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IT’S January 2021, and any summer travel plans were made more in hope than expectation. Fast forward 12 months, and a more positive picture on the pandemic has translated into renewed vigour for travel  - an extra 7% of us are planning a trip abroad this year compared with last.

This should spell good news for the travel industry, which can consider itself among the worst affected by the pandemic.

Is now the time for investors to turn their attention to travel stocks? And if so, what do you need to know before investing?

Reasons to be cheerful

We began the year with Omicron casting yet another gloomy shadow over the beleaguered travel sector, but those initial fears are starting to calm. While the virus has spread like wildfire, Omicron appears to be less potent than previous strains.

With fears beginning to abate, travel restrictions are also easing. Earlier this month, the government scrapped pre-departure tests for travellers entering the UK. For a family of four, that means saving around £500.

For short-haul flyers, this is all good news. Ryanair and easyJet have both seen their share prices comfortably beat that of the wider UK market so far this year, as investors ride the latest upward wave of optimism. Wizz Air, another short-haul airline listed in the UK, reported a 296.3% increase in passenger numbers over the last month compared with December 2020. Most people expect airlines to continue along this positive trajectory through this year.

Of course, we’ve been here before. Take a look at these companies’ share prices over the past 20 months and you can trace the mood of the UK as its hopes rise and fade. Optimism now could easily be hit by a fresh wave of pessimism soon.

Meanwhile, most travel companies’ financial footing remains precarious. The three airlines above have made significant losses over the past couple of years - easyJet, for instance, recorded its first-ever annual loss in 2020, followed by another £1.13 billion loss in the financial year to the end of September.

Could there be further turbulence ahead?

The threat of the pandemic

Any new restrictions caused by the virus would clearly cause concern. Whether it’s a new strain of the virus or the misadventures of a tennis player, we’ve seen already this year that travel is still far from normal.

The initial response to Omicron heralded a host of new restrictions. The government swiftly reintroduced a “red list” of countries, while neighbouring countries like France and Germany effectively banned travellers from the UK.

The extent of the disruption to travellers contrasted with a relatively muted domestic response, highlighting how travel remains particularly exposed to the whims of the virus.

Those restrictions have since, for the most part, been lifted, but that’s only half the battle. The threat of constant chop and change breathes doubt into an industry that relies on assurance. As Ryanair boss Michael O’Leary put it, “Travel only exists in a degree of confidence.”

It’s for this reason that more domestically focussed companies may prove a more stable investment over the short term.

Coach companies like National Express require less forward planning, which stands in their favour in an uncertain environment.

That’s not all that makes National Express attractive right now. In December, the company announced that it had agreed a share-based takeover of Stagecoach. This looks like a shrewd acquisition. The company hopes it will expand its “growth businesses” such as private hire coach and shuttle operations.

While National Express has certainly not enjoyed the pandemic, it’s also been well supported through government financial support schemes. The £3 billion National Bus Strategy, announced in spring last year, should provide a boost going forward.

At the other end of the spectrum stands IAG, owner of British Airways. Unlike budget airlines such as easyJet and Ryanair, IAG focuses on long-haul international flight. That’s made it particularly vulnerable to Covid restrictions and the slowdown in business travel (more on that below). Even as other airlines began to recover some lost ground through the pandemic, IAG has proved a slow burner.

However, the reopening of transatlantic flights to the US suggested there may be light at the end of the tunnel for IAG. A relatively strong balance sheet should also see it stomach further losses through the short term.

A similar case can be made for Rolls-Royce, which (among other things) supplies plane engines.

Rolls-Royce is another that will take a while to bounce back, as increased travel demand slowly translates into increased engine production and maintenance.

In order to shore up its cash position, Rolls-Royce has opted to streamline operations by selling parts of its business and cutting jobs. These moves, coupled with its relatively resilient space and defence businesses, have kept the company afloat. If it can keep that momentum, the company could be in a strong position as we emerge from the pandemic.

The future of flying

The issues don’t stop with Covid, however. Quite apart from the virus, there are fears within the industry that flying has lost some of its lustre.

So far, we’ve seen a bounce in flights as travel has reopened, but it’s been muted: international travel over November (pre-Omicron) remained down 47% on 2019’s levels. It’s an unfair comparison, and will continue to be so long as the pandemic lingers, but that’s a big, big drop.

Today’s recovery bears resemblances to the situation immediately following 9/11. There was a belief then that aviation had taken a permanent hit following the terror attacks - of course, in reality, flights returned to their pre-9/11 peaks soon thereafter.

While flights this time round have fallen far further than they did then, the international recovery remains notably subdued.

Is this simply because the pandemic lingers, or has something permanently shifted in people’s approach to travel?

The swift recovery of domestic travel implies it’s the former rather than the latter. But there are significant obstacles that may suggest otherwise.

Covid has certainly made international travel more of a hassle. Forms, tests, masks - many people can’t be bothered. After the opportunity to enjoy a staycation or two, some of us may have concluded that international travel no longer appeals.

Perhaps more importantly, the shift to home working looks to have permanently scuppered international business travel. Many companies have seen their businesses thrive in a remote set-up, to the extent that most industry analysts don’t expect business travel to return to a pre-Covid level. Even if white-collar workers do gradually return to offices, expensive and difficult trips abroad seem a bridge too far. An ever-intensifying focus on companies’ carbon footprints may also keep workers grounded.

In this light, perhaps investors should open their eyes to alternative travel companies, such as cruise line Carnival. The industry has been able to recover its operations at a faster pace than airlines, and an early go-ahead for round-UK cruises drew a good proportion of travellers who were new to cruises.

However, cruise lines are a risky call. The industry ground to a sudden halt early in the pandemic, and the burden of maintaining a hoard of stationary ships has seen it encumbered with mountains of debt. Carnival has amassed a healthy volume of cash to cover its short-term obligations, but investors should be aware that there could still be choppy waters ahead.

Sustainability will be key

Perhaps the most important long-term shift could be climate change.

Over the course of the pandemic, sustainability has come further to the fore. Some people now view international travel as environmentally irresponsible, and even those with more moderate views may be questioning the amount of travel they do in the future. Recent news of airlines flying empty planes in order to hold onto take-off and landing spots has not been a good look.

Right now, zero-emissions planes look far off, and many technologies to decarbonise flights remain prohibitively expensive. That leaves the long-term future of aviation looking precarious.

While regulatory pressures will certainly intensify, what remains to be seen is how far people are willing to cut out flying for the sake of the environment. According to Deloitte, 24% of UK adults who planned an overseas flight last year were worried about the impact of their flight - an increase of 4% on the year before.

The question now is how far those anxieties will translate into aversion. Perhaps the pandemic provided a final nudge for people to kick their flying habit - or, maybe its absence made their hearts grow fonder.

Important information: Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. When you are thinking about investing in shares, it’s generally a good idea to consider holding them alongside other investments in a diversified portfolio of assets. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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