The Soaring Potential of Airport Stocks in India’s Resurging Travel Industry
People are once again taking to the skies. Air travel is on the rise. And the travel business is overjoyed.
If you want to bet on it, you can buy airline shares. They are the ones who transport all of these passengers. However, the issue is that airlines do not make a lot of money. An airline has several dependencies: they must lease aircraft, pilot costs are considerable, and fierce rivalry means they are frequently striving to deliver low fares at the expense of their earnings. Not to mention the turmoil caused by the fluctuating oil prices.
Airports lack all these amenities. Sure, there is a fixed cost to installing fancy terminals. However, airlines then fight to pay airports for the best landing slots.
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Furthermore, most cities have only one major airport. As a result, it becomes a monopoly. Also, given the number of new airlines springing up around us, it’s safe to argue that getting into the airport business is far more difficult than starting an airline.
Investment terms and airport stocks
Airports have what’s known as a moat, or a high barrier to entry, in terms of investing
This is reflected in the statistics as well. When the global operating margins of listed airports and airlines are compared, the gap is stark: airports had average profits of 32% in the four years preceding the pandemic, while airlines had close to 8%. And even when margins fell during the pandemic year, airport margins remained positive.
That is why investors are interested in the airport industry. GMR Airports Infrastructure, the only pure-play airport player listed on India’s stock exchanges, has risen by 60% in the last six months.
Currently, the firm operates three airports in India: Delhi, Hyderabad, and a new one in Goa. However, there are two more in the works: Bhogapuram (Andhra Pradesh) and Nagpur. When aviation traffic across India is taken into consideration, GMR already has a market share of 27% with these airports in its portfolio. It even holds shares in two international airports, one in Greece and one in Indonesia.
How are airport operators making money?
Aero revenues, which include things like landing and parking fees from airlines. Passengers could be charged user development fees. Also, revenue from cargo handling. It often encompasses anything directly related to the business of flying.
However, there is a regulator in place to keep them under check. The Airports Economic Regulatory Authority Of India (AERA) is in charge of ensuring that airport operators do not become overly greedy. As a result, they have price ceilings defined by a formula that takes into account the return on capital, depreciation, operational expenditures, and taxes.
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As a result, non-aero revenue comes into the picture. This is the rent paid by the airport shops and eateries. It could also come through advertising boards and the distribution of spots. It could also be a result of parking fees.
Another source is what we call city-side development.
When airport operators get involved in a project, they are not merely constructing runways and terminals. They also buy up enormous tracts of land in the area. Perhaps it will be used for airport development in the future. They may also lease it to others to construct warehouses, hotels, offices, and even shopping malls.
According to an ICICI Securities analysis, GMR appears to be sitting on a goldmine of great land, with 230 acres in Delhi, 1,467 acres in Hyderabad, and 232 acres in Goa. GMR can pretty much do whatever they want in these areas without interference from the government. That is the huge monetization potential that everyone is looking for right now.
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With increased interest from overseas investors, GMR Group is also simplifying its company structure. It’s an attempt to improve its attractiveness.
Conclusion
The majority of GMR’s airports are located in high-traffic areas, and they have a near-monopoly in those major cities. As air travel becomes more affordable for more people, the constant stream of passengers should only increase. Sure, high-speed rail networks will compete, but they may not make a significant impact right away.
Furthermore, GMR does not appear to have gone beyond previous bids for additional airports. We anticipate the Group’s next round of airport bids in 2024 will be more cautious and less aggressive.
