The beginning of 2019 has seen a rally in all major indices around the globe. Here at home, the ASX is up just over 14% – the recent sell off during the back half 2018 has presented some opportunities for bulls to get back in the driver’s seat and they did just that. The S&P/ASX 200 (INDEXASX: XJO) has gained 27% this year and in the last 3 trading days has been flirting with its pre-GFC high of 6,850.
Chances are if you have been to Australia, live in Australia or are just passing through you would have heard of Sydney Airport Holdings Pty Ltd (ASX: SYD). This behemoth is responsible for 31% of all air traffic within the nation. It also happens to be the only publicly listed airport on the ASX, making it a unicorn within its peer group of other infrastructure and transportation companies.
Sydney Airport’s share price is currently trading for $9.06 with a dividend yield of 4.24% and an extreme upside within its macro-sector, making Sydney Airport shares worthy of a ‘buy’ status in my view.
Here’s why I would buy and hold SYD shares for the long-term.
1. The aviation oligopoly
Due to the extreme barriers of entry for building, owning and operating an airport there is an apparent ‘Boys Club’ amongst Brisbane, Melbourne and Sydney Airports controlling an overwhelming 72% of the market.
Unlike other infrastructure companies where competitors can join markets without much trouble, there is a labyrinth of red tape one must cut before turning soil on a shiny new runway. State and Federal Government is needed to issue a license for a new airport, which makes the big end of town extremely comfortable with their market share security.
2. Sound business model
Sydney Airport isn’t some fancy biotech company trying to make seaweed into coffee cups, it’s a bricks-and-mortar operation with tangible assets that are pretty darn hard to miss. Sydney Airport monetises its runways through 4 avenues:
- Airline services: Think runway fees, aviation fuel
- Retail operations: Food and beverage, or any shop that pays rent within the terminals
- Property and car rentals: The airport owns and operates 2 hotels within the airport’s vicinity and has literal carparks of hire cars available
- Parking: This one is slowly being edged out of the market due to the popularity of ride sharing apps.
This wide spread of services is still underpinned by the volume of airplanes that are departing and landing and passenger willingness to spend money whilst in the terminals. Which brings me to reason 3.
3. High growth in foreign travel predicted for the next 20 years
This is the most important thing to understand about the potential of Sydney Airport’s operation. The International Air Transit Association (IATA) has identified that global air transit demand will double by 2036, bringing total global passenger volume to 7.8 billion annually. This demand is driven by emerging markets such as China, India, Brazil and within a decade, Africa.
These markets have a growing hunger for world travel, which means we will experience a 3% growth factor annually, year-on-year, for 20 years. Sydney Airport estimates that it will also experience a doubling in passenger volume, according to their last annual Report.
Sydney Airport isn’t going anywhere. Its assets are real and its business model is sound, the upside within its industry is immense and its market share protected. This company is an ASX 200 company, which means that all the fundies and super companies have to own it in their passively tracked index funds – which means less volatility. This spells long-term buy for me.
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Motley Fool contributor Jack Kaminski has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.