Airports Outperforming Airlines in 2013

Date: 2015-08-27

Airports operate in an attractive market structure with high barriers to entry and a fuel-neutral exposure to aviation growth. This has helped them generate better economic returns than airlines. Over the past five years, the airports of Hong Kong, Thailand and Malaysia have, in aggregate, generated twice the return on capital earned by their respective flag carrier airlines. Despite this, airport stocks failed to outperform airlines for a long time as investors perceived risks from uncertain government policies. This has changed and Asian airports have started to rerate since 2012. This, nonetheless, comes at a lag to their European peers that have been outperforming airlines since 2010.

We believe two developments have changed the earnings outlook for airports in Asia and have improved investor sentiment. First is the start of a gradual improvement in the regulatory structure at a few Asian airports. The regulatory structure in Asia has been a substantial weakness. Government policies and a lack of transparency in the price setting mechanism have, in the past, clouded the earnings outlook and dampened investor interest. Although new structures at some ASEAN airports still do not provide a mechanism to set charges based on a cost-plus or return on assets formula (like at Western airports), better clarity and a formula-based periodical increase in charges (like for MAHB) provide a way to better cover a rise in the cost of providing services.

Second and more important is the rapid rise of low-cost carriers in the region and their contribution to the improved earnings outlook of airports. Irrespective of the way air travel is being incentivised in Asia, airports are well-placed to benefit from increasing aircraft and passenger throughput both from rising aeronautical collections and increasing retail spend. Also, airports are able to use relatively low-cost infrastructure to support this growth like MAHB using a low-cost carrier terminal (LCCT) and AOT using Don Muang Airport (DMK). 

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