Travel Stocks Could Offer Investors a Glorious Trip, This Analyst Says

Conor Cunningham, of Melius Research, is an “uber cruise bull.” Why he likes airlines, Booking.com, and Hyatt Hotels, too.

Travel Analyst Connor Cunningham of Melius Research. (PHOTOGRAPH BY LANNA APISUKH)

Let’s get the bad news out of the way first: Even travel-stock analysts don’t have secret hacks to get cheap airfare at Christmas, says Conor Cunningham, an analyst at Melius Research who has covered the travel industry for nearly two decades.

Cunningham has something else, however: insights into an industry that he says is far less cyclical than people think. Plus, he has stock picks.

“I view travel as a secular growth industry that is going to grow at a much greater rate than gross domestic product,” he says. “There is a perception that people will change their travel plans at the drop of a hat because of economic fears related to tariffs. But I see a consumer who is changing, and is willing to continue spending on experiences more than goods.”

The numbers back him up. Global air passenger traffic grew by a record 10.4% in 2023, compared with a gain of 3.8% in 2019, before the onset of the Covid-19 pandemic. And nearly two-thirds of people surveyed last year by McKinsey said they were more interested in travel than they had been prepandemic.

“People always ask me when travel demand is going to fall off, and my view is, never,” Cunningham says.

He explained why in a June 16 interview with Barron’s, and offered his views on a variety of travel companies and stocks. An edited version of the conversation follows.

Barron’s: The number of international visitors to the U.S. began declining this spring, with a double-digit drop-off from Canada and Western Europe, according to the U.S. Travel Association. Regardless of the cause, which some blame on U.S. policies, is this a concern?

Conor Cunningham: Europeans and Canadians are still traveling, but they just aren’t coming here in the same numbers. If you take a thousand-foot view, however, you haven’t seen any real change in spending on travel. Besides, a lot of companies are agnostic about where customers travel. Booking.com doesn’t care if you’re going to go to Florida or Mexico when you book a trip. Would I like U.S. inbound traffic to be better? Yes, but it doesn’t make or break the demand profile for travel.

Airline stocks soared after the Covid-19 pandemic, but most couldn’t hold their gains. Yet, they ought to be prime beneficiaries of permanently higher travel demand. What is the issue?

The near-term outlook is challenging because we have seen a pullback in corporate travel, and the oil price has spiked. [Oil prices have since retreated.] But, from a long-term standpoint, I am encouraged because the industry structure has changed for the better, demand is strong, and the strongest players are seeing expanding margins. We forecast 1% growth for airlines this year, and 6% next year.

Things changed post-Covid. Basically, the U.S. government bailed out all the airlines. Those that went into the crisis with strong balance sheets, like Southwest Airlines, couldn’t benefit from that advantage.
Also, it is difficult to operate in the current environment because of increased costs and shortages of both labor and planes. And, the ultra-low-cost carriers (ULCC) that once grew by double digits annually can’t grow that fast anymore. They don’t have the assets to do so.

Historically, if you looked at the margin structure of the industry, the ULCCs were at the high end and Delta Air Lines, United Airlines Holdings, and American Airlines Group were at the lower end. Now that order has flipped. The big carriers have all sorts of benefits connected with their loyalty programs, which gives them an advantage over the low-cost airlines.

What needs to change in the industry is a doubling down on return on invested capital, free cash flow generation, and sustained, controllable margin improvement. That is what it will take for investors to embrace the stocks, and for the stocks to shed their image as merely trading vehicles.

What are your favorite airline stocks?

Of the Big Three legacy airlines—American, Delta, and United—we like the latter two the best, but have Buy ratings on all three, with price targets of $13, $53 and $80, respectively. All three trade cheaply, for well under 10 times enterprise value to Ebitda, or earnings before interest, taxes, depreciation, and amortization. Yes, adjusted earnings per share will decline this year, but we estimate they will rebound in 2026, climbing 23% and 18% for Delta and United, respectively, and 116% for America.

Cruising is another travel-related industry that looks a lot different—and a lot better—since the pandemic. What does the future hold?

The cruise industry accounts for 2% of global travel spend. It is a niche industry with a long runway for market-share gains. It isn’t about Royal Caribbean trying to steal passengers from Norwegian Cruise Line Holdings, but about cruise companies attracting people who might otherwise have gone to, say, Orlando or Las Vegas, and getting them on a boat for the first time. We forecast 8% growth for the industry this year overall.

