With lockdowns across the globe slowly lifting and signs that global economies are emerging from hibernation, is now the time to invest in airports?
Valuations certainly are cheap relative to history with global airport stocks down more than 40% over the past four months.
The question becomes how long it will take before air traffic goes back to normal and which airports have a strong enough balance sheet and sufficient liquidity to survive.
Consumer behaviour also has a part to play. When will the public feel safe enough to fly? Retail investors have piled into the sector in recent months with a 'buy the dip' mentality, but many institutional investors are long-term investors in the sector.
Whitehelm holds three airport stocks: Zurich Airport, Paris Airport and Aena, an operator of Spanish airports with a total weight of 7% of the portfolio.
These are preferred over other options such as Sydney or Auckland airports, both of which are significantly more levered with less cashflow cover of interest payments on debt.
Overall, the portfolio was conservatively positioned at the start of the year with two-thirds of the portfolio in fully regulated utilities and only 25% in transportation infrastructure including airports, railways and tollroads.
Through March and April our airports team spent a lot of time analysing the liquidity of the airport stocks and modelled the cashflows and debt covenants under a conservative recovery scenario. As a result, we were comfortable with the financial viability of three airport stocks and felt that the share price declines more than reflected the outlook.
We haven't added to the exposure however, as the prospects for a recovery in traffic is more uncertain than previous negative shocks such as the SARS epidemic in 2003.
This is because, firstly, travel restrictions in some form may continue for some time even if the spread of the virus seems contained; and secondly, the deteriorating global economic outlook would likely slow the recovery in traffic and consumer spending, even if travel restrictions are eased.
Additionally, the crisis is also weakening the credit profile of airlines, which have been drastically cutting capacity.
Our base case is that passenger numbers are severely depressed for six months, with a gradual recovery over the following 18 months, reaching 2019 levels in mid-2022, and zero growth for the rest of 2022.
In recent months, as a result of the pandemic, we have made changes to our holdings in the sector. The result of our analysis was that we were comfortable with some exposure to the airports sector, including our holdings in Zurich Airport and Aena holdings, but we sold out of Frankfurt Airport and purchased Paris Airport.
The share prices of both Frankfurt and Paris airports had been similarly impacted, having fallen 45% from mid-February to the March lows, but Paris Airport has a much more secure liquidity position, so for the same valuation, we swapped to the higher quality asset.