A Value Investing Blog

Posted on 15 Feb 2017 by Gareth Brown

Europe Takes Off

Europe Takes Off


There is a strong correlation between general economic health and the number of people taking to the skies. It’s held across most individual markets for more than 50 years. Specifically, commercial passenger numbers have grown around 1.5-times real (after inflation) GDP over the long term.

Short term data is noisier. It’s knocked about by factors like oil prices, terrorism fears, pandemics and the health of airline balance sheets. So short term passenger number growth might not be a particularly accurate economic thermometer. With those caveats in mind, we might be seeing early evidence of a ruddy recovery in Europe.

I track a lot of airport data. The below table highlights passenger growth over the past year at large European airports. Each entry shows the percentage change in passenger numbers from the same corresponding month a year earlier.


Growth seems evident, once you understand a few important exceptions. Paris-Charles De Gaulle and London Heathrow are both butting up against capacity constraints, which is why you see little growth in the busier (northern) summer months, but some growth in the off-peak months. Both did well considering their constraints. I’ve added the numbers for secondary London airports Gatwick and Stansted as a counterpoint to Heathrow.

Brussels had a tough year. The terrorist attack at its airport in late March 2016 hit hard. Frankfurt was another underperformer. Lufthansa pilots went on strike later in 2016, but that didn’t coincide with the main weakness in the middle of 2016. The company’s second quarter financial report cites terrorism fears and weather events – but those excuses don’t stack up versus other European airports. The more likely cause is shrinking capacity at Lufthansa. The German national carrier provides about 60% of the airport’s traffic and is burdened by particularly large unfunded pension obligations.

Europe Takes Off

Exceptions aside, passenger growth across most European airports was strong over 2016. An acceleration is evident over the past 2-4 months at most locations. Where more detail has been provided by airports, intra-European growth has generally been higher than growth to or from the rest of the world. And ‘periphery’ countries like Spain and Ireland are growing faster than ‘core’ EU countries, although the core is clearly also doing well.

Even Athens is killing it, though that’s probably more about inbound tourists than in- or outbound business people. Any sunny European spot perceived as safe has been growing recently at the expense of Turkey, Egypt and Tunisia.

I wouldn’t go basing any large macro bets off this (or any other) data. But it’s a good sign for Europe. Economies that are in the doldrums don’t tend to grow passenger numbers at an annual rate of 5-10% or even more, not for long anyway. It’s worth keeping a sharp eye on European passenger numbers over the next few months.

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6 thoughts on “Europe Takes Off

    • We sold the last of our stake in Flughafen Zurich in the first half of 2016. It wasn’t timed to perfection – the stock kept going up after we sold. But the fund did well out of the investment made in 2013 and we moved on to cheaper investment opportunities.
      Airports have, for the most part, become the playthings of desperate dividend investors, for now at least. We did buy another airport stock more recently – it’s cheap for idiosyncratic reasons. We’re likely to discuss that investment in a coming quarterly.

  1. Thanks Gareth.

    The fun never stops at your house 🙂 Does the International Fund still hold Rolls Royce? No mention recently. If so, I guess a cyclical tailwind will be good for most European carriers and their suppliers. Any comment on the 2016 full year result for Rolls? Things seemed to be going so well there for a while.

    • We still own Rolls Royce. A passenger growth tailwind won’t hurt, but Rolls is less directly tethered to that influence than airports, at least in the short run. In all likelihood Rolls is a several year turnaround story, we’ll be right or wrong based on what East is able to achieve over a multi-year period. I’ll write a 2016 results update for a coming monthly or quarterly letter.

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