The outlook for airlines this summer

Naturally, resurgent summer travel demand is a tailwind for the airline industry, which is enjoying strong ticket sales. Airlines are also benefiting from lower fuel prices and a weaker greenback, especially as many costs are dollar-based.

“Although estimates across the board have moved up materially, the relatively benign fuel environment combined with yield outperformance still leaves scope for earnings upgrades across our coverage,” said Harry Gowers, European Airlines and Travel Retail Analyst at J.P. Morgan. “Consumers are proving resilient to the cost-of-living crisis, and we expect the strong demand environment to continue into the summer months.”

In addition, airline capacity for both short- and long-haul flights in Europe remains below 2019 levels due to ongoing staffing and aircraft shortages. This is creating a supply-demand imbalance, helping to push airfares higher.

“The biggest risk to a great summer of profitability for the airline industry continues to be whether the system can cope with the level of demand. Operational disruption and widespread flight cancellations, similar to what we saw last summer, also pose a constant risk,” Gowers said. “But overall, bar any external shocks, the setup into summer 2023 continues to look encouraging.”

Hotels have staying power this summer

Resilient summer travel demand also spells good news for the hotel industry. “European hotels have had a good run year-to-date, up circa 25% on average and outperforming the MSCI Europe Consumer Discretionary Index by circa 10pts,” said Estelle Weingrod, Head of European Leisure Research at J.P. Morgan.

While overheads are increasing due to inflation, hotels are successfully passing on higher costs to consumers, as seen in higher RevPAR (revenue per available room). “When it comes to RevPAR, momentum remains supportive overall versus a comparable 2019 period,” Weingrod noted. In March 2023, RevPAR in the U.S. was 114% of 2019 levels (in USD); the figure was 123% in the U.K. (in GBP), 115% in Continental Europe (in EUR) and 98% in APAC.

In addition, first quarter results across J.P. Morgan’s coverage universe have been largely positive. However, this is in part due to easy year-over-year comparisons — the hotel industry was heavily impacted by the Omicron variant in early 2022. “We will continue to assess positioning as solid reporting within the space will likely move expectations up over time, raising the bar on the quarters ahead,” Weingrod said. “Also, hotel shares typically start to underperform when RevPAR starts to decelerate, which should happen from the second quarter of 2023 onward as comps become more challenging.”

The cruise industry makes a recovery

The cruise industry, too, is on the rebound after a lengthy period of COVID-19 restrictions. “Our fieldwork and recent management access across the Big Three cruise operators point to fundamental momentum year-to-date, with a record-breaking wave season [the time of year when cruise lines run their best sales] led by broad-based demand across customer segments, regions and customer demographics,” said Matthew Boss, Head of Department Stores, Specialty Softlines and Leisure at J.P. Morgan. Additionally, in April 2023, Chase credit card data for the “Other Travel and Entertainment” category, which includes cruise-related spending, tracked +47% year-to-date versus 2019.

This travel recovery is being driven by several factors, including higher ticket prices, the growth of the experience economy — where consumers prioritize spend on experiences than on material items — and a more premium fleet offering within the cruise industry. “Around 25 to 30 older ships were disposed of during the pandemic, raising consumer cruise perception and overall pricing power,” Boss observed. “Overall, while the pandemic was the largest demand shock in the history of the cruise industry, we see the industry benefiting over the next three years from these drivers.”