01/11/2004
If you urgently want to fly a vital organ somewhere, hire an executive jet, deport illegal Mexican immigrants from Texas or join the press corps flying around with US presidential candidates, it is likely you will find yourself dealing with Air Partner.
Based in Crawley, Sussex, not far from Gatwick Airport, Air Partner has been arranging corporate air charter flights for more than 30 years. Last December it became the only company in the sector to receive a Royal Warrant for fixing flights for the Queen's family.
Chaired by Tony Mack, who joined what was his father's company back in 1970, the company's core business is to act as a broker, connecting charter flight customers with airlines with spare capacity on a daily basis.
Floated on the old Unlisted Securities Market in 1989 and fully listed since 1995, Air Partner is in the process of diversifying its operations to achieve chief executive David Savile's goal of 'greater visibility' of future earnings. He sees growth coming from wider geographical reach, further development of specialist subscription-paid services, such as emergency flights, and growing disenchantment among business travellers with queues, delays and discomfort on scheduled flights.
Savile detects particular promise in the USA, both from commercial and government clients. This is despite the fact that it was largely US problems that caused Air Partner's profits to fall from £4 million to £2.9 million in the year to July 2003.
Savile maintains the trauma of the World Trade Center terrorist attack on 11 September 2001 boosted Air Partner's business by making US clients more security-minded. But he says the company later lost money in the USA, because it set up a costly infrastructure before enough new business flowed in.
This has now changed. US overheads have been pruned, even though new regional offices have been opened, and, says Savile, 'the USA is making its highest contribution ever'.
He also insists high oil prices and their impact on aviation fuel costs do not cause him any loss of sleep. Unlike the mass tourism market, among Air Partner's target customers, 'demand is driven by events, such as the need to get an urgent job done, and not by costs, which are rising for everyone.'
STRATEGY
Describing Air Partner as 'a big fish in a tiny puddle', Savile explains that the company is these days pursuing a strategy of diversification to insulate it from cyclical shocks. This policy involves geographical expansion, into the USA, where Air Partner intends to expand its network from the east coast to mid west and west coast centres, to Dubai and elsewhere in the Middle East, and to Germany.
America is now making money, as revenues catch up with the investments made and £500,000 of cost-cutting measures bear fruit. Savile says there remains 'much more scope' in the United States, where he argues there is no one dominant charter broker and Air Partner could win plenty of new business without putting too many local noses out of joint.
Germany, another area of recent expansion, has been a loss maker, suffering from economic stagnation. But operations there are also now in the black.
Diversification is taking Air Partner into new sectors. The company already arranges regular flights to the Falkland Islands and flights for troops, equipment and VIPs into the Gulf and other war zones as well as arranging emergency services, such as evacuation airlifts from trouble spots for expats.
Savile would like to see a third of revenues from the government sector, especially where the state client is prepared to pay a regular subscription to ensure the availability of such services around the clock. These newer areas would yield higher margins on lower volumes than Air Partner's present core ad hoc charter broking business, fixing flights in anything from 747s to light aircraft.
The company arranges some 35,000 flying hours a year, mostly on short flights, with clients paying an average bill of £12,000 for a four-flight contract. Rates in this competitive market can vary by between ten and 15 per cent a day and typical margins range from eight per cent to 13 per cent, with 'sharp extremes at both ends' – but 'we can make money on one per cent'.
This places a premium on personal experience, know-how and contacts. 'Our business is based around ad hoc contracting,' explains Savile. 'We have longevity but a minute forward order book.'
Contrary to public myth, 'pop stars account for less than one per cent of our business.' Business is the prime source of revenue, which can be 'lumpy', as when a motor company usually generating light annual traffic launches a new model.
Reckoning that the overall air transport market grows seven per cent a year over the long term, he says clients tend to use agents such as Air Partner in boom times when the priority is getting jobs done quickly. In sluggish times, however, they often seek to try their hand at direct dealing in the (sometimes misplaced) belief that they can obtain better deals that way.
