In 1903, the Wright brothers successfully completed the first engine-powered flight. They managed to get up into the air four times, each session lasting longer than the previous. Unfortunately, as they were discussing the last flight, a gust of wind flipped their fragile wooden plane over, and it was damaged beyond repair. From these humble beginnings, the spirit of aviation took flight, embarking on an era of rapid experimentation and daring feats, and setting the foundation for air travel as we know it. The Wright brothers pushed the boundaries of distance and endurance, turning the skies into pathways for exploration, adventure and connection. Thanks to them, we can experience new people, cultures and countries with relative ease.
But despite its societal value, aviation was one of the hardest-hit industries during the COVID-19 pandemic. Due to concerns about the spread of the virus, many countries enacted strict restrictions on foreign visitors, and leisure travel was effectively banned. Demand for travel evaporated overnight, leaving more planes parked on the ground than flying in the sky. Wall Street analysts were predicting it would take as long as seven years for the sector to fully recover! The outlook was very pessimistic.
In late 2020, with the development of a vaccine underway and the loosening of restrictions on the horizon, we began investing in aviation stocks. We saw past the scary headlines and the doom and gloom. Our confidence stemmed from a belief that air travel would resume and eventually resemble pre-pandemic levels. The desire to travel didn’t disappear during the pandemic, it was just deferred.
Moreover, history shows that air travel tends to grow at a faster pace than the global economy. This trend is measured by comparing the growth rate of air passenger traffic (measured in revenue passenger kilometers) with the growth rate of the global Gross Domestic Product (GDP). Air passenger traffic has generally grown at an average annual rate of 5%, which is nearly double that of the global economy, typically 2% to 3%.
This trend was massively derailed in April 2020, and air travel fell more than 90% when compared to the prior year. However, by the end of 2023, it had recovered to 94% of pre-pandemic levels. Investors expect 2024 air traffic to eclipse 2019 levels, but there is still a long way to go before it recovers to where it would have been without the pandemic disruption. Looking back to significant events like 9/11, the SARS pandemic or the Global Financial Crisis, air traffic has always returned to its 5% annual growth trend, and we are confident it will do so again.
Why is it that air travel tends to grow at such a rate? The answer is hardwired. Humans are social beings; we have an inherent inclination to seek relationships and connections and to explore and learn. Air travel satisfies those needs. It reduces geographical distances, enabling people to be with family and friends and to discover new things. A key principle of Warren Buffett’s investment philosophy is to invest in the things that do not change, and this human condition is unlikely to. If anything, it has intensified after the pandemic.
A growing middle class and greater access to the infrastructure that supports aviation are driving demand from new sources. Forecasts indicate that 70 million people will join the middle class around the world each year, all while airfare is becoming more affordable thanks to budget and low-cost airlines. There are presently 514 infrastructure projects in progress globally, adding new airports and related frameworks that will improve access and open new markets.
With the travel rebound from the pandemic still ongoing and the natural growth of the aviation industry not yet back to its long-term historical trend, we believe this area offers an opportunity for investors.
Our first recommendation in this space was CAE in late 2020. CAE provides pilot training and services for civil and military applications. The need for pilots and pilot training will grow alongside demand for air travel. According to CAE, U.S. Federal Aviation Administration statistics indicate over 45,000 commercial pilots will be required in the next 10 years. This represents about 27% of the current commercial airline pilot population in the U.S. In addition, industry growth is expected to increase global demand for pilots by more than 40% over the next 10 years.
TransDigm is another business likely to benefit. The company sells aftermarket parts for civil and military aircraft. In many instances, it is the sole source provider of replacement parts. Planes fly all over the world, and proper maintenance and repair are critical to healthy airline operations.
Finally, we like GE. General Electric, as it was previously known, was once the most valuable public company in the United States. For well over a century, it was known for invention and innovation, blazing a trail with its production of the incandescent lightbulb, electric locomotives, household appliances and radio communications, to name just a few. It was one of the largest and most diversified corporations in the world. However, almost two decades of mismanagement have taken a toll, and GE is presently undergoing a corporate reorganization to focus on aerospace.
In 2018, GE appointed Larry Culp, the former CEO of industrial stalwart Danaher, to the helm to turn operations around. Mr. Culp is well regarded by investors. Since his tenure, he has divested non-core businesses, repaid debt and worked to improve GE’s culture and processes. He’s made progress, and today GE is the market leader in jet engines with its machines installed on three times as many planes as its nearest competitor. This transformation is still very much underway, and we believe investors will ascribe GE a higher valuation when it is complete.
Looking back, it’s hard to fathom how far aviation has come. The technology going into air travel today would probably exceed the limits of the Wright brothers’ imaginations. Their initial flights never got more than a few feet off the ground. Today, the average commercial flight operates at an altitude higher than the peak of Mount Everest! Aviation stands as a testament to humanity’s ambition and ingenuity in the pursuit of satisfying our innate instincts to connect with one another and explore. The industry’s journey mirrors the human condition itself – always striving and dreaming of a world brought closer together.
Please read our Odlum Brown Limited Disclaimer and Disclosure - It is important!
Odlum Brown Limited is an independent, full-service investment firm focused on providing professional investment advice and objective research. We respect your right to be informed of relationships with the issuers or strategies referred to in this report which might reasonably be expected to indicate potential conflicts of interest with respect to the securities or any investment strategies discussed or recommended in this report. We do not act as a market maker in any securities and do not provide investment banking or advisory services to, or hold positions in, the issuers covered by our research. Analysts and their associates may, from time to time, hold securities of issuers discussed or recommended in this report because they personally have the conviction to follow their own research, but we have implemented internal policies that impose restrictions on when and how an Analyst may buy or sell securities they cover and any such interest will be disclosed in our report in accordance with regulatory policy. Our Analysts receive no direct compensation based on revenue from investment banking services. We describe our research policies in greater detail, including a description of our rating system and how we disseminate our research here.
This report has been prepared by Odlum Brown Limited and is intended only for persons resident and located in all the provinces and territories of Canada, where Odlum Brown Limited's services and products may lawfully be offered for sale, and therein only to clients of Odlum Brown Limited. This report is not intended for distribution to, or use by, any person or entity in any jurisdiction or country including the United States, where such distribution or use would be contrary to law or regulation or which would subject Odlum Brown Limited to any registration requirement within such jurisdiction or country. As no regard has been made as to the specific investment objectives, financial situation, and other particular circumstances of any person who may receive this report, clients should seek the advice of a registered investment advisor and other professional advisors, as applicable, regarding the appropriateness of investing in any securities or any investment strategies discussed or recommended in this report.
This report is for information purposes only and is neither a solicitation for the purchase of securities nor an offer of securities. The information contained in this report has been compiled from sources we believe to be reliable, however, we make no guarantee, representation or warranty, expressed or implied, as to such information's accuracy or completeness. All opinions and estimates contained in this report, whether or not our own, are based on assumptions we believe to be reasonable as of the date of the report and are subject to change without notice.
Please note that, as at the date of this report, the Research Analyst responsible for the recommendations herein, associates of such Analyst and/or other individuals directly involved in the preparation of this report hold securities of some of the issuer(s) referred to directly or through derivatives.
No part of this publication may be reproduced without the express written consent of Odlum Brown Limited. Odlum Brown Limited is a Member-Canadian Investor Protection Fund.