Monthly passenger figures released yesterday confirmed that Sydney Airport (ASX: SYD) had its best July ever with growth in both domestic and international passenger numbers. The share price has outperformed the index so far in 2012 and is a good reminder that investing in monopolies can be a great way to grow your wealth.
There was positive news on two fronts for investors. Firstly, Sydney Airport benefited from more airlines (such as Emirates) flying more routes into and out of Sydney and secondly, traffic growth from Singapore, Malaysia and China grew substantially.
Just like a utility business such as AGL Energy (ASX: AGK), Sydney Airport has a high fixed cost base. As a result it enjoys substantial leverage to growth in passenger volume, so understandably investors pay close attention to these numbers. For further evidence of solid industry wide demand, a recent update from Australian Infrastructure Fund (ASX: AIX) confirms growth at most of Australia’s airports.
With decent industry-wide growth and monopoly attributes, airports can be a good hunting ground for quality companies. The beauty of monopolies is that they generally enjoy pricing power and limited competition which creates a ‘moat’ around a business. (Like a medieval castle, a business’ ‘moat’ refers to an attribute which gives a business a competitive advantage, and therefore some protection.) In Sydney Airport’s case, it enjoys a substantial ‘moat’ from competition and also a reasonable ‘moat’ from inflation.
In contrast to the ‘moats’ enjoyed by airports, their primary customers, namely airlines, rarely fare as well. Later this week we will see just how tough Qantas Airways (ASX: QAN) is finding the competition from new entrants having already provided market guidance of a substantial loss. Meanwhile Virgin Australia (ASX: VAH) is not expected to report until the end of the month but with its share price near a 52 week high while Qantas is closer to its 52 week low, the market appears to be thinking things are better in Virgin’s hangar.
The Foolish bottom line
Buying a quality company at a reasonable price is a proven formula for above average investor returns. Airports are one such industry to keep an eye on for opportunities to purchase quality companies. On the flip side while a low share price, such as Qantas at $1.17, may look appealing, it is worth remembering Warren Buffett’s sage advice to never invest in an airline.
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Motley Fool contributor Tim McArthur owns shares in Australian Infrastructure Fund. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.