ASX travel shares: Here’s why investors should be on high-alert

Yesterday Alloggio (ASX:ALO) had bad news for shareholders and we think investors in other ASX travel shares should be wary of.

Shares fell 37% after the company announced two things. First, the deal may be called off given that due to the projected financial results in April not looking favourable. And second, EBITDA falling given softening demand.

 

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Demand is softening and Alloggio’s EBITDA is projected to fall

Alloggio had previously told shareholders it expected ‘Forecast Normalised EBITDA’ (being EBITDA less rental expenses) to be $6.4-$8.2m. But now it expects it to be $4.8-$5.1m.

The company told shareholders this was due to softening demand.

‘Booking pace failed to pick up in the traditional post Easter period,’ it said.

‘Reduction in consumer confidence traditionally hits the hospitality industry early in an economic cycle and the low consumer confidence reflected in our April result was mirrored in the Westpac Melbourne Institute Confidence index decline in May and otherwise exacerbated by unseasonable colder conditions in key holiday destinations’.

 

 

ASX travel shares

Investors in ASX travel shares should be wary of this news. For so many months economists have warned that travel demand could be hit by higher inflation and people tightening their belt.

Not only has not been manifest in the results of any ASX travel shares whatsoever, but virtually all companies have said for months that there is no end in sight to the booming demand. Alloggio is the first company to buck the trend.

 

 

This is not the first time the industry has had such a rosy outlook.

Cast your mind back to September 2017. Then American Airlines CEO Doug Parker famously declared that his airline would never lose money again – that turned out well!

 

American Airlines posts US$2.2B loss during pandemichttps://t.co/fk7JK9zbB0 pic.twitter.com/ylJg8R2iBF

— BNN Bloomberg (@BNNBloomberg) April 30, 2020

 

Maybe they wouldn’t have lost money in 2020 but for the pandemic, but we’ll never know.

 

So are ASX travel shares doomed?

Not all of them are. We think Alloggio was more vulnerable because it had a more niche position in the sector.

We think investors should look at ASX travel shares with broader exposure such as travel agents and airlines. But they may want to reconsider investments in more niche stocks such as Alloggio.

To be clear, we don’t expect travel demand to plunge as it did when the pandemic first broke out, or even during the GFC. But we think the run of people taking their first post-pandemic trips are almost over – except maybe people with round birthdays or anniversaries this year. People may still travel, but will travel less and may well spend less money at their destinations.

 

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