U.S. Global Investors (NASDAQ:GROW) earlier this week highlighted resilient travel demand, the return of corporate passengers and airline pricing power as factors supporting the outlook for the travel industry and airline stocks.
CEO & CIO Frank Holmes told Proactive that Air Canada (TSX:AC.B) was anticipating a particularly strong fall travel period as corporate travel recovered and demand became less seasonal.
“I think Air Canada said that the fall is shaping up to be one of its strongest travel periods, helped by this resurgence in corporate travel and less seasonality in demand,” Holmes said.
He noted that competition for business-class passengers was intensifying, with American Airlines looking to compete more strongly for corporate travellers. Holmes said United Airlines and Delta had been particularly successful in capturing corporate travel, a segment he described as an important source of high-margin business.
Leisure demand was also providing support. Holmes said roughly one third of global leisure travel spending was occurring in Southern Europe, benefiting luxury goods spending and restaurants. He noted that Americans and Canadians continued to travel to Europe despite the euro being more expensive relative to the US dollar.
The US hotel market was another indicator of travel strength, with Holmes citing CoStar data showing another positive year-over-year comparison for the industry.
For investors, airline valuations and pricing power emerged as key themes. Holmes described Delta as a classic GARP, or “growth at a reasonable price,” stock. He also said airlines had become adept at cutting capacity on weaker routes, helping maintain fares and pricing power.
“It is a serious trend that's very positive for the industry and gives them pricing power,” Holmes said.
Potential catalysts identified during the discussion included continued corporate travel growth, sustained leisure demand and airlines' capacity discipline. Holmes also highlighted oil prices as an important influence on airline share prices, saying airline stocks had shown trepidation when oil moved above its 50-day level and strengthened as oil fell below it.
Holmes argued that airline valuation multiples remained low compared with the S&P 500 and said there could be “much more surprise in the upside” if the favourable travel trends continued.