You Know What’s Better than Owning an Airline?

An airport. 

Airports are natural monopolies. Who wouldn’t like owning a natural monopoly?

And unlike other natural monopolies such as local utilities, airports tend to be higher growth assets (air travel is less penetrated than electricity). 

At a high level, airports receive revenues from 2 sources: 1) fees on passenger tickets, and 2) commercial revenues generated in airports (e.g. rents from terminal vendors, parking fees, baggage fees, etc).

Airport business models are generally superior to airline business models in nearly every single way:

• Usually exempt from competition at the local / micro level – Many cities only have one airport. Only in extremely high-trafficked areas will there be multiple airports serving the same catchment area, but that’s a rich problem to have.
• Less cyclical than airlines – Airports generally receive a large proportion of revenues as fees from passenger tickets. During recessions or downturns, airlines are incentivized to cut prices to keep planes full. That behavior supports passenger flow, which acts as a countercyclical buffer for airports.
• Beneficiary of irrational airline competition – Since airports are more levered to passenger flow than ticket prices, irrational competition between airlines (e.g. low ticket prices) could lead to higher passenger flow, while airline income statements bear the cost.
• Lower sensitivity to commodity prices – No need to worry about direct impact of oil (although there is some indirect impact if oil prices change enough to affect ticket prices and air travel demand).

There are no publicly traded airports in the US, but many well-trafficked airports around the world are privately operated and publicly listed. And a cursory glance at 10-year stock price performance illustrates the lower volatility and range of outcomes for airports vs airlines.

Mexican American Airports (ASUR MM – Cancun, GAPB MM – Guadalajara, OMAB MM – Monterrey) vs Mexican Airlines (Aeromex, Volaris) and Pan-LatAm/Brazilian Airlines (Gol, Copa)

The Mexican airports have seen stock price increase anywhere between 4x to 9x over the last 10 years. The Mexican airlines have only been public for less than 2/3 of the timeframe but have not even doubled. I have also generously left out the Mexicana bankruptcy in 2010. Gol has declined by 93% over the last 10 years. Copa has done decency well, returning 4.7x.

European Airports (KBHL DC – Copenhagen, FHZN SW – Swiss, FLU AV – Vienna, FRA GY – Frankfurt) vs European Airlines (IAG LN – British Air/Iberia/Aer Lingus, RYA ID – Ryanair, EZJ LN – Easyjet, NAS NO – Norwegian Air, AB1 GY – Air Berlin)

European airlines have done decently well (excluding Air Berlin, which has lost 96% of value in 10 years), mainly because of the low-cost carriers Ryanair and Easyjet. As a result, airlines have kept up decently well with airports but with higher volatility, nonetheless.

Chinese Airports (694 HK – Beijing, 600009 C1- Shanghai, 600004 CH- Guangzhou, 357 HK – Hainan) vs Chinese Airlines (1055 HK – China Southern, 670 HK – China Eastern, 2610 TT – China Air, 600221 CH – Hainan Air, 753 HK – Air China)

Out of the various geographies, China appears to be the most volatile, even for the airports. Airports have done fairly average, returning 56% to 2.9x over the last 10 years. However, similar to the other geographies, airport performance is better clustered than airline performance. Airlines have returned anywhere from -65% to 4.8x.

Seems to me that airports are generally one of those assets that you can buy and tuck away for a very long time. 

Disclosure: I have no direct beneficial interest in any airline or airport mentioned as of publishing date and have no intent to initiate a position within the next 48 hours.