Amid record revenue figures by Qantas, are tourism profits starting to take off? Newspaper headlines have stated that the Australian dollar is overvalued at current levels and therefore, on a purely theoretical perspective, it would be rational to assume tourism will greatly benefit. However, what makes sense in theory does not always eventuate. While it might appear that the tourism sector largely depends on macroeconomic trends such as; the exchange rate, technological changes and global economic growth, there is much more to this relatively volatile sector.

 

There are two things investors should note when looking for value in tourism: firstly, the tourism sector is notoriously known for its low margins and more importantly each company is exposed to different key variables. When it comes to major players on the ASX (think Qantas, Ardent Leisure and Village Roadshow), each of these companies have extremely large operational costs mainly attributed to wages. However, this is where many listed companies have the ability to differentiate themselves. Qantas is able to reduce labour costs through hiring flight attendants through its subsidiary JetConnect, which is based in Auckland. This means that despite working for Qantas, the staff are paid per New Zealand law, which requires no superannuation payments. Going forward investors should keep an eye out for companies with high debt levels and an increase in operational expenditure. 

 

Secondly, for a sector largely dependent on macroeconomic factors it is important not to be blinded by a lower Australian dollar. Each tourism company is exposed to its own variables. Case in point; Mantra Group is exposed to property leases and its overseas expansion, Ardent Leisure (a breakaway performer) has seen revenue growth from its healthcare clubs and gyms and airlines such as Virgin Australia are exposed to oil prices. One to note is the fact that crude oil trades in US dollars and amid a falling Australian dollar, could negatively impact earnings to not only airlines but related services such as Webjet and Flight Centre. 

 

Although it is possible for tourism to grow and become the next healthcare, a big determinant going forward is for firms to reduce their exposure to each variable factor, e.g. Qantas’s purchase of fuel efficient planes. Yet, in a sector that represents Australia’s third largest export, it can be easy to forget that not all firms are created equal and this especially applies to tourism.

Cameron Hee