Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, Neville White, Head of Socially Responsible Investing Policy and Research at EdenTree, explains how aviation is on the cusp of a golden age of growth.
Aviation has seen sustained growth through all economic cycles and currently generates around $600 billion of GDP per year, which is forecast to rise to $1 trillion by 2026. In the UK, one of the world’s major aviation economies, the sector contributes 3.4% to GDP.
Aviation is marked by two compelling global phenomena: ageing fleets in Europe and the US, and air traffic growth in Asia and the emerging markets – both contributing to a significant backlog of new aircraft required within the next two decades.
Asia Offers a Compelling Growth Story
The highest growth is predicted to come from Asia-Pacific, particularly from internal traffic within China and the wider region. China’s airlines surpassed 100 million passengers per quarter for the first time last year, but domestic flights remain dominant at around 90% of all flight activity.
Both Boeing and Airbus predict that Asia will see the strongest growth, driven by rising GDP and a growing affluent middleclass. Boeing expects the fleet in China to surge to over 7,000 by 2034 – from a capacity of 2,570 capacity in 2014.
Asia is also leading the way in airport infrastructure, with Beijing the second busiest airport in the world by passenger numbers. Airport investment is at its strongest in Asia and the Middle East with 35% of airport investment occurring in Asia. We therefore expect to see more investment coming through as capacity lags passenger growth across the region.
A Diverse and Vibrant Investment Arena
Aviation has a diverse value chain encompassing manufacturers, airports infrastructure, airlines, support services, engineering and technology. The sector is a diverse and vibrant arena in which to seek investment returns.
While manufacturing is broadly non-investible for us, there is ample investment quality in engineering and technology. Airports infrastructure is ripe for consolidation or privatisation as a means of delivering much needed investment, such as the recent flotation of a minority stake in Aena of Spain.
As a house, we gain exposure from quality investments across the value chain, but we have avoided airlines on environmental grounds. We will refine this, allowing investment in the most sustainable airlines on a case-by-case basis, which deliver superior long-term shareholder returns.
Balancing Environmental Concerns
Aviation is a global success story. However, the industry presents several environmental impacts of interest to the ethical and responsible investor. Aviation is responsible for 2-3% of all human induced carbon emissions. Without intervention, aircraft emissions could reach 15% of global GHGs by 2050, given growth projections.
Slow to respond to the challenge of climate change, the industry is now placing emphasis on technology - particularly cleaner and younger fleets. Lowering fuel burn by reducing aircraft weight has a significant impact on CO2 generated.
Engine technology has evolved considerably. Improvements in fuel efficiency of 0.8% per annum to 2050 is viewed as credible based on evolving airframe and engine design. Carbon intensity under this scenario would reduce by about 30%. Moreover, a cumulative carbon intensity reduction of 35% by 2050 would allow up to 55% more aircraft movements – equating to passenger growth of around 60%.
The industry has coalesced around achieving 1.5% annual efficiencies in fuel, carbon neutral growth from 2020, and a net reduction in aviation carbon emissions of 50% by 2050 – relative to 2005 levels. Ultimately to reach more ambitious targets, some constraint on our desire to take to the skies may be necessary. The ultimate goal is to ‘decouple’ growth from emissions. Responsible investors will need to balance all of these ESG risks before taking flight.
Disclaimer
The views contained herein are those of the author(s) and not necessarily those of Morningstar. If you are interested in Morningstar featuring your content on our website, please email submissions to UKEditorial@morningstar.com
