The aviation industry can be a tough gig. High cost of capital, high rates of depreciation, fierce competition, thin profit margins and low return on incremental capital are just some of the challenges facing the industry. In this article, we weigh up the advantages and potential risks of investing in the aviation sector.

Aviation is broader than airlines

The aviation sector extends beyond pure airlines as we traditionally think of them. Frequent-flyer programs, aircraft manufacturing and infrastructure are all examples of related sectors which are often quite profitable and are not so bound by external factors such as oil prices, which can heavily influence airline profitability.

In fact, aviation-related infrastructure - such as airports, runways, terminals, hangars, and ground transport systems can present a compelling opportunity for investors. Generally speaking, aviation-related infrastructure has similarities to other forms of civilian infrastructure in that it can provide an ongoing cash stream that gradually rises with inflation.

Other advantages of infrastructure as it relates to the aviation industry include:

What are the considerations?

Like all potential infrastructure investments, any prospective investor considering the aviation sector should carefully assess risks. Competition from other hubs may be an important factor though this is generally more relevant overseas than in Australia. Investors should also consider competition from other travel destinations, which is particularly relevant for airports where traffic is majority inbound tourism.

Some other questions that may be worth exploring include:

These are all questions that investors should consider before allocating any capital. Positive financial indicators of a ‘good’ airport investment should include a favourable regulatory framework that doesn’t cap returns, high operating margins, strong aeronautical asset base with spare capacity, moderate level of gearing and an ability to expand.

Final thoughts

With the appropriate research, the potential exists to provide an ongoing, inflation-sheltered income stream that should rise in value meaningfully over time.

About the Author

Mar Beltran is Investment Director of AMP Capital’s airport investments.

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