Global equities: Boeing, Airbus look good as tourism takes off

One way to get exposure to the post-Covid tourism growth story is via plane manufacturers. Pendal global equities PM ASHLEY PITTARD explains

• Paris Air Show demonstrates strong demand
• Major manufacturers act as duopoly
• Find out about Ashley Pittard’s Pendal Concentrated Global Share Fund

AUSTRALIANS who experienced shoulder-to-shoulder tourist crowds during overseas holidays this year might be wondering how to get exposure to the fast-recovering travel industry.

Even before the northern Summer travel season, international tourism was returning strongly towards pre-pandemic levels, notes the UN’s World Tourism Organisation.

Commercial flight bookings have also recovered, catching up with leisure bookings late last year, notes Mastercard in its latest travel industry trends report.

One way to get exposure to this story is via plane manufacturers says Pendal global equities PM Ashley Pittard.

Pittard recently attended the 2023 Paris Air Show during two months of travel, meeting company executives across Europe.

The Paris Air Show is the world’s premier aerospace trade show. This year, post-Covid, more than 1000 new plane orders were announced, demonstrating the rude health of the two big manufacturers, says Pittard.

“Demand for planes is very, very strong,” says Ashley Pittard, who manages Pendal Concentrated Global Share Fund.

“The backlog for the industry is about 8000 units which is about the next ten years of production.”

There are four key reasons, Pittard says.

• “There are new markets like India which are opening up dramatically as demonstrated by the orders at the Paris Air Show.
• “China is slowly opening up again, albeit slower than Europe.
• “There is a sustainability trend – airlines are getting rid of older planes and buying new, more efficient options.
• “And there is also higher airline yields – more people are flying.”

The two major airline manufacturers comprise about 7 per cent of Pittard’s concentrated share fund, while airport monopolies account for another 4.5 per cent.  

When valuing aircraft manufacturers, investors need to look five years out because of the long-life cycle in manufacturing an aircraft, Pittard says.

That cycle, alongside capital expenditure and other factors, means Airbus and Boeing act as a duopoly with little chance of a competitor in the medium term.

Post-Covid tourism growth

While demand has jumped, there’s still some way to go with Asian tourists yet to return to pre-Covid levels, and international travel still below 2019 numbers.

That augurs well for the manufacturers.

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Also, both large manufacturers have been able to maintain pricing power.

Airbus, which has about a 60 per cent share of the narrow-bodied planes, benefitted from the grounding of Boeing 737 MAX aircraft in 2019.

“There is plenty of demand for Airbus, it has a beautiful back-book and it has pricing power,” Pittard says.

Boeing has less pricing power, but it is trading on a low multiple. Boeing continued to build planes during 2019, notwithstanding its challenges around its Boeing 737 aircraft.

As a result it has planes ready to deliver, and be paid for, resulting in very strong cash flow.

“Boeing is really cheap. It has $78 billion dollars of inventory on its balance sheet. The majority is finished, or near-finished planes.

“Its total market capitalisation is only $US150 billion. So half its market cap are planes that are sitting there, and they just have to deliver them.”

Keep an eye on supply chain

The potential downside for the aircraft manufacturers is supply chain issues.

“It’s skilled labour – building a plane needs high skills and many left the industry during Covid.

“And there’s a shortage of engine parts. Suppliers are able to produce engines, but because demand for planes is so strong, some of them have been diverting resources into manufacturing spare parts for existing planes. They are getting a higher return on servicing parts.”

Main image: A Boeing 777X flies over the Paris Air Show (June, 2023). Photo credit: Anthony Guerra

About Ashley Pittard and Pendal Concentrated Global Share Fund

Ashley Pittard leads Pendal’s Global Equities investment boutique. He is responsible for setting the strategy, processes and risk management for the boutique and its funds including Pendal Concentrated Global Share (COGS) Fund.

Ashley has more than 24 years of finance experience, including roles in petroleum economics, global energy investment analysis and 20 years as a global equities fund manager.

Pendal COGS Fund is an actively managed, concentrated portfolio of global shares diversified across a broad range of global sharemarkets.

Find out more about Pendal Concentrated Global Share Fund

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

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