The global aviation industry is widely regarded as being on the cusp of a golden period of growth.
Aviation has seen sustained growth through all economic cycles and now generates about $600bn (£417bn) of GDP a year, which is forecast to rise to $1trn by 2026. In the UK, one of the world’s leading aviation economies, the sector contributes 3.4 per cent to GDP.
Aviation is marked by two compelling global phenomena: ageing fleets in Europe and the US, and air traffic growth in Asia and the emerging markets – both contributing to a significant backlog of new aircraft required within the next two decades.
Asia’s compelling growth
The highest growth is predicted to come from Asia Pacific, particularly from internal traffic in China and the wider region. China’s airlines surpassed 100m passengers per quarter for the first time last year, but domestic flights remain dominant at about 90 per cent of all flight activity.
Both Boeing and Airbus predict Asia will see the strongest growth, driven by rising GDP and an affluent middle class. Boeing expects the fleet in China to surge to more than 7,000 by 2034 – from a capacity of 2,570 in 2014.
Asia also leads the way in airport infrastructure, with Beijing the world’s second-busiest airport by passenger numbers. Airport investment is at its strongest in Asia and the Middle East, with 35 per cent of airport investment occurring in Asia. We expect to see more investment coming through as capacity lags passenger growth across the region.
Diverse investment arena
Aviation has a diverse value chain encompassing manufacturers, airport infrastructure, airlines, support services, engineering and technology. Although some areas of the sector are not investible owing to the extensive defence exposure, the sector otherwise remains a diverse and vibrant arena in which to seek investment returns.
Airport infrastructure is ripe for consolidation or privatisation as a means of delivering much needed investment, such as the recent flotation of a minority stake in Aena of Spain.
As a house, we gain exposure from quality investments across the value chain, but we have avoided airlines on environmental grounds. We will refine this, allowing investment in the most sustainable airlines on a case-by-case basis.
Aviation is a global success story, with more than five trillion route passenger miles flown in 2014. The industry also supports a variety of specialist engineering, military and service sector enterprises. However, it presents several environmental impacts of interest to the ethical investor. Aviation is responsible for 2 to 3 per cent of all human-induced carbon emissions. Without intervention, aircraft emissions could reach 15 per cent of global greenhouse gases by 2050.
Slow to respond to the challenge of climate change, the industry is now placing emphasis on technology – particularly cleaner and younger fleets.
Engine technology has evolved considerably. Improvements in fuel efficiency of 0.8 per cent a year by 2050 is viewed as credible based on evolving airframe and engine design. Carbon intensity under this scenario would fall by about 30 per cent. Moreover, a cumulative carbon intensity reduction of 35 per cent by 2050 would allow up to 55 per cent more aircraft movements – equating to passenger growth of about 60 per cent.
The industry has coalesced around achieving 1.5 per cent annual efficiencies in fuel, carbon neutral growth by 2020, and a net reduction in aviation carbon emissions of 50 per cent by 2050 – relative to 2005 levels.
Ultimately to reach more ambitious targets, some constraint may be necessary. The “greenest” airlines are those with the youngest fleets: easyJet, Ryanair and Norwegian achieve impressive fuel efficiency based on fleets with an average age of six to seven years. The worst are those with ageing or obsolete fleets.
There is only so far design can go, however. Ultimately, further deep reductions will require a step-change in thinking. The ultimate goal is to “decouple” growth from emissions.
Responsible investors will need to balance all of these ESG risks before taking flight.
Neville White is head of SRI policy and research at EdenTree