The COVID-19 demand-side shock, and the impact of lockdown measures on population behaviour meant that we saw patronage assets like the transport, toll roads and airports sectors take an unprecedented hit, with services coming to a screeching halt. The sell-down in these sectors was severe and deep.

For airports, there have been a number of major events that have disrupted air travel significantly which are helpful to contextualise COVID-19. For example, in the aftermath of September 11, where air travel was halted suddenly in a matter of hours, air travel quickly returned to trend again even with the overarching concerns about terrorism that played out for many years to follow. While Avian Bird Flu and SARS impacted airline operations, they were eventually subdued as major risks to travel and the industry returned to trend relatively quickly.

While global airport shares have bounced hard off their March lows, we believe a cautious approach to airport investing is still warranted, though interesting investment opportunities are emerging. The challenge with airports is that there still remains a wide range of possible outcomes in terms of the recovery of air travel even as countries look to progressively open- up to domestic and international air travel. The worst case, but still plausible scenario, is of a very slow recovery and some structural change to air travel could have a more material impact on value, balance sheets and gearing. For example, we believe that there is potential for a permanent and structural reduction in corporate air travel resulting from COVID-19. Given the wide range of potential scenarios, balance sheet strength is very important in terms assessing an airport investment.

Airports were hit hard, even the high-quality hubs such as ADP (EPA: ADP) that owns Charles de Gaulle Airport in Paris, and Aena (BME: AENA) which owns all of the airports in Spain. In the local region, Auckland International Airport (ASX: AIA) undertook a substantial capital raising given liquidity constraints, highlighting that even the highest quality airports were not immune. AIA shares have traded up strongly since the capital raising, and when COVID-19 subsides, and air travel trends become clearer, airports like AIA and Sydney International Airport (ASX: SYD) will benefit greatly.

Similarly to airports, the patronage of toll roads collapsed during the COVID-19 lockdowns, significantly impacting these assets. For example, traffic on Transurban’s (ASX: TCL) assets fell 57% at the peak of the crisis, and Atlantia’s (BIT: ATL) traffic fell ~80-85% across its European assets. Atlas Arteria (ASX: ALX) that owns the APRR toll road in France temporarily lost almost all of its traffic as the country was placed into lockdown. While commercial vehicle traffic proved far more resilient, light vehicle traffic almost entirely vanished in some cases.

Overall, toll roads saw traffic severely impacted for some time, but because they can still operate with social distancing, as lockdowns have been lifted, we have witnessed in many cases a sharp recovery in traffic back to levels not too dissimilar to pre-COVID levels. Moreover, given recent trends, there is a case for toll road traffic to overshoot previous levels if people remain cautious about how they travel to work from a social distancing perspective.

There are other opportunities in toll roads as they are likely a focus for government stimulus (as we have just seen with the Australian Government announcing that it will expedite 15 infrastructure projects worth $72 billion), and also the potential divestment of additional infrastructure assets that are held by governments which still own 80% of the world’s infrastructure assets. For example, Atlas Arteria have just completed a capital raising to give them flexibility to pursue ‘shovel-ready’ road projects as part of a potential Government stimulus program. There is likely to be the potential to expand existing assets, and invest in new infrastructure opportunities that become available as governments eventually seek to pay down some of their stimulus debt.

In contrast to airports, and given the sharp road traffic recovery we are witnessing in most instances, the range of potential outcomes for toll roads is far narrower. Toll road valuations are unlikely to be materially affected by COVID-19, in our view. We generally approach toll road valuations conservatively with traffic constrained to capacity assumptions usually prior to the concession ending. This, in turn, means any temporary traffic disruption, even severe ones like those triggered by COVID-19, will have a more muted valuation impact. Nonetheless, similar to airports, not all toll roads are the same, and require detailed due diligence, with balance sheet and liquidity considerations of paramount importance.