A golden age for aviation

The global aviation industry is widely regarded as on the cusp of a golden period of growth. Aviation has seen sustained growth through all economic cycles and currently generates around $600bn of GDP per year, which is forecast to rise to $1trn by 2026. In the UK, the sector contributes 3.4% to GDP. Aviation is marked by two compelling phenomena: ageing fleets in Europe and the US, and air traffic growth in emerging markets – both contributing to a significant backlog of new aircraft required over the next two decades.

The highest growth is predicted to come from AsiaPacific, particularly internal traffic in China and the wider region. China’s airlines surpassed 100m passengers per quarter for the first time last year, but domestic flights remain dominant at around 90% of all flight activity. Aviation is diverse – encompassing manufacturers, airports infrastructure, airlines, support services, engineering and technology.

While manufacturing is broadly non-investible for us, there is ample quality in engineering and technology. Airports infrastructure is ripe for consolidation or privatisation as a means of delivering much needed investment, such as the recent flotation of a minority stake in Aena of Spain. As a house, we gain exposure across the value chain, but avoid airlines on environmental grounds. We will refine this, allowing investment in the most sustainable airlines on a case-bycase basis.

Aviation is a global success story. However, the industry presents several environmental impacts of interest to the ethical and responsible investor. Aviation is responsible for 2-3% of all human-induced carbon emissions. Without intervention, it could reach 15% of global GHGs by 2050. Slow to respond to climate change, the industry is now placing emphasis on technology – particularly cleaner and younger fleets. Lowering fuel burn by reducing aircraft weight has a major impact on CO2 generated. Engine technology has evolved considerably. Improvements in fuel efficiency of 0.8% per annum to 2050 is viewed as credible, based on evolving airframe and engine design.

Carbon intensity under this scenario would reduce by about 30%. Moreover, a cumulative carbon intensity reduction of 35% by 2050 would allow up to 55% more aircraft movements – equating to passenger growth of around 60%. The industry has coalesced around achieving 1.5% annual efficiencies in fuel, carbon neutral growth from 2020 and a net reduction in aviation carbon emissions of 50% by 2050 – relative to 2005 levels. Ultimately to reach more ambitious targets, some constraint on our desire to take to the skies may be necessary. The ultimate goal is to ‘decouple’ growth from emissions. Responsible investors will need to balance all of these ESG risks before taking flight.