American Express: Travel Rebound remains a catalyst for growth (NYSE: AXP)

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hypothesis

In 2020, the American Express Company (New York Stock Exchange: AXPBusiness has been hit hard by the pandemic as consumer activity is down, and travel, an important part of AmEx’s strategy, is no longer a regular part of people’s lives. While consumer activity has It has long returned to pre-pandemic levels and even beyond, and the recovery of the tourism industry, which is one of the main catalysts for further business growth, remains in question.

Tourism and AmEx

Since a significant portion of AmEx’s revenue is related to tourism and travel, further growth will be supported by the recovery of this region. Travel and leisure account for 23% of total revenue, down from 32% in 2019.

American Express Revenue Distribution

American Express

The restaurant business has only recovered to 2019 levels, with occupancy rates in air travel and hospitality continuing to decline, according to the company.

Travel and Leisure by Industry

American Express

First of all, the aviation industry’s recovery will benefit from the strategic partnership with Delta Airlines (NYSE: DAL) that AmEx entered into in 2019 for a 10-year term, thus extending the 2014 5-year agreement. Delta provides travel and service benefits, including access to airport lounges, to select cardholders. Management expects airline capacity to reach 2019 levels in 2023. In addition to Delta, American Express has partnerships with British Airways, Emirates, Etihad and Finnair.

American Express also offers unique offers to its partners in the hospitality industry. For example, the company partnered with Hilton (HLT) in the fourth quarter of 2021 to develop an attractive welcome bonus program with the ability to earn membership rewards. Partnerships with Hilton, Marriott (MAR) and Radisson, where owners can redeem points earned on the AmEx network, will also increase revenue.

At the same time, the company owns amextravel.com, which has more than 1,800 hotels. The portal allows users to book flights and directly use Membership Rewards points to book flights and activities instead of transferring rewards to partner airlines or hotels.

amextravel.com

amextravel.com (American Express)

In short, American Express has one of the strongest travel business models that creates a huge opportunity to take advantage of the industry’s recovery.

Macroeconomic environment

Despite significant macroeconomic uncertainty and ongoing geopolitical risks, I still don’t think a recession is inevitable. This is also indicated by the estimates of leading international organizations such as the International Monetary Fund, the Organization for Economic Cooperation and Development and the World Bank. In recent months, these organizations have significantly lowered their economic forecasts, but all of them have continued to build their foundation on global GDP growth in 2022 and 2023, with positive dynamics expected in all major countries and regions of the world. In particular, the International Monetary Fund in its latest report expects the US economy to grow by 2.3% in 2022 and by 1% next year.

IMF GDP forecasts

Bloomberg

Against this background, we can say that the US economy is not weak enough to prevent people from traveling. Due to the unusual macroeconomic environment in which we find ourselves, consumers are reluctant to spend less despite the massive inflation as the labor market remains very strong. Thus, we can also count on further growth in consumer and business spending on American Express cards.

Travel season 2022

The 2022 travel season has a lot of problems that it inherited a lot from 2021.

The number one problem to overcome was COVID. According to the New York Times, as of July 14, 73% of the US population between the ages of 18 and 64 has been fully vaccinated. A large number of countries are abolishing the mask regime and restrictions on international travel. Thus, travelers will have more opportunities to travel abroad.

Vaccination according to age groups

nytimes.com

Then inflation. Despite the high prices, travelers are not yet ready to give up on their planned summer excursions. Airline bookings in May were 4.4% above pre-pandemic levels. As of the end of May, the number of tickets sold for the summer season was only 2% lower than in 2019.

An American Express survey showed that 74% of respondents agree that they are willing to book a flight for 2022 and 86% expect to spend more or the same on travel in 2022 compared to the model year prior to the pandemic. At the same time, according to marketing agency Zeta Global, 74% of Americans try to save money while traveling. We can conclude that the strength of the brand and the reward system that attracts high spenders helps the company to overcome macroeconomic challenges.

I think while the 2022 travel season still faces some headwinds, it will be offset by huge pent-up demand. As mentioned earlier, the current economic environment will not prevent consumers from spending less.

Q2 Earnings: What are you looking for?

American Express is scheduled to report its quarterly earnings results on July 22.

We will get valuable information about consumer activity in an economic environment like this. The attention of investors will be focused on the global consumer services group, through which a wide range of different consumer cards are issued. Revenues for this sector were $6.9 billion in the first quarter. I think the strong consumer services results will result in strong AmEx results overall because it shows the brand’s customers want to keep spending.

This earnings report is likely to underline the strength of the brand, helping the company to significantly increase transaction volumes during the travel season.

conclusion

2022 is the first travel season outside of COVID as many countries lift restrictions in a bid to attract tourists.

American Express has a strong bet on tourism. Its strategic partnerships with airlines and strong brand-name hotel chains create a robust revenue stream even if the macroeconomic environment is not ideal.

Given the big name and the industry’s recovery as a tailwind, I think the rebound in travel remains a catalyst for explosive growth. Thus, I think American Express stock is He buys.

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