High-End Consumers Embrace Summer Travel; Delta, Marriott, Royal Caribbean to Benefit

Key Takeaway

• High-income consumers are prioritizing summer travel, benefiting stocks like Delta Air Lines (DAL), Alaska Air (ALK), and American Airlines (AAL).
• Marriott (MAR) and Hilton (HLT) are well-positioned in the high-end lodging sector, with strong RevPAR growth outpacing midscale segments.
• Royal Caribbean (RCL) is favored over Carnival (CCL) and Norwegian Cruise Line (NCLH), reflecting better positioning among higher-income travelers.

Summer Travel Trends

Despite persistent inflation, many Americans are planning to travel this summer, particularly those with higher incomes. A survey conducted by Morgan Stanley and AlphaWise in May revealed that 60% of U.S. consumers are preparing for a summer trip. Among those earning between $75,000 and $150,000, 75% have travel plans, and this figure rises to 78% for those making over $150,000. Higher-income consumers are prioritizing travel over other discretionary purchases, with 21% of those earning more than $150,000 planning to spend "a lot more" and 31% planning to spend "a little more" on their summer vacations compared to last year.

Morgan Stanley analysts, led by Michelle Weaver, noted that companies catering to wealthier consumers are likely to benefit. "Around the pandemic, relative performance for the high end struggled more vs the low end," Weaver wrote. "This has changed post-Covid, and we believe travel names exposed to high-end consumers will continue to outperform those exposed to low-end consumers."

Airline Sector Performance

The airline industry is optimistic about the summer season. Delta Air Lines CEO Ed Bastian highlighted strong demand during the company's earnings call, stating, "We see a record spring and summer travel season with our 11 highest sales days in our history all occurring this calendar year." Morgan Stanley analysts prefer premium airlines, with Ravi Shanker noting that premium cabins have consistently outperformed main cabins by approximately 10 points. Shanker emphasized that premium is also defensive, as high-end consumers are more insulated from macroeconomic pressures and more likely to fly.

Morgan Stanley's top airline stocks include Delta Air Lines, Alaska Air, and American Airlines. Delta, the top pick, is expected to benefit from its strong push into premium services, which should boost ancillary revenues and total revenue per available seat mile/yield. Alaska Air, the second pick, is favored for its domestic premiumization story and its proposed acquisition of Hawaiian Airlines. American Airlines is also recommended due to its clean execution, improving balance sheet, and rising premium revenue, which now makes up 61% of its total revenue.

High-End Lodging Insights

Investor sentiment in the gaming and lodging sector has been cautious, but high-end trends are evident. Morgan Stanley analyst Stephen Grambling noted that upper-scale and luxury revenue per available room (RevPAR) is outpacing midscale and economy segments. Marriott and Hilton are well-positioned to benefit from this trend. Grambling has overweight ratings on both companies, citing Marriott's scale, geographic diversity, and focus on higher-end properties as drivers of above-industry RevPAR and fee growth. Hilton's stable RevPAR and continued buybacks support expectations for earnings per share growth in the high teens to 20%.

Wyndham, although skewed towards the lower end, is also seen as a potential beneficiary. Grambling pointed out that Wyndham's average household income is $95,000, and the company is heavily skewed towards leisure travel, which could drive a multiple re-rating if trends re-accelerate.

Cruise Industry Outlook

The survey results were generally positive for the cruise industry, which has rebounded since being hit hard by the Covid-19 pandemic. However, analysts Jamie Rollo and Stephen Grambling caution that the industry's long booking window may limit revenue beats this summer. They noted that Royal Caribbean and Norwegian Cruise Line, which cater to higher-income brackets, are better positioned than Carnival. Year-to-date, Royal Caribbean is up about 14%, while Carnival is down nearly 19%, and Norwegian Cruise Line has lost more than 20%.

Rollo and Grambling have an equal-weight rating on Royal Caribbean and underweight ratings on both Carnival and Norwegian.

Street Views

• Michelle Weaver, Morgan Stanley (Bullish on travel names exposed to high-end consumers):

  "Around the pandemic relative performance for the high end struggled more vs the low end. This has changed post-Covid and we believe travel names exposed to high end consumers will continue to outperform those exposed to low end consumers."

• Ravi Shanker, Morgan Stanley (Bullish on Delta Air Lines):

  "Since the pandemic, premium has been one of the fastest growing (and likely most resilient) parts of the industry today, with premium cabin outperforming the main cabin consistently by ~10 pts."
  "Delta is Morgan Stanley’s top pick in the space. The airline’s strong push into premium will allow it to outperform... That premium focus will also help boost ancillary revenues, push total revenue per available seat mile/yield higher, and continue to push revenues to all-time highs."

• Stephen Grambling, Morgan Stanley (Bullish on Marriott and Hilton):

  "MAR [Marriott] has been leveraging its scale, geographic diversity, and skew to higher end properties to drive above industry RevPAR and fee growth. The survey only bolsters this view and our expectation for future beats to support the stock."
  "[Hilton's] stable revenue per available room and continued buybacks... support his forecast that earnings per share should run in the high teens to 20%."

• Jamie Rollo & Stephen Grambling, Morgan Stanley (Neutral on Royal Caribbean; Bearish on Carnival & Norwegian Cruise Line):

  "RCL [Royal Caribbean] and NCLH [Norwegian Cruise Line Holdings] skew to higher income brackets compared to CCL [Carnival], so we think the readacross for the higher income consumer favors RCL/NCLH over CCL."

Management Quotes

• Ed Bastian, CEO of Delta Air Lines:

  "We see a record spring and summer travel season with our 11 highest sales days in our history all occurring this calendar year."