Air Travel Is Set To Boom (Here Are Some Ways To Profit…)

There wasn’t anything particularly noteworthy about June 26, 2022. It was a rather ordinary Sunday in most regards… unless you happened to be traveling.

According to the TSA, 2,462,097 people passed through airport security checkpoints that day. Let’s go ahead and round that number up to 2.5 million. It has been a long time since that many passengers boarded flights. February 11, 2020, to be exact — just before Covid turned airports into ghost towns.

As you’ll recall, non-essential travel restrictions went into place shortly after. Airlines started slashing capacity, eliminating thousands of flights. Within two months, daily TSA screenings plummeted below 90,000 – a drastic 96% reduction from normal levels.

But let’s not dwell on that. Because after two and a half years, domestic air travel has nearly made a full recovery.

Air Travel Is Back

Take Dallas-Fort Worth (DFW). After slumping to 39 million passengers in 2020, the volume could reach 75 million this year. The bustling American Airlines hub has accommodated 35 million travelers year-to-date through June versus 36 million through the first half of 2019. These concourses, shops, and restaurants are as crowded as ever. So are the flight arrival and departure boards.

It’s not just Dallas. Atlanta’s Hartsfield reported a 77% surge in fliers last year, regaining its title as the world’s busiest airport. Traffic jumped 74% in Denver, 75% in Los Angeles, and 99% in Miami. And with the federal mask mandate lifted, operations at most of these airports have continued to normalize in recent months.

Harry Reid (formerly McCarran) Airport in Las Vegas set a new monthly record of 4.9 million arriving and departing passengers. Chicago’s O’Hare welcomed 1.4 million over Memorial Day weekend alone, a 47% increase from last year. Plane movements (industry jargon for takeoffs and landings) at the facility have risen to 2,000 per day and continue to climb.

Judging by the TSA’s count (and it would know), there are as many business and leisure travelers as ever. At least on busy days.

The pace of recovery is slower overseas, where some Asian countries still have travel restrictions in place. Still, Airports Council International (ACI) is projecting global air traffic to surpass 7.1 billion passengers this year. That’s about 77% of normal levels (9.2 billion) from 2019. But it’s only a matter of time before we hit the 10 billion mark.

The latest projection from the International Air Transport Association (IATA) calls for worldwide air traffic to reach 94% of pre-crash levels in 2023, 103% in 2024, and 111% in 2025. The slump is over.

The airline industry hit a major speed bump (perhaps turbulence would be a more fitting analogy). But it’s finally back on course. And as you can see from the table below, that means a steadily increasing number of flights each year to meet rising demand.

Confirming this recovery, Southwest Airlines (NYSE: LUV) just reported record-breaking revenues and earnings last quarter. Internal metrics like enplaned passengers, load factor, and revenues per available seat mile (RASM) all show a business firmly on the mend.

American Airlines (NYSE: AAL) just upped its guidance and is now anticipating next quarter’s revenues to be 13% above the same period in 2019. United (NYSE: UAL) is also running double-digits ahead of its pre-crash pace.

All of this means more planes in the sky.

We Need More Planes. Lots Of Them…

According to the FAA, there are 5,000+ commercial aircraft in flight at any given time across the United States. That number doubles to 10,000 worldwide. And as any flier can attest, many of these flights are overbooked and boarded to full capacity.

Given rising global populations, demand for air travel will continue to grow. By 2030, there will be 4.8 billion middle-class consumers with rising disposable incomes. Household spending is expected to reach $90 trillion that year, 50% above today’s levels. And a good chunk of that will be spent on travel. Surveys indicate that most people intend to take more trips in the future than they did in the past.

This trend is particularly strong in China. Before Covid, China’s 250 airports were already bursting at the seams. Beijing alone handled more than 100 million passengers annually. With an eye on the future, civil aviation officials are investing billions in runway expansions and new facilities and plan to have 450 airports in operation by 2035.

That means the construction of 200 new airports.

But this isn’t really about airports. It’s about planes. While more ground infrastructure is great, the only way to ferry tens of millions more passengers is for airlines to expand their fleets.

To that end, Southwest has a capital spending budget of $4 billion this year and is awaiting the delivery of 66 new aircraft, ending the year with a fleet of 765. United has purchased 270 new jets – its largest order ever.

China Airlines bought two dozen 787 Boeing Dreamliners last month. Lufthansa, the flag carrier of Germany, just received its first Dreamliner delivery and has 30 more on order. As Boeing (NYSE: BA) reports, the range and fuel efficiency of this sleek, twin-aisle jet has allowed buyers to add 325 new non-stop routes since it entered service.

Not to be outdone, European rival Airbus has also been securing new business. It recently booked orders for 300 new jets from China’s big-three airlines, a transaction worth $36 billion. Rest assured, there will be more deals to come.

As recently as 2008, there were just 16 airports worldwide serving 40 million yearly travelers. Today, that number stands at 54 – three times as many.

And while most planes are meant to accommodate passengers, let’s not forget about cargo jets. I won’t bore you with the gross tonnage statistics. But shippers can’t move mountains of freight (especially overnight) simply by truck. FedEx has 650 planes flying in and out of its Memphis hub to connecting destinations such as Frankfurt and Hong Kong.

Between passenger and cargo planes, the total number of aircraft in operation is currently estimated at 28,000, give or take. But we will need more. Thousands more. Based on the manufacturer’s latest annual market outlook, here’s how Boeing sees it.

That’s a total of more than 40,000 new aircraft needed to meet demand over the next two decades — not to mention the hiring of 602,000 new pilots. In the meantime, the company already has a current work backlog of 4,200 commercial planes worth $372 billion.

Action To Take

The way I see it, there are a few ways to profit from this trend. One is to bet on the airlines themselves — Southwest Airlines and United are the two I’d be inclined to look at first.

The other is to look at Boeing. After a series of missteps, combined with the challenges brought on by the pandemic, the aviation giant is trading at half the price it was before the pandemic.

The other option I recently told my High-Yield Investing subscribers about is a company that leases airplanes to carriers worldwide. The result is a win-win: lower expenses for airlines, a recurring revenue stream for the company, and dependable income for investors.

Needless to say, these planes don’t come cheap. Jets from the popular 737 family, the workhorse of many global fleets, cost somewhere in the neighborhood of $120 million. Each. That steep price tag (coming at a time of inflationary cost pressures and higher borrowing costs) makes it difficult for many airlines to make meaningful capacity additions.

You won’t hear about a safe, secure 7% yield like this in the financial media — yet this is the kind of thing we do regularly over at my premium newsletter. To find out how to get details on this pick, check out my latest report right here.