Unsurprisingly, Savile claims most who go direct 'miss the best deals', as, he insists, do corporate clients who prefer to own their own corporate planes or fleets. Most owners do not use their planes enough and so cannot extract good value from them, he maintains.
Typically, argues Savile, the owner of a $10 million private jet is paying '£7,000 for every one-hour flight. By going on the open market, punters could pay £2,000 an hour for an identical plane.'
At present, 'charterers are subsidised by owners'. How long such a happy state of affairs can last may be debatable.
But, if Air Partner's strategy works, it should have insulation enough from its newer activities, with governments, US customers and blue chip subscription-paying clients, to compensate for any reversal on this front. 'Client loyalty is at an all-time high,' claims Savile.
MANAGEMENT
Now 54, chairman Tony Mack joined his father's business 34 years ago at the age of 20. He became managing director in 1979 and executive chairman six years later.
Though ten years younger at 44, chief executive Savile also has long professional experience of the air charter business, where he has spent 24 years, 20 of them with Air Partner. He joined the board aged 27 in 1987 and became chief executive ten years later.
Finance director Stephanie White, 40, joined the company from NatWest Bank 21 years ago, reaching her present post seven years ago (and gaining an MBA from Brighton University in 2001). In a business where experience counts, according to Savile, most of Air Partner's senior managers have been in aviation for between ten and 25 years.
Non-executive director Sri Srikanthan, 52, brings experience of the wider commercial world, as a consultant to several companies and board member of one engineering group.
He is also a senior lecturer in finance and accounting at Cranfield University.
PROSPECTS
Air Partner may have increased profits 30 per cent in the year to July, but the company has still to make up lost ground and show it can grow further. The pre-tax figure of £3.7 million was £840,000 better than the previous year's, but still below the £4 million achieved in 2001-02, while turnover of £100.6 million was £14 million down on 2002-03's figure.
The turnover fall chiefly reflects the ending of 'high-volume, low-margin' freight contracts relating to the Iraq war, including moving military supplies and equipment to Basra, and similar contracts to Kabul in Afghanistan. The profits increase is partly attributable to the stemming of US and German losses.
In the UK market, which last year accounted for 52 per cent of group turnover, Air Partner scored from a cyclical upturn. A 40 per cent recovery in executive jet charters began in the second half and gained momentum towards the end of the financial year.
Savile speaks of forward bookings 'significantly ahead of this time last year'. He notes an 'encouraging' increase on business from clients in the financial sector.
All this supports analysts' estimates of a return to £4 million pre-tax profit levels in the current year, with earnings of 27p a share. Thereafter, the company should be able to build on that and grow further.
For the longer term, Air Partner should be able to benefit from the fact that, though it is a small player by comparison with the overall air charter market, it is much larger than its competitors. The company's next biggest rival, Hunt & Palmer, is only a third of its size in revenue terms and much smaller than that in profits.
Air Partner is, for the most part, not a principal in air chartering and is not in the volatile business of aircraft leasing. The one exception to this rule, which should make a small, but useful contribution to results, is an investment in a leasing outfit in Australia.
Described by Savile as 'an attractive one-off deal', this company has seven-year leases on well-travelled planes in the Outback. There is no operational or managerial commitment for Air Partner.
VALUATION
At 435p, Air Partner's share price, which has performed strongly over the past 18 months, values the company at 16 times expected current earnings. This is fairly demanding unless Mack, Savile and colleagues continue to develop their strategy of moving onto less cyclical, more 'visible' areas of operation.
If the drive for more subscription and government business and geographical expansion, especially in the key US market, pays off as hoped, however, the market's appreciation of the company should be enhanced. Regular dividend increases should underpin this to some extent, though a yield of 3.5 per cent is not in itself all that exciting.
Another comfort for investors is Air Partner's year-end cash pile of £9.98 million, up 11.5 per cent on a year before. This should help weather storms and fund appropriate expansion.
In a fairly conservative business, Air Partner is working to adapt itself and shift into higher-margin, more predictable markets, without losing its core areas of expertise. As market leader, it also offers investors a route into a niche market where there are significant opportunities of long-term growth for those who know how to catch them.
| LSE | £55.11m |
555.00p
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