Boe Pahari, Chairman and Founder of VisionEdgeOne, reflects on the recovery of the aviation sector following the Covid-19 pandemic.

It is clear now in the aftermath of Covid-19 that the aviation sector has been through the greatest of ‘black swan’ events, the likes of which have never been seen before. It is always the mainstay of prudent infrastructure investing to consider extreme downside scenarios – as patronage risk is additive to the availability-style investments that kick-started the asset class.

One only needs to turn the clock back to the 1990s and hit play. We start with the dot com bust, followed by the 9/11 terrorist attacks, the SARS outbreak in Asia, the Avian Flu outbreak, The Global Financial Crisis, the H5N1 Swine Flu, the eruption of Icelandic volcanos, Avian Flu returned in 2013, then came Ebola, MERS and Zika.

From pandemics to economic crises and all in between, the nature is different, the magnitude of different sizes, but the recovery and continual growth is inevitable. Despite these shock events, world airline traffic has consistently shown long-term growth since the 1970s. Empirical research published by IATA Global Air Passenger Markets: Riding Out Periods of Turbulence puts forth that it generally takes at least five years for the industry to recover, and that 72% of the impact of the initial shock persists one year after the event, just over a half after two years, and after five years, the effect is just one-fifth of the initial impact.

But like always, we learn, adapt, and continue to grow 

Close to two years on from seeing scenes of planes grounded and unprecedented travel restrictions, we have seen this trodden path of recovery once again play out – with global passenger volumes as of December 2022 close to 85% of 2019 levels 1 . As we write this piece in March 2023, airports with leisure-orientated travel and the visiting friends and family segment are seeing passenger volumes return to 2019 level 2 . Airlines are nimble, and their playbook during times of crisis is to reduce capacity, increase load factors and lower fares, not flinching on lower usage of the fleet until there is confidence that load factors can be maintained. While there have been some airline collapses, we believe capacity is quickly absorbed by competitors with minimal impact on flight frequency. We haven’t seen as much fare discounting this time around, and global passenger load factors (PLF) have continued to remain above the threshold of 80% (as of Nov 2022) 3 . This is a major move of almost 14.9 and 5.1 percentage points for international and domestic travel respectively, reflecting the strong Northern Hemisphere Summer of 2022, which exceeded expectations. Indeed the expectations for this Summer is that capacity will be at or above 100% 4 , with the PLF expected to hold or improve. Significant pent-up demand remains, and the continued phenomenon of a rising middle class in emerging economies will, in our view, propel growth in the coming years.

We see growth the post-pandemic era being shaped by significant tailwinds
1. The airport cost base has been reinvented
When passenger levels were at or close to zero of 2019 levels, airport owners really only had two levers to move: shore up liquidity through drawing down on facilities and/or providing equity support, and aggressively reduce the cost base, as an indefinite cash burn took hold. As a result of the latter, the fixed cost base has been reset, with non-essential expenditure identified, reduced and removed. Staffing flexibility has also been achieved

2. Knee-jerk travel restrictions are unlike to take place again
Leading bodies and experts have established lines of engagement and protocol around responding to outbreaks. The prevention of the spread of disease must betaken into account with a more holistic lens around the impact on broader society and the economy

3. Point-to-point (P2P) traffic will still outpace hub volumes
At the peak of the pandemic, hub traffic made a brief return. Yet the next generation aircraft order book indicates that P2P traffic will continue to grow at higher rates than wide-bodied aircraft

4. Airlines have remained resilient
Major Low-Cost-Carriers (LCCs) and Ultra LCCs are well capitalised and nimble, expanding routes and maintaining frequencies, yet yields will come down to stimulate  further demand. Ryanair and Wizz Air are the only two of the top 15 aircraft operators who operated more flights in 2022 vs. 2019 in Europe 5

5. Sustainability is critical
The licence to operate and grow continues to be an ever-increasing threshold for airport owners. Airports are becoming more adept at meeting this, with glided paths to achieving net zero both for the airport’s operations, and longer-term plans towards net zero for all activity through encouraging airlines to adopt next gen aircraft and the accelerated use of sustainable aviation fuels

6. Jet fuel supply to normalise
Record jet fuel premium to brent crude oil has been seen of around c.50%, largely attributable to supply imbalances, yet this is expected to recalibrate over the near term

7. Significant pent-up demand
Frustration around operational bottlenecks and delays was a key theme as the recovery attempted to accelerate quickly, yet is a symptom of the pent-up demand that remains

Transaction activity stalled, but activity picked up in 2022, and a mega deal took place when passenger levels were only 10%

The greatest of black swan events for the sector did not deter investors from setting another record – the greatest cash takeover in Australian history was Sydney Airport in 2021. This transaction took place at a time when passenger levels were severely impacted (domestic passengers at -58% of YTD
levels and international passengers at -97% vs. 2019). Yet it traded at 24x EV/EBITDA on FY 19 actuals 6 , what seasoned investors would consider a fair price in normal times for this airport.

Three notable transactions have also taken place subsequently, with two in Latin America and an increased shareholding in a European group of airports.
At VisionEdgeOne, we have always understood the resilience of the sector, but also its ability to continually grow – capturing the global forces of disruption. We also recognise that black swan events can happen again, and believe that investors can create a natural hedge by creating a diversified portfolio through assets in other sectors.