Product drives a lot of this growth. The Icon of the Seas, the biggest ship in the world, which Royal Caribbean launched a few years ago, is a pretty significant change in the industry. It is a ship that offers something for everybody. And at the same time, Royal Caribbean is bringing you to a private destination where they can continue to monetize a higher percentage of your wallet.

So, you have a product that is significantly different and much better than it has ever been. All the cruise companies are launching new ships with bells and whistles that appeal to a younger demographic. Royal Caribbean, for example, would tell you that 50% of people coming onto their ships are millennials or younger. People are more willing to try a cruise than in the past. Cruises are 15% to 20% less expensive than a traditional land-based vacation, so cruise operators have an opportunity to raise prices.

Which of the cruise stocks do you favor?

I cover Royal, Norwegian, Carnival, and Viking Holdings, and I have Buy ratings on every one of the stocks, with price targets of $270, $24, $28, and $51, respectively. Royal Caribbean and Viking are at the forefront of the industry and are considered best-in-breed right now: Royal Caribbean’s management is dead-set on expanding margins and Viking is a unique asset with customer demographic that make its returns much more resilient than other areas of travel.

But I see an opportunity ahead for Carnival and Norwegian, too. I never would have thought I would become an uber cruise bull, but I am. There is just an underappreciation for how good these companies became in the past couple of years. We’re forecasting double-digit growth in earnings per share for all four cruise operators in 2025, from a 44% increase for Carnival at the high end to 13% for Norwegian. We expect that growth will slow next year, but not by much.

Most people still take land-based vacations, though. Which lodging stocks are most attractive?

People think the sector is hugely consolidated, but that isn’t the case. Marriott International has the most rooms in its network, but that is still only around 8% of the total. This is a highly fragmented industry.

Within the hotel group, Hyatt Hotels has a unique opportunity. Investors tend to think they can own Hilton Worldwide Holdings or Marriott forever, and I wouldn’t fight them on that. Hilton and Marriott are good companies with a long growth profile ahead. But Hyatt is now adopting more of an asset-light business model, which Hilton and Marriott have already done. Hyatt has an opportunity to generate a lot more free cash flow as a result of this change. It trades at a discount to Marriott and Hilton on the basis of EV/Ebitda. You could argue that it should trade at a premium, given that it tends to be more high-end.

What is your view of Airbnb?

Airbnb is a unique company. They caught lightning in a bottle with short-term rentals. Now they have become a verb. But they have become overly reliant on the U.S. consumer and the U.S. market. Places like New York City have banned short-term rentals. The company is running into a lot of regulatory barriers, and its growth has slowed materially.

Airbnb needs to start growing again to command a higher price/earnings multiple. How? My view is that they should invest heavily in other markets. They are doing it now in Japan, and have had some success, but growth has been relatively slow. Other companies have made a lot of headway in alternative accommodations, including Booking Holdings and Expedia’s VRBO. We have a Hold rating on Airbnb.

Why are online travel agencies (OTAs) like Expedia so popular when booking directly gets you more perks and loyalty points? Will they be replaced by ChatGPT and other artificial intelligence chatbots? And, which companies are best positioned?

Booking is a great company; we have a Buy rating and a $5,300 price target on the stock, and expect the company will grow earnings per share by 16% this year and 14% next year. Long term, the opportunity set remains significant as the company broadens out its travel offering.

Most leisure travelers are looking to book a trip once or twice a year. They don’t care about loyalty; they’re going purely on price, which makes OTAs attractive.

Is that person willing to pick up a new app, one based on AI, and book on a platform like that? That would be a change in consumer behavior, and many people aren’t there yet. People are willing to use AI when an AI company such as ChatGPT partners with an OTA. We are already seeing this with Booking and Expedia to some degree. You can use AI to plan trips or summarize reviews. Still, OTAs are entrenched in the public consciousness, and I don’t regard the growth of AI as an existential crisis for them.

OTAs need to expand beyond their reliance on lodging, however, and invest in other areas of travel, whether experience or attractions, or bundling–that is, booking your hotel and rental car both on their platform. How does a company get more of the overall travel wallet? By reducing friction and making it seamless to do it all on their platform.

What is your dream vacation?

For our honeymoon, my wife and I went on safari in Tanzania, and that was so much fun. I would love to go back again and maybe see the gorillas in Uganda.

Happy travels, Conor, and thanks.

Write to Teresa Rivas at teresa.rivas@barrons.com