Learn more about our Airline ETF
For a moment,
let’s pretend that the pandemic never happened, or that we managed to contain
it early on. What are some of the value propositions for investing in airlines and an Airline ETF over the long term?
Middle Class Expansion
We believe one of the most attractive investment
cases is the rise in the size of the global middle class, particularly in the
past decade before the pandemic. In September 2018, the Brookings Institute
declared that for the first time in human history, over half of the world’s
population, or some 3.8 billion people, lived in households that could qualify
as either “middle class” or “rich.”[1]
This achievement is incredibly constructive for international tourism, as
illustrated below. The number of tourist arrivals by world region has closely
tracked the growth in global gross domestic product (GDP).
Ancillary Revenues
Airfare has been on a downtrend for years on an inflation-adjusted
basis, so one of the ways airlines have generated higher revenues is through
fees for extra baggage, extra legroom, hotel stays, concessions, upgrades and
more. These are what’s known as ancillary revenues, or non-ticket fees. From
2011 to 2019, global ancillary revenues for the industry expanded approximately
240%, from $32.5 billion to a record $109.5 billion. This figure collapsed by
nearly half to $58.2 billion during pandemic-impacted 2020. Notice, however,
that as a percent of total global revenue, ancillary fees actually rose for the
year compared to 2019. We expect these revenues to recover alongside travel
demand as a whole.[2] 
Among the
most profitable non-operational revenue streams has been Delta Air Lines’
deal with American Express. The Atlanta-based carrier announced in 2019 that
it renewed this partnership through 2029, extending the Delta SkyMiles Credit
Card for an additional 11 years. Delta said at the time that it expected the
benefits from this relationship to double to nearly $7 billion a year by 2023,
up from around $3.3 billion in 2018.
Protected by an Economic Moat
One final point
we should make is that the airline industry is regarded as being protected by
an economic moat. The barriers to entry, in other words, are very high, making
it prohibitively challenging for new competition to disrupt the ecosystem.
Since the industry consolidated a decade ago, a vast majority of the market
share is now concentrated in the big four carriers. From January to December
2020, American, Delta, United and Southwest controlled a combined 65% of the U.S.
market.
Investing Across the Value Chain
The companies
that produce the aircraft and manage the airport terminals and service the
airplanes also benefit when the airline industry is growing.
Manufacturers
Today, there are two major
players in the commercial airline manufacturing business: the U.S.-based Boeing
and Airbus, which operates in France. Both hold a respectable share of the
overall market, with a combined share of nearly 90%.
Time will tell whether
Boeing and Airbus can continue to dominate the manufacturing space. There are
three new rising players in the space: Embraer (of Brazil), Bombardier (of
Canada) and Comac (of China). Very much like airlines,
aircraft manufacturing is a highly oligopolistic industry with high entry
barriers.
It’s possible that increased
competition in the manufacturing space could lead to lower construction costs,
which may help airline carriers become even more profitable. Some of the
savings could even be passed onto consumers, which may then promote further
general consumption, increased air travel and continued economic growth.
Airport Services
There are about 15 publicly traded
airport stocks available around the world, mostly in Latin America, Western
Europe, East Asia and Oceania.
We like airports not just because they’re
about as close to monopolies as you can get. They can also be highly profitable
businesses, despite having huge fixed costs—not unlike airlines.
Airports have two types of revenue streams:
aeronautical and non-aeronautical. Aeronautical includes revenue generated from
the carriers that use their services. Think fees associated with landing,
parking, transfers and the like. In 2018, such fees accounted for about 56% of
airports’ income, according to Airports Council International (ACI).[3]
The other revenue stream, non-aeronautical, is derived mostly from passengers
and includes retail concessions, duty-free, car parking, food and beverage,
advertising, rental car concessions and more.
Before the
pandemic, airports were becoming havens for high-end shopping, generating a
growing share of global sales for luxury goods companies. Over the years,
they’ve learned to capitalize on captive flyers, many of them high-net worth
individuals who have time between flights to browse in Louis Vuitton and
Chanel. For every dollar they spend, the airport receives a cut.
This has helped
listed airports record extremely attractive operating margins in recent years.
In the four years before the pandemic, they’ve had an average margin of around
32%, roughly three times greater than global airlines’ average margin. In 2020,
airports’ operating margin remained positive at 8.17%, while airlines saw
theirs fall to negative 24.51%.
Associated Risks
- The value of equities
and equity-related securities can be affected by daily stock and currency
market movements
- Investors'
capital is fully at risk and investors may not get back the amount originally
invested
- Exchange rate
fluctuations could have a negative or positive effect on returns
- Please note
this is not an exhaustive list of risks. Other risks may apply.
Visit our Airline ETF fund page to learn more about the ETF.