When Will Travel and Tourism Recover?

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Previous epidemics or recessionary events have depressed travel demand for four to seven months before beginning to recover, according to Dufry DUFN and Amadeus AMS. As discussed in "Morningstar's View: The Impact of Coronavirus on the Economy," aggressive containment measures with an immediate severe economic impact could help contain the virus spread, leading to lesser long-term negative economic implications.

Amadeus recently noted that previous disease outbreaks recovered to pre-outbreak levels six to seven months after the peak of the outbreak. Also, while perhaps not a perfect precedent, Amadeus and Sabre SABR, whose platforms service a large amount of global airline bookings, recently highlighted data on what occurred on their global distribution system networks in 2003 during the SARS outbreak. In 2003, the GDS industry saw a revenue drop in a range of 10% to the midteens during the first two quarters of that year, followed by stabilization in the second half of the year (flat revenue year over year) and then 5.5%-6% growth in 2004 (recovery).

The ban on travel from Europe to the United States has extended the halt in the flow of potential travelers entering and leaving the U.S. For the cruise operators, we do not anticipate a recovery in demand until around eight weeks past the peak of the outbreak, which has just begun in the U.S. and Europe. This is when past booking behavior has returned to normal in prior geopolitical and health-related events. It would probably take another few months for postponed bookings to catch back up. Additionally, if the travel ban to Europe is extended beyond 30 days, it could prevent Americans from getting abroad for the summer sailing season.

Drawing on the SARS experience in China, Trip.com’s TCOM second-quarter 2003 revenue fell 42% sequentially and bounced back 196% sequentially in the third quarter. However, we don’t think recovery from COVID-19 will be as quick as SARS, which was not as widespread globally.

The outbreak of COVID-19 within and outside China substantially reduced travel demand and supply for international and domestic travel businesses. Despite more moderate increases in confirmed new cases in China, there is rising concern about imported confirmed new cases. So while China’s domestic airline routes may start to recover by the end of 2020, overall international travel and tourism is unlikely to recover until 2021.

We Prefer the Casinos With Lower Debt Levels Recent social distancing efforts involved in containing the coronavirus are placing increased financial pressure on casino companies, and we think the demand recovery in 2021 could be more paced than past industry demand shocks, placing operators' 2021 sales roughly flat with 2019 pre-virus demand levels. For context, we estimate the global distribution system industry returned to 2002 pre-SARS levels in 2004, while Amadeus' 2010 sales were 4% above its 2008 pre-recession revenue level.

Macau gaming revenue fell off the cliff in February with an 89% year-over-year decline. The Chinese government is likely to exert caution, even after a period of zero confirmed new cases, before resuming the individual visit scheme for visitors to Macau, in our view. For gaming revenue to recover, we need to see a normalization of all restrictions to be lifted as well as a rebound in consumer confidence. In this regard, we only expect a full recovery in 2021.

In the meantime, a number of casino stocks are attractively valued, but given the risks from a prolonged outbreak, we prefer companies with lower debt, such as narrow-moat-rated Las Vegas Sands LVS and Macau’s Galaxy Entertainment 00027.

Airlines Should Start Recovering on Pent-Up Demand by Year-End The fallout for airlines so far has been worse than we expected; they have announced steep capacity reductions, and load factors (that is, capacity utilization) in 2020 may fall well below our previous expectations. For example, United Airlines UAL management recently said load factors could fall into the 20%-30% range if demand trends don't worsen; the carrier's recent full-year load factors have been in the low 80s. Delta DAL management reduced capacity by 40%, the largest reduction in the company's history. Delta expects to operate with this much lower level of capacity for at least the next several months. Singapore Airlines C6L, whose routes are entirely international, has cut scheduled capacity by 50% through April.

Regardless, airlines would have to survive around seven months of significantly lower demand, which strains their working capital. We already see cuts to capital expenditures and salaries to try to preserve liquidity. Voluntary furloughs requested of staff wouldn’t be a complete match to route reductions. At Australian and New Zealand national carriers Qantas QAN and Air New Zealand AIR, we anticipate labor costs, which make up around one third of operating costs and are largely fixed, weighing on profitability. However, these airlines do have levers to pull to reduce the impact, including executive pay cuts, hiring freezes, and voluntary leave for employees. We expect the reduction in fuel bills--both from lower consumption due to cuts in capacity and lower jet fuel prices--to offset some of the impact. It has helped that crude oil prices have halved since the beginning of 2020. The Sydney SYD and Auckland AIA airports would face weaker aeronautical revenue from lower passenger volume and weaker retail revenue as airports become less hospitable environments. Capital-intensive projects such as building new terminals may be postponed to free up cash flow and help the airports service their debt obligations amid lower revenue.

