In 2020, American Express Company (New York Stock Exchange: AXPBusinesses have been hit hard by the pandemic as consumer activity plummets, 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 and even exceeded pre-pandemic levels, and the recovery of the tourism industry, considered one of the main catalysts for further business growth, remains in question.
Tourism and AmEx
Since a large portion of AmEx’s revenue is related to travel and tourism, 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.
The restaurant business has only recovered to 2019 levels, with occupancy rates for air travel and hospitality continuing to decline, according to the company.
First of all, the recovery of the aviation industry will benefit from the strategic partnership with Delta Airlines (NYSE: DAL) that AmEx entered into in 2019 for a period of 10 years, thus extending the 2014 5-year agreement. Delta provides travel-related benefits and services, including airport lounge access, to select cardholders. Management expects the airlines’ 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 packages 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 use membership reward points directly to book flights and activities instead of transferring rewards to partner airlines or hotels.
In short, American Express has one of the strongest travel business models that creates tremendous opportunity to benefit from the industry’s recovery.
Despite the significant macroeconomic uncertainty and ongoing geopolitical risks, I still don’t believe 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 Co-operation and Development and the World Bank. In recent months, these organizations have significantly lowered their economic forecasts, but they all continue to base themselves 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 predicts that the US economy will grow by 2.3% in 2022 and by 1% next year.
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 we find ourselves in, consumers are reluctant to spend less despite massive inflation as the job 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 faces many problems that it inherited from 2021.
The first 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 eliminating the mask regime and restrictions on international travel. Thus, travelers will have more opportunities to go abroad.
Then inflation. Despite the high prices, travelers are not yet ready to give up on their planned summer trips. Airline bookings in May were 4.4% higher than 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.
A survey conducted by American Express showed that 74% of respondents agree that they are ready to book a flight for 2022 and 86% expect to spend more or the same on travel in 2022 than in a typical pre-pandemic year. At the same time, according to marketing agency Zeta Global, 74% of Americans try to save money while traveling. We can conclude that brand strength and reward system that attract high spenders helps the company to overcome macroeconomic challenges.
I think even though 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 stop consumers from spending less.
Earnings Q2: What are you looking for?
American Express is scheduled to report its quarterly earnings results on July 22.
We will gain valuable information about consumer activity in an economic environment like this. Investor interest will be focused on the Global Consumer Services Group, through which it issues a wide range of different consumer cards. The sector’s revenues amounted to $6.9 billion in the first quarter. I think strong consumer services results will lead to strong AmEx results overall because it shows the brand’s customers are willing to continue spending.
This earnings report is likely to underscore the strength of the brand, helping the company significantly increase transaction volume during the travel season.
2022 is the first non-COVID travel season as many countries lift restrictions in an effort to attract tourists.
American Express is making a strong bet on tourism. Its strategic partnerships with airlines and hotel chains with strong brand names creates a strong revenue stream even if the macroeconomic environment is not ideal.
Looking at the big name and industry recovery as a tailwind, I think the travel rebound continues to be a catalyst for explosive growth. And so, I think American Express stock is He buys.