Travel demand this year is looking good. With that in mind, I’m looking at travel stocks. Some of the most obvious FTSE 100 candidates include TUI (LSE:TUI) and International Consolidated Airlines (LSE:IAG). But I believe that there’s a more attractive way to take advantage of the surge in holiday bookings.
The stock catching my eye is hotel chain InterContinental Hotels Group (LSE:IHG). Investing in any travel-related company carries risk. Increasing restrictions to travel arising from either the pandemic or the ongoing conflict in Ukraine could negatively impact travel stocks across the board. But here’s why I think that InterContinental is the best way for me to cash in on the return to international travel as an investor.
Business model
InterContinental has an asset-light business model. Instead of owning the buildings that its hotels are in, the company uses a franchise model. Independent operators pay InterContinental a fee to use its branding and become part of its network.
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This gives InterContinental very good control over its costs. During the pandemic, this was particularly important. Where companies such as TUI and IAG had to pay costs to maintain their aircraft and staff, InterContinental was able to leave this to its franchisees.
The benefit of this manifests itself in InterContinental’s financial statements. InterContinental makes more money than TUI or IAG while having lower fixed costs. Moreover, while total debt at TUI and IAG has increased by around 300% since 2018, InterContintental’s debt is only up around 50%.
Switching costs
In my view, InterContinental has another big advantage over its FTSE 100 rivals. Unlike TUI and IAG, InterContinental’s business benefits from high switching costs.
Switching costs at TUI and IAG are low. If I book a holiday with IAG, for example, this doesn’t automatically give me an incentive to do it again. It’s easy for me to shop around for my next holiday and find the best deal, even if that’s somewhere else.
With InterContinental, though, things are different. Its network of franchisees are typically tied into contracts that last between 20 and 30 years, making it expensive for them to leave.
Furthermore, switching to a different chain is costly for the hotel operator. Moving away from InterContinental to a competitor involves renovating and rebranding, which is expensive. As a result, franchisees have an incentive to stay with them in a way that TUI and IAG customers do not.
Conclusion
Overall, I think that InterContinental Hotels is a much more attractive way to take advantage of the surge in holiday bookings than either TUI or IAG. In my view, the company has a stronger business model and a better balance sheet than its FTSE 100 rivals. I’m keeping the stock firmly on my watchlist for now and I’ll be looking to take advantage of any weakness in the share price as a chance to start an investment.
