Zoom video calls have replaced business meetings, the Davos World Economic Forum is taking place online, and booking a holiday overseas involves navigating a bewildering array of travel restrictions, virus testing and quarantine requirements. Why then are Bill Gates and Blackstone Group Inc. teaming up to buy a company that makes much of its money refueling private jets?
Blackstone and Gates’s Cascade Investment LLC are weighing a takeover offer of at least $5.17 a share, or $4.3 billion before debt, for Signature Aviation Plc, which also provides passenger amenities and technical support for business jets. The bidding group will most likely need to raise its offer to seal the deal after Global Infrastructure Partners made a $5.50-a-share proposal, but Cascade’s preexisting 19% stake in Signature gives the Blackstone team a significant edge.
Blackstone is renowned for bold bets like the one it made on U.S. residential real estate in the wake of the 2008 recession. But servicing private jets is more of a sure thing. Global airline passenger traffic collapsed 66% last year through November, according to the International Air Transport Association. In contrast, private-jet activity was down just 11% in December, the best monthly performance since the pandemic began, according to data from WingX, an aviation data and consultancy company.
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While travel restrictions and health concerns have kept many corporate fleets grounded, those who can afford to travel privately and avoid crowded airports are doing so, a boon for charter flights and companies such as NetJets that offer fractional shares in private planes. (NetJets, owned by Warren Buffett’s Berkshire Hathaway Inc., is Signature’s largest customer.) Traffic to and from Florida actually increased by 12% in December from a year earlier, with the Caribbean serving as another hot spot, the WingX data show. In Europe, private jets haven’t been taking off as regularly of late because ski resorts are closed, but it was a different story in August when they were in high demand to whisk customers to Mediterranean beaches in comparative safety.
NetJets has said the leisure side of its business bounced almost all the way back to pre-Covid levels as early as July. The company signed three times as many new customers during the pandemic as in the prior year. Will that demand stick around once Covid-19 outbreaks abate and the jet-set crowd has been vaccinated?
A popular refrain in the industry is that once people fly private, they aren’t eager to go back to the headaches of commercial air travel. And the ultra-wealthy individual has largely been a winner in the pandemic thanks to rising asset prices. Eventually, businesses will start sending their executives around the world again, too, providing another leg of growth.
So far, companies haven’t offloaded their plane fleets to the extent they did after the 2008 recession. However, the pre-owned jet market remains bifurcated. Large jets for intercontinental travel are proving harder to move than small and medium-sized planes used on domestic routes. Inventories of light jets and turboprops are actually lower now than before the pandemic began, according to data provider Amstat.
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Manufacturers of private jets such as Bombardier Inc., General Dynamics Corp. and Textron Inc. slashed production rates earlier in the pandemic but lately have sounded optimistic about their ability to win new customers.
“You have people that are coming in to business aviation that have not historically been in business aviation or owned an equity piece of an aircraft,” Textron Chief Executive Officer Scott Donnelly told investors recently. “The reduction in the number of [commercial] flights is making it very difficult for people to get from point A to point B in the country without taking a whole day doing it.” North America accounts for nearly two-thirds of the world’s fleet of private jets.
Climate concerns are real but so are near-term safety worries, and the convenience of flying private yields real productivity benefits for top corporate managers, Carter Copeland of Melius Research said in an interview. While private jets have a larger carbon footprint relative to the number of seats, the emissions created by that corner of the market pale in comparison to the broader commercial aviation industry, so the latter will likely attract more attention from climate-change activists, he said.
Honeywell International Inc., which makes engine technology and cockpit controls for business jets, has said it expects demand for private flights to return to 2019 levels by the middle of this year. The growth case from there is murkier and is most likely tied to private-jet travel becoming more attainable for the masses, or perhaps becoming a greener alternative to commercial flight if the sector can lead the way on electric planes.
In the meantime, airport real estate is a finite asset, and there’s no business case for building more, which makes the prime leases that service providers such as Signature hold incredibly valuable, Copeland said. “The prospects for competition or disruption are effectively nil,” he said. He compared Signature to a gas-station operator, taking a cut of the fuel and snacks that customers buy. Because business-jet customers usually aren’t the most price-sensitive about things like catering, that cut tends to be large and profitable. It’s this recurring and lucrative nature of Signature’s revenue that makes this business attractive to the private equity world.
In a gold rush, the real money’s often made by those selling shovels. In a pandemic, refueling the planes of the super-rich has similar appeal. – Bloomberg
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