It’s not every day you hear an argument in favour of investing in airports during a global pandemic.
More so as Europe lurches between total and partial lockdowns which bar most people from travelling1.
But Andy Jones, the London-based portfolio manager and analyst at AMP Capital who specialises in transportation infrastructure, has been following the sector for more than a decade through its highs and lows.
And his view is that after years of airport companies looking expensive, they suddenly look good value again and that the doom and gloom in the industry due to COVID-19 is both misplaced and temporary.
“I don’t for a moment believe that post COVID-19 people won’t want to see the Eiffel Tower, the Vatican or the Sydney Opera House,” says Jones.
The air travel industry hasl ong been attractive to investors, chiefly because it tends to grow faster than global GDP.
The International Civil Aviation Organization (ICAO), an arm of the United Nations, records that since 1995, global GDP has grown at an average 2.8 per cent but world passenger air traffic has increased at an average annual rate of 5 per cent2.
I don’t for a moment believe that post COVID-19 people won’t want to see the Eiffel Tower, the Vatican orthe Sydney Opera House.”
– Andy Jones, AMP Capital
There’s also an interesting relationship between GDP per capita and the propensity to travel,” says Jones.
“It spikes quite a lot once you get past a certain level of GDP per capita.”
“Clearly in places like the US, UK and most of Western Europe, we have quite wealthy countries and travel won’t grow much beyond GDP.”
“But when you look at countries like China, India and Brazil, they’re still right at the bottom of the curve.”
“They have low GDP per capita and a very low propensity to travel. A small change in GDP per capita in those places will lift their propensity to travel disproportionately.”
It is this relationship to global growth and income that is behind Jones’s faith that the industry has decades of growth ahead of it despite the current dislocation.
To be sure, the pandemic had a significant impact on the industry.
ICAO says air travel has fallen 50 per cent in calendar 2020 from its normal activity as measured by seats offered, while the overall number of passengers flying has fallen about 60 per cent year-on-year, with the worst hit regions like Europe down 75 per cent even after a ‘normal’ Q13.
“But I don’t think the primary reason is because people are scared of catching COVID-19 on a plane,” says Jones.
“People are more scared of being stranded in another country because the rules change when they’re abroad.”
The International Air Transport Association (IATA), a trade association of the
world’s airlines, has been keeping track of the number of COVID-19 cases transmitted on flights.
Since the beginning of 2020, 1.2 billion passengers have travelled. But just 44 cases of COVID-19 have been reported in which transmission is thought to have been associated with the flight4.
As IATA proclaims on its website, that’s one case for every 27 million travellers5.
Jones believes the real driver of decline is a lack of policy consistency, contrasting Australia and New Zealand’s stringent but unwavering travel bans with the chopping and changing of policy responses in Europe.
“In Europe, each country has a different approach, each country has different rules and the rules have changed frequently,” he says.
“It’s basically created a complete lack of confidence for travelers.”
This fuels his confidence of a swift return to growth as things settle down: “We’re currently expecting the 2019 volumes to come back in 2023 and 2024.”
Jones was not always this confident in the investment case for airports.
“Generally, my view was that many listed airport companies were overvalued for much of the last four or five years,” he says, adding “we found we needed to invest very selectively within airports.”
But with the pandemic halving the share prices of many airport operators, the industry has come strongly onto his radar.
Valuations aside, Jones believes the pandemic is likely to eventually leave the industry on a more sustainable footing.
He says the pandemic has given airports a chance to reset their relationships with regulators which bodes well for investors who stick with the industry.
“Airports have their own regulatory cycle like a utility, and we were at a point where after five very strong years of growth they were about to get into some quite noisy discussions with regulators,” says Jones.
“And then all of a sudden you hit COVID-19 and all discussions have a very different starting point.”
He expects the relationship between airports and retailers, which had got out of balance in recent years as power shifted towards the airports, to be similarly reset.
“The retail relationship has been quite unhealthy. The effective rent in an airport was three to four times what you’d be paying to be in a high-end shopping mall,” he says.
