Consumers Driving Travel Despite Costs

Many of the top-weighted ancillary beneficiaries benefit from travel retail and the return of travelers.

LVMH Moët Hennessy Louis Vuitton SE (MC FP, 5.0% index weight), L’Oréal SA (OR FP, 4.8% index weight), and Estee Lauder Companies (EL, 4.8% index weight) are currently the second, third, and fourth largest constituents in the TRAVEL index, contributing 14.6% of weight to the index.(1) These companies are considered “ancillary beneficiaries” of the travel sector and are selected for the index using natural language processing (NLP) to extract keywords from company transcripts. NLP keywords include travel, leisure, vacation, etc. among many others. All three have exposure to “travel retail” which consists of mostly duty-free shops at airports in addition to some sales on-board airplanes, cruise ships, border shops, and certain city centers. L’Oréal refers to the target customers as “global shoppers” who view shopping as part of their travel journey.(2)

Consumers are spending on luxury goods and services despite inflationary pressures.

While companies mentioned above benefit from increased travel and passenger throughput at airports, overall sales also help provide color on where consumers are willing to spend their money. On one hand, consumer spending has been muted for mass market retailers — for example, Wal-Mart (WMT) recently lowered its profit outlook for its 2Q earnings citing less demand in general merchandise including apparel, which has had to take markdowns.(3) This makes sense given that personal savings rates are at their lowest point since August 2009, according to the Bureau of Economic Analysis (5.1% of disposable income as of June 2022).(4) But consumers are still willing to buy luxury goods including handbags, wines, and beauty products despite large price increases from designer brands. As consumers return to socializing in person, they may be more willing to spend money on better quality and higher end clothes, accessories, and beauty products that they may not have been able to justify in the past couple of years. LVMHfor example, reported a 28% y/y increase in its 1H22 total sales with all of its six segments up at least 20%. About half of its sales revenue is derived from its Fashion and Leather Goods segment, which was up the most at 31% y/y. Since 1H19 (pre-pandemic), sales in this segment have been up 74%. And similarly, L’Oréal SA saw increases in both luxury goods and consumer goods but has seen much larger growth in its L’Oréal Luxe segment. In 1H22, the company saw 33.4% growth in net sales in Luxe compared to 1H19. This segment includes higher end products like Lancôme, Giorgio Armani, and Prada. Luxury goods now make up the highest portion of the company’s net sales (37.4% of market share), finally beating out the Consumer Products division which was 37.0% of net sales in 1H22. In 1H19, Luxe was only 36.9% of net sales, while Consumer Products were 42.7% of net sales. The Consumer Products segment includes mass market brands like L’Oréal Paris, Garnier, Maybelline, and NYX.(5)

With higher airline ticket prices, travel has also become a luxury, and similar to the companies mentioned above, airlines are still able to sell tickets at much higher prices (see PRASM below). But airlines have been experiencing a couple of major issues which has muted their performance. First of all, capacity is still constrained with certain airlines experiencing pilot shortages and forced to reduce schedules. While more passengers are traveling compared to last year, TSA passenger volumes in 2Q22 were still 10% below pre-pandemic levels which is about in line with averages for major U.S. airline capacity (see ASM below). Also cost pressures including fuel, wages, and advertising spend are increasing at a faster rate, which is deteriorating profit margins (see CASM below).

TRAVEL is largely driven by the consumer.

Out of its peers, TRAVEL is the most diversified by sector with a large allocation toward consumer discretionary, industrials, consumer staples, and technology. Although only 15.6% of TRAVEL’s constituents by index weight overlap with the Dynamic Leisure & Entertainment Intellidex Index (DZL), the two indexes performed almost exactly in line YTD—suggesting how strongly consumer-driven companies are impacting TRAVEL compared to pure-play travel companies.