10 aviation stocks to help your investments take off

With easyJet'sshare price reaching record levels in August and Thomas Cook staging a triumphant turnaround after near collapse, the aviation industry has been attracting attention from investors recently.

However, you don"t have to invest in high-profile airlines and tour operators to turn a profit. Companies that supply aircraft parts, for example, operate on high profit margins for initial sales and also enjoy lucrative ongoing maintenance contracts.

"We've been bullish on aerospace for the past 18 months," says Jake Robbins, senior investment manager at Premier Asset Management. Growth in the industry is being driven by record order books at Boeing and Airbus and the need to update fleets to more economic models, according to Robbins. Some lesser-known shares can offer access to that growth.

We spoke to some industry experts to find out which aerospace shares they think are taking off.

Engines and brake systems

Rolls-Royce is probably the first company most investors think of when aircraft engines are mentioned. It's a very successful manufacturer, but other companies, such as Meggitt, are also worth considering for investment.

Meggitt is a FTSE 100 engineering company that manufactures aerospace control systems and brakes, and does "the less sexy work behind the scenes", says Helal Miah, an investment research analyst at The Share Centre. Because of that the company tends to get overlooked. He says: "It performed very well over the past couple of years, so we put it on a 'hold', as we thought the price had run ahead of itself, but it has just gone up and up."

Robbins at Premier Asset Management is not so keen on such manufacturers. He sees their lack of free cash flow and relatively tight profit margins as issues. "The problem is you have to invest a lot of money to come up with a new engine," he says.

But Miah counters that such companies make a large proportion of their revenues from after-service contracts. Airlines spend a lot of money to keep their planes in the air, he says, and these companies will send out engineers to do repairs and replacements immediately. Miah says more can be made from these contracts than from initial part sales, and he thinks this business model may roll out to other areas of the industry as airlines continue to strive for efficiency.

PEEK production

Getting more niche, Victrex is a leading supplier of a plastic polymer called PEEK, which is used in the manufacture of a number of vehicles, including aeroplanes. The material, which is used as a substitute for metal is inert, strong and lightweight - key qualities for airlines seeking to improve fuel efficiency and burnish their green credentials.

Some 3,000 tonnes of PEEK is produced by Victrex each year, one tonne of which goes into each 787 aircraft, says BlackRock's Arnold. The material is also manufactured by other companies, but Victrex's reputation for quality products has put it in a strong market position.

Aircraft leasing

David Mecklin, managing director at Insight Financial Consultants, believes the big moneymakers in the aviation industry are the companies that lease planes to airlines.

Airlines don't like tying up great amounts of capital in a single asset, says Mecklin - and many are unable to. He adds that with nearly every US airline going into Chapter 11 bankruptcy in the past few years, many struggle to get finance to purchase aircraft. As a result, companies such as GECAS (a subsidiary of General Electric) and International Lease Finance Corporation have built highly lucrative businesses offering hire purchase agreements similar to those available to consumers on privately owned cars.

ILFC intends to float on the US stockmarket soon, allowing investors direct access to its shares.

Air and heat exchange

Engineering firm Senior manufactures air and heat-exchange systems. Roland Arnold, manager of BlackRock UK Special Situations, says it "hasn't disappointed in a long time". His fund has held the company since 2010, and he likes it because it fits his investment criteria: it has a strong management team with a strategic focus, it is a well-financed business in a dominant market position, and it consistently exceeds expectations.

Senior is already supplying parts for a lot of big aviation platforms, including the Boeing 737 and 787 as well as the Airbus A330. Arnold from BlackRock says once a company gets that contract it tends to keep it. Each 787 incorporates around $750,000 (£487,000) worth of Senior parts, thanks to the broad range of structural products it produces.

Around 65% of its business is in aerospace and half of that is in the commercial aircraft sector. The rest is in defence, energy and automotive industry).

Fixtures and fittings

French company Zodiac and US company BE Aerospace enjoy something of a duopoly in the provision of fixtures and fittings to Airbus and Boeing. They make everything from seats and in-flight entertainment packages to oxygen systems, kitchen galleys and toilets, says Robbins from Premier Asset Management.

"Decades-long relationships and the testing required to implement these fittings are huge barriers to entry," he says.

Margins are high, and there is little downward pressure from purchasers, as the products these companies produce are among the cheaper elements needed to make an aeroplane, and their research and development costs are relatively low.

BE Aerospace has secured a contract to provide toilets for the new Dreamliner planes, having created a design that allows room for an extra eight seats on the plane.

The two companies also provide refurbishment services for older planes.

Robbins says: "I expect 20% growth in 2014."

Emerging market opportunities

Demand for travel in emerging markets is on the increase. China will be building dozens of airports over the next few years and other Asian nations are starting to invest heavily in their aviation infrastructure, according to Richard Hallett, manager of the Marlborough UK Leading Companies fund.

In Singapore, for example, according to research from the Singapore Economic Development Board (EDB), strategies are in place to enhance the country's position as a global business centre, and aviation industry development is a major part of this. Jet Aviation Singapore is tripling the size of its maintenance hangar at the Seletar Aerospace Park by January 2014 to meet increased demand. Meanwhile, Canadian turbine designer and manufacturer Pratt & Whitney is due to open a new manufacturing facility on the site.

The EDB says the rising affluence of the Asia Pacific population is driving growth in the aviation sector, with demand for air travel rising particularly steeply in China and India. It is expected that around a third of Airbus and Boeing aircraft deliveries will go to Asian countries in the next two decades. Airline Asia Pacific, for example, is looking to triple its fleet to 13,500 aircraft by 2031.

Premier's Robbins prefers emerging market airlines to their developed-world counterparts. In part that's because they have less debt, but also because they don't depend on defence business and are unaffected by current defence budget cuts.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.