Stock story: ADP

An aeroplane takes off or lands every 30 seconds from Charles de Gaulle airport in Paris, one of the largest and most centrally located hubs in Europe. Over the year, this airport will see 66 million passengers pass through it, as 152 airlines take people to and from 329 global destinations.

Aviation operations in Paris extend beyond this one major hub and include Paris-Orly to the south with another 29 million passengers per year, Paris-Le Bourget to the north, one heliport and 10 general-use airports. The total passengers handled each year through the Paris system of airports reaches 102 million and connects 357 cities. Then there are shops, offices, restaurants and other property and services such as car hire to manage at these airports. And it’s all handled by one company, ADP, the acronym for its former name, Aéroports de Paris.

ADP, a 50.6% government-owned group that first listed in 2006, goes beyond Paris too. The group has direct or indirect investments in 12 other airports around the world that mean the company handled 228 million passengers last year (including the Paris traffic). Such is the reach of ADP, which generated 3.62 billion euros in revenue in 2017.

Airports provide an essential service, often with monopoly positions in the cities in which they operate, which helps lay a solid foundation for investment. Airport operators have enjoyed rising demand for their services. Lower airfares from increased competition (including from low-cost carriers) and deregulation of air rights, which has opened up markets, have combined with a growing global middle class to see global air travel boom. While regulation is structured to allow the aeronautical operations to earn returns in line with the cost of capital, generally few if any constraints are placed on the returns airport owners can generate from commercial activities such as shops and parking.  

The commercial operations are generally lucrative businesses because wealthier segments of society often spend hours browsing in shops or eating in restaurants while waiting for flights. Traffic through these shops and other facilities usually increases over time because airlines generally deliver more passengers to airports each year, via more flights or bigger planes. Other commercial operations of ADP include managing offices, hotels and car parks on airport land. Given the constant traffic into and out of Paris, ADP is well placed from an investment point of view.

No business, however, is immune from risks. France has witnessed acts of terrorism in recent years that reduced visitor numbers, while outbreaks of disease (e.g., SARS) or economic downturns can also hamper traffic. Such interruptions have historically been infrequent and generally short-lived. While there is risk from the French government being the majority shareholder (and acting to the detriment of minority owners), so far ownership structure has been benign and the government is moving towards selling its stake. No matter the challenge, the robustness of traffic from one of the world’s most-visited cities helps give us confidence in the cash flows of the business over the medium and long term.

Global reach

Aviation remains one of the world’s fastest-growing industries. Since the development of commercial aviation, the number of people passing through large airports has grown at multiples of GDP over any medium-term period – aviation traffic is roughly doubling every 15 years or so. This growth is due to increased wealth, the declining (real) cost of air travel and improvements in international airspace regulations that make flying easier. These trends have helped ADP to grow passenger traffic at 1.8% p.a. in Paris since 2005. Over that time, higher airport-use fees and healthy growth in commercial activities have translated into revenue growth of 4.5% p.a. and profit (EBITDA) growth of 7.7% p.a.

ADP can derive such results because the group has a privileged economic position as the monopoly airport owner of a major tourist destination with a large population. The Paris airports host most of the world’s major international airlines, including those belonging to the three main alliances, SkyTeam, Star Alliance and Oneworld. About 70% of airport traffic comes from origin and destination passengers where there is limited competition. However, for the 30% of transfer traffic, ADP benefits from network effects as airlines including primary tenant Air France-KLM rely on Charles de Gaulle, with its four parallel runways, as a base for a ‘hub-and-spoke’ network.

Other ADP long-term advantages include that its three major airports in Paris are complementary; they can service all categories of traffic, from long haul to short haul, local to international, business to leisure. In addition, ADP’s airport infrastructure in Paris has capacity to accommodate further traffic growth. The unused capacity includes 381 hectares of land reserves. 

ADP’s reach, however, extends well beyond France as it has taken its expertise and experience to other markets. The company has interests in airports in Belgium, Chile, Croatia, Guinea, Jordan, the Netherlands and Turkey. These ventures might have justified a name change but the company’s main assets are still those in Paris.

Sources: Company filings and website.