We continue to believe that once coronavirus fears fade, air traffic will improve and could overshoot normalized demand for a period as pent-up demand (for example, postponed family vacations or business conferences) is released. So, despite weak short-term earnings, we anticipate the travel downturn to be short-lived and companies with strong balance sheets to be able to weather the storm.

We anticipate a U-shaped impact on demand from COVID-19, similar to the shape of the impact experienced during SARS in 2002, and forecast a return to capacity growth from early calendar 2021. We expect retail revenue per passenger to also recover as passenger confidence is restored. Longer term, we continue to expect growth in the Asian middle class to drive relatively strong passenger growth.

While it's still early, data from China is tracking our base-case expectations. The Chinese carriers began to see traffic bottom in mid-February with fewer flights canceled. Assuming the conditions in China continue to stabilize, we expect domestic passenger traffic to bounce back to 2019 levels in the third quarter of 2020. We anticipate similar patterns (a rebound in the second half of 2020) for the Hong Kong and Singapore carriers. Over the past decades, the aviation industry has been resilient to shocks, including pandemics, and history teaches us that adverse effects on air transport are always temporary. Jelena Sokolova, Chelsey Tam, Brian Bernard, and Angus Hewitt

With People Staying Home, Will Video Streaming Get a Boost? More people staying indoors will likely produce a material uplift in the usage of streaming services and tempt consumers to try new offerings. For the market leaders like Netflix NFLX in the U.S., increased usage may not provide a material uplift in revenue, as most households already subscribe or have tried the service. For newer entrants like Disney+ DIS, however, additional time spent provides an opportunity to accelerate adoption. Companies that plan to launch streaming services later in the year, like Comcast's CMCSA NBC Peacock and AT&T's T HBO Max, may see slower adoption than expected if pent-up demand to get out of the house leads to lower television viewing than normal for a time. Postponing the Olympics will also slow Peacock's launch as Comcast intends to use the event to promote the service.

Similarly, video game usage is likely to rise as people move indoors, potentially providing material revenue gains from both full-game sales and additional in-game purchases. Naturally, we would expect console and PC games to gain more of the additional sales than mobile games.

Mobile games and video content as a share of online activity gained in China during the Lunar New Year period as people stayed home. Global mobile game downloads were up 39% in February as per Sensor Tower, while Apple’s AAPL App Store in China registered a 62% increase in game downloads. Due to the COVID-19 outbreak and the Lunar New Year holiday, China’s mobile time spent share in games was up 370 basis points from Jan. 2-8 to 12.2% during Feb. 4-10, according to QuestMobile. There are reports by 36kr of a surge in traffic in leisure games in China. Puzzle games like Brain Out and Tencent’s TCEHY online battle game Honor of Kings were among the most downloaded games in China as per App Annie. Tencent’s Game for Peace ranked number two in terms of user spending. We think the Chinese online gamer base is mature, given the industry’s single-digit growth, so we don’t expect faster adoption and expect only a boost in earnings in the gaming sector resulting from this pandemic this year.

There is greater upside potential for video streaming services. The outbreak of COVID-19 and Lunar New Year holiday led to a 210-basis-point increase from Jan. 2-8 in mobile time spent share in short videos, a popular form of online entertainment in China, during Feb. 4-10, according to QuestMobile, and online video’s mobile time spent share was up 40 basis points during the period.

Online long-form video memberships have increased as a result, and some could be first-time subscribers. While some subscribers are expected to drop off after the pandemic is over, we think some of them who never paid for online videos might stay if they enjoy the services.

On the other hand, advertising is a significant revenue driver for short- and long-form online videos, and a weak macroeconomic outlook puts pressure on that revenue. As the economy fully recovers after COVID-19, we believe advertising growth will pick up in 2021 to its normalized level. IQiyi, the leader in online long-form videos, expects revenue to increase 2%-8% year over year in the first quarter of 2020, similar to the 7% year-over-year increase in the fourth quarter of 2019, although we would have expected higher revenue growth in the first quarter if not for COVID-19. Michael Hodel and Chelsey Tam