Since the first powered flight by the Wright brothers in 1903 commercial aviation as an industry has fascinated many and it has been an area that has attracted a very significant amount of investment. As global disposable incomes continue to rise, and a growing middle class continues to emerge, the demand for air travel will keep increasing. The International Air Transport Association (IATA) estimate that the long-term GDP multiplier for air travel is c.2.1x and by 2043 it expects passenger numbers to have doubled to over 8bn, an expected additional 4.2bn passengers. This suggests an average annual passenger growth rate of almost 4% to 2043. Investment into commercial aviation offers access to this structural growth with differing levels of risk and return available across the industry’s capital structure.
The most obvious way to take advantage of this strong passenger growth trend over the medium-term is through an investment into an airline. However, in the short term the airline business can be volatile and while equity and debt investments into an airline can offer high returns, investors need to be cognisant that the track record of the airline industry in terms of covering its cost of capital and repaying its debts is patchy. As a result, choosing the correct airline business model is of the utmost importance for investors and financiers. We have a preference for the low-cost carrier model.
There are a variety of other ways in which both investors and financiers can gain exposure to the growth potential of aviation, including through airports, aircraft lessors, manufacturers and Maintenance, Repair & Overhaul (MRO).
Airport operators such as the Dublin Airport Authority (DAA) offer a different way to play the structural growth in passenger numbers. IATA defines a level 3 airport as one where demand significantly exceeds capacity with slot constraint being an issue. According to IATA there are over 200 Level 3 airports globally with 50% of all passengers departing from a level 3 airport. On that basis a doubling of passenger numbers represents a major challenge for the aviation industry which will require considerable public and private investment. Given the infrastructure like positioning of the airport operator business model we expect that most investments will be via the debt market rather than the equity market.
Aircraft leasing is another important part of the aviation complex and a major consumer of capital. Over the last 20 years the percentage of leased aircraft as a proportion of the global fleet has increased from c.30% to c.50%. Ireland has been a major player in this growth and as both aircraft and engine leasing has continued to grow as a segment within the commercial aviation industry the opportunities for investment have also increased. While there is some scope to invest directly into the equity of lessors such as AerCap Holdings, which is listed on the New York Stock Exchange, others such as SMBC Aviation Capital are private companies and as such we believe that the majority of the investment opportunity in aircraft leasing will also be via the debt markets.
Another avenue for investment in commercial aviation is into the traditional aircraft and engine manufacturers (OEMs) such as Airbus, Boeing and GE or into an MRO business. This segment allows both equity and debt investors to benefit from the growth in passenger numbers as airlines continue to increase the number of aircraft in their fleets as well as benefitting from the commercial aviation industry’s ongoing push to lower emissions as airlines look at fleet renewal to reduce their environmental impact. Indeed, last year we estimated that the investment into the global fleet alone would come to over $1tn in the medium-term. In the short-term OEM investors will need to consider the impact of the ongoing production issues at the OEMs versus the current bloated orderbooks. While MRO investors need to factor in the risk that the current very tight MRO market will see larger airlines look to in-house a significant portion of their maintenance.
However, taking a step back and thinking about the long-term, the key question for us revolves around sustainability and the fact that despite producing significantly lower emissions new aircraft will not be enough to properly address the sustainability agenda. In order to get the commercial aviation industry on a credible path to net-zero by 2050 a very considerable investment will be required into sustainable aviation fuel (SAF) and alternative propulsion systems. The future of a true SAF is largely dependent on the availability of renewable energy. With its abundant wind energy potential Ireland should be actively looking to take a leading position in this space and we note that a report last year by SkyNRG and SFS Ireland highlighted that Ireland has the potential to develop a SAF industry generating revenue of €2.5bn by 2050 as well as providing up to 1,000 jobs in Ireland. This is an imperative for Ireland. Outside of SAF, another alternative for investors looking to play the sustainability agenda is to look at alternative propulsion systems within the commercial aviation sector. Hydrogen powered aircraft are a long way into the future; however, electric aircraft are not that far away as businesses such as Heart Aerospace look to decarbonise regional air travel by developing an electric regional aircraft by the end of this decade.
While there will need to be further investment by existing operators, private equity, sovereign wealth and governments, there will also be a very significant need for funding for the commercial aviation sector from both the equity and debt capital markets. With that in mind Goodbody, in conjunction with AIB, Irelandia and UCC, is delighted to host Invest in Aviation conference on 19 September 2024. Invest in Aviation brings together leaders from across the global industry with financiers and investors for a day of interviews and panel debates. Interviewees include, Willie Walsh (IATA Director General), Michael O’Leary (CEO of Ryanair), Peter Barrett (CEO SMBC Aviation), John Slattery (Chairman Heart Aerospace), Maury Gallagher (Founder Allegiant Airlines), Declan Ryan (Founder Irelandia), Kenny Jacobs (CEO DAA), Bobby Healy (Founder Manna Drones), Conor McCarthy (Founder Emerald Airlines / Dublin Aerospace), Patrick Jordan (Founder Atlantic Aviation Group), and Yvonne Moynihan (Corporate and ESG Officer – Wizz Air).
The information in this document is not investment advice and should not be taken as such. It is not a recommendation to buy or sell any security, service or product.