In AMP Capital’s experience, airports tend to charge rent on a sliding scale with a minimum guarantee and a maximum set by percentage of sales, sometimes at 40 per cent or more.
“Retail revenue in shops is pretty close to zero at the moment, and those minimum guarantees have become completely untenable,” says Jones.
“So, the model has fallen apart.”
Jones says this means the airports and their retail tenants have had to restructure to reduce the minimum guarantees, reduce the rents and often extend the contracts.
“Generally speaking, it is going to lead to a lot more joint vision between the landlord and the retailer.”
“This move to a more joined up approach will actually reinvigorate the rate of growth in spending in airports.”
Meanwhile, Jones says some of the technology that airports have been forced to install during the pandemic will pay off in reducing their costs and improving the airport experience in future.
Some airports have been investing in reducing human contact at check in, security and border control making the process of moving through an airport more frictionless.
The UK is trialling facial recognition technology on domestic flights that allows passengers to avoid handing their passports or ID cards to boarding agents.
Some airports in China aim to use facial recognition through the entire airport process.
These systems are being installed to reduce human-to-human virus transmission, but they are having the side effect of making the airport experience more pleasant and freeing up people’s time for shopping and eating.
Jones says cleaning is another area where airports are investing in automation in response to customer expectations of clean, virus-free surfaces.
“Cleaning is actually one of the levers that an airport can tweak up or down to make a material difference to the cost base,” says Jones. “It’s a very labour-intensive activity.”
“If you can have a broader adoption of automated cleaning robots then that is something that will come at an upfront cost – when capital is very cheap – but will be worthwhile for an airport in the long run.”
Another factor supporting the outlook for airports is that falls in the cost of travel are likely to continue.
“The cost base of an airline is predominantly fuel, and the fuel price is still down substantially year on year,” Jones says.
“The price that an airline can offer a ticket at relative to 2019 has come down. Low cost carriers sense a 'once in a generation' opportunity to win market share from flag carrier airlines via a stimulative focus on low ticket pricing.”
Jones says airlines have been forced by the pandemic to reduce their costs and the larger, older inefficient planes that have been mothballed during the virus will probably never come back.
“This means an aviation fleet post-COVID probably has a lower unit cost,” he says.
All these factors look like making air travel more attractive than ever as the pandemic fades.
And when air travel comes back, Jones expects it to come back quickly.
“Look at China, where domestic air travel demonstrated it could return to 2019 levels within six months6, or Mexico, where domestic demand is back to around 70 per cent, even above 100 per cent in some cities7.”
“It’s kind of hard to argue that Mexico has actively controlled the virus so, again, the fear factor doesn’t appear to be an issue.”
“At the start of this pandemic, the plane was the only place where you had to wear masks and have social distancing.”
“Now these are the same precautions you take at the supermarket – we are all used to it.”
“The airline industry is fighting a battle to prove to consumers that it is safe to fly.”
“Ultimately, it is a battle that they are winning.”
With a suite of vaccines becoming available imminently, the aviation industry recognises its importance to kickstarting tourism. Industry trade associations have moved with high speed and unusual collaboration to develop a ‘travel pass’, which they hope states will adopt as part of the process of reopening borders. For a large part of the crisis so far, the industry’s safety claims have been disregarded by politicians – now it seems they are ready to hear.
Footnotes:
1. https://www.gov.uk/guidance/new-national-restrictions-from-5-november
2. https://www.icao.int/sustainability/pages/facts-figures_worldeconomydata.aspx
3. https://www.icao.int/sustainability/Documents/COVID-19/ICAO_Coronavirus_Econ_Impact.pdf
4. https://airlines.iata.org/analysis/extremely-low-risk-of-viral-transmission-inflight
5. https://www.iata.org/en/youandiata/travelers/health/low-risk-transmission/
6. Bank of America Securities research reports
7. Grupo Aeroportuario del Pacifico; Volaris monthly traffic data