Back on January 31, 2013, I wrote a blog entitled “Consolidation through mergers and acquisitions in the Canadian regional airline industry and how to Value them ?”.
I introduced the Exchange Income Corporation (EIC) (TSX: EIF) run by Mr. Mike Pyle out of Winnipeg, which today owns 6 aviation companies, 4 are regional airlines in Canada (Perimeter Aviation, Keewatin Air, Calm Air International and Bearskin Lake Air Service) plus Custom Helicopters and US based Regional One an aircraft and engine leasing company which provides full maintenance support for regional airlines.
Exchange Income Corporation (EIC) owns 4 regional airlines, photos of 3 of the airlines are above, Perimeter Aviation DHC-8-300 (left), Bearskin Airlines Metro III (center) and Calm Air International ATR-42 (right), the 6 aviation companies EIC has generated $313.2 million in revenue in 2013, with PAL on board, we could see upwards of $540 million in 2015, with the 3rd largest fixed wing commercial fleet in Canada at around 117 (as of Nov/2014).
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This EIC is a dynamic company, and owning 6 aviation companies, it has shown it can make money in aviation, in fact EIC Aviation segment in 2013 had revenues of $313.2 million or 30.4% of total revenue), but produced $64.7 million in EBITDA (20.6% margin), while consolidated company EBITDA was $80.4 million, so aviation produced 80% of its EBITDA in 2013, a rare bad year for EIC, more on that further down. Now with PAL becoming part of EIC, its Aviation sector in 2015 should generate at least $540 million in revenue !
Well, EIC has struck another big aviation deal when it reached an agreement on November 12th, 2014 to acquire all of the shares of Provincial Aerospace Ltd. of St. John’s, Newfoundland & Labrador for $246 million, its biggest deal to date and it’s 7th aviation holding. The two shareholders of PAL, Mr. Gus Ollerhead and Mr. Tom Collingwood have built up a wonderful company, from a small air service this company has gone global and now has more financial resources to really dominate its market segment, and the market for maritime patrol and surveillance aircraft is growing and will continue to grow for many years and under its current CEO Mr. Brian Chafe, there is nothing the company cannot achieve in its markets with the financial support of EIC.
The PAL Aerospace Ltd fleet is around 32 in total as of today, with the main fleet centered around the King Air 200’s (left), DHC-8-100/300’s (center) and three Saab 340’s (right) which probably will be phased out in time as they were with Calm Air. The King Air 200 and the DHC-8’s are the bulk of the maritime patrol aircraft (MPA) fleet.
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PAL Aerospace, a $185 million a year company with 900+ employees has 3 business units, from an airline, FBO’s and integrated aerospace and defense business designing, modifying and operating maritime patrol aircraft (MPA). The airline business is something EIC knows well, it currently operates 75 fixed wing aircraft (inc. 4 jets the 2 x Dornier 328Jet’s and 2 x Lear 35A’s) and 71 turboprops which include PC-12, King Air 200’s, Beech 1900’s, Metro II/III/23’s, ATR-42/72, DHC-8-100/300’s and 22 helicopters.
With 75 fixed wing aircraft today plus another 32 aircraft at PAL and you are looking at Canada’s 3rd largest fixed wing commercial aircraft operator after Air Canada and WestJet ! It has bought up several well run, profitable and privately owned regional airlines Perimeter from the Wehrle family, CALM Air from the Morberg family, Bearskin from the Friesen brothers and Keewatin from the May family.
There really are not many profitable, well run privately owned regional airlines left in Canada, one basically has only Coastal Pacific Airlines run by the Smith family, CMA run by McCrea family, Transwest Air run by the Campling family, West Wind Aviation by the Goll family and Pascan the Charron family left. Succession is always difficult, either another generation steps in or an outsider runs it, like Mr. Gillespie at West Wind Aviation, times are changing and sadly even some of the above will disappear one way or another in time. Consolidation of the aviation industry is under way, and big money is coming into the industry, be it EIC, Ledcor, Discovery Air, etc. and the industry is changing rapidly, a new generation of airline executives, MBA’s, CFA’s, etc. are taking over from the pilots, usually for the better.
Few in the industry have heard of EIC and what is has done and is doing, and more importantly it is providing its shareholders with wonderful dividend yields and stock growth, and they say there is no money in aviation ? but now more will take notice It has stuck to its cardinal rules for 10 years:
- Right value, never pay more than a company is worth, never more than 5 times EBITDA (it did in this deal)
- Niche markets, want limited competition, and markets that lack big fluctuations.
- Strong management, run subsidiaries autonomously, keep old management in place.
- Plan for growth, companies must have growth plans and a competitive advantage.
I like what the company has done and continues to do, my few years back in Canada after 20 years overseas, I find the majority of Canadian aviation companies “stuck” bogged down in the past, without a clear vision where to go and how to get there, points 2, 3 and 4 from above generally are absent, content to be ‘comfortable’ and no desire to keep moving forward, sad.
What EIC gains that is new is the unique maritime surveillance market, from designing, adapting and operating specialized aircraft for countries around the world, at a time when countries need better surveillance against terrorism, fisheries and patrol over their internal and territorial waters (12 nm) as well as exclusive economic zone (EEZ) out to 200 nm, countries need more aerial surveillance.
My own experience in this area, has shown me the huge potential, my years in third world countries that desperately need such platforms, from King Air 200’s to DHC-8’s and CL-415’s, get out and market this more than in the past and this division could be $185 m a year on its own in no time.
Provincial Aerospace’s core business is providing maritime patrol and aerial surveillance solutions across many capabilities. From operating Beech King Air 200’s on fisheries patrol the company has become a Tier 1 integrator, when in 2006 it provided 2 x DHC-8-106 maritime patrol aircraft in a $100 million/10 year operational contract to the Dutch “Kustwacht’ for operations out of Curacao covering the Dutch Antilles, with their extended range, observation windows, 360 degree maritime radar and 360 degree electro optical IR (infared) turret mods from Provincial Aerospace.
One of the two Netherlands Coast Guard DHC-8-106 (high gross weight version) MPA’s based in Curacao, modified and operated by PAL since 2006 on a $100 million, 10 year contract.
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In 2009 PAL was awarded a huge $370 million contract to modify and operate 2 x DHC-8-315Q’s of Abu Dhabi Aviation for the United Arab Emirates (UAE) into maritime patrol aircraft, instead of the UAE buying two CN235’s. It pulled this off against heavy competition and established itself as a serious player in this defense business segment, and will be a new source of revenue for EIC one with big potentials.
One of the two United Arab Emirates DHC-8-315Q MPA’s, modified and operated by PAL, this was a $370 million contract, which put PAL into the big league of aircraft modifications for special missions. Took two DHC-8-315Q’s from Abu Dhabi Aviation and designed, built, installed a state of the MPA that was superior to the CN235’s the UAE was going to buy.
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The Aerospace Division operates several aircraft in 702 and 703 operations (specialty flying and charters), like the Medavac and charter King Airs, maritime patrol aircraft and the Citation X business jet. The company has roughly 32 aircraft with 17 at the Aerospace Division comprising:
2 x DHC-8-315Q’s operating in the United Arab Emirates (UAE)
2 x DHC-8-106’s in Curacao for the Dutch Kustwacht (Coast Guard)
2 x CL-415 converted to MPA in Malaysia for Malaysian Maritime Enforcement Agency
2 x Metro III’s operate offshore surveillance in Trinidad and Tobago
5 x Beech King Air 200’s for MPA and Medavac roles
2 x King Air 350’s a Citation S550 for Medavac and a Citation X for VIP charters
Plus the company is an operator of several UAV’s (unmanned aerial vehicles) another huge, I mean huge business to come.
Provincial Airlines, operates a fleet of roughly 15 aircraft on 704 and 705 operations to 19 destinations in Newfoundland and Labrador, Nova Scotia, New Brunswick and Quebec. Latest fleet is presently operating:
3 x DHC-8-102’s
1 x DHC-8-300
1 x Metro III Freighter
5 x DHC-6-300’s
1 x Saab 340A
2 x Saab 340B’s
2 x Beech King Air 200’s.
The airline operates a DHC-6-300 operation Innu Mikun Airlines, which is a partnership with the Innu First Nations of Labrador, and provides vital services to the coastal communities of Labrador.
Lastly, PAL Aviation Services operates FBO’s at two locations, Halifax, Nova Scotia and St. John’s Newfoundland, with the usual ground handling, fuel sales and aircraft hangar and associated services, a business that surely can be grown in Eastern Canada.
This big EIC deal comes after a rather ‘rough’ 2013 for the company, a November 11, 2013 crash of a Bearskin Metro III that killed 5 at the time of a major restructuring at Bearskin as Kitchener/Waterloo, Ottawa were dropped from the network and services reduced throughout the system and problems with manufacturing company Wes Tower Communications (bought in 2011) that was growing beyond its abilities to keep up with AT&T orders for cell phone towers in the US market, and costs increased and margins decreased in 2013 where EBITDA was only 7.8% and adjusted net earnings were a very low $11.6 million (1.13% net earnings margin).
Yet the company hit revenues of $1.030 billion, the first time it hit the billion dollar mark, and still gave out dividends of $1.68 per share for a very nice 7.4% yield, so investors get a good dividend and the stock price goes up, what else can investors ask for ?
The hallmark of any good management team is to be able to claw out of a mess which every company has time to time and then be able to dust off the troubles and get on with things, and Mr. Mike Pyle and his team did just that, quickly they sold of Wes Tower Communications US division for $200 million, even made some money on it and hence the money to do this $246 million PAL deal, 2014 looks like a very good year for them, 3rd Quarter was very good and this PAL deal is expected to increase earnings per share significantly (+30%), with share expected to increase by +10+% over the next 6 months to over $25 a share.
Let’s quickly look at the deal, now in the past EIC has bought its aviation companies that produced good EBITDA margins and paid a multiple on that and or a multiple on the annual revenues.
In 2008, EIC bought Calm Air International for $59 million, roughly 3.78 x EBITDA or 0.7 x Revenue.
In 2011, EIC bought Bearskin Airlines for $32.5 million, roughly 3.91 x EBITDA or 0.65 x Revenue.
This Provincial Aerospace Ltd. (PAL) deal was $246 million at a EBITDA multiple of 5.3 (the highest multiple to date) which equates to $46.4 million in EBITDA at PAL, and 1.33 x Revenue (90% more than for Calm Air International), clearly showing a great desire to make the acquisition, probably not the airline or the FBO’s, but the potential for a new revenue stream with the Aerospace Division, as it has the potential to really grow that business with more investment as the world is its market.
The world is changing and the potential for many new contracts is huge, not just with the big countries like the UAE or Netherlands, but so many smaller nations, needing MPA and aerial surveillance capabilities, from my experience it’s the likes of the Philippines, Ghana, Equatorial Guinea, Angola, Nigeria, Mexico, Indonesia, Vietnam, Oman, etc.
Africa is spending a lot more these