Investing through a winter of discontent
The term “Winter of Discontent” was used in the opening line of Shakespeare’s...
It’s August. Airports around the world would typically be bustling with passengers heading off on holiday.
But this year it’s different. The pandemic has caused a level of disruption in the aviation industry never before seen in peace time and, with no vaccine yet in sight, airports, aeroplanes and overseas holiday destinations are all still struggling to return to normal.
Many people are opting instead for staycations, and it’s a much reduced number taking advantage of the ‘travel bridges’ to venture further afield. Even then, some families are opting to drive instead of fly.
The sudden removal of Spain from the UK’s travel corridor exemption list in late July only added to the sector’s woes, with the share prices of airline companies falling quite dramatically on the news. Virgin Atlantic has even filed for bankruptcy in the US and is seeking a restructure plan in the UK.
With seemingly no end in sight, the future remains uncertain. But some fund managers believe there are still opportunities to be found among the airlines. While some will inevitably go under, the winners should emerge stronger.
Comgest Growth Europe ex UK managers like Ryanair*, for example. They commented: “The outlook for air traffic remains uncertain, with most commentators not expecting a return to the 2019 level of traffic before 2024. In our view, the morose outlook is likely to see the strong get stronger. Ryanair has capitalised on the crisis to renegotiate terms with Boeing, the airports and the pilot unions in order to enhance cost competitiveness.”
Niall Gallagher, manager of GAM Star Continental European Equity, also backs Ryanair as a winner in the airline sector. He said that the airline is one of the strongest companies in the sector in terms of its balance sheet and, with about €4bn in cash, it had enough to endure 18 months of lockdown. He was also early to call that intra-Europe travel would come back earlier than long haul.
Ninety One Global Special Situations, Man GLG Income and ES R&M UK Recovery all own Easyjet (the latter also owns Ryanair)*. The FTSE 250 company plans to fly at 40% of its capacity over the rest of the summer and the announcement was greeted favourably by the market. Man GLG Income has actually reduced its holding in the company after it rallied more than 30% in June, but still owns a number of shares.
Some fund managers are venturing back into airports too. James Mahon, co-manager of SVS Church House Tenax Absolute Return Strategies, told us in his podcast interview in May, why he thought Heathrow was a better investment than Gatwick.
Meanwhile, Artemis Corporate Bond fund bought a new issue from Aeroports de Paris recently, and Comgest Growth Japan added Japan Airport Terminal to its portfolio in June*. The managers said: “We have admired the franchise of this company in the years since it listed; now seemed a good opportunity to buy at a good price given Japan’s long-term tourist arrivals target.”
Fidelity Asia Pacific Opportunities fund holds Auckland International Airport**, as well as Flight Centre Travel Group**, while Ian Simmons, manager of Magna Emerging Markets Dividend, said of OMA, the Mexican airport operator, “Consider that OMA’s shares halved, but it has enough cash on hand to cover costs even if there are no flights until the end of 2021.”
Finally, ASUR, which operates tourism-focused airports in Mexico, was the best performing stock in First State Global Listed Infrastructure fund in June. Manager Peter Meany commented: “Although passenger volumes have fallen sharply since the pandemic began, investors took the view that the company’s low leverage and constructive regulatory framework should enable it to thrive again once normalised conditions return.”
However, Peter ends with a word of caution: “We expect airports will have a longer recovery period than other areas. Domestic flying will return first, then regional – such as within Europe or Australia and New Zealand.
“However, the high value customers are international. Compared to domestic, they pay up to three times more to land and spend five times more once they arrive. As a result, we are forecasting at least a three-year recovery period for this type of asset. Pre-pandemic, we believed airports had been overpriced, and so, even after recovering, we expect their value will be reset at a lower point than before.”
*Source: Fund factsheets, 30 June 2020
**Source: FE Analytics, full holdings list, 30 June 2020