- It’s interesting how global economic activity is shifting more and more toward the east.
- Air traffic is expected to continue to grow at more than 6% per year. However, this doesn’t mean that any related investment will do well.
- Good investments will be those with limited or no competition. Think airports.
When investing, you want to be exposed to growing trends not declining ones. Not that investing success can’t be found in declining industries, but focusing on growth sectors simply increases your chances for a positive return and lowers the possibility of a negative return. Thus, increasing your expected return and lowering your risk.
One such almost certain long-term trend is the growth of the global airline industry.
Boeing (NYSE: BA) recently released its 20-year industry forecast and it’s essential to go through it not only for investing in the airline sector, but also for any other kind of global investment as it all depends on demographics and economic development in the long term.
So let’s start today’s article by analyzing what Boeing has to say about the next 20 years.
The World Is Turning To The East
Of the 41,000 expected aircraft deliveries in the next 20 years, 16,000, or more than the combined deliveries for the U.S. and Europe, will be delivered to Asia.
Figure 1: Expected aircraft delivery. Source: Boeing.
It’s staggering how fast the emerging market share in the global GDP is growing. Their share of GDP in the last 20 years has more than doubled and it’s expected to continue on the same path going forward.
Figure 2: Emerging markets’ share of global GDP. Source: Boeing.
The shift toward the east is extremely important. We’ve discussed the trend on Investiv Daily several times and it’s extremely important to have portfolio exposure to such a strong trend.
The Airline Industry
The airline industry is exploding. Year over year, passenger number growth has averaged over 6% in the last 5 years, while growth in China was above 10% and the growth in India was over 20%.
All global geographies are expected to see positive growth in airline traffic.
Figure 3: Expected global air traffic growth. Source: Boeing.
The average traffic growth in the global aircraft industry is 4.6% per year.
It’s important to look at the regional growth rates because as you will see below, the best investments to take advantage of this huge growth trend aren’t really airlines, but those investments opportunities where there is little or no competition. Think airports.
For example, 65% of air traffic in Asia is going to remain local which means that local airports especially will benefit from the trend.
Figure 4: Traffic distribution in Asia. Source: Boeing.
If an industry expands at incredible rates, it isn’t said that every investment will be profitable. Low cost carriers have disrupted the environment for the more established, older airlines while ultra-low cost carriers are now disrupting the environment for the low cost carriers. This means that margins are very likely to be squeezed. Nevertheless, low fares are definitively going to boost demand for airplanes and airports which gives a hint as to where to invest. Aircraft production and airport capacity aren’t easy to compete with.
Investing In Airports
Investing in airports isn’t all that easy as they are usually simple, profitable businesses that don’t need your money to operate. That is one of the essential criteria of a good investment, it doesn’t need everyone’s money.
There are some publicly traded airports where those looking for exposure to the above trend might find interesting investment opportunities.
For example, there are three Mexican airports traded on the NYSE:
- Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. (OMAB)
- Grupo Aeroportuario del Sureste, S.A.B. de C.V. (ASR)
- Grupo Aeroportuario del Pacifico, S.A.B. de C.V. (PAC)
For those who prefer Europe, the Viennese airport, Flughafen Wien AG, is traded on the Austrian stocks exchange. Stock of New Zealand’s Auckland International Airport Limited is traded in New Zealand. To own the stocks of the Beijing Capital International Airport Company Limited, you need to trade in Honk Kong, which isn’t that difficult these days.
These airports also have ADRs that trade on U.S. stock exchanges, but the liquidity is very limited.
You can also find the Sydney International Airport on the Australian stock exchange.
By investing in airports, you get one of the few monopolistic investments left out there. You also get extreme leverage of economic and traffic growth as the cost per passenger doesn’t increase much for an airport while the profits increase exponentially with traffic growth.
In today’s article, I focused on airports.
Aircraft producers like Boeing are definitely going to benefit from the aircraft trend, while airlines have to be approached carefully because it’s difficult to determine which will operate positively and manage to keep its moat in a highly competitive environment where switching costs are practically zero and there is absolutely no brand loyalty.