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Booking Holdings Inc. (BKNG) is a global leader in online travel and related services, offering reservations and sales for a wide range of travel products and services through its websites and brands. The company operates several well-known travel-related websites and services, including Booking.com, KAYAK, Agoda, Cheapflights, and OpenTable. The company offers a range of services to travelers, including hotel reservations, flights, rental cars, and restaurant reservations. Booking Holdings has a strong presence in the online travel industry and has been consistently profitable for well over a decade, making it one of the few companies in this sector that enjoys profits. Even at the height of pandemic fears in 2020, Booking Holdings reported positive earnings, which goes on to highlight the strong brand value associated with the company’s products and its resilience to macroeconomic shocks. At a time when pent-up demand for travel is kicking in following mobility restrictions that lasted well over two years, Booking Holdings seems well-positioned to grow.

The travel sector faces many hurdles

Booking Holdings' revenue staggered during the early stages of the pandemic because of travel restrictions and worldwide lockdowns. The Covid-19 pandemic had a significant impact on the travel industry as many countries imposed travel restrictions and lockdowns in an effort to slow the spread of the virus, which led to a decline in the number of people traveling both domestically and internationally. As a result, many travel companies, including airlines, hotels, and travel booking websites, saw a significant decline in revenue and profitability. Many were forced to lay off employees or declare bankruptcy. This also resulted in a sharp decline in bookings and revenue for Booking Holdings.

In response to the crisis, Booking Holdings took several steps to mitigate the impact on its business. The company implemented cost-cutting measures, such as reducing marketing expenses and suspending its dividend, and it also raised additional capital through a stock offering. In 2020, Booking Holdings reported a net income of just $59 million compared to a net income of over $4.8 billion in the previous year. The company's revenue also declined significantly in 2020, falling by over 50% compared to the previous year.

The travel industry has begun to recover as the Covid-19 pandemic looks less threatening amid global vaccination efforts. In 2021, the company reported revenue of close to $11 billion and a net income of over $1 billion. But the recovery of the travel sector has been uneven, and it may take some time for the industry to fully recover. Some sectors of the travel industry, such as domestic travel and adventure travel, have seen a stronger recovery than others, while international travel and group travel have been slow to recover. The recovery has also been impacted by the continued spread of new variants of the virus and the implementation of new travel restrictions. Some experts predict that the long-term effects of the pandemic on the travel industry may include a shift towards more domestic travel and a greater focus on health and safety measures.

Many travel companies have implemented health and safety measures, such as enhanced cleaning protocols, in an effort to reassure travelers and encourage them to book trips. Some companies have also introduced flexible cancellation policies to allow travelers to change or cancel their plans if necessary. According to the latest UNWTO World Tourism Barometer, international tourism saw a 182% year-over-year increase in Q1 2022, with Europe leading the sector’s rebound.

Many travel companies have implemented health and safety measures, such as enhanced cleaning protocols, in an effort to reassure travelers and encourage them to book trips. Some companies have also introduced flexible cancellation policies to allow travelers to change or cancel their plans if necessary. According to the latest UNWTO World Tourism Barometer, international tourism saw a 182% year-over-year increase in Q1 2022, with Europe leading the sector’s rebound. The below chart highlights how the travel sector has come a long way since 2020 to get closer to a full recovery to pre-pandemic levels.

Exhibit 1: International tourist arrivals (% change over 2019)

Source: UNWTO

The travel sector has also been affected by ongoing Russia-Ukraine tensions and the global energy crisis. This has exacerbated already high oil prices and disrupted international supply chains resulting in higher transportation and accommodation costs. According to Emerging Europe’s recent report, Russian and Ukrainian tourists usually spend around $45 billion per year on outbound travel mainly in countries in emerging Europe. They also made up a larger proportion of tourists in many Asian and Middle Eastern countries over the past couple of decades. However, after the invasion of Ukraine, many countries and regions including Canada, the EU, the UK, and the U.S. banned Russian aircraft from their airspace. In response, Russia banned aircraft from these countries. These sanctions imposed against Russia are now having a negative impact on the global tourism industry. Many non-Russian airlines have to take diversions to avoid flying through Russian airspace, with some of them canceling their flights to certain countries altogether.

Exhibit 2: Top ten destinations in terms of international departures from Russia (no. of travelers, 2021)

Source: Airport Industry Review

Additionally, the weather has not been so cheery this holiday season as well. The snowstorm over the 2022 Christmas holiday resulted in the cancellation of more than 10,000 flights. This might have a near-term impact on the U.S. travel sector.

The path to recovery

The recovery for the travel sector will be an edgy road as short-term challenges arising from lackluster global economic growth will negatively impact the demand for travel. These challenges, however, are unlikely to permanently impair the earnings power of the leading companies in this sector including Booking Holdings. In the next few quarters, Booking Holdings is likely to see an acceleration in gross bookings as travelers finally embrace international traveling in the post-pandemic world. With China recently opening borders, Chinese consumers are very likely to travel overseas and make up for the lost time in the last 3 years, which is good news for the global travel and tourism industry.

The financial performance is trending in the right direction

Booking Holdings released Q3 2022 financial results on Nov. 02 and reported its highest quarterly revenue and adjusted EBITDA ever. Revenue during the quarter surged 29% year-over-year to $6.1 billion and adjusted EBITDA rose 26% year-over-year to $2.7 billion. Gross travel bookings for the quarter ending Sept. 30, 2022, climbed to $32.1 billion, an increase of 36%, and the room nights booked rose 31% from the same quarter last year. The strong results were driven by the record level of travel during the peak summer season. Gross bookings in October were estimated to be up about 30% driven by the recovery in Asia and Europe.

According to company filings, 60% of room nights were booked through mobile phones with 45% booked through the company’s mobile app, a 10% increase over 2019. The company plans to enhance the benefits of the Genius loyalty program to increase engagement and drive more customers to download and utilize the mobile app. The company's investments in technology are finally paying off, which is evident from how consumers are embracing its digital reservation tools in the post-pandemic era.

Takeaway

It is difficult to predict how the travel industry will deal with current challenges this year, but the pandemic is likely to have a long-term impact on how people travel. Shifting priorities in the face of rising prices may have a short-term impact on the travel industry. Despite this, the long-term outlook remains positive, and Booking Holdings is a market leader in this segment. The company is well-positioned to ride the tide and come out stronger in the years ahead, which makes BKNG one of the best bets in the travel industry for contrarian investors looking for outsized returns in the long run.

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