Damian: And so there's still a big component of that, of that revenge travel, where people were isolated for multiple years and are now looking to travel and experience it.
Chiara: Welcome to the ETF Exchange podcast, where we exchange the latest trends, provide analysis, and share strategies that will help you navigate the complex world of investing. I'm your host, Chiara Carozzi, ETF Business Development Manager here at TD Asset Management.
Today, we'll be taking off on a journey through the booming travel industry. No passports required, but buckle up as we explore how you can capitalize in this high flying sector. Joining me today is Damian Fernandes, one of our star portfolio managers from our public equities team who runs over $40 billion in assets. Welcome to the show.
Damian: Oh, great to be on. And just as a preamble, this is one of my favorite topics. We're talking about one of my favorite pastimes in travel. So really looking forward to it.
Chiara: Absolutely. I'm sure many of our listeners, including myself, share your love for travel. So let's get right into it. So summer is in full effect, and despite economic uncertainties, geopolitical shakeups, there are no signs of stopping the travel bug that's going around. I find friends, family, colleagues are all traveling and either leaving for a European vacation or coming back from one.
I was just traveling to the United States. And I was in line for a Starbucks. And I could not believe the queue. I was in line waiting for around 25 minutes. And recently I read a report that the US domestic travel is busier than ever. I think Sunday, June 23, even broke an all-time record for the most people screened at a US airport, with roughly 3 million people passing through the TSA safety checks.
So it seems like the revenge travel hasn't really gone away. Damian, tell us, what are the main factors driving this recent travel boom? Why is this happening? Are the Swifties contributing to this travel frenzy?
Damian: Yeah, full disclosure, I'm not a Swiftie. I do travel and take occasional pictures. Don't really post them on social media, but maybe I should. I think we can separate that question into two components, what we'll call a cyclical and a secular component.
The cyclical component is just-- you termed it revenge travel. That's really it. We were collectively developed, and even emerging markets faced a certain amount of restrictions during COVID, where people consumed on goods, and you couldn't really do much else. And as soon as restrictions were lifted, there was this idea of I'm almost like I want to break free. Come out of my cave and see the world again because I've been sequestered.
And so there's still a big component of that, of that revenge travel, where people were isolated for multiple years and are now looking to travel and experience it. But then the second-- that's a cyclical component. But then there's a very, very strong structural component. And the structural component has more to do with this term I call experiential consumption, like you experience consumption.
So when you consume things, you can actually consume goods or food, or you can consume services. Travel is a service. And when you look at the data, now going back 25, 30 years, there's been a steady shift in consumption dollars away from goods towards services and things like travel, things like medical advice, things like education. And that continues to take place. And the reason for this is also structural, right?
As people in developed markets are getting older, they have more discretionary income. There's only so many flat screen TVS and cars and patio sets you can buy. But there is so many places to travel that you haven't. And so you're seeing a migration of dollars towards that.
The other really important thing is that in emerging markets, what's actually happening is that they're reaching critical mass of income. What do I mean by that? Think about, like, a hierarchy of needs. Like, in economics, they call it Maslow's hierarchy of needs. The bottom pillar is sustenance-- shelter, food safety. But as you reach higher levels of income, your demand function changes. You satisfied those basic safety needs, and you're looking to explore more.
And what we find is that there's a very sharp line where countries in GDP per capita are over 12,000 to 15,000, they no longer want to take a bus. They no longer want to talk to their relatives across the country on mobile phones. They want to visit them. They want to visit them by jumping on a plane. And so there's all these secular forces-- technology, how much easier it is. I'm pretty sure when you were on vacation in the States, and you were booking your sites, you weren't going into a travel agent. All of these things are facilitating ease of use and travel. And that's why I think it's just such a wonderful long-term secular trend.
Chiara: Yeah, like when think about do I buy another thing for my household, and most of us are running out of space, right? So how else can we spend our dollars? We work hard, so we might as well travel and explore. And I find there is a trend, like you're saying, a lot of people would rather make more memories than purchase a new materialistic household item. Right?
Damian: Especially when those memories are now captured forever in your social media profiles. And I joke about this all the time, but there was a sharp increase in travel and the rise of Instagram because people are looking to demonstrate interesting things on their profile by traveling to new places and taking pictures on wonderful monuments and then getting a degree of likes that is supporting that. And that achieves some sort of satisfaction too.
We can't discount that. The likes and the acclamation people receive from social media channels, that's the same as affirmation you receive from purchasing a new-- I don't know, a clothing item or something material.
