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Investment Idea: Emerging Market Airports

I came across an intriguing investment idea recently while reading hedge fund letters. Broyhill Asset Management has a note on emerging market airports

A perfect storm has hit airports located in emerging economies. Even before a global pandemic decimated travel, emerging market equities and currencies had drastically underperformed their developed market peers, particularly in Latin America. The world’s current challenges have only served to accelerate this trend. Smaller companies within these markets have underperformed even more. A reversion to the mean in any or all of these factors would drive substantial upside potential.

Airport Business Models

Airports have attractive business models. First of all, airports have economies of scale: high fixed costs and large capital investments mean the average cost per passenger declines as the airport grows. Network effects are also an important characteristic of airport business models. The network effects of a hub can serve as a barrier to entry, creating a “lock in effect” for new airlines. There are also regulatory and physical barriers to entry. A competitor can’t just build a new airport down the street- this effectively leads to monopoly rights. Finally, airport fees represent a tiny portion of total airline costs. This leads to an inelastic demand curve that benefits airports. These advantages become truly unlocked when airlines pass from public to private hands. The change in incentive structure is similar to demutualization of exchanges, banks and insurance companies.


Here is Broyhill on the changes that have taken place in the industry:

While most global airport groups are either fully or partially private today, this was not always the case. The privatization of the British Airports Authority in 1986 marked an important inflection point for the industry, demonstrating the value airports could generate when put into the right hands. Large infrastructure assets require multi-decade, long-term planning decisions to ensure sufficient capacity and growth. While lucrative if executed correctly, airports require significant capital investment, which is why many governments have sold to private buyers.

Over the past three decades, airports have evolved from government-owned, municipal infrastructure providers into sophisticated operators focused on cost-effectiveness, traffic efficiency, and return on capital. In public hands, many components of the business were undermanaged or ignored. But since the trend toward airport privatization has accelerated, sophisticated operators have increasingly invested in ancillary services to boost returns.

This privatization trend started in the UK and developed countries, but now it’s happening in emerging markets as well.

Mexican Airports


Broyhill highlights the opportunity it sees in Latin American airports, especially Mexico. Latin American airports started privatizing in the late 1990s. Passenger volume at Latin American airports typically grows twice as fast as GDP. Mexican airports have some of the highest passenger growth in the world. As an added bonus, Mexican airports are well capitalized, with conservative balance sheets. This provides protection against a prolonged Covid-19 induced downturn.


In the post covid-19 chaos its likely the relative importance of different airports will change. Companies are working on rearranging their supply chains. This will require increased business travel. People have also changed travel plans in the wake of Covid-19 new destinations might become popular. This could set up interesting investment opportunities.

Click here to access Broyhill’s Asset Management’s full thesis.