Morgan Stanley’s top travel stocks this summer

Americans might be watching their spending amid persistent inflation, but it’s not deterring many of them from traveling this summer — especially those with higher incomes. Morgan Stanley and AlphaWise polled about 2,000 U.S. consumers in May and found that 60% of consumers are preparing to take a summer trip. Among consumers who earn between $75,000 and $150,000, 75% said they have travel plans, and the figure jumps to 78% for consumers making more than $150,000, the poll found. What’s more, those higher-income consumers are making travel one of their key priorities this summer when compared to other discretionary purchases, according to the survey. They also plan to dig deeper into their wallets this year, with 21% of those in the $150,000-plus bracket saying they plan to spend “a lot more” compared to last year, and 31% planning to spend “a little more” on their summer vacation. Therefore, companies with exposure to the wealthier consumer should benefit, said a team of Morgan Stanley analysts led by Michelle Weaver. “Around the pandemic relative performance for the high end struggled more vs the low end,” she wrote in a May 15 note. “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.” Top airline picks The airlines are painting a rosy picture for the summer . Delta Air Lines CEO Ed Bastian said on his company’s earnings call last month that demand continues to be strong. “We see a record spring and summer travel season with our 11 highest sales days in our history all occurring this calendar year,” he said. Morgan Stanley continues to prefer the premium airlines. “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,” analyst Ravi Shanker wrote. Premium is also defensive, with the high-end consumer more isolated from macroeconomic pressures than the low end and more likely to fly, he noted. Delta is Morgan Stanley’s top pick in the space. The airline’s strong push into premium will allow it to outperform the rising tide of overall airline demand, Shanker said. 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, he said. His No. 2 pick is Alaska Air , thanks to its domestic premiumization story. Its proposed acquisition of Hawaiian gives Alaska Airlines a much larger piece of the premium market, he noted. Shanker also likes American Airlines , which he said “may be one of the cleanest stories among our coverage with rising numbers, clean execution, improving balance sheet and low noise.” Its management has also noted its premium revenue is nearly 20% from last year and currently makes up 61% of revenue, he said. Playing high-end lodging While investor sentiment has been cautious across the gaming and lodging sector, the high-end trends can be seen in the sector after “peeling back the onion,” said Morgan Stanley analyst Stephen Grambling. Upper scale and luxury revenue per available room are outpacing midscale and economy, he noted. Marriott is the most exposed name within his coverage to the trend, while Hilton should also benefit, he said. He has overweight ratings on both names. “MAR has been leveraging its scale, geographic diversity, and skew to higher end properties to drive above industry RevPAR and fee growth,” Grambling wrote. “The survey only bolsters this view and our expectation for future beats to support the stock.” MAR YTD mountain Marriott year to date With Hilton, he highlighted the company’s stable revenue per available room and continued buybacks, among others, which support his forecast that earnings per share should run in the high teens to 20%. He also likes Wyndham , although it has a lower-end skew versus other lodging corporations, he said. “Wyndham’s average household still makes $95k and the company is much more skewed to leisure travel (71% vs. MAR/HLT < 50%),” Grambling said. “As such, a re-acceleration in trends could be enough to drive a multiple re-rating.” A mixed picture for cruises The survey results were also generally positive for the cruise industry, which came roaring back last year after being decimated during Covid. However, the industry has a very long booking window and analysts Jamie Rollo and Stephen Grambling don’t think cruise lines are likely to see revenue beats this summer. “RCL and NCLH skew to higher income brackets compared to CCL, so we think the readacross for the higher income consumer favors RCL/NCLH over CCL,” they said. This year, cruise stocks have seen mixed results. Royal Caribbean is up about 14% year to date, while Carnival is down nearly 19% and Norwegian Cruise Line has lost more than 20% so far this year. Rollo and Grambling have an equal-weight rating on Royal Caribbean and underweight ratings on both Carnival and Norwegian. — CNBC’s Leslie Josephs contributed reporting.