Why I Prefer Buying Airports Over Airlines At These Prices
Given the significant dip in prices of anything related to travel during the COVID-19 coronavirus outbreak, you have not surprisingly read and heard many views on airlines, hotels, and even cruise lines. Airlines may be some of the riskiest of these, as many don’t own their planes, face steep competition pushing down how much they can charge on the revenue side, and often remain fully exposed to labor, financing, oil, and airport slot costs on the cost side. While an airport will often have several airlines competing to pay for its landing slots, many cities often have just one or a few airports with limited competition between them, and it is much harder to build a new airport than to insert a new airline. In addition to charging airlines for every flight, airports also have several other ways to make money, including parking, leases on concession and duty-free shops, and sometimes even per-passenger fees for services like airport security, which every airline would have to pass through in their tickets. In summary, airports are long-term, high-quality enterprises that often face little risk of competition from other airports and infrastructure the way that airlines compete with each other. During price dips like this most recent one, these are the types of quality businesses one might like to accumulate more of at these lower prices, especially those who believe the virus outbreak and dip in travel volume will be temporary.
7 Largest Publicly Listed Airport Stocks
So far, I have not found any publicly traded US airports, but there are ADRs on at least 10 publicly traded non-US airport stocks, the 7 largest by market cap being:
- Airports of Thailand Public Company Limited (OTCPK:AIPUY) – 6 major airports across Thailand, include both of Bangkok’s major airports
- Aéroports de Paris SA (OTCPK:ARRPY) – Manager of Paris’s 3 airports, and operator of services in several other airports around the world
- Auckland International Airport Limited (OTCPK:AUKNY) – New Zealand’s largest international airport
- Japan Airport Terminal Co., Ltd. (OTCPK:JTTRY) – Primarily operates Tokyo’s Haneda airport, but also provides food and beverages to Tokyo’s larger Narita airport
- Beijing Capital International Airport Company Limited (OTCPK:BJCHY) – The larger of the two major airports serving China’s capital
- Grupo Aeroportuario del Sureste, S. A. B. de C. V. (ASR) – 9 airports in southeastern Mexico, including Cancun, as well as one airport in Puerto Rico and 6 in Colombia
- Grupo Aeroportuario del Pacífico, S.A.B. de C.V. (PAC) – 14 airports on Mexico’s west coast, plus two in Jamaica
- Bonus: Technically not the airport, but the main provider of ground handling and in-flight meals for Singapore’s Changi airport is SATS Ltd. (OTCPK:SPASF), which I have also bought on this dip, as I fly in and out of Singapore airport more than any of these others and see what SATS does there.
Many investors new to investing in airports may prefer to start with the airports they are most familiar with, and I admit I am clearly more interested in this space because I spend a lot of time in airports. In addition to BJCHY, it is also worth noting that China probably leads the world in publicly traded airport shares, with the airports of Shenzhen, Guangzhou, Shanghai and Xiamen all being listed on domestic exchanges. Across the Tasman Sea from Auckland, you will also find Sydney Airport listed on the ASX.
The Crash in Airline vs. Airport Stock Prices
As a simple price impact comparison, the chart below compares the price declines of AIPUY and ASR (the largest listed examples in Asia and North America, respectively) versus the US Global Jets ETF (JETS), which is 80% US and 88% airlines:
The simple narrative of the above chart is that Thailand declined sooner as the virus started impacting Asia earlier, and then the Mexican airport operator ASR and JETS ETF fell farther and faster as the outbreak spread to North America. The difference in trading patterns of these shares seemed to vary more by region than whether the asset was an airport or an airline. If two businesses of very different quality are both down 50%, and the higher-quality one would (for example) see a 10% hit to long-term earnings while the more competitive business expects a 30% hit, we would naturally want to buy the better business at half off.
Next, we will take a quick look at these groups of airports by region.
Asia’s Listed Airport Stocks
Our first chart compares the three listed airport stocks based in Asia: covering Thailand, Japan’s Tokyo Haneda, and China’s Beijing Capital airports. Of these, we see all three have revenues of around US$1.5-2.5 billion/year, but AIPUY is somehow far more profitable and has reflected these profits in a much more steadily increasing dividend. Without looking more deeply, I would think this might be due to two reasons:
- AIPUY operates 6 major airports across Thailand, including both of Bangkok’s major airports, while JTTRY and BJCHY operate one of two competing airports in their cities;
- China and Japan have far newer, faster, and more comprehensive rail networks than Thailand’s, which mean far more competition for their airports than Thailand’s; and
- AIPUY might have more and higher-margin services than the other two. I have definitely spent more on meals and duty-free shopping in Bangkok’s airports than I have during similar amounts of time in Beijing and Tokyo, and Bangkok has a labor cost advantage over Tokyo.
Mexico’s two listed airport stocks, ASR and PAC, initially look somewhat similar to each other, and in some ways to Airports of Thailand as well. Both ASR and PAC have annual revenues around $850 million/year and annual profits of around $270 million/year, with dividend patterns that are probably rising but hard to see from the data. Like Thailand, these two operators seem to have the advantage of running many airports across a region with relatively few other infrastructure options, especially the lack of a high-speed rail network.
France vs. New Zealand
In our final group of airports, I am comparing Paris to Auckland, even though they are literally on opposite sides of the world, because they are the only two left on my list. As one might expect, Paris is far, far larger in terms of revenues, while Auckland is the far more profitable one, more more than half the net income on less than 1/10th of the revenue. Again, this is likely due to Paris being surrounded by a dense, developed, and competitive hub of high-speed rail (including to London via the tunnel) and other infrastructure connecting it to many destinations nearby. New Zealand, on the other hand, is relatively isolated and Auckland about the only major international gateway to the $200 billion economy of almost 5 million people.
As with any other business, when looking at airport stocks, it is important to consider the “moat” or set of competitive advantages. Chances are, your local airport is not likely worried about a competing one being build across town anytime soon, but you know how many alternatives you have to using your airport and paying the fees it is able to charge when you do. The systematic risk of significantly lower travel volumes is hitting all parts of the travel sector, but if travel picks up as quickly after this outbreak as it did after 9/11, we are likely to see less impact to long-term earnings of airports as to the airlines. Of the airport stocks, I prefer to stick with airports and groups of airports that have very little competing infrastructure, especially those without high-speed rail connections. Of the ones listed here, Airports of Thailand and SATS are the two I own and have been accumulating the most of, mostly because I am most familiar with how little alternative there is to using those airports. Although I have owned the locally listed shares of some of the Chinese airports in the past, there is ever-increasing competition from China’s amazing high-speed rail network.
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Disclosure: I am/we are long AIPUY, ASR, PAC, SPASF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.