Buy before you fly
The growth of airports in emerging markets means more air passengers – and more airport shoppers.
Fly into Istanbul, Mexico City or Shanghai and the bustling retail activity that accompanies air travel quickly becomes apparent – perfume, clothing and technology companies are all well-represented in airport terminals.
This is because airports in emerging markets are not simply transit centres for air passengers – they are increasingly shopping malls, too. In developing economies, where air travel is rising rapidly, it is a phenomenon that translates into some exceptional investment opportunities.
“In many of these airports, retail sales account for around 40% of total revenues,” says Ajay Krishnan of Wasatch Advisors. “The worst time to own them as an investor is when oil is expensive, airline balance sheets are stressed and those airlines are also reducing capital expenditure – today the opposite is true.”
Krishnan, who co-manages the St. James’s Place Emerging Markets Equity fund, began investing in airports almost a decade ago. He was particularly impressed by TAV Airports, which owns Istanbul Atatürk airport – the largest in Turkey and a key stopover for flights crossing Eurasia. The company’s profitability was also exceptional.
In developed markets, the amount air travellers spend is unlikely to rise rapidly, since consumer habits are more deeply ingrained. But in emerging markets, where airport shopping remains quite a new phenomenon and passenger numbers continue to rise, the potential remains enormous – so long as airports understand how to maximise the retail opportunity.
“Airports will try to manage traffic flow,” says Krishnan. “Where they place their duty free is key – it needs to be as soon as possible after security. Airports will often delay announcing gate numbers for flights in order to encourage spending. It’s a very profitable business – more like a mall where people park planes.”
Pick your port
But the general increase in domestic air passenger numbers across emerging markets does not translate neatly into sharply rising stock valuations for all major emerging market airports. Instead, investors need to pay attention to the regulatory environment – in many cases, governments will hand out concessions that last several decades.
Krishnan points to Indian aviation and airport retail, which would offer good opportunities if airports were not all government-owned, while in Brazil the government’s tendency to step into the sector can also complicate the outlook.
If a country’s regulatory environment is positive, however, then another key issue is the financial health of the airport’s clients – the airlines. It was the correct alignment of these considerations that drew Krishnan’s attention to Mexico.
“After 1998 Mexico handed out long-term airport concessions,” said Krishnan. “Airlines like Aeroméxico, Volaris and others were well-capitalised and ready to spend the money; so in addition to the right regulatory environment, the client support was there. Plus Mexico had the right developing market dynamics too – air traffic will increase but retail spending will increase even faster.”
A significant proportion of the Emerging Markets Equity fund is held in Mexico. One of the fund’s major holdings is Grupo Aeroportuario del Pacifico (GAP), which operates 12 airports across the western states of the country.
“GAP has had a great run since we bought it,” said Krishnan. “And it can compound its earnings at around 15% over the next five years.”
Another major holding is a major Mexican infrastructure and construction company whose core business includes airport projects. Both companies are ultimately buoyed by the rise of tourist travel both into and out of Mexico.
“Two-way tourism is key but most of the current tourist travel through Mexican airports is foreign visitors,” says Krishnan. “The pent-up demand is really local tourists – that is yet to be realised.”
If air travel growth translates into airport retail growth, then it could also make sense to invest in some of the retailers, not least because occasionally they might get the better end of the deal with airports. Should you buy the vendors too?
“Yes, but it’s more hit-and-miss,” says Krishnan. “We did own shares in Salvatore Ferragamo because the company was benefiting from increased travel from Asia and was one of the first to recognise the opportunities in airport retail. We’ve since lowered the rating as lots of that was driven by Chinese tourists – they get 35% of revenues from China and obviously growth in China is not what it was.”
Yet the rise of airport traffic and retail presents other investment opportunities, too. Krishnan points to the fact that Mexico’s GAP has the opportunity to use real estate nearby the airport too – one of the ways the company is looking to monetise this is by providing warehousing for freight operators. Another potentially lucrative avenue is lounges, which provide yet another way to persuade air travellers to open their wallets.
“Not every new avenue will work out,” says Krishnan. “But the fact that so many possibilities remain untapped suggests this story still has some way to go.”
The opinions expressed are those of Ajay Krishnan of Wasatch Advisors and are subject to market or economic changes. This material is not a recommendation, or intended to be relied upon as a forecast, research or advice. The views are not necessarily shared by other investment managers by St. James’s Place Wealth Management.