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Shanghai International Airport Co Ltd (SHA:600009) is the operator of the Shanghai Pudong international airport. Situated at the edge of China’s Yangtze River Delta, Pudong airport appeals to investors as it sits within one of the Middle Kingdom’s fastest-growing economic regions – an area that accounts for a massive one-fifth of China’s GDP.
Before making an investment decision, though, let’s take a look at the airport’s advantages as well as the potential risks, and how it can cash in on the burgeoning tourism market in the world’s second-largest economy.
Benefitting from growth in air travellers
There are three ways Pudong airport can benefit from the rise in air travel. First and foremost, capacity is everything. Currently, Pudong airport’s annual passenger throughput ranks ninth globally, whereas its cargo throughput ranks third. It has been estimated that the airport can further increase its passenger throughput by 3% this year to 76.8 million. Compared to other airports, capacity won’t be a major concern that limits growth potential in the near future.
Secondly, there’s also the fact that an excellent airport needs a robust international network. As the county’s third-largest hub airport (after Beijing and Hong Kong), Pudong airport operates regular flights to over 270 locations in 48 countries, a wide mix that will help it survive amid any global economic or political uncertainty.
Finally, air travellers demand faster services. Pudong airport has invested in scanning devices that are able to speed up baggage controls, which free up passengers’ time so they can spend money in the terminal’s shops. In 2018, retail income increased by 33% year-on-year and spending per passenger increased 26% over the same period – reflecting a well-balanced secondary source of income.
How to measure airports’ profitability
The first question that comes to mind is “what is the expected growth in air traffic”? The aviation industry is particularly vulnerable to the weakening of economies. Since the beginning of 2019, many have predicted that the soft demand on many short-haul routes in China will spread to long-haul international flights, particularly in light of the US-China trade dispute.
To become more sustainable, airlines are leaning towards using larger aeroplanes to carry more passengers and increased cargo volumes. While the fixed costs remain constant, the reduced number of flights directly impacts the profitability of many airport operators.
Then there’s competition, which remains a key concern. China’s rapidly-growing high-speed rail network means demand for civil aviation could be adversely affected. Moreover, competition from nearby airports, like the newly-completed Beijing Daxing international airport – that is scheduled to start operating in September 2019 – needs to be considered.
What investors need to know
The Yangtze River Delta is China’s central economic hub that operates within an exciting and fast-growing ecosystem. For years, Pudong airport has been running beyond its capacity. But after expanding and by pooling passengers and cargo, the airport can now offer airlines much more efficient rates for landing slots.
Investments in strategic airport operators can also generate stable dividends (given the recurring income) and remain an excellent moat against potential economic downturns, with Shanghai International Airport among the best choices for investors.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Dessie Cheung doesn’t own shares in any companies mentioned.