Profit as Millennials Redefine the Travel Industry
In the most general sense, investment works because of demographics.
Populations grow, incomes increase, and more people with more money buy more stuff. Great companies will do more than their share of selling stuff to people. Great companies will also control costs and boost productivity better than their competitors. And great companies will adapt to change faster than their competitors.
That’s why IBM has thrived while Hewlett-Packard has floundered. It’s why Netflix is a household name and Blockbuster is effectively gone. Great companies not only survive, they thrive. And part of the reason is that they understand their customers. They “get” demographics.
So, as investors, we need to do the same thing. We need to keep an eye on demographic trends, because these are the customers of the future. And that means we'd better be watching the millennial generation.
The millennial generation is the future of the American workforce. They are the future of Starbucks and Netflix and Apple, as well as companies that don’t even exist yet. The millennials will become a powerful economic force. They are the biggest generation yet. They became the largest part of the U.S. workforce in 2015, and they will be inheriting $30 trillion from their boomer parents.
Millennials are only just starting to have kids and buy homes. Their emergence is the demographic and investment trend of the next 20 years or more. And they like to travel.
The Millennials Are Changing Travel
In the U.S., Boston Consulting Group says millennials are far more interested in travel than older generations, and by a 23% margin, no less.
Even the UN is quick to point out that millennials make up about 20% of all international travelers. That’s around 200 million millennial explorers — or, in monetary terms, $180 billion a year!
According to American Express Business Insights, millennials are the fastest-growing age segment when it comes to the amount of cash they’ll spend on such expeditions. And they're doing it differently than other generations, too. A study by Phocuswright, a travel market research firm, gave some interesting statistics and insights:
- More than 70% of millennials took at least one leisure trip in 2013
- Many take four or five trips a year
- 66% of millennials think travel is an incredibly important part of their lives
- 71% of millennials took short jaunts of three nights or less
- Millennials are twice as likely as older travelers to take trips of 14 or more days
This is why we recommended an airline to The Wealth Advisory readers in May.
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Gotta Love LUV
Out of all the airlines in the country — well, out of the handful of airlines in the country — you might ask, “Why Southwest?” One of the reasons is that in the recent backlash against poor customer service, it’s been one of the only to come out shining. Pretty much only Southwest and JetBlue aren’t getting ripped apart on social media for the way they overbook flights and treat customers.
In the past five years, since Southwest started offering its Wanna Get Away discount pricing, the company has grown revenues by 20%. That’s impressive by itself, especially considering the company did that while offering fares far lower than major airlines like Delta, American, and United.
But when you look at the profits the company generated over that half-decade, you’ll really see how well management excelled. Net income grew from $421 million in 2012 to a whopping $2.244 billion last year. That’s a 433% growth in profit over five years, all while offering fares that undercut the competition.
So, how’d they do that? Simple answer: They cut costs drastically. Gross profit margins (what’s left of revenues after paying for the cost of your product) increased from around 50% to 70% between 2012 and 2016. And they did it better than anyone else. Over the same period, United cut costs by about 35%. American cut them by about 20%. And Delta cut expenses by about 30%. But Southwest reduced its costs by a whopping 40%.
Airlines are a huge beneficiary of low oil prices. Roughly half of an airline's costs are fuel-related. But you'll notice that ticket prices have been pretty stable as oil prices have fallen. Those savings go right to the bottom line.
Some of that money Southwest saved got pumped back into advertising. The other airlines were content to rest on their laurels. Management there was thinking that people don’t have a choice and have to buy whatever tickets they sell. But Southwest proved them wrong by targeting millennials with creative advertising campaigns and slogans. And now it’s getting a lot of millennial business.
Southwest started out as a Texas airline that only flew travelers to three airports within the state. Today, less than 50 years after its first flight, it’s the largest low-cost carrier in the world. And it’s got aspirations to beat American, United, and Delta at their own game.
As Southwest continues to expand its coverage and keeps hitting millennials with targeted campaigns, the stock price is going to keep on climbing. Wealth Advisory members bought at $57.09, and it's trading around $62 now. But I've got an $85 12-month target on the stock, so there's still plenty of upside.
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.
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