Post-COVID supply-demand imbalance
In September, I had the chance to attend a few transportation infrastructure conferences and meet with company management across Europe and the UK. While the market remains concerned about higher inflation and interest rates and the flow-on effects to the real economy, one of the key takeaways for me was that people continue to be on the move – whether it be commuting to work again, taking more leisure trips post-COVID, or getting back on planes and trains for business meetings (like I was doing). Such is the pent-up demand. While a few assets are still seeing demand below pre-COVID levels on idiosyncratic issues, the majority are now approaching or pushing through this ceiling.
In parallel, the supply of transport services has been struggling to keep up with the rapid return of demand. For example, while not as bad as in 2022, there are still lingering operational issues that the aviation industry continues to face, including lack of qualified ground handling staff, pilot and cabin crew strikes over wages – and even air traffic control staff catching COVID! In some instances, airports such as Frankfurt and airlines such as Lufthansa have had to artificially cap their capacity* to ensure those who do book flights are guaranteed a journey without the fear of last-minute cancellations.
What this supply-demand imbalance has triggered is a steep increase in prices, most notably airfares, but also dynamic tolls on urban roads such as Ferrovial’s managed lanes in Dallas which have seen a surge in e-commerce truck traffic**. Getlink, which operates the concession for the 50km Channel Tunnel connecting France and the UK, has also seen a strong uptick in its car shuttle pricing***. Furthermore, people seem to be willing to pay more to travel during peak periods or to get a premium ticket with additional perks or flexibility. And such dynamics have been playing out on top of the high general level of inflation we have been seeing across the economy due to higher energy costs (which feeds into the cost of jet fuel for airlines, for example). We have seen that airports have tended to raise prices more in line with inflation – including aviation tariffs, retail prices across restaurants and duty free, and office rents, but in some cases have eclipsed them such as AENA’s recent Duty Free re-tender.
While such strong price rises can’t continue indefinitely, what this speaks to is the ability for transportation infrastructure to offset the impact of higher interest rates, whether it be through higher prices (as an offset to higher inflation) or higher volumes (as an offset to higher real growth rates or real interest rates). This contrasts with the parallels some tend to draw between infrastructure and bonds which only offer fixed real or nominal coupons. And while such assets are typically more financially leveraged than stocks in other sectors (rightly so given the stability of their cash flows), many of these companies prudently fix the interest rate on most of their debt and spread their expiries over different time periods, to avoid being exposed to too much refinancing risk at any one point in time.
The power of incumbency
Another key takeaway for me was that, beyond near-term traffic and price dynamics, infrastructure assets will continue to hold real value over the long term. Post-COVID, we are being reminded that mobility and face-to-face connection (not just virtual!) is an integral part of the human experience. Airports, toll roads and rail tunnels are not easily replicated, given the sheer level of investment needed to build them, but also given their incumbent positioning within their respective catchments which can’t be easily displaced. Furthermore, in a carbon-constrained world, where new airport runways or terminals are becoming harder to justify, such assets (especially those with spare capacity) are likely to become even more strategic and increase in value, even with more eco-consciousness, purely from population and economic growth alone. Indeed, even slot-constrained airports could increase throughput without physically expanding capacity, by processing passengers more efficiently or up-gauging aircraft for example.
While infrastructure assets no doubt occupy a privileged position, it also places enormous responsibility on management teams and regulators of these assets to remain good stewards and operate them in a sustainable manner, financially but also societally and environmentally. As investors, we in turn have a responsibility on behalf of our client-owners, to engage with management and boards to ensure this is happening with a medium to long-term view. This is the basic premise for meeting with companies and doing such trips. While near-term inflation, interest rates and traffic prints certainly matter, infrastructure is a long game and so it is crucial to also look further up the road!
* Frankfurt Airport. Lufthansa Airlines.
** Ferrovial Investor Presentation, March 2023. Pgs 30, 32, 60, 62.
*** Getlink FY21 Annual Results Presentation, 24 February 2022. Pg 16. Getlink FY22 Annual Results Presentation, 23 February 2023. Pg 6. Getlink 1H23 Half Year Results Presentation, 20 July 2023. Pg 7.
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