially longer for any air route that previously crossed Eastern Europe. Vacation plans for Eastern Europe have been paused, if not cancelled.

Corporate Budgets. A single enterprise cutting back on business travel is a micro issue. When seemingly all enterprises limit business travel, it becomes a macro matter. Companies benefited from a budget windfall associated with no-travel policies; they are loathe to reinstate discretionary authority. A familiar retort to business-trip requisitions is “Just use Zoom.”

Hospitality Capacity. Aside from the SARS epidemic in 2003 and the financial crisis in 2009, international tourist arrivals grew steadily and markedly since the early 1980s. Peak travel may have been 1.5 billion arrivals in 2019. We all benefitted from cheap airfares in our generation, but that low cost led to an extreme build-up in travel-related infrastructure.

Macro Turbulence. Energy prices are not the only thing out-of-kilter in the global economy. Fiscal and monetary decisions made during the pandemic are aggravating inflation. Extending the analysis, some would blame supply-chain disruptions for price increases; we think that is too simple. Regardless, higher household costs mean less room for far-flung vacations.

The risk in our argument is that we paint a general picture that is not relevant everywhere. We note, for instance, that the Dominican Republic, a prime Caribbean destination, saw its second highest volume of arrivals ever in 2021. But that story, like others, is a regional one with a targeted demographic from a nearby hinterland. Further afield in Australia, the industry trajectory is still uncertain, given that the country just re-opened to international arrivals at the end of February after a two-year hiatus.

Our Vantage Point: Hospitality has always been a popular draw for investors because of its cash-generation features. It may be time to re-examine that bias. We moderate forward-looking optimism based on faltering fundamentals.

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