Economic Moat of Airport Operators

Before we discuss airport operators, let's talk about airports themselves. Building an airport is a complex and costly undertaking, and there are many factors to consider, such as:

•          Location, where it must accessible to the public with a possibility to expand.
•          Runways, which must be a certain length and width and there must be enough of them to handle the anticipated traffic.
•          Terminals to handle the passengers and cargo. It must have enough space for check-in, security, baggage handling, and boarding. It also must have enough space for taxis, car parks, and other transportation.
•          Support facilities, like fuel storage, maintenance hangers, and air traffic control towers.
•          Environment impact, the airport must have a minimal environmental impact. This includes minimizing noise pollution and protecting wildlife.

Building an airport is a complex and expensive undertaking.

However, it can also be a major economic driver, attracting businesses, boosting tourism, and generating foreign income.

As such, governments need to ensure that airports are operated safely, efficiently, and sustainably. Therefore, when selecting airport operators, governments will scrutinize their candidates for experience, management expertise, and commitment to safety.

Once the Airport Operator got the contract… it can be very ‘Sticky’

Once an airport operator has been in place for a while, they will have built up a "sticky" moat. This is because their employees will have learned how to make full use of the airport's layout, machinery, and other resources. They will have established a good workflow, and they will have refined it over time. This takes time and effort, and it is very difficult for a new operator to replicate.

As a result, once an airport operator has proven itself to be competent, it will be very difficult to replace them. The government will have to consider several factors before making a change, such as:

•          Can the new operator handle a crisis?
•          Can the new operator ensure smooth operations?
•          Will the handover be a smooth process?

Unless the new operator can offer something significantly better than the incumbent, the government is likely to stick with the current airport operator.

Unless you are considering other modes of transportation...

Depending on the traveler's needs, flying is often the fastest way to reach a city or country. With a few exceptions, most cities only have one or two airports. This means that airports have a natural monopoly, and can charge high prices for their services. This is similar to a toll road, which is the only way to get to a certain destination.

Combo Economic Moat

Therefore an Airport Operator has a few things going in its favor that can create a wide economic moat. These include:

•          A Natural Monopoly, there isn’t much choice available for travelers…
•          A Toll-like business, as all travelers using the airport will have to pay certain fees…
•          High Regulation Requirement, which creates a high barrier of entry for others
•          High Switching Cost, as the government worries if a new operator can perform just as smoothly as the current operator.

Thus, with all these combinations, airport operators tend to gain a wide economic moat. 

With Economic Moat, does it mean it's a good business?

Despite the wide moat airport operators can have, it does not mean that they are on the road to prosperity. We still have to do our due diligence.

Therefore, I am just taking a glance at three airport operators. At the time of writing, the three with the largest market caps are:

1.       Airports of Thailand (AOT)

2.       Aena (AENA)

3.       Shanghai Airport (SHA)

I will be briefly looking at their Revenue trend, Net Income trend, and then Gross Margin.

These details will show roughly how profitable these companies are. 

AOT’s Revenue, Net Income Trend, and Gross Margin

AENA’s Revenue, Net Income Trend, and Gross Margin

SHA’s Revenue, Net Income Trend, and Gross Margin

These companies had been growing their revenue and net income for years, with gross margins consistently above 50%. However, the COVID-19 pandemic struck, and their businesses were severely disrupted.

Conclusion

I was inspired by Beansprout’s article “Airports of Thailand - Beneficiary of Thailand's tourism recovery”, https://growbeansprout.com/aot-airports-of-thailand-thai-tourism-recovery, which discusses what factors benefit AOT and what are the risks AOT may faces.

However, I still want to learn more about AOT and airport operator business in general. Thus, this motivates me to write this blog post.

I am not disappointed by this type of business. But I still have some concerns, which I have to look into it later on.