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What are the biggest challenges to travel companies’ success?

As the COVID-19 pandemic swept the earth, governments across the globe engaged in widespread public lockdowns in an attempt to curb the spread. This approach led to the international closure of airports and cancellation of flights, thereby leaving the travel industry to plummet into freefall. Now that the world is on the road to recovery, the reopening of public spaces and the resumption of flights has enabled travel companies to embark on an economic recovery. But while the travel industry experiences rapid growth rates like never before, several challenges are standing in the way of travel stocks unlocking their full growth potential. How can these companies overcome such issues and achieve a full financial recovery?

Returning to normal

Once the travel industry embarked on its pandemic-induced decline, travel companies sought ways to cut expenses in order to salvage any profitability that they could. For many companies, this meant the largescale retrenchment of their workforces.

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In the year following the coronavirus outbreak, 23% of jobs across the leisure and hospitality industry were lost. This figure accounted for 39% of the United States’ total unemployment for that period. Fast forward to June 2022 and 1.4 million leisure and hospitality jobs are still unfilled.

Now as the demand for travel services surges, short-staffed travel companies are faced with the challenge of determining how to meet this demand. In April 2022, air traffic across the U.S. rose by 230.2 percent compared to the previous year. While a rampant rise, this challenge also presents a disguised opportunity. 

While the short-term costs of rehiring and retraining employees may be steep for many travel companies, this will enable them to meet higher levels of demand and, therefore, increase their productivity and earning potential. This means that the short-term expenses should be well worth the medium-to-long terms increase in revenue provided that demand remains steady.

The global fuel shortage

Just as the travel industry recovers from the drawbacks of the pandemic, global fuel shortages threaten to reverse this progress. In the first seven months of 2022, the price of jet fuel has risen by 90 percent to approximately $4 per gallon. 

Airlines are not the only companies reeling from such inflated expenses, however. Rising fuel costs have also affected cruise stocks, with the effects of Russia’s invasion of Ukraine in March 2022 leading cruise lines to consider imposing a surcharge on travelers in order to offset such losses. Although the likes of Royal Caribbean Group decided against doing so, how will airlines and cruise lines overcome this hurdle?

One potential remedy for cruise lines and airlines could be to restructure their capacity deployment, whereby they divert all of their resources and focus to only their most profitable operations. This means postponing and cancelling flights and cruises that are typically less profitable while also avoiding the operation of ghost flights and other low-capacity journeys.

By purely offering their most popular and profitable travel routes, airlines and cruise lines can save more fuel while also using their largest profit margins to offset rising fuel costs.

Although most cruise lines have refrained from charging customers surcharges following the fuel shortage outbreak, smaller cruise ship operators Celestyal Cruises and CroisiEurope have done so. Whether more cruise lines will follow remains to be seen.

Conserving the environment

Today, climate change has emerged as one of the most pressing global issues in the eyes governments, companies and individuals alike. With 40% of Europeans and 38% of Americans being open to giving up flying in the name of environmental conservation, travel companies face the challenge of limiting their carbon footprint in order to earn consumers’ trust.

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Considering that the travel industry has been reported as the source of 8% of global carbon emissions, numerous companies have sprung into action in an effort to boost their conservation efforts.

United Airlines is one of the early entrants in the race to a green future, becoming the first U.S. airline to publicly commit to a carbon emissions reduction target. The company aims to become 100% carbon neutral by 2050. 

Virgin Atlantic has joined as well, entering into an agreement with Neste Oyi to receive a supply of 2.5 million litres/2,000 metric tonnes of neat Sustainable Aviation Fuel (SAF). This fuel is produced from renewable waste and residue raw materials and, in its neat form, is capable of reducing greenhouse gas emissions by up to 80%.

Numerous hotel stocks have also increased their conservation efforts, with Hilton Worldwide Holdings committing to its own net zero emissions goal. To do so, the hotel company aims to reduce its energy emissions and cut both its water usage and waste in half by 2030.

Racing down the road to recovery

While faced by challenges on numerous fronts, there are clearly numerous solutions that travel companies can employ in an effort to continue their steady economic recovery in the post-pandemic world. As such, one might consider investing in travel stocks in the hope of deriving benefit from future growth. 

Important Disclosures:

Fund holdings and sector allocations are subject to change at any time and should not be considered recommendations to buy or sell any security.

The Funds’ investment objectives, risks, charges, and expenses must be considered carefully before investing. The prospectus contain this and other important information about the investment company.

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