For investors who missed out on the strong 2021 US travel recovery, there is an opportunity to participate in Europe’s forthcoming boom.
A strong travel revival is on the horizon for several reasons. Europe’s regulatory environment promotes work-life balance: laws guaranteeing workers at least 20 paid holidays a year have consistently driven Europe’s hotel occupancy above the United States, with the former’s long-term average fill rate at 67% versus 62% (1995-2019). Switzerland is Europe’s least accommodative nation when it comes to paid time off, but it still provides a hearty 20 days of paid vacation and four paid holidays. Spain offers 25 days annual leave and 14 holidays – meaning nearly one in nine days is paid leave.
Europe’s favourable travel environment is also supported by labour protections that provide job security and enshrines into law the ability to take holidays. The UK requires employers to give redundancy pay to laid-off workers, making it financially harder for employers to fire employees. In contrast, the US has no such law..
After initially lagging, Europe’s vaccination rates surpassed the U.S. this summer and have a widening lead. This could increase consumer confidence to return to normal activity. The region’s rising rates allowed for loosened COVID-19 restrictions this summer. European revenue per available room (revPAR) rose from a quarter of 2019 levels in the first quarter to 82% by August.
Europeans have a long and proven affinity for travel; investors should crave this exposure
Europeans have a strong desire to travel, which is evident in their historical demand for holidaying. In fact, our analysis of over 20 years of European and US industry hotel performance data supports our view that Europeans travel more than Americans in all economic scenarios, enriching our stance that the Continent’s desire to travel will buoy a recovery in the region in 2022-23.
We analysed decades of pre-pandemic European and US hotel industry performance data, which highlighted that the desire to travel is strong. Europeans appear to be more price-sensitive to changes in economic growth, which can mitigate the near-term attractiveness of industry growth during economic downturns but benefit growth during economic upturns. Historical performance data shows that both Europe and the US have seen long-term hotel industry revPAR grow ahead of GDP – reflecting the importance travel agendas hold in these regions and offering investors an attractive growth industry opportunity.
We think these factors set Europe on a course for a continued rebound in travel to sustainably higher levels in 2022. Now is a good time for investors to review undervalued names, even though there is, as ever, no complete certainty. The key catalyst for a continued recovery remains the success of the global vaccination effort and reopening of borders. We should be mindful that new variants and a possible surge in infections during the Northern Hemisphere winter could pose the risk of a pull-back in the near term.
Dan Wasiolek is a senior equity analyst for Morningstar
