Stock Story: Aena
January 2021
Aena is the world's largest airport operator in terms of passenger traffic. The company earns that title by shuffling 275 million passengers through Spain’s 46 airports and two heliports and another 18 million people through its 51%-owned Luton in the UK, one of the 45 airports outside Spain in which Aena has a direct or indirect holding.
In February 2020, the year ahead was looking good enough for the majority-Spanish-government-owned company to raise its forecast for growth in passenger traffic for last year to 1.9% from 1.1% – not a spectacular increase but a reflection of the steady growth that essential services tend to enjoy as populations grow in size and wealth. Needless to say, Aena’s prediction was upended when the coronavirus arrived in Europe.
Passenger numbers are key for airports because they are the key determinants of their two main sources of earnings (which, for Aena, amounted to 4.5 billion euros in 2019). The biggest source of income is from aeronautical revenue (64% of Aena’s revenue in 2019). This comprises the income from flights, terminal space rentals, landing fees and other usage fees. The other source of revenue for airport operators is non-aeronautical earnings, the term for the money people spend at shops within a terminal and for parking their cars (29% of Aena’s 2019 revenue). Basically, the more people fly, the more an airport operator earns. Thus, the income of airport operators was devastated when passenger numbers dived after European governments imposed restrictions on daily life and banned or restricted travel to combat infections.
The pandemic hit Spain hard so Aena’s businesses suffered. Passenger numbers in March dropped by 59% from a year earlier. April’s plunge was 99%, as was May’s. The result for June was a dive of 96%, July’s drop was 76% while August’s decline came in at 70%, an improvement that reflected an easing of restrictions as infection rates declined.
Aena’s stock naturally fell when the virus reached Europe as investors reassessed its earnings outlook and rating companies such as Moody’s reviewed the ability of companies to repay debt. On March 31, for example, Moody’s downgraded the debt rating on 11 European airport operators but only reduced the 'outlook‘ on Aena’s ‘A3’ rating – which is a warning that Moody’s might reduce the rating. From the end of 2019, Aena’s stock fell as much as 48% by mid-March before ending 2020 only 17% lower overall for the year.
Another way to read that sentence is that Aena’s stock ended the year 60% above its 2020 low. The gain was thanks to news in November that vaccines had been developed for the novel coronavirus, with the possibility that life could return to normal sooner. The optimism surrounding these vaccines even overcame concerns about the financial damage Europe’s second wave of covid-19 infections and related restrictions would herald. The UK in December became the first country to commence vaccinating its population. Expectations are high that ,over 2021, vaccination campaigns can defeat the pandemic.
Aena is particularly well placed for a recovery compared with its listed airport peers. Not only does the company have a government-endorsed monopoly over air travel in Spain, but also, its mix of passenger traffic in terms of tilt towards domestic routes and purpose of travel makes it stand out.
We would expect domestic and regional traffic to come back first, followed by long-haul international travel. At Spanish airports, 91% of Aena’s traffic in 2019 was domestic or EU travel. Aena also estimates that business travel represented only about 19% of total traffic in 2019 – well below that of other listed peers. This mix is especially important given potential structural shifts in the market that could arise from the pandemic – there is likely to be a quick rebound in leisure and personal travel but only a partial revival in business flying.
Personal travel is likely to bounce back most quickly because people will be keen to see the friends and relatives they couldn’t visit in 2020. Leisure travel is also likely to return to more pre-covid-19 levels because, freed of lockdowns, people will look to get away on holiday; these would include many northern Europeans keen to escape their chilly countries by visiting sunny Spain. However, the recovery in business travel is expected to lag as the economic damage of the pandemic is likely to see businesses seek to reduce costs. Travel budgets will likely be one of the first areas to be cut, not least because the pandemic showed that Zoom, Microsoft Teams and other such software were adequate substitutes for many face-to-face meetings.
On top of all this, Aena is a well-managed company that due to exceptional control of costs recorded a profit in its aeronautical business in the third quarter of 7.5 million euros even though traffic was down 75% for the three months. That result added to years of reliable earnings. All up, we are confident that Aena can redisplay one of the key attributes we expect from infrastructure stocks; that is, the ability to offer reliable earnings.
It must be stressed that the pandemic is not over. Covid-19 could have transformed, rather than just temporarily impeded, people’s holiday and personal travel habits in such a way that Aena loses out. Airlines’ financial burdens have increased substantially, and it is unlikely all will survive. In addition, airport operators in Europe face the longer-term threat of increase environmental taxes on plane tickets, making air travel less attractive. Prior to the pandemic, there was an active ‘flygskam’ (flight shaming) movement to encourage the use of trains over planes. Even allowing for these, Aena seems one of the best-placed of the world’s listed airport operators as 2021 gets underway.
Sources: Company website, Bloomberg and Dunn & Bradstreet.
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