Investing in air traffic control

As specialist investors in infrastructure we like sectors that provide essential services. One of these sectors is transport and in particular air travel. We have just participated in the IPO of an air traffic control company in Italy called ENAV, the first IPO of its type. We thought we would provide some background on why it’s an area you may hear more about.

How does it work?

Air navigation businesses earn a fee every time an aeroplane flies into or out of its airspace (in this case Italy). ENAV has a clear correlation with air traffic growth over the Italian airspace. In our opinion ENAV ticks all the infrastructure boxes. It is a legal monopoly that has in indefinite right to control Italian airspace. It is also a very stable and predictable business with 88% of revenue regulated by Eurocontrol, the EU wide regulator of air space.

What happened?

ENAV listed on July 26th and finished up 11% on its first day of trading. We participated in the IPO and we have now accumulated a 2% position in ENAV for the Macquarie International Infrastructure Securities Fund.

What do we like?

We had direct discussions with ENAV management about the opportunities ahead, including:

  • As a new type of investment, this is the first time global investors have been able to access an air traffic control tower operator. We believe this new sector offers investors the potential for steady cash generation and growing dividends. Our discussions with management support our view that ENAV should have significant opportunity to increase dividend payments to shareholders over time.
  • One key area of potential outperformance is on the cost side where ENAV gets to keep 100% of any unit cost savings that exceed those targeted by the ENAV has very low gearing and net debt. This provides management with significant scope for special dividend payments to shareholders, including the Italian government which remains the largest shareholder at 53% following the IPO.

Conclusion

As heavily indebted governments across the globe turn to the private sector to support essential infrastructure needs, we see meaningful opportunities for global listed infrastructure portfolios, and this recent IPO is a good example of this thematic. We expect the successful IPO of ENAV will be a positive catalyst for the listing of similar air traffic control companies in other parts of Europe, a region which is suffering from heavy sovereign government debt burdens.