2020 has been, to put it lightly, a terrible year for travel stocks. McKinsey projected in October that global tourism revenue may fall to $2.1 trillion in 2020, a 50% haircut from 2019. It also predicts tourism spending will not get back to 2019 levels until 2023 at the earliest. However, in November we got some news that may alter these estimates: three potential COVID-19 vaccines, all with 90% or more effectiveness, that could be ready by the middle of 2021.
A distributed vaccine combined with pent-up demand from a year's worth of quarantining may be just what the doctor ordered for downtrodden travel stocks. Two companies, Booking Holdings (BKNG 1.08%) and Alaska Air Group (ALK 5.08%), are ready to benefit from this change.
Booking Holdings is the largest online travel agency (OTA) in the world. It owns brands like Booking.com, Kayak, and OpenTable and operates in over 220 countries. With the effects of COVID-19 still in full force, revenue was down 48% to $2.6 billion in the third quarter and was down 52.6% for the first nine months of 2020.
At first glance, this looks concerning. However, with Booking's asset-light model (it doesn't own any of the destinations on its platform), expenses can rise and fall along with sales. In fact, if you back out a non-cash charge for goodwill, operating expenses actually dropped 34% over the past nine months, allowing it to generate $662 million in operating cash flow so far in 2020. With $11.8 billion in debt mostly offset by $11.2 billion in cash, investors shouldn't be worried about solvency issues with Booking, especially if the company will still generate cash in 2020.
The stock has recovered to where it traded earlier this year, meaning investors think Booking can get back to its 2019 numbers at some point. But they may need to be more optimistic. For one, its healthy balance sheet gives it a leg up versus asset-heavy competitors. Second, in a recent travel survey, 46% of respondents said taking a vacation would be their family's first discretionary purchase after the pandemic, with a travel advisor stating, "People are desperate to travel again and want to make up for lost time." If true, Booking's financials should not only get back to its 2019 numbers, but grow substantially in the years after COVID-19.
Alaska Air Group
If the travel industry at large is struggling in 2020, then airlines are on life support. Alaska Airlines is no exception. Revenue in the third quarter was down 71% to $701 million, and down 58% to $2.6 billion in the first nine months of 2020. Since the company is an asset-heavy business with tens of thousands of employees, it cannot throttle expenses like Booking Holdings. Alaska is losing $4 million a day as of the end of September, and will likely not get profitable until the vaccine becomes widely available.
This cash burn looks dire, but Alaska has $3.7 billion in cash on its balance sheet and $5.5 billion in total liquidity (which includes any debt it can take on but hasn't chosen to yet), meaning it likely can survive until a vaccine is widely available in 2021. Alaska is a top airline for Hawaii, the West Coast, and Mexico. These destination hubs should be buzzing once international travel starts up again. In fact, in that same travel survey mentioned above, 46% of respondents said taking a trip of 500 miles or more is a priority for their family over the next 12 months.
Alaska may never get back some of its business travel, carries $5.4 billion in total debt, and will continue to have grounded planes throughout the winter. But if investors can see through this current crisis and envision a way for the company to get back to generating $1 billion in operating income a year (which it did in 2019), the current sub-$6.5 billion market cap looks like a bargain.
The world isn't going to stay in quarantine forever. Once a vaccine is widespread, the billions of people who have been stuck in their homes all year will be itching to see the world again. Alaska Air and Booking Holdings, while not perfect businesses, may be an opportunity for investors to get exposure to industries that will benefit in this post-pandemic world.