Asia's aviation megatrend is gathering pace. What's more, the opportunities for investors will exist across many different verticals.
A long-term growth story
Favourable demographics, increasing wealth levels and rising urbanisation rates are all supporting long-term demand across a range of sectors and industries in Asia. Against this backdrop, we see air travel, in particular, as one of the major beneficiaries of the region’s secular growth trends. We discuss our long-term approach and the importance of ESG analysis as the industry transitions to a lower-carbon environment.Asia Portfolio Manager Michael Millar highlights air travel as one of the major beneficiaries of Asia’s secular growth trends. Michael discusses the long-term investment opportunities and the importance of ESG analysis as the industry transitions to a lower-carbon environment.
Once only the preserve of a limited percentage of Asia’s population, the growth in the region’s air-passenger numbers over the next decades will be nothing less than phenomenal. For example, while US domestic air travel is expected to rise 40% by 2037; in China that figure will be 240%, and in India it will be even higher, at a 370% increase.1
Air traﬃc passenger numbers (millions)
Source: Statista and Airbus 2019.
Indeed, the projected growth in aircraft fleet numbers globally over the next twenty years shows a similar picture of surging air travel demand in Asia compared with the rest of the world. Rising from a level of rough parity in 2018, Asia Pacific aircraft fleets are set to be almost twice the size of their North American counterparts by 2038, growing over 146% during that time.2
The growth in the region’s air-passenger numbers over the next decades will be nothing less than phenomenal.
Size of aircraft ﬂeets by region worldwide in 2018 and 2038 (units)
Source: Statista and Boeing, 2019.
Diversity and scale
From an investment perspective, it’s not only the scale of this growth trend that we find compelling, but also the diversity of opportunities it presents. We see this theme playing out across a whole range of verticals directly and indirectly associated with air travel in the coming years.
Online travel underpenetrated
Take the online travel market in Asia for instance. Although still underpenetrated, it is already uniquely integrated with ‘Super App’ platforms (powerful online ecommerce ecosystems such as Tencent’s Weixin), which we believe present significant scope for the online travel agent (OTA) segment. We think there is huge potential here for companies such as Tongcheng-Elong (TCEL) and Ctrip to monetise as an increasingly wealthy consumer base travel either for the first time or with greater frequency, as well as take a share of significant industry revenue growth. China’s OTA sector, in particular, is projected to increase revenues by 90% in just four years, rising from 48.5 billion yuan in 2018 to 92.3 billion by 2022.3
Much of this growth will be leveraged from the extensive user reach enabled through association with the Super Apps. However, the potential for OTAs to cross sell (e.g. hotel rooms, land transport, tours) and efficiently target specific markets will also be meaningfully augmented by rising mobile penetration rates across Asia.
Likewise, China’s Global Distribution System (GDS) provider TravelSky Technology is also a direct play on the growth in China’s air travel industry. The company operates as the dominant provider of information technology solutions for China’s aviation and travel industry.
Solid barriers to entry
TravelSky’s platform enables automated transactions between third parties and booking agents including travel distribution, airport passenger processing and ticketing and is therefore directly exposed to any increase in travel volumes but is also protected by some solid barriers to entry.
Increases in direct sales from airlines as well as government deregulation of the market are potential threats to the investment case, but these are unlikely to transpire due to scale requirements and national security concerns respectively.
Meeting the demand
The requirement to meet vastly increasing passenger numbers is also already driving a scaling of infrastructure and real assets across Asia. For example, the newly opened airport, Beijing Daxing – which is designed to handle 45 million travellers a year – is a direct response to this demand. Other airports across the Asian region are also looking at expansion plans as well as possible stock exchange listings, providing further opportunities for investors.
And with much larger fleet sizes, the need to service aircraft operations will rise accordingly. Companies such as Singapore Technologies Engineering (STE), which is one of Asia’s largest defence and engineering groups and a dominant commercial airframe maintenance, repair and operations (MRO) service provider, are likely to see significant uplift in demand for their services. Evidence of this is already apparent. In June this year, STE announced record-breaking levels of over SG$15 billion in its orderbook and its long-standing partnership with China Eastern Airlines – one of the region’s leading airlines – is also likely to experience scale as China Eastern expands its fleet size.4
Room for growth
Elsewhere, we see substantial headroom for growth in the low-cost carriers (LCC) airline segment. Penetration of LCCs remains low in some Asian countries, with China in particular, currently only at around 11%, compared with c.50% in Southeast Asia. Companies such as Spring Airlines, the leading LCC in China are well placed to claim market share as this segment rapidly opens up5.
In Spring’s case, its efficient operating model, low distribution costs and strong synergies with its parent company’s integrated travel website should provide natural inroads into the expanding LCC market.
Travelling more, spending more
Less directly, as Asia’s middle classes travel and spend more, we also expect notable growth in other markets – for instance stimulating demand for hotels and the food and beverage (F&B) sector, as well as duty free shopping (DFS). Within an Asia context, China again provides an interesting snapshot of the size of the addressable market. Chinese consumers contribute over a third of the US$76 billion spent on DFS globally and with policy makers looking to direct more of this money onshore in China, local players such as China International Travel Service which currently controls over 80% market share, could be set to benefit.6 infrastructure and real assets across Asia.
The requirement to meet vastly increasing passenger numbers is also already driving a scaling of infrastructure and real assets across Asia.
Applying the ESG lens
As long-term investors, we look for companies which can demonstrate sustainable returns long into the future. When identifying opportunities directly or indirectly related to the aviation industry it is therefore crucially important that we understand the impacts of climate-related change on the industry as a whole, as well as on individual companies.
Integrating ESG analysis
Specifically, by integrating ESG analysis into every part of the investment process we are able to assess the materiality and impact of the move towards a lower-carbon environment. For instance, as the policy response on global initiatives such as COP24 become apparent, we need to evaluate how companies will model their operations in light of increasing regulation on emissions. Similarly, how businesses manage climate-related financial disclosure will gather increased importance not only to regulators, but to investors and consumers alike.
As such, greater transparency in the ways in which companies report their carbon usage can even provide a competitive advantage in a sustainability focused market place as well as helping to preserve their ‘licence’ to operate.
Much of the focus understandably, is on the airlines themselves. With aviation accounting for 12% of CO2 emissions from the transport sector globally, air carriers are needing to find ways in which they can balance industry growth against controlling and then reducing carbon usage. The industry’s emission mitigation initiative, ‘Carbon Offsetting and Reduction Scheme for International Aviation’ (CORSIA), is aiming for 2020 as the year in which air traffic emissions peak, so the regulatory and consumer-led catalysts are building.
As in any market environment, there will be winners and losers. We believe the best way for identifying both is through applying a fundamental, research-driven approach that fully integrates ESG analysis.
In this environment, engagement with company management can help determine the extent and effectiveness of a business’s carbon management policy. While some airlines still show a limited awareness of the impact of regulatory and public pressure on carbon reduction, other companies are clearly demonstrating some of the strategic assessments we believe that are required for sustainable growth – for instance, setting long-term targets for reducing emissions and aligning these with management performance.
Asia’s aviation megatrend is gathering pace. What’s more, the opportunities for investors will exist across many different verticals. However, it is unwise to assume that structural growth of this kind is synonymous with ubiquitous success stories. As in any market environment, there will be winners and losers. We believe the best way for identifying both is through applying a fundamental, research-driven approach that fully integrates ESG analysis to help understand the material risks and opportunities.
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