British Business and General Aviation Association
BAN's World GazetteerU.K.
The British Business and General Aviation Association (BBGA) recently held its annual conference at the Selsdon Park Hotel in Croydon, UK. A number of talks were hosted throughout the day, with one being of particular interest to EBAN: London Executive Aviation chief executive Patrick Margetson-Rushmore, Kennedy's lawyer and aviation specialist Aoife O'Sullivan and Gama Aviation ceo Marwan Khalek discussed consolidation in the industry, and were led by Leaburn Limited director Murray Law.
"I think people consolidate, whether that's merger, acquisition or selling up, for different reasons. At LEA we became part of Luxaviation Group because we wanted to be part of something bigger and we saw the benefits to our clients," began Margetson-Rushmore. "We have no intention, myself or George [Galanopoulos], of leaving the business, so for us it was a natural stepping stone and expansion.
"Some consolidate because they want to retire. I think a lot of smaller operators have a 'lifestyle' approach to their businesses; typically they are a business person who has an interest in aviation and flying, who started off with one aircraft. So consolidation very much depends on the individual motivation of the two parties involved."
O'Sullivan said that operators must be careful what they wish for when entering the consolidation process: "I have sat on both sides, both advising and also going through it ourselves two years ago, and what I completely underestimated was how personal it is. You start off with people telling you how wonderful you are, and how much they really want you to join them, that it is all going to be fantastic and we will all walk off holding hands into the sunset together. And then you send in the lawyers and the accountants and they rip you to shreds, and find as much fault with you as they possibly can.
"I would probably say to anyone considering doing it to ensure that they have very strong reasons for doing so, because you will need to come back to them again and again, and remind yourself why you are doing it. There will be a period of intense pain."
Marwan Khalek's Gama Aviation has recently combined its fleet and resources with those of Hangar8. He believes that customers do not drive such consolidation. "What we are really talking about when we talk about regulation is that it makes smaller scale businesses less viable, and that forces consolidation. But it is not actually the regulatory framework that does it, it is the affordability of running a business that is regulated, and the profitability of that business.
"I think what it boils down to really is: what do the investors want? What is in the best interest of shareholders? Consolidation could be as simple as seeing whether you can get one and one to make three rather than two. If the answer to that is yes, then consolidation makes sense. If the answer to that is no, it doesn't. For me it was an education to go from owning a business that I started in private equity to now being listed on the stock market, because a lot of us in this business are owner/managers and we don't think as investors, we think as people working in that business. Once you get investors in, the rules change." Investors are concerned with enterprise value and share price, and these are factors that do not apply to an owner/operator style of business," he said.
Margetson-Rushmore explained that many people in the industry place too high a price on what their business is worth, overestimating its value. He says the concept is simple: get the buyer to offer you a price. "You can either say yes or no, but do not discuss it. This is a good approach to have."
"George and I did not find the due diligence programme especially difficult, but that is because we knew what was required of us." He does nonetheless add that if one company is being acquired by another, it is important to have an understanding of the acquirer's long term strategy, as they will no doubt look to absorb further companies in the future, when your company is part of the group.
"In the legal industry, there is no value put on goodwill, which is pretty much what generates your business and what builds your business. It all comes down to hard cash," continued O'Sullivan.
"If you were really as good as you think you are, you would be a lot richer! So it is a bit of a blunt conversation, but I agree that it is worth having that conversation to begin with."
The final issue brought to the fore by Law was business aviation as a 'lifestyle' business, and the challenges of transferring it into a viable business. Margetson-Rushmore is forthright: "I think for smaller companies with two or three aircraft it is a lifestyle choice rather than a question of seeing a return on investment. Having said that, although it is a difficult and low margin industry, it is a business that when it reaches a certain size, does become viable.
"I have gone from being a believer to a disbeliever, but I do now strongly believe that the air taxi model works, if you have the right volume of aircraft around Europe; and that is not 25 or 30, it is a larger number. I believe that what Marwan is doing and what Luxaviation is doing makes good business sense."
Adds O'Sullivan: "A bone of contention of mine at the moment is the credit rating of this industry, and of aviation and aircraft in general. We have been doing a lot of research on it, but interestingly I have had meetings this week with new entrants to the market who are not in aviation at all. When we started talking to them about the differences between the airline industry and the corporate jet industry, they were genuinely astounded, and they were looking at it with fresh eyes.
"If you take it to someone outside the industry, we look like a very scary bunch of random individuals. That is an argument for consolidation if ever there was one, let's tidy up a bit."
Khalek concludes by saying that private aviation is a 'seductive' business: "Once you get sucked into it, you come to a crossroads, and the options are fairly straightforward: do you want to continue to run it as a lifestyle business, or do you want to take some additional risk and grow it?
"I have been on that journey myself and I can tell you it is not a lifestyle business in that sense now. It has transitioned into a business which earns me an income that supports a lifestyle, and that requires a significant difference in approach and mindset. The presence of a lifestyle business in any industry does create an artificial market that depresses margins.
"In Europe, 85 per cent of operators operate with five aircraft or fewer. Only six or seven per cent have over 20 aircraft. There is not a single operator with more than a four per cent market share. In any other industry there will always be a dominant player, and there isn't in this marketplace. The fact that there are so many 'lifestyle' operators out there makes the transition of business aviation into a mature industry much more difficult, because the returns that can be extracted by consolidation are not always attractive to everybody."