Q-Series: Running away rather than towards the summer sun?

Climate change is expected to impact a number of aspects of our daily lives which we currently take for granted. Increasingly the impact from climate change is being felt on tourism in terms of where, when, how and the cost of travel. In this note we try to address the impact climate change will have on tourism from the perspective of suppliers (hotels, airlines, tour operators, cruise liners, aerospace and airports) and consumers (travel patterns and costs will evolve), as well as on countries reliant on tourism.

We see the cost of travel increasing over the coming years as companies race to achieve net zero and governments through punitive taxation increase the pressure on travel related companies to reduce emissions and capital investment. Indeed in terms of IATA's roadmap to net zero transition between 2024-2050 they think transitions costs will be USD 5 trillion while the capex need will be USD 4-8 trillion due to capital investment in for instance SAF facilities. Furthermore, certain hospitality companies may find they need to amortise investment quicker or reinforce investment to withstand global warming (for instance hoteliers on coastal regions which are exposed to rising sea levels). Travel demand is highly elastic so any increase in costs would reduce demand, all else being equal.

We already are seeing travel patterns change given the impact from climate change. Furthermore, our empirical case study finds that a 1% increase in temperature impacts Spanish tourism by more than 1% in volume. Some studies suggest that Spain could see temperatures 7°C higher at the end of the century compared to today, and the volume effect is likely non-linear in our view. Furthermore, we are also seeing the impact on ski slopes, outdoor related activity and indeed the concept of “last chance to see” tourism. An IPCC analysis shows that tourism in Europe would reduce by 5%, i.e., Euro 15 bn p.a. due to 2°C of warming, while Southern Europe would lose up to 11% of tourism revenues, i.e., Euro 6 bn p.a., and the UK would potentially gain by Euro 0.5 bn p.a.

We think travel growth will likely be negatively impacted in certain regions (such as Southern Europe). Furthermore, risk premia could rise over time to reflect increased risks and impact valuations. Challenges of climate change will likely drive some of the weaker players out of the market and lead to greater industry consolidation through both organic and inorganic growth. We think this represents opportunity for the larger players who would benefit from a more disciplined pricing environment and lower competition. Nevertheless, we also see an operating and capex headwind for the tourism industry.