Travel Stocks Charge Higher Ahead of Peak Season

Americans are once again boarding flights in numbers similar to prepandemic levels. About 2.3 million passengers, on average, have passed through U.S. airports each day this year, according to data from the Transportation Security Administration. That is on par with the daily average in 2019.

Demand for domestic leisure travel soared after the worst of the pandemic as flexible work schedules became more common. Meanwhile, business travel and international demand have been slower to recover, said Michael Bellisario, senior hotels analyst at Baird.

“People are traveling, but they’re traveling to different markets, and on different days of the week, and for different purposes," he said.

The resurgence has led to booming business and rising share prices for airlines and related industries, such as hotels and casinos. Executives say they expect the good times to continue.

Delta Air Lines shares advanced 6.8% Tuesday, their best day since October, after the airline raised its profit outlook for the year. Cruise operator Carnival said Monday that advance bookings and customer deposits are at record levels.

Shares of Carnival have more than doubled this year, making it one of the top performers in the S&P 500. United Airlines Holdings has advanced 49%. Booking Holdings is up 32%, while Marriott International has gained 19%. The S&P 500 is up 14%.

Investors pay attention to travel trends because they provide insight into the willingness of both consumers and businesses to spend. Despite fears of a recession, which hit travel stocks last year, unemployment remains low and consumers are still spending on discretionary categories.

“Everyone’s worried about the consumer. I get it," Delta Chief Executive Officer Ed Bastian told Wall Street analysts on Tuesday. “They should worry about the consumer maybe in certain sectors, but not in this sector."

Valuations have come down as business outlooks have brightened. American Airlines Group trades at 5.5 times its expected earnings over the next 12 months, down from eight times in February. Royal Caribbean Group changes hands at 17 times forward earnings, down from 20 times, according to FactSet.

The S&P 500 trades at 20 times forward earnings.

Still, stock prices for many companies in the sector sit well below prepandemic levels. United shares are down about 28% from levels just before Covid-19 fears sparked a selloff in 2020. Carnival stock is down about 58%.

Companies have had to focus on paying down the debt they incurred to survive the pandemic, instead of returning cash to shareholders in the form of dividends or stock buybacks. Many travel-focused companies now have speculative, or junk-rated, credit ratings.

“Priority one is getting down to investment grade," said Chris Raite, industrials analyst at research firm Third Bridge Group.

Carnival said Monday it expects to approach investment-grade status by 2026, while Delta said it expects its balance sheet will strengthen back to prepandemic levels next year.

In many cases, higher costs from key inputs such as labor and fuel have accompanied higher revenue. Several airlines have agreed to new contracts with pilots that call for raises of as much as 30%.

Shares of major hotel companies such as Marriott and Hilton Worldwide Holdings are trading near records because they don’t own real estate outright and have avoided some of the cost pressures that have hampered other travel sectors. That has freed up cash available for shareholders, said Baird’s Bellisario.