Blain's Morning Porridge - Jan 24th 2018 - Aviation - Complex and risky - but great example of g
Blain’s Morning Porridge – January 24th 2018
“You can teach….. monkeys to fly better than that!”
Sorry for late comment… again, but I’ve a good excuse.. Rather than blab about markets this morning, I spent yesterday at the Airline Economics Growth Frontiers Conference in Dublin, perhaps the largest gathering of airlines, aviation financiers, plane makers, and lessors. Fantastic day – if somewhat hectic. I gave a presentation on Aircraft Assets as a core investment that should be on investor consideration lists.
I spent the day meeting folk in the industry and listening to other panels. Aircraft are a complex investment environment – where doing the research, understanding the market, and picking your spots is critical. Hard work pays off. There is no shortage of risk and plenty of pitfalls. I came to a realisation: “There are Old Aviation Investors and there are Bold Aviation Investors, but there are no Old and Bold Aviation investors..” (Apologies to ace pilot Chuck Yeager who might have said something similar...)
Aviation is a complex market – and it’s difficult for non-experts to fully grasp. There are new aircraft, old aircraft, midlife and end-of-life – and they all have value. There are regionals, wide-bodies, and freighters. Airlines do seem to go bust with surprising frequency, and there is much talk of cycles, costs and regulation. Fortunately, we’re working with a number of leading aircraft managers, lessors and industry experts. If you want to learn more, we will be happy to make the introductions.
The basis of my buy recommendation on Aviation assets, and alternative assets in general, is simple. The global growth outlook is universally strong and positive. However, after a decade of QE distortions and contagion, financial assets look fully priced. The bond market has turned from Bull to Bear, and the gains in global stocks leave them looking fully priced.
Therefore: buy assets correlated to Global Growth and uncorrelated to financial assets. Simple.
Other alternative asset classes to consider include housing, infrastructure, renewables and even shipping. All of them exhibit strong potential to outperform in coming years. Buy risk assets is one part of the equation, but the other is making sure you fully comprehend the risks.
For aviation the arguments are simple – aviation growth and the demand for aircraft is closely correlated with economic growth. The global macro outlook is strong. We expect rising affluence, tourism and business travel, combined with growing demand for regional travel in Asia will mean the demand for regional aircraft greatly exceeds supply.
On the other side of the equation is finding access to open and transparent information on aircraft valuations, the relative risks between different aircraft types (and models), the complexity of the counterparty risk that an airline leasing a plane may fail vs the asset risk of finding someone else to hire it to. There is a perception it’s a closed market of geeky aviation financiers, specialist teams in commercial and investment banks, and a closed industry of airlines, lessors and plane makers. Not so. The non-banks in the user community understand the need for diverse funding sources.
We’ve a couple of deals in the works, and if you want to learn more.. please get in touch so we get you on the lists! I’ve attached a PDF of yesterday’s presentation, and there is even a video of it somewhere.. (I dread to watch it myself..)
I suppose I really should comment about Davos.. er.. As the stock melt-up continues, everything is so hunky dory that the only possible thing that can happen is it all goes spectacularly wrong and catches the complacent masses where it hurts the most.. or something like that..
Very out of time..
Bill Blain