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Aviation: Ready for take-off

Neville White
By Neville White Head of SRI Policy and Research February 2016
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Aviation: Ready for take-off

Summary:

Summary:

“Man must rise above the Earth – to the top of the atmosphere and beyond – for only thus will he understand the world in which he lives” Socrates (469-399BC)

In this second Amity Insight to explore modern transport, we look at the complex economics of civil aviation from aerospace manufacturers and infrastructure providers to airlines, and consider some of the anticipated drivers for growth in a sector that appears to be powering ahead. We also look at the ethical issues arising for responsible investors, particularly safety and the environmental impact on climate. Finally, as ever, we look at the investment value chain, and reach some conclusions on whether airlines can ever be viewed as sustainable.

In this Insight, we won’t seek to explore the motivation for flight itself, be it for business or leisure purposes; rather we will set out our views in an accompanying SRI Expert Brief on responsible and sustainable tourism given over half of all international tourists now travel by air. The air transport industry supports over 58m jobs worldwide, and contributes $2.4trillion to global GDP – we believe it is ready for take-off.

The Economics of Aviation and Global Outlook:

The Economics of Aviation and Global Outlook:

Aviation generates around $600bn of GDP per year, which is forecasted to rise to $1trn in 2026. Globally there are 20,910 aircraft in operation serving the world’s 3,864 airports. The current global fleet of 20,910 aircraft is set to increase to around 42,180 by 2033. It is a huge, global industry that is widely regarded as on the cusp of a golden period of growth.

Asia: A compelling story for growth

Asia: A compelling story for growth

As with Shipping, Asia represents a compelling story for aviation. China’s airlines surpassed 100m passengers per quarter for the first time this 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, middle-class. Boeing expects the fleet in China to surge to over 7,000 by 2034 from the 2,570 capacity in 2014. In the next two decades, China alone is going to require 6,330 new planes worth $950bn.

Asia is also leading the way in airport infrastructure with Beijing the second busiest airport in the world by passenger numbers (87.7m in 2014/15). 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.

Ethical Issues for Responsible Investors:

Ethical Issues for Responsible Investors:

Aviation is a global success story, with over 5 trillion route passenger miles flown in 2014. The industry also supports a variety of specialist engineering, military and service sector enterprises across the world. However, aviation also presents several environmental and social impacts which are of interest to the ethical and responsible investor. Here we look at three; employment, safety and climate change.

View from the Top:

View from the Top:

Aviation is on a growth trajectory. The investment value chain is not a ‘nice-to-do’; there is very little airlines can cut back on if it impacts airworthiness or safety. The value chain is, by turns, fragmented and regional with only a few global players. Whilst 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. Decoupling emissions from growth is going to become a key challenge for an industry suffering over-capacity and indebtedness. Low-cost airlines have proved that profitability is possible but have, in so doing, disrupted long-accepted models of fixed employment. We will therefore need to balance all of the ESG (environmental, social and governance) risks with the investment proposition before taking flight!

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