The Economist reports that 4.5 billion passengers took to the skies last year, and that, on average, over 100,000 commercial flights a day filled the skies. Altogether, the airline industrial complex generated some 1.3 trillion in revenues in 2019. Nearly two-thirds of those revenues was attributed to airlines for transporting people and cargo, $170bn was generated by the world’s airports, $100-$150bn by the aircraft manufacturing supply chain, and the remainder was travel booking fees earned by companies like Booking Holdings, Expedia and Trip.com.
Last year’s results were impressive, considering how disruptive the grounding of Boeing’s MAX aircraft was for the travel industry.
2020 is proving to be a lot different as the coronavirus pandemic has hit the entire air-travel complex pretty hard. It’s not just that airlines will sell fewer tickets, airport operators will experience lower foot traffic, aircraft manufacturers will sell fewer passenger jets, and booking sites & apps will record fewer transaction this year. The magnitude of the declines in each segment is unprecedented.
Unprecedented Hit to Revenues in 2020
Airline revenues are projected to fall by 50% to $419bn this year, as worldwide travel restrictions and fear of infection keep people from flying. The revenue shortfall for airlines would be a lot worse were it not for the fact that cargo volumes have rebounded faster than passenger traffic. Global air freight volumes in May reflected just a decline of -17.9% compared to May 2019.
The hit to airports’ bottom line is expected to be even more devastating. Airports get about 60% of their revenues from aeronautical activities such as terminal, landing and passenger fees paid by airlines. The remaining 40% comes from commercial activities such as retail, parking, car rentals, and advertising. Given the reduced activity from fee-paying planes, and the very low footfall from customers who would normally buy food, pay for parking and shop while waiting for flights, airport revenues are forecast to plunge by 57% in 2020.
In turn, the collapse in air travel demand will keep thousands of planes grounded this year. Despite a pickup in travel these past two months, 35% of the global fleet of around 25,000 aircraft is still parked, according to consulting firm Cirium. Analyts at Citigroup predict excess capacity could remain as high as 4,000 aircraft in 18 months’ time, dragging out the slump for plane manufacturers and their suppliers.
Air Travel Greenshoot
In the midst of this darkness, green shoots are emerging, although the stage and pace of recovery varies between countries.
In the United States, where the pandemic is still raging, airlines are still operating at just 27% capacity, meaning the number of passengers they are carrying is 73% below last year’s level. Meanwhile, in Europe, UK-based low-cost carrier easyJet said it expects to fly around 40% of its planned capacity in Q4 (July to September) compared to the 30% it had originally forecast. It said the increase reflected greater demand than anticipated on key routes to holiday and weekend getaway destinations.
Contrast this to China, where flights carried 37 million passengers last month, according to data released yesterday by the country’s civil aviation administration. That’s 62% the number of air passengers carried in July 2019. On average, China operated 11,941 flights daily in July, which is already 70% the number of flights operating a year earlier.
The rebound in China, once the epicenter of the pandemic, provides encouragement to other travel markets that they too can experience a strong recovery once they contain the domestic spread of the pandemic or a vaccine becomes available. All regions recorded year-on-year declines above -90% at the height of their pandemic lockdowns, so even small improvements like those seen in the U.S. are bound to have a significant positive impact on the airline-industrial complex.
Domestic routes in large markets like America, Europe and China are the first to recover, however demand for international travel will quickly follow once travel bans and quarantine rules are eased. Various surveys, including by the IATA and by WebInTravel, have revealed that the increasing occurrence of border closures and lengthy quarantine rules for travelers have been a huge factor in people’s reluctance to travel overseas. A 14-day quarantine requirements –- imposed at the travel destination and/or upon return — could leave travelers locked indoors for an entire month. Again, these deterrents will likely go away once a vaccine a vaccine becomes available.
Within airline-industrial complex, the earliest beneficiaries of a recovery in air travel will likely be the airlines, travel booking companies and airport operators. The case for the first two segments is fairly straightforward. Every seat sold on a flight sold directly benefits airlines. Travel booking companies appear upstream in that sales process since a large percentage of flights are booked via travel technology companies that receive a fee for facilitating the reservation.
As for airports, their fortunes are also closely tied to increased passenger jet service and increased foot traffic. That’s because airports receive a fee every time a plane lands or takes off from its facility. How much of a fee depends on the size of the aircraft, whether it is landing or departing, how many passengers are on board, etc. The airport also receives a cut of every sale made by the various retailers on its territory, including restaurants, retail shops, parking lots, and car rentals, among other things.
For an airport to make money, its revenue per passenger needs to be higher than its cost per passenger. For illustrative purposes, Simple Flying breaks down how London Heathrow Airport, one of the busiest in the world, makes money. Every airport has its own metrics, but on average, the cost to operate an airport is $13.55 per passenger. Global aeronautical average revenue per passenger is $10.15, while airport revenue from commercial activities is $7.12, resulting in total revenues of just over $17 per passenger.
As passenger travel returns, operating margins will improve for airports, perhaps even sooner than for airlines since the majority of airports around the world are natural monopolies. With the exception of places like NYC, London, Paris, Beijing, and Tokyo, most cities in the world will only support one major airport, which puts that airport in a strong bargaining position vis-a-vis airlines and passengers who have no choice but to use that airport’s facilities.
How to Gain Exposure
Airlines: The US Global JETS ETF (JETS) is the only real pure-play airline ETF. The Fund invests primarily in US-based airlines and companies involved in the aviation industry, although a portion of its portfolio is in international companies. JETS is probably the simplest way to bet on a rebound in U.S. air travel given that the fund’s geographic and sector exposure is 80% U.S. and 88% airlines.
Travel Booking Technology: The ETFMG Travel Tech ETF (AWAY), which launched in February 2020, invests in global travel booking technology companies. The fund’s portfolio is comprised of 15 companies that, via the internet and internet-connected devices, facilitate travel bookings & reservations, travel price comparison, and travel advice. AWAY is not a pure-play on air-travel as its exposure extends to ride sharing companies and other modes of transportation.
Airports: There are over 2,500 airports in the world spread across 180 countries. These are state-run entities or they are operated by a private company that oftentimes overseas a several other airports within that geography. Below is a list of publicly-traded airport stocks mostly providing exposure to markets in Asia & Oceania, Europe, Latin America & the Caribbean.
LATAM & CARIBBEAN: Grupo Aeroportuario del Sureste (ASR), Grupo Aeroportuario del Pacífico (PAC), Grupo Aeroportuario del Centro Norte (OMAB), Corporación América Airports (CAAP).
EUROPE: Frankfurt Airport AG “Fraport” (FPRUY), Flughafen Zuerich AG (FLGZY), Vinci SA (VCISY), Aéroports de Paris SA (ARRPY, AEOXF), AENA S.M.E. SA (ANNSF), Atlantia SpA (ATASY).
ASIA & OCEANIA: Beijing Capital International Airport Company Limited (BJCHY), Japan Airport Terminal Co. (JTTRY), Airports of Thailand Public Company Limited (AIPUY), Sydney Airport Limited (SYDDF), Auckland International Airport Limited (AUKNY).
The US Global JETS ETF (JETS) is down 50% year-to-date (YTD). All the airport stocks are also down YTD, with returns ranging from -10% to -53%. of the airport stocks. The ETFMG Travel Tech ETF (AWAY) is just 6 months old, but it too is down 25% since its inception on February 12. All three segments are lagging the general broad transportation ETF (IYT) and the S&P 500 ETF (SPY).
Managing Director, Research
McAlinden Research Partners