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Air travel is making a comeback, and the travel industry is thrilled about it. While investing in airline stocks may seem like the obvious choice, it’s important to remember that airlines often struggle to turn a significant profit, as Richard Branson famously noted. However, there’s another option for investors looking to capitalize on the travel resurgence: airports.
Airports have distinct advantages over airlines. Airlines deal with various dependencies, such as leasing aircraft, high pilot costs, and fierce competition that forces them to offer low fares, impacting their profits. Additionally, they must navigate the unpredictable fluctuations in oil prices.
In contrast, airports face fewer challenges. They have the initial cost of constructing modern terminals, but after that, airlines compete to secure landing slots. Most cities have only one major airport, essentially creating a monopoly. This high barrier to entry, often referred to as a “moat” in investing terms, protects airport operators.
This difference is evident in the financial numbers. Globally, listed airports boasted average operating margins of 32% in the four years leading up to the pandemic, while airlines struggled with margins of around 8%. Even when the pandemic hit and margins declined, airports still managed to stay profitable.
One notable pure-play airport operator listed on India’s stock exchanges, GMR Airports Infrastructure, has seen its stock surge by 60% in the past six months. GMR currently operates three airports in India (Delhi, Hyderabad, and Goa) and has two more in the pipeline (Bhogapuram and Nagpur). These airports give GMR a 27% market share of air traffic across India, and the company also has stakes in international airports in Greece and Indonesia.
But how do airport operators like GMR make money?
They generate aero revenues from sources like landing and parking fees, user development fees from passengers, and cargo handling fees. While these fees might seem lucrative during a travel boom, they are regulated by the Airports Economic Regulatory Authority Of India (AERA) to prevent excessive charges.
To compensate for regulated aero revenues, airports rely on non-aero revenues, which include rent from shops, restaurants, advertising, and parking. These revenues can be substantial, and while India’s rules dictate that 30% of them must subsidize airport charges, they are less regulated overall.
However, the real game-changer in the non-aero segment is real estate or city-side development. Airport operators acquire significant land parcels for future expansion or leasing to build warehouses, hotels, offices, and shopping malls. GMR, for instance, holds large land parcels near Delhi, Hyderabad, and Goa airports, offering immense monetization potential.
GMR has partnered with Groupe ADP, which manages one of the world’s busiest airports in Paris, to leverage technical expertise and potentially boost passenger spending at its airports.
Despite the potential rewards, it’s crucial to acknowledge the risks. Just as airlines can face financial challenges, airport operators are not immune. The pandemic forced European airports to raise significant debt, with some even filing for bankruptcy. While GMR’s strategic location and near-monopoly status provide a cushion, investors should monitor its debt levels.
In conclusion, airports present a promising investment opportunity, with GMR Airports Infrastructure as a notable player. However, investors must keep an eye on debt levels and financial performance before making their decisions.
Note: Another option to invest in airports is through Adani Enterprises, which owns Adani Airports. However, Adani Enterprises encompasses various businesses, including roads, mining, data centers, and green hydrogen, making it a more diverse investment choice.
