Luxaviation’s acquisition on 30 April of one of Europe’s largest business aviation services providers, ExecuJet, has shone a spotlight on the continent’s vast and fragmented management and charter market.

ExecuJet is the fifth long-established and strategically located company the Benelux-based venture has swept under its umbrella since 2013, after the UK’s London Executive Aviation (LEA), France’s Unijet, Portugal’s Masterjet and Belgium’s Abelag. With the latest acquisition, Luxaviation is on target to achieve its fleet goal of 500+ and position itself as a global business aircraft operator.

“`This wasn’t always my intention to grow the company,” says Luxaviation chief executive, Patrick Hansen. “We began operations in 2008 with one managed aircraft. Two years later we had a complete strategic rethink. We realised that in order to be profitable you need a big fleet so we began to raise the cash to do just that. We have never looked back.”

The scale and ambition of Luxaviation is not typical in the industry, however.

According to German data services and analysis company WingX Advance, there are over 1,000 operators in Europe today, of which around 90% have “one tail” fleets.

Furthermore, fewer than 50 operators have fleets of more than five aircraft, and only a handful have more than 20 aircraft under management.

“There is a good argument,” suggests WingX managing director Richard Koe, “that much of business aviation market’s inadequacy comes from its highly fragmented supply side.”

Marwan Khalek, chief executive of Gama Aviation, which merged late last year with fellow UK charter and management company Hangar8, shares Koe’s view.

Khalek refers to these small companies as “lifestyle operators”: people who perhaps have made their money elsewhere and have decided to buy and manage their own aircraft, or an aircraft for a friend.

He believes, however, that this large population of small, niche operators – for whom a return on investment is not a priority – is having a detrimental effect on the market.

“The presence of a lifestyle business in any industry does create an artificial market that depresses margins,” Khalek says.

There is not a single operator in Europe, he continues, with more than a 4% share of the market.

“In any other industry there will always be a dominant player, and there isn't in this marketplace,” he says. “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."

Khalek is speaking from experience. “I have been on that journey myself,” he says. “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.”

Khalek set up Gama in 1982 with a couple of aircraft but made the decision early on to expand the business through acquisitions. It is now one of the largest business aviation companies in the world with a fleet of 145 aircraft globally, of which 60 are based in Europe.

“Private aviation is a seductive business,’” he says. "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? Not everyone has a appetite for that.”

The owners of LEA – one of the UK’s largest business aircraft operators – made a decision in 2014 to sell to Luxaviation after spending years building up their company. “We wanted to be part of something bigger,” says LEA founder and chief executive Patrick Margetson-Rushmore. “It was a natural stepping-stone to expansion and we saw the benefits to our clients. I think people consolidate – whether that's a merger, acquisition or selling up – for different reasons. It depends on the individual motivation of the two parties involved."

The shift to more stringent and costly regulatory compliance for commercial operators may, however, force the hand of many small companies. “As we move to a more mature regulatory framework the cost of running a business is going up,” says Margetson-Rushmore.

“The pressure on small companies just to comply with the latest requirements on health and safety and CAMO [continuing airworthiness management organisation] regulations is putting so much pressure on them, particularly as the [management and charter] margins are so slim at the moment. Further consolidation is inevitable.”

LEA’s amalgamation into the Luxaviation group has helped to ease its running costs and boost its productivity. “We have a much broader offering now, both in terms of the fleet – we didn’t have access to Gulfstream and Airbus Corporate Jets before the merger for example – [and because] we also have greater opportunities within our charter fleet, with access to more customers,” he says.

“Being part of a large organisation gives us economies of scale in terms of fuel maintenance, insurance and crew training, for example. All these cost savings are passed on to our customers.”

WingX’s Koe is not convinced by the argument for purchasing power driving consolidation, however.

“Aircraft management companies are largely at the behest of their aircraft owners in terms of where the aircraft fly,” he says. “So they can’t guarantee airports or fuel companies an increase in activity.” Even if they could, he says, “the additional volume, in the scheme of things, is pretty insubstantial”.

“After all, even 100 aircraft represents barely 3% of the European business aviation fleet. From a fuel provider´s point of view a private jet has only a fraction of the uplift and utilisation of a commercial aircraft.”

For Gama’s Khalek, it is not the customer who drives consolidation, but the cost of running a business. "But it is the regulatory framework that forces consolidation: it is the affordability of running a business that is regulated, and the profitability of that business.”

With margins getting tighter and competition increasing, the time is ripe for more consolidation, Hansen argues. Although he declines to reveal his next move, he is confident the market is at the “beginning of a big change”.

“A lot is going to happen over the next few years,” he predicts.

For companies seeking to consolidate, access to the money markets has never been so good.

Luxaviation’s spending spree was funded though a series of debt-funded acquisitions, with the bonds paying yields of between 4.5% and 6.5%. Gama expanded its business through private equity. Since its merger with publicly listed Hangar8, the company now has access to the money markets.

“This is a very appealing industry to investors right now,” says Khalek. “They believe it is a sector ripe for consolidation and will show significant growth.”

Gama has successfully positioned itself within a number of growth areas including air ambulance operations – it has a long-term contract for Scotland's healthcare provider – and maintenance, repair and overhaul.

Following its acquisition in 2007 of Swiss VIP operator PrivatAir’s US venture, Gama is also an established player in the strategically important North American market.

“Once you get to a certain size, you start to pull away from the field,” says Khalek. “Now if I can show an investor that the acquisition is value accretive to my bottom line, they will give me the money in a heartbeat.”

This enthusiasm is not bestowed on the smaller companies, however. With their lean cost base, these operators are less appealing to investors.

The recent consolidations involve the top 15% operators, which has done little to stimulate competition or boost service levels. “There needs to be more movement within the 85%,” Khalek says.

The answer, he suggests, is for the small ventures to consolidate among themselves, enabling them to move into another league and therefore become more appealing to investors. “The same amount of work goes into a $4 million investment as a $40 million one. That is where people are willing to put their money,” Khalek says.

He admits it has been “an education” to go from owning a business that he started in private equity to now being listed on the stock market. “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,” he says. “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.”

WingX’s Koe believes that in the race to consolidate, operators with managed fleets must bear in mind a significant factor. “These companies don’t own their assets. They are only secured to the operator so far as the management contract is maintained,” he says. “Such contracts are generally short term and not binding.

“Unless the newly enlarged operators can find sufficient savings to pass onto owners, the latter might find comparable aircraft management services elsewhere. In fact, being traded as if they were a commodity might be all the incentive they need to vote with their feet,” he adds. “If so, we will see what´s been inflated very rapidly deflated.”

Khalek – who owns seven out of his 145-strong global fleet – dismisses this view. “Owners will always want their aircraft to be managed by a well run, efficient and successful company who, through economies of scale, can pass on huge cost savings. We need to encourage more companies to move in the same direction,” he says.

While the outcome of consolidation may be fruitful for some, the process can be painful, cautions aviation lawyer Aoife O’Sullivan. "I have sat on both sides and what I completely underestimated was how personal it is,” she says.

“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,” she says. “There will be a period of intense pain."

With the aircraft management and charter industry on the brink of a recovery, a new wave of consolidation is inevitable – as is the emergence of more “lifestyle” companies seeking to explore new business opportunities.

Many of these will little or no experience of business aircraft management and charter market.

"For someone outside the industry looking in, we look like a very scary bunch of random individuals,” says O’Sullivan. “That is an argument for consolidation if ever there was one; let's tidy up a bit."

Source: Flight International