Chiara: So this trend is expected to reach 11 trillion by the end of 2024, surpassing pre-pandemic highs of 10 trillion back in 2019. So there's clearly a boom. But, Damian, is this a flash in the pan, or is this growth trend sustainable? Here in Canada, we hear that in July our economy is showing signs of slowing. We've seen less spending at restaurants, less gas station spending as well.
But you still see strong hotel bookings. So what is the global outlook on this? What are the trends that you're seeing?
Damian: Travel's still a consumption item, so it's still beholden to the economic cycle. When times are tough, people will maybe reduce their discretionary spend to travel. But what they're doing is they're reallocating. So, for example, instead of, your case, traveling to the US or Europe, you might decide to have a staycation at home. And so the companies that participate in travel, whether it's the booking sites or the hotel, they're almost indifferent to a certain degree.
Like, you reduce your overall discretionary spend, so airlines might be front and center to that pain. But, overall, you will just increase luxuries that are closer to home as opposed to traveling far off. So I just think that we've opened it up where the world has become smaller. What I mean by that, because of technology and social media accessing far-off places and the enjoyment you get from that is actually-- it's hard to reverse the clock on that.
So I think, yes, we might interrupt if the economic cycle slows. But the long-term secular trends are still in the favor of more experiential consumption via travel.
Chiara: So in-- let's say there's a hard-landing scenario. What are your thoughts? It will only impact travel in the short term?
Damian: I think in a hard-landing center, all travel is impacted because people, if you lose-- in a hard-landing scenario as just described, where you have economic uncertainty or economic calamity, for example, people lose their jobs. Of course, you get back to food on the table, shelter at home, as opposed to vacation in the South of France. That takes precedence.
But it is temporary, right, because economic cycles are cyclical. And as you see a recovery-- we saw what happened in COVID, I think that will just play out. And I think that whenever we think about investing, for us, we're always-- on our desk, we think about investing for the longer term. Like, where do we find opportunity, where we can tie to these secular trends and where the marketplace is so focused on are we in recession next quarter as opposed to where are we going to be in three years?
Chiara: So those are all really fascinating points. And I think for us as investors, the question is, how do we identify companies that we get the most return on our dollars? Intuitively, when we think about travel, we think about airlines and cruise ships. But why might there be better opportunities elsewhere? And how are you as a portfolio manager thinking about exploiting this travel trend?
Damian: Yeah, I think, think grand. Reflect back on your more recent travel experience. What was the last time you actually took a plane?
Chiara: A month ago.
Damian: One month ago. Where did you go to?
Chiara: Went to Italy.
Damian: So, see, it feels like we're playing reverse here. I'm asking the questions. So your trip to Italy, the initial booking for that trip was likely done on an OTA, on an Online Travel Agency, right, something like either like booking.com, where you compare prices. Chances are Italy is an EU country, so you don't need a visa. But a lot of visas now you can actually access them online. You don't have to go into an embassy. So there you have, you know, technology helping that.
Once you step into the airport, airports are private operators. So a lot of these airports, you can invest them, particularly in Europe. They're like toll roads. The more passengers go through the airport, the more profitable they are. And you can even think about an airline you took. Yes, hopefully it's not a Boeing. Want more recent things. But maybe it's an Airbus or Boeing. So those are airplane manufacturers. But the really wonderful part are the companies that make the parts that go into them.
Think about GE that makes the engine parts or a company that we like called Howmet that makes component parts that go into making the framing of your fuselage in your aircraft. And then once you land at your destination, obviously you have the hotel you're staying in. And it's a capital light business model. For example, most hoteliers don't own the property. They just take care of it and charge owners an ongoing fee and an incentive fee.
There's so many different-- most people when they think about travel, they're like, I don't want to own a cruise ship. For my part, I probably wouldn't-- I haven't gone on a cruise ship yet. It's one of the few travel things that I'm still open to doing. But it's not cruise ships and airlines and Boeings. It's so much broader. It's the credit card companies that earn-- whether it's Visa or Mastercard, they earn significant profits from cross-border transactions. When you are in Europe and you're swiping your card, they earn significant fees from you doing that because you're domiciled in Canada.
Chiara: Yeah, and it's also the logistics to and from the airport, booking the restaurants, and all that.
Damian: The Ubers and the recommendations and all-- it's such a broad industry. And there's so many ways to exploit it.
Chiara: So you mentioned hotels. And that's one of the areas and companies that you like to invest in in this travel trend. How do you anticipate the new regulations with Airbnb impacting the growth for hotels?
Damian: I think traditional-- Airbnb is going to face some issues. They just reported. Hotels are a little insulated because the problem with Airbnb right now is, particularly in certain places where they operate, is that there's a shortage of housing. And the domestic municipalities that are there are almost reluctant to-- they're saying, well, why do you have vacant apartments when we have a shortage of housing in the city?
That doesn't hold for a hotel, right? A hotel is already-- the hotel's built. It's an operator. So we're almost biased towards the hoteling model versus to these newer forms of lodging like Airbnb or MyStay. Just because the hoteliers have already received approval from the municipality to build, to construct, to actually operate that. And that doesn't take away housing units from the existing thing.
So I think those are important regulatory changes you have to be aware of. We just like hotels because when people either stay at a Hilton or a Marriott or a Fairmont-- which is owned by a European company called Accor-- they think that these hoteling companies own the property. But they don't. These hotelling properties sell the property.
Chiara: The brand, right?
Damian: They just own the brand. They own the loyalty. They own the points. They provide the services. So these capital-light business-- I mean capital-light, meaning they don't actually own a lot of assets that are highly profitable, that are tied to these secular trends. For us, these are almost like clipping coupons. They keep recurring on an ongoing basis.
Chiara: So you talked about many interesting business models and value chains. You talked about hotels and part suppliers. Are there any other business models that are your favorite? What are you holding in your portfolios, maybe how long you've been holding them for?
Damian: So, for example, in some of our favorite products are the global enhanced ETF that Ben Gossack leads and I co-manage. It's similar to the US enhanced ETF. These are wonderful high-quality companies. And the ETFs are constructed to pay for things. But we are tied to secular trends in them. So within those, we own parts suppliers, companies like Howmet, that provide ongoing maintenance and parts to the airline manufacturers. We also own hotels in those.
And we're always thinking about what are different ways we can exploit this theme. And we can exploit this theme in a reoccurring cash flow. We stay away from capital intensive industries, think cruise lines. They own the cruise ships. If, god forbid, there's an outbreak on that cruise ship, that's a lot of money lost. That doesn't happen in a hotel, right?
So we'd much rather own the companies tied to-- for example, we did a lot of work on this-- between an aircraft manufacturer and a part supplier, you'd rather own the people who provide aircraft parts because they have ongoing maintenance. That's where they earn a lot of their income. The aircraft has to replace the item, has to, like, just because from wear and tear. So these annuity-like business models-- all your listeners know what annuity is-- that's where we gravitate to. And that's what's sitting in our global enhanced ETF and our US enhanced ETF.
Chiara: Yeah, I really like those themes because, like you said, it's an ongoing revenue for the company, less capital, and if anything were to arise, you don't have to worry about that because it's an ongoing revenue stream.
Are there any final thoughts you want to leave our listeners with? Maybe, what are things that investors need to consider when wanting to capitalize on this trend?
Damian: We'll end on risks and opportunities. And the risks are, you did identify there, which is that the risks are economic. Travel is still discretionary. It's not a staple item. It's not like buying a loaf of bread or some other staple item. So it is discretionary. So if you do come into some weakness, travel stocks will feel some pain. But don't let that-- I think about that as being an opportunity because of the longer term trends in place.
And then the second thing is just-- the opportunity ahead for all these listeners is, the next time they book a trip, whether it's done in an online travel agency and then they take an Uber to the airport, and they've signed up with an airline. And they're placed on a plane, and they're looking and they're fiddling with their seat belt. I can just go on about all of the different value chains. They get to their destination, and they check into their hotel.
There's so many different value chains tied to that. And I think when people think travel, they're like, it's almost myopic. They're like, oh, I don't want to own an airline or a cruise ship. But there are such wonderful business models that we spent a lot of time analyzing that actually sit in our portfolios that we're super excited about.
Chiara: Yeah, so as an investor, really take a step back. And every step of the way that you're planning your vacation or your trip, think about, oh, what companies are behind the scenes working to get me to point A to point B. And then maybe that's an opportunity that they could take advantage of.
So in another decade, tourism is set to become a $16 trillion industry. And if you want to take advantage of this growing opportunity in the travel industry, please check out our ticker TGED, TD Global Active Enhanced Dividend ETF, and ticker TUED, TD Active US Enhanced Dividend ETF. Both of these are 5-Star Morningstar rated funds, top percentile ranking in their respective categories, and are a great option to give you exposure to some of the sectors and companies we talked about today.
Thank you so much for your time, Damian, it was a pleasure.
Damian: Pleasure's mine. Always love talking about things that are both personally and professionally interesting.
Chiara: Awesome. Thank you.
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