Investing in ASX transport shares

What are ASX transport stocks? 

ASX transport shares are companies involved in the transport industry that are listed on the ASX. Transport covers everything to do with getting goods and people around. Companies in the transport industry may be involved in logistics, rail or air services, or road infrastructure. 

Moving people and their stuff around is big business. The COVID-19 pandemic that emerged in early 2020 caused supply chain bottlenecks that still impact ports, railroads, and trucking companies. In the meantime, global demand for travel has returned with a vengeance, leaving airlines scrambling to meet the influx of passengers. 

ASX shares in the transport sector vary in size from billion-dollar behemoths to small-cap traffic technology providers. The transport industry includes the following types of businesses:

• Airlines and air freight companies 
• Railroads that move people and goods by train
• Marine shipping companies
• Trucking companies that haul goods by road
• Service providers such as airport operators and toll road companies.

Why invest in ASX transport shares? 

By investing in ASX travel stocks, you can potentially profit from the crucial role transportation plays in the economy. 

Transport companies are critical to enabling economic activity — without them, passengers and freight would not move quickly across distances. 

Transport infrastructure also supports economic growth by reducing costs to business through faster, more efficient roads, rail and ports.

Transport shares are often a leading indicator for equities. Rises in the share price of transport stocks can signal strength in the economy. The logic is that a booming economy will lead to more travel and deliveries of goods. 

During the early stages of economic recovery, companies will anticipate improved business conditions and ramp up their shipping of goods. Conversely, a decline in shipping demand can signal economic weakness ahead as it indicates businesses are scaling down expenditures. 

As the global economy recovers from the pandemic, the transportation and logistics industry looks set to contribute significantly. The industry is being optimised, adapting to new trends and investments in transport infrastructure. 

Top transport stocks on the ASX

(based on market capitalisation from high to low)

Transurban Group 

One of the world's largest toll-road operators, Transurban operates toll roads in Melbourne, Sydney and Brisbane in Australia, Greater Washington in the United States and Montreal in Canada. Having delivered 15 major projects over the last two decades, Transurban operates more than 330km of road infrastructure. 

Traffic on Transurban's roads reached a new high in the fourth quarter of 2022, exceeding pre-pandemic levels. This was driven by new asset capacity and increased mobility and travel. Inflation-linked increases in tolls are providing the company with protection in the rising interest rate environment. Near-term interest rate exposure is limited, with Transurban refinancing $3.4 billion in debt in 2H22, lowering the weighted average cost of debt. 

Qantas

Qantas is the world's second-oldest airline. Founded in 1920 in outback Queensland, Qantas is now recognised as one of the strongest brands in Australia. Its low-cost carrier, Jetstar, was launched in 2004 and has grown to five Jetstar-branded airlines operating across the Asia Pacific. In addition, Qantas has a broad portfolio of subsidiary businesses, including freight and loyalty businesses. 

The breadth of Qantas' model allows it to serve many customers, increasing resilience to external volatility. Qantas developed a three-year plan to guide the company through the COVID crisis and create a robust platform for future profitability.  Just 12 months ago, Australia's borders were largely closed. This led to an underlying loss before tax of $1.9 billion, taking total losses since the start of the pandemic to $7 billion with $25 billion in lost revenue. 

COVID cost Qantas more in the past three years than it made in the five years before that. Now that it has been able to steer through the crisis, things are improving faster than expected. Flights are full, and the airline can't bring aircraft out of storage fast enough. Forward bookings are strong, and customer research shows travel is one category people want to keep spending on, even as inflation and interest rates see them pull back elsewhere. 

Auckland International Airport 

One of the busiest international airports in Australasia, more than three-quarters of international visitors to New Zealand arrive at Auckland airport. Meanwhile, more than $15 billion worth of freight passes through it every year. 

Heavily impacted by pandemic-related travel restrictions, the airport has experienced a stronger-than-expected rebound in the aviation market. 

Aircraft loads have been high, and the company sees continued strength in forward international seat capacity, which is expected to fuel ongoing recovery.  As a result, Auckland International Airport revised its FY23 profit guidance in October to $100 – $130 million, up from $50 — $100 million.  

The global aviation system continues to be impacted by constraints such as crew and ground staff availability and resourcing challenges associated with bringing fleets out of hibernation. Uncertainty also remains about the reopening pathway for the Chinese market. Nonetheless, the company is increasingly confident that aviation is returning to normal. International passenger numbers are predicted to be between 60% and 70% of pre-COVID levels in FY23, with domestic passenger numbers between 85% and 90%. 

What to look for when buying transport shares 

The impacts of the pandemic on global supply chains have prompted a focus on fixing the system. This may allow for innovation and improvements to emerge. 

Several logistics companies on the ASX focus on moving goods through the supply chain, including through the provision of transportation services. Shareholders in this sector will want to see steadily increasing revenues, even if higher costs eat into profits in the short term. 

Because the transportation market includes many distinct subsections, investors must be aware of factors that influence the performance of different categories of transport stock. Depending on the company, investors may choose to take a stake to earn dividends, participate in capital gains, or combine the two. But it is important to note that transport shares tend to be sensitive to economic fluctuations. 

The sector is benefiting from the global reopening post-COVID as well as trends such as the rise of electric vehicles. It will be part of the solution in reducing supply chain disruptions like those seen during the pandemic, relieving inflationary pressures. 

Investors should note, however, that transportation stocks can be cyclical as the transport volume of goods and people increases when the economy grows and decreases when it slows.

Pros of investing in transport shares 

Heightened demand. The number of parcel deliveries increased as e-commerce boomed during the pandemic, resulting in heightened demand for freight and logistics services. This is expected to be sustained post-pandemic. 

Improved infrastructure and efficiencies. The freight and logistics market is forecast to grow at a compound annual growth rate of 5.85% between 2022 and 2027.¹  The exponential increase in parcel movements will see more logistics infrastructure investment, contributing to an efficient and cost-effective industry.  

Cons of investing in transport shares 

Transport shares are not immune to the economic cycle. Transportation stocks tend to be cyclical, with revenues and profits dependent on economic trends. This means share prices may be volatile, fluctuating more than the broader market. 

Rising rates can constrain spending and therefore shipping. The interest rate cycle and economic cycle are inherently linked. The affordability of credit plays a key role in driving business expenditure and personal consumption. As rates rise, expenditures may start to falter, reducing demand for shipping and transportation.

Are ASX transport shares a good investment? 

Investor interest in transport shares is increasing as the world emerges from the COVID-19 pandemic. The industry spans an array of markets and comprises a vital part of the global economy. In addition, ASX transport shares have the potential to generate returns through both dividend income and capital growth. 

The performance of Australian (and international) transport shares depends on the economy's performance and myriad other factors. Transport shares can be cyclical, turning on different stages of the economic cycle.

Whether transport shares are right for you will depend on your financial circumstances, investment goals, and risk appetite. 

There are a variety of large and smaller capitalisation ASX transport shares from which to choose if you are interested in investing in the sector. Take your time when making an investment decision and seek professional advice if required.