Emerging Money author Jonathan Yates made
a number of compelling points
as to why airlines from developed nations mostly make for terrible
investments. However, investors and traders alike can find a lot to
like about emerging market airlines.
[caption id="attachment_64667" align="alignright" width="300"
caption="Emerging market airlines like Emirates have proven that it
is indeed possible to make money in this difficult industry"]
[/caption]
Compared to their developed market counterparts, many emerging
market airlines offer a far more intriguing investment thesis.
Airlines from Australia, the U.S., Europe, and Japan suffer from
bloated cost structures, aggravating labor disputes, massive debt,
thin profit margins, and cutthroat competition. Profitability is
difficult to attain, and is often the product of the vagaries of
global energy markets.
While emerging market airlines also suffer from whipsawing crude
prices, juxtaposed with their developed market peers, listed
emerging carriers are in general more flexible and benefit from
cheaper labor, although the intensity of competition varies from
market to market.
This increased flexibility has allowed emerging market airlines
to become more dynamic. With their lower cost structures and
superior service, Middle Eastern carriers like Emirates and Qatar
Airways have all but put some entrenched developed-market airlines
like Qantas out of business.
As a result, a number of emerging market carriers are able to
operate profitability, even if the industry is widely denigrated in
investment circles. While most carriers were hurt by sustained high
oil prices throughout 2011, in 2010, emerging market airlines like
Emirates and Singapore Airlines made more than $1 billion in
profit.
In addition to flexibility and profitability, emerging market
airlines are also fantastic growth stories. The Chinese domestic
market is expected to double within the decade. China's largest
carrier by passengers flown, China Southern Airlines (
ZNH
,
quote
), will be able to take advantage of this trend. As more and more
people enter Brazil's middle class, more Brazilians will have the
opportunity to fly, helping airlines like
TAM
(
quote
) and
GOL
(
quote
).
For those with a more short-term perspective, emerging market
carriers can serve as very effective trading vehicles. Given the
role that oil plays in airline cost structures, it should be no
surprise that emerging market airlines frequently trade in
inversely correlated fashion to the price of crude. However, when
the price of crude drops on global growth concerns, airlines don't
always outperform. This leads to potential buying opportunities as
the lower price of oil will boost future earnings for many of these
firms.
Furthermore, some emerging market carriers offer unique currency
exposure. For example, it's somewhat difficult for retail investors
to short the real; however, because GOL
generates most of its income in reais
, shorting GOL can serve as a de facto short for the real.
For both traders and investors, emerging market airlines offer
interesting opportunities. However, you must be discerning, as some
airlines like Kingfisher
are much more poorly run
than an airline like Jet Airways. Right now, you could consider
going long COPA (
CPA
,
quote
). The Panamanian carrier is a particularly compelling investment
because of its rapid growth, savvy fuel hedges, low forward P/E of
8.73, smart management, exposure to the dynamic Panamanian economy,
and its ideal geographic position allowing the firm to take
advantage of the sharp rise in traffic between both first and
second-tier cities in North and South America.
Disclosure: Author is long GOL
