Investment

New avenues for investing in the aviation sector 

Bhanu Choudhrie, founder and executive director of Alpha Aviation, argues that air transport is a crucial part of the economy and needs to be front and center of investment drives to support international recovery.

Air travel has been one of the hardest-hit industries during the Covid-19 pandemic. Successive travel bans and border closures saw airlines globally lose in excess of $200bn, eradicating nine years of profits in one fell swoop.

To add to these turbulent market conditions, passenger numbers continued to struggle last year, down nearly 50% – hindering any period of sustained recovery for gross passenger operating revenues. 

Now rising geopolitical tensions, unprecedented fuel price increases, soaring inflation rates, and a cost-of-living crisis are creating new economic shocks that are once again putting the liquidity buffers of airline companies under pressure.  

However, despite the continuing headwinds, air transport is a crucial part of the economy and needs to be front and center of investment drives to support international recovery. 

So why, despite the global economic uncertainty, should we be investing in the aviation sector and where are new opportunities emerging?  

Inter-industry links

Whilst air transport only represents a small share of GDP, it has strong inter-industry links with both upstream and downstream sectors – making it a crucial facilitator of much broader economic activity.  

Without a doubt, mobility is at the core of society’s economic fabric. Whilst there are numerous pillars of transport, the aviation industry provides an unrivalled global transportation network, creating jobs, economic growth, and facilitating international trade. 

In particular, air cargo is rapidly emerging as a stable investment both in terms of demand and profitability. Driven largely by the ecommerce boom, the IATA recorded a 9.4% increase in air cargo demand in October last year, and this momentum is set to continue throughout 2022.  

While passenger traffic has struggled to return to pre-pandemic levels, air cargo is quickly becoming an appealing avenue for airline operators. In fact, we’ve already seen several operators convert passenger aircraft to transport cargo instead and both Airbus and Boeing are debating launching bespoke freighter carriers – highlighting the appetite for investment within this space. 

Given the potential economic returns, both for the sector and society, it is crucial that the aviation industry has the support to diversify operations accordingly amid the ongoing economic turmoil. 

New market opportunities

As fears of the pandemic continue to abate and travel restrictions ease with each coming week, optimism is retuning to the aviation industry and paving the way for new market opportunities.  

In particular, domestic market activity is booming across the Asia-Pacific region and as a result, investment into short-haul air travel is expected to rise considerably over the next 12 months.  

In line with this sentiment, key market players in India and China have already announced the launch of new airlines and, with the Asian middle class predicted to increase to around 3.5 billion people by 2030, this region is set to become extremely important and will have to meet new demands.  

On top of this, the aviation industry has pledged to cut its net carbon dioxide emissions to net-zero by 2050. The widespread adoption of sustainable aviation fuels will form a core component of reaching this goal, but at the moment uptake is still slow.

In fact, last year the industry only used around 100 million litres of sustainable aviation fuel (SAF) and this is largely in part due to cost (coming in at over two and a half times the price of jet kerosene). 

If the IATA is to hit its production goal of SAF accounting for 449 billion litres of the sectors needs by the middle of the century, then investment in engine technology and efficiency will be crucial.  

Whilst the pandemic has thrown the aviation industry into turmoil, it has also created the opportunity for new market players to emerge by taking advantage of the voids left by their competitors. Against this backdrop, it will be the airlines and companies that invest in these future market opportunities and technologies now that will be the ones that benefit in the long run.   

A different financial approach 

Without a doubt, the past two years have been a turbulent period for airline stocks. Now, with crude prices hitting unprecedented levels, we are once again seeing a mass selloff.

Whilst this is triggering market uncertainty in the short term, for those that are able to adopt a longer-term mindset and wait out the current disruption, there is reason for optimism.

If the pandemic has shown anything, it is that airlines are able to within crisis and demand for air travel will always bounce back. Therefore, with industry stocks at a discount, now may be the time to invest ahead of the next market boom.

In addition, traditional banks have significantly reduced their exposure to the aviation sector as a result of the pandemic. Whilst this may serve as a warning to some, in actual fact, this vacuum has enabled new sources of financing to enter the market.

From green bonds to private equity, this influx of capital has propelled the sector forward, creating investment opportunities for new start-ups and leasing platforms.

With new airlines being launched across the globe and aviation resuming its climb to pre-pandemic levels, it is unsurprising that some estimates have suggested that over 500,000 pilots will be required over the next decade. 

Whilst this renewed demand for pilots is a welcomed step forward for the sector, now attention needs to turn to ensuring that there are enough resources available to comprehensively train new cohorts.  

At Alpha Aviation Group, we are already seeing an increase in demand for localised training facilities and educational institutions, along with a growing appetite for simulator training facilities and e-learning solutions. Sustained investment into developing and rolling out these solutions en masse will be crucial over the coming years to ensure the industry can build back better.  

The aviation industry has taken a significant hit amid the Covid-19 pandemic and ongoing global economic turmoil.

However, the sector has also proven its resilience and it is now imperative that we start planning ahead for the future and invest in new market developments and technological advancements that will enable the industry to once again resume its position as a pillar of economic growth.

From freighter carriers and emerging domestic markets to stock fluctuations providing entry points and shifting sentiments prompting new sources of financing, there are plenty of new avenues coming to market for those that are able to turn optimism into opportunities.