Airports: Your Ticket To Investment Success

Airports are an attractive investment opportunity, with revenue growth driven by investments in terminal and airfield facilities to meet increasing passenger demands. Airports can increase their charges to recover a fair return on capital expenditure, and typically earn revenue as a per-passenger charge and/or a charge based on aircraft size. Dual till airports, where aeronautical activities are subject to price control or monitoring, are particularly appealing to investors as the commercial segment can usually earn a higher rate of return. However, airport stocks tend to be expensive, and investors should be mindful of concession periods, which may only grant operating rights for a limited number of years.

Airports' revenue and how it is earned

Airports generate revenue in a variety of ways. The most common form of revenue is aeronautical revenue, which is earned as a per-passenger charge and/or a charge based on the size of the aircraft. Airports can increase these charges to recover a fair return on capital expenditure to provide additional capacity or to improve service or safety standards. Aeronautical activities are often subject to price control or price monitoring to ensure that the airport is charging a fair price for passenger-related facilitation activities.

Airports also earn revenue through retail leases. They earn rent from retail space within the terminal buildings for stores ranging from duty-free shops to restaurants and general merchandise. The leases are typically structured with minimum guaranteed rents and additional rent based on sales above certain thresholds.

Another way airports generate revenue is through capital investment and expansion. Airports invest in terminal and airfield facilities (such as new gates, expanded terminals, runway improvements, aircraft parking spaces, etc.) to meet increasing passenger demands. This allows them to expand their passenger facilitation and related activities, leading to higher revenues.

Investing in airports can be expensive, but there may be good opportunities during times of crisis. It is important to consider the concession period before investing, as the rights to operate an airport may be limited to a certain number of years.

Capital investment and expansion

Revenues grow as airports invest in terminal and airfield facilities to meet increasing passenger demands. This includes new gates, expanded terminals, runway widenings or improvements, aircraft parking spaces and related facilities. Airports also earn rent from retail space within the terminal buildings for stores ranging from duty-free to restaurants and general merchandise. The leases are typically structured with minimum guaranteed rents and upside from sales above certain thresholds.

The deregulation of the global aviation industry saw a steep change in the level of growth of air travel as increased competition, including the arrival of low-cost carriers into the marketplace, together with the larger and more fuel-efficient planes, saw prices fall and air travel become more accessible. The World Bank estimated carriage of 4.5 billion airline passengers globally in 2019, up from 1.7 billion in 2000, an increase of 267%. Even with all the disruptions from COVID, IATA estimates that air travel rebounded quickly, back within 6% of 2019 levels by June 2023.

Dual till regulation is the most common form of regulation, where aeronautical activities are subject to some form of price control or price monitoring to ensure the airport is charging a fair, but not excessive, price for the passenger-related facilitation activities. Dual till airports are more attractive investments because the commercial segment can usually earn a higher rate of return than the regulated aeronautical segment. Examples of dual till airports that are publicly listed include Sydney, Auckland, AENA (a portfolio of principally Spanish airports), Zurich, Frankfurt, Copenhagen and Paris.

Dual till regulation

When considering investing in an airport, it's important to keep in mind that costs are usually scalable and relatively fixed. This means that airports can expand their passenger facilitation activities to meet growing passenger numbers without significant increases in their cost base. Airports are typically able to increase their charges to recover a fair return on capital expenditure, providing additional capacity or improving service and safety standards.

Revenues grow as airports invest in terminal and airfield facilities to meet increasing passenger demands. This can include new gates, expanded terminals, runway improvements, aircraft parking spaces and related facilities. Airports also earn rent from retail space within the terminal buildings, such as duty-free stores, restaurants and general merchandise outlets.

It's worth noting that airport stocks can be expensive, and you may only have the rights to operate an airport for a certain number of years. However, in times of crisis, there may be good investment opportunities. For example, during the COVID-19 pandemic, air travel rebounded quickly, returning to within 6% of 2019 levels by June 2023.

Retail leases

Airports earn revenue from a variety of sources, including retail leases. Retail leases are agreements between an airport and a retailer to rent space within the terminal buildings. This can include stores such as duty-free shops, restaurants, and general merchandise outlets. The leases typically include minimum guaranteed rents, with additional rent based on sales above certain thresholds.

When considering investing in airports, it is important to note that costs are typically scalable and relatively fixed. This means that airports can expand their operations to meet growing passenger demands without significant increases in their cost base. However, capital investment and expansion are usually significant requirements to facilitate increasing passenger numbers.

Additionally, it is worth considering the concession period before investing in an airport. Concession agreements may only grant the rights to operate an airport for a certain number of years, which can impact the attractiveness of the investment. Airport stocks can be expensive, but crises may present opportunities to invest at lower prices. For example, the Vienna International Airport stock was trading with a dividend yield of 4.6% and a price-to-earnings ratio of 15 based on 2019 numbers, making it a potentially attractive investment opportunity.

Concession periods

When investing in airports, it is important to consider the concession period. Concession periods refer to the amount of time an investor has the rights to operate an airport. These periods can vary in length, and it is important to check the concession period before investing as they can be subject to expiring concessions.

During the concession period, the investor will be responsible for managing the airport's operations, including capital investment and expansion to facilitate growing passenger numbers. Airports are able to increase their charges to recover a fair return on capital expenditure, providing additional capacity or improving service and safety standards.

Revenue is usually earned on a per-passenger or aircraft size basis, and aeronautical revenues are typically subject to economic regulation to ensure fair pricing. Airports can also generate revenue through retail leases, earning rent from retail spaces within terminal buildings.

Airport concessions can include a range of businesses, such as retail outlets, restaurants, duty-free shops, and service providers. These concessions generate substantial non-aeronautical revenue, with the global airport retailing market valued at $43.2 billion in 2023 and projected to grow to $68.8 billion by 2030.

Effective management of airport concessions is crucial, with regular meetings recommended between airport concession managers and concessionaire managers to discuss agreement provisions and address any contractual uncertainties.

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