The airlines themselves are notoriously difficult to invest in for long-term investors.… Listed airports, GDS operators, travel integrators and online travel agencies are areas to think about.
Kim: Hello, and welcome. This is the AFTERMATH. Today we're going to cover the Transport sector, and for that I'm going to be joined by my colleague Mike Miller from the Asia team. Mike, really good to see you.
Mike: Hi there Kim.
Kim: So Mike, in a nutshell, how would you frame the outlook for the sector right now? What's happening?
Mike: Well I mean it’s certainly been a very traumatic start to the year for the airline industry, and the travel industry as a whole. You know, it will go down as the worst year in in Civil Aviation history.
So, I mean we've already seen a number of airlines go bankrupt, we've seen quite a number of others having to resort to bailouts from various governments, so it's a pretty bleak picture.
If you look at IATA, some of their recent data, their projections for this year, and they're talking about passenger numbers being half this year, taking us back to where we were in 2006. And also expect the industry to be losing somewhere in the order of US$84 billion this year. That’s about US$230 million a day.
Also, you have to look at a lot of the airlines are culling capacity, they are cancelling orders, so there's a knock on effect in terms of the aircraft manufacturers, the engine manufacturing, the whole supply chain there, which we have to think about as well.
So, it's a pretty bleak picture but you're looking forward and what are we expecting, I mean I think in terms of the tourist in the leisure market, and that should, in terms of airlines anyway, should come back quite quickly. And we think that will sort of return to pre-COVID levels.
But if you look at the business part of the market, we think there's more of a kind of structural change going on there, which is a certain extent was happening before COVID, but we think that COVID has probably given that more emphasis.
So, you know, businesses during COVID, with work from home, have seen that you know their staff can actually work quite effectively meeting people over ZOOM or Teams. And they don't need to fly across the world to go to these meetings. So, we do think the business part of the market will be much more subdued, certainly for longer and may never get back to the pre-COVID highs.
If you think about how that impacts the airlines, it’s the premium cabins where they really make their money, particularly on the long-haul flights, so that is going to be an issue for them going forward.
And also you know if you think about what other regulations might be put in terms of allowing people to get back on planes, whether it's a you know the middle seat has to be empty, that will cap the load factors for the airlines, and also if they have to deep clean between each flight, that’s going to limit the number of hours an aircraft's in the air making money.
Kim: Yeah, I think that's a pretty bleak picture. So, if you're looking at it from the perspective of an investor, you know looking forward say on a two, three-year view, what areas would you focus on as potential possibilities?
Mike: Yeah, I think first of all I’d just say to investors to just track the data as we've been kind of doing.
You know we've been looking at China, where it was first in into cold weather and was one the first out. So, your viewing passenger volumes for airlines, and that market was down 84% from the peak of COVID in February, and have now recovered to about minus 30% down. So, we could be I think by the end of this year, for the domestic market there, we could be flat, rather surprisingly.
One other area I’ve kind of been thinking about is whether there's a power shift back from the LCC (low cost carriers) to the full-service carriers. Full-service carriers have been the ones that have got the bailouts, and the LCC have kind of been left to their own devices. And also, in the shorter routes, you have seen a green agenda in a number of countries in Europe, to kind of dissuade people from using flights for kind of shorter and shorter trips.
And the other part of interest for investors looking to position themselves for recovery for this segment of the market, where they should be looking, are also the airlines themselves. But they're notoriously difficult to invest in as long-term investors because quite often, a lot of the time they're not there returning, they are not recovering, they're not covering their WACC.
So other areas to maybe think about are listed airports, and there's a number of those in Asia, there's several in China in fact. So, the aeronautical revenues will start to come back as flights start to recover, and also more importantly, the retail franchises will start to kick in again from duty free. So, if you can find an airport that's already gone through an expansion phase of a new terminal, and the CAPEX is done, and are in a sort of harvest phase from that, that could be interesting.
Yet another area to perhaps look at is in the GDS (Global Distribution Systems) operators. The two big international players, Amadeus and Sabre, which compete in the global market, but there's also a listed GDS Chinese company called Travelstart, listed in Hong Kong, which is essentially a near monopoly in the GDS market in China, so it is a kind of pureplay on the volume recovery there.
And just lastly, one other option is to look at the big platform travel integrators, and also their online travel agencies. And these are companies like Expedia, booking.com. And again, China has two large OTAs (Online Travel Agency), one called trip.com another called Tongcheng-Elong. The second of those is more focused towards the lower-tier city market, so we think there's possibly more growth in that segment.
Kim: Mike, thank you very much, that’s very helpful.
Thank you to you all for tuning in. Give us your feedback, good or bad, and tune in next week and we'll go to a different sector.
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