As expected, the airport sector was hit hard by global travel restrictions arising from the response to COVID-19. As countries reopen their borders, and more people venture abroad for their holidays, this is one sector that's clearly bouncing back.
Our valuations and modelling team recently teamed up with Inframation to analyse the size of premiums that listed airports traded at over their underlying reported net asset values (NAVs). This analysis shows how even amid uncertainty the market still regards airports as 'safe haven' assets.
In collaboration with Inframation, we looked at two main factors of infrastructure investment trends in the airport sector:
The first factor we considered was global listed airport companies’ average share prices relative to their average book values per share. We did this to identify a proxy for the premium an investor is willing to pay over and above its reported NAV per share.
After that, we analysed private sector deal data as provided by Inframation to ascertain whether the (more accessible) listed market sentiment is mirrored in the private sector, and understand the investment trends inferred by it. The periodicity of reporting means that there are limitations to this approach, so our inferred premium to NAV should only be used as an informal guide.
As expected, the global shutdown in international and domestic air travel caused listed premiums to drop by more than half: from around 248% to around 117%, between January 2020 to March 2020.
Source: S&P Capital IQ
This is echoed in the passenger travel numbers reported by the International Civil Aviation Organisation (ICAO). An approximate 60% fall in 2020 lead to around USD 115 billion lost revenue for airports and around USD 371 billion lost revenue for airlines.
Despite continued uncertainty about the impact of coronavirus and the severity and length of global travel restrictions, market sentiment seems to be picking up. Listed premiums in the airports sector are actually now exceeding pre-coronavirus levels, rising to around 283%. Private deals also appear to show that market appetite is returning.
Source: Inframation
As shown in Figure 2, deal activity including M&A, greenfield and refinancing transactions, recovered quickly in Europe and, more recently, has also picked up in Asia and North America noting that the North American data presented above includes a significant aviation services company deal in Q2 2021.
It's also noticeable that deal sizes in Q2 2021 were far higher than at any other point since Q1 2020.
The primary transactions have been a large brownfield deal in North America, and two significant refinancing deals in Europe. Understandably, greenfield deals have been relatively limited across the whole period.
Interestingly, it appears that the market is taking a longer-term view on the sector beyond the current. With premiums rising because of a steady increase in share price, the market is viewing these assets as a potentially attractive long-term investment.
Source: ICAO
Pre-coronavirus estimates suggested that 4.7 billion passengers would use air transport in 2020, but ultimately there were only 1.8 billion journeys. When compared to the ICAO global passenger numbers reported, while passenger numbers, which have only returned to 50% of their earlier levels premiums, now appear to exceed their records from the same period.
This long-term view appears to mirror funds' approaches to valuations: generally short-term issues are captured in cash flow adjustments, with only sustained issues requiring an adjustment to the discount rate, to avoid unnecessary volatility.
While passenger numbers are slowly increasing, revenue passenger kilometres (an industry measurement of the number of kilometres travelled by paying customers) have been slower to respond. It's a sign that domestic flights will return to normal levels sooner than international flights.
Industry experts now forecast a 56%-62% reduction of international seats in 2021, compared to 2019, while domestic seat numbers will only fall by 20-22%. These numbers will have an impact on the financial performance of airports, but it will depend on their revenue splits between domestic and international customers.
Different regions also, typically, have different mixes between domestic and international flights. China and North America accounted for over 50% of domestic flights in 2019 and 2020, while over the same period Europe accounted for over 46% of international air travel.
It's in Europe where premiums have surged the highest, despite the greater uncertainty around when international flights will resume in earnest. When we look at airport premiums on a geographical basis, we see how they diverge across the globe.
Source: S&P Capital IQ
European airports are leading the pack with a consistent upward trend from Q4 2020, partly because of a release of financial reporting results reducing NAVs, but also likely as a result of the successful vaccine rollout keeping market sentiment positive with ICAO expecting international European passenger numbers to increase at a faster rate than North America .
In all but North America, we can see that premiums have returned to pre-coronavirus levels, and even exceeded them: European airport premiums has gone up to almost 600% in June 2021, from under 420% in January 2020, with investors taking advantage of depressed share prices relative to their historical performance.
More muted trends were observed in how China compared to the rest of Asia, where premiums were initially far lower and the drop caused by coronavirus was less marked, although figures observed in June 2021 are now in excess of January 2020 levels.
This market sentiment is reflected in the consistent airport deal flow throughout 2020 to 2021 in Europe, with Asia starting to pick up from late 2020.
We have deliberately excluded Sydney airport from the data set due to its negative NAV from Q1-Q3 2020, driven by its debt capital exceeding equity and its significantly high premiums to NAV (reaching 1,100%) from Q4 2020 into Q2 2021. According to S&P Capital IQ, as at June 2021, Sydney Airport was still over 90% debt capital, as opposed to a global observed range of between 40% - 60% on average.
The sharp spike in share price since 5 July 2021 is down to the recent speculation over a proposed takeover of Sydney Airport. It has been reported that IFM Investors and Global Infrastructure Partners have lodged an AUD 22.3 billion bid in July 2021. This bid reportedly represented an 81% premium to the offer price of the airports last equity raise in August 2020, which has put upwards pressure on the share price despite its current capital structure.
Source: S&P Capital IQ
This follows along with a wider trend of refinancing deals across the industry. There was around USD 1.5 billion in refinancing deals in H1 2020, rising to around USD 4.3 billion in H2 2020 and around USD 4.7 billion in H1 2021.
As air travel goes back to normalised levels, we’d expect to see premiums stabilise. However, it remains to be seen when this will happen, with forecasts showing international flights will not have reached pre-coronavirus levels by the end of 2021.
The uncertainty facing the airport industry as a whole is what makes this appetite for investment all the more surprising. What’s more, unlike airlines, airports have not generally received the same levels of government support to survive the crisis.
Given the numerous interlinked factors at play, global air travel is perhaps one of the industries with the highest levels of uncertainty around when it may return to normality. New strains of coronavirus, the success of vaccination programmes, government-mandated travel restrictions, the duration and depth of global recession, and long-term attitudes to business travel will all play a part in the fortunes of the airport industry.
The current circumstances have drawn attention to the pitfalls and opportunities of investing in the broader infrastructure sector, testing the attractiveness of airports for the first time.
Nevertheless, given that, broadly, premiums have returned to previous levels, the market clearly views the impact of coronavirus as a short-term blip on the horizon. In the long-term, airports remain ‘safe-haven’ assets, and the industry has already priced in the short-term impacts.
Airports have an economic multiplier effect on the wider economy that will be crucial for global recovery, and these assets will likely remain an important part of long-term liability-matching strategies for investors, such as pension schemes.
Traditionally regarded as safe and stable assets due to naturally high barriers to entry and geographical monopolies, it's understandable that those looking at the long term are seeking bargains at a time when airports are having to take on ever-greater levels of debt. The question remains as to how long those brave enough to pay higher premiums will wait to be rewarded.
For more information on global infrastructure investment trends, get in touch with Tomas Freyman.
