Investing in airports: concessions, flight shaming and electric planes

“Modern airports are essentially shopping malls with a landing strip, with the added feature that its customers are forced to stay for hours. Airport travellers tend to be relatively wealthy, and most are vacation-mode, making for an attractive customer segment.” – First State Stewart Asia Investment Managers

I’ve been through many an airport in my lifetime. I’ve often purchased something in them. I almost always eat and drink in them. But I’d never really thought about airports per se (outside of arranging to get to and from them once or twice a year) until I read that opening quote.

And the more I dug into the subject, and the investment opportunities surrounding them, the more fascinating they became.

Making concessions

Did you know, for example, that many of the familiar brands we see at airports – the shops and food outlets – are franchises run by concessions businesses?

Rathbones’ Alexandra Jackson enlightened me about this. SSP is a holding in her fund and its one such concessions business, with 50 years experience in the travel market. It has 500 brands in 33 countries, at airports and railway stations.

“Airports are complex places, with complex logistics,” she told me. “The food, the drinks and the goods that are sold, as well as the staff that work there, all have to pass through security each day. Legal and regulatory requirements are tough. SSP is an expert in creating and running food outlets in locations where people are on the move. It specialises in offering airports ‘packages’ – from it’s own brands of Upper Crust and Ritazza, to partnerships with Burger King, Starbucks and Yo! Sushi – which it combines with operational expertise, trained and managed staff and good supply chains.”

Alex Savvides, manager of JOHCM UK Dynamic, has also benefited from a recent concessions win through holding Restaurant Group. In 1991 the company opened its first TRG Concessions branch, Garfunkel’s, in Heathrow Terminal 1. In 2018 the company took on the Wagamama brand and, a couple of months ago, it won multiple sites at the new Manchester Terminal 2, including a Wagamama. “This reaffirmed to us the undoubted synergies available by bringing the Wagamama brand into the group,” Alex said.

Sid Chand Lall, manager of Marlborough Multi Cap Income holds another airport favourite, WH Smith, in his portfolio.

“WH Smith is known as a high street retailer but also has outlets at airport terminals both before security and airside. At the airport, what you and I see as a store with wide product range is actually quite a complex operation. The key skill is knowing how and when to restock shelves, with the right product, that will maximise turnover for both themselves and the landlord. This is easier said than done, but WH Smith are possibly second to none in this regard and this is why you see their store brand appear more often than not compared with peers at such locations.

WH Smith’s dividend has risen every year since 2006. It has recently bought US chain Marshall Retail, which operates under a number of brand names including Flight Stop. The company has also bought travel accessories business InMotion. Travel now accounts for two-thirds of profits.

First State Global Listed Infrastructure fund also invests in airports, although the fund is currently underweight exposure to them, with holdings limited to leading European and Mexican operators. In a recent update, manager Peter Meany said: “The airport sector faces medium term headwinds following a long period of above-average growth.”

He has recently added shares in Eiffage, a French-listed infrastructure concession and construction company, to the fund. “It has stakes in high quality French toll roads like APRR and Channel Tunnel operator Getlink, and a growing presence in the French airport sector,” Peter said. “Following the successful example of larger peer (and existing portfolio holding) Vinci, concessions are becoming a more important part of Eiffage. We expect this will reduce earnings risk and volatility.”

Lending them money

Shares of companies aren’t the only way to invest in airports – their bonds are surprisingly popular too. I say ‘surprising’ but when I spoke to the managers about them, it makes a lot of sense.

Jonathan Platt, manager of Royal London Corporate Bond, who holds a Heathrow bond said: “Heathrow airport bonds give bondholders security over the entire airport and its cash flows. The airport has a dominant market position compared with other airports in the UK and Europe, and a supportive regulatory framework, giving lenders excellent visibility over cash flow generation in the future. This is complimented with a strong covenant package, locking up cash if operating performance deteriorates.”

Jerry Wharton, co-manager of Church House Tenax Absolute Return Strategies, is also a Heathrow holder. He added: “We’ve been holders of Heathrow funding paper for quite a few years now. The company has a large number of bond issues across several currencies and, along with parent company Ferrovial, is outstanding in its engagement with its bond investors. Heathrow remains one of the most, if not the most significant global hubs and the stability of its cash flows are attractive to bond investors. Passenger numbers are closely watched as an indicator, and these remain strong.’

Nicolas Trindade, manager of AXA Sterling Credit Short Duration fund, owns Gatwick. In a recent video interview he said: “Airports tend to trade more cheaply than the wider market, as they are more volatile – passenger and cargo traffic is linked to the economy, so if there is a turn down, numbers can fall. But the bonds of airports offer extra securitisation: you get the added protection of very strong covenants, physical assets and the cash flows of the business.”

Flight shaming

Finally, it would be remiss of me not to mention the potential threats to airports – namely in the increased concern that they – or aeroplanes – are bad for our environment.

Jason Pidcock, manager of Jupiter Asian Income fund said recently: “I’ve sold the airport holdings I had in the portfolio. Flying is the new smoking. Lots of people did it, then got health issues, then regulation came in. It will be the same for aviation. Young peoples’ attitude towards flying is changing and there is now ‘flight shaming’. This will probably change consumer patterns – albeit slowly. Governments will benefit, however, as they’ll have an excuse to tax the sector – via airline tickets and other ways.”

We asked Luciano Diana, co-manager of Pictet Global Environmental Opportunities for his thoughts when he recorded an Investing on the Go podcast recently. He said: “There’s two facets to this: one, the behaviour of people and two, technology.

“Looking firstly at the people, I wouldn’t go as far as comparing flying to smoking because you can live a nice life without smoking, but these days you can’t live a normal life without travel – it’s so embedded into society. I don’t see people stopping travelling — in the next generation at least.

“There will be more taxes on airfares, and I think it’s good. I’m sorry for Ryanair and EasyJet, but a business model where you pay €30 to go and have a weekend in Madrid, it’s just not right. That ticket should cost €200-€300 and then it will limit the volume.

“Then looking at technology, the key question is that of electrifying air transport. Because of the physics involved, electrifying long-haul air travel is many, many, many years away: I read something recently that said, to satisfy a 5 hour flight, the weight of the battery would need to be twice the weight as the plane.

“But, like everything else, I don’t think we’ll never crack this – we will crack it, we will just need a different technology. I do see urban air mobility as something that will take place in the near future: start-ups are working on vertical take-off and landing vehicles – a kind of electric taxi. They will have a very specific use, for example to connect airports to town centres. I see very clearly within the next 5 or 10 years the possibility of having an air corridor between JFK and Manhattan.”

I don’t know about you, but next time I’m jetting off on holiday, I’ll be looking at the airport lounge in a very different light.