Airports can be quite exciting places. A trip to the airport could mean that we are about to jet off to somewhere glamorous. Airports can also be quite comforting places. It could mean that we have just come back home from a long trip to somewhere exotic. But whether we are jetting off or jetting back, airports are unquestionably strategic assets for a country. Some countries think that airports are so important that these prize assets must always belong to a sovereign state. In other words, they should be run under the jurisdiction of a government. Private vs public? But…
Airports can be quite exciting places. A trip to the airport could mean that we are about to jet off to somewhere glamorous. Airports can also be quite comforting places. It could mean that we have just come back home from a long trip to somewhere exotic.
But whether we are jetting off or jetting back, airports are unquestionably strategic assets for a country.
Some countries think that airports are so important that these prize assets must always belong to a sovereign state. In other words, they should be run under the jurisdiction of a government.
Private vs public?
But some countries have privatised their airports. The reasoning is that airports could be more efficient when management is held accountable to shareholders rather than answerable to a government.
The question of private versus public transport is, perhaps, something that academics and economists can debate over to their hearts’ content. As investors, we should, instead, ponder over whether these assets are able to generate long-term returns for us, given their obvious advantages….
…. They are, in many cases, monopolies, after all. And in business, competition is never quite as attractive as total domination.
There are no fewer than 17 dominant airports listed on various stock exchanges around the world. Singapore’s Changi airport is not amongst them, though. That could be a strong argument for not privatising airports. Changi Airport has won the Skytrax World’s Best Airport Award nine times since 2000.
Many happy returns
The nearest privatised airport to us is Malaysia Airport Holdings (KLSE: 5014.KL) that runs Kuala Lumpur International Airport. Other nearby airports include Airports of Thailand and three airports in China.
Overall, airports can generate a decent return on shareholder funds. Between 2006 and 2017, the 17 airports that were looked at delivered an average bottom-line profit of $10 on every $100 invested by shareholders. But some have done much better.
Copenhagen Airport, which runs two airports in Denmark, and Malta International Airport are notable standouts. In the case of the former, the return on equity has been around 30%, while the latter has delivered about 20%.
The reason that these two airports have delivered outstanding returns is primarily because of their efficient use of assets. Copenhagen Airport generates around $37 of revenue from every $100 of asset employed.
So too does Malta International Airport. That is nearly 40% higher than the average. But they are not alone. TAV Havalimanlari, which operates Istanbul Ataturk Airport, and Flughafen Wien, which runs Vienna Airport, are just as efficient.
But it’s not just an efficient use of assets that determines how much profit airports can generate on every shareholder dollar. It is also important that they can make a decent bottom-line profit on every dollar of revenue.
A profitable business
Some of the most profitable airports include Shanghai International Airport that makes $36 of net profit on every $100 of revenue, and Auckland International Airport that makes around $37 on every $100 that it rings up at the tills.
Another driver of returns on shareholder funds is leverage. That is because the airport would be using borrowed money rather than shareholders’ money to generate returns. One of the most indebted is Sydney Airport. It has borrowed $27 for every dollar of shareholder dollar invested in the business.
But even in the case of Sydney Airport, debt does not appear to be a major concern. The interest payments on its loans is more than adequately covered by its free cash flow. There is even enough left over to reward shareholders with dividends.
From an income investor’s perspective, it is those dividends that are important. And airports don’t disappoint on that front. It is little wonder that pension funds are some of the main shareholders in many of these infrastructures.
On average, they pay out around half their profits as dividends to shareholders. The rest is retained for use within the business to generate roughly 10% a year. In other words, airports could increase their dividends, if they wanted, at about 5% a year.
These vitally important assets coupled with the fact that they are monopolies with pricing power and an ability to generate recurring income and rising dividends could explain why they have delivered attractive total returns to shareholders.
A flight to certainty
Over the last ten years, they have on average delivered a total return of about 18% a year. Around three-quarters of that has come from share-price appreciation and the rest from reinvested dividends.
Some of the best performers include Malaysia Airport Holdings, Shanghai International Airports, Auckland international Airport and Airports of Thailand.
Airports might seem, at the outset, to be staid and boring investments. But at a time when there is some uncertainty over the direction of interest rates, there is something to be said for a flight to a place with some certainty that has the potential for rising income.
A version of this article first appeared in The Business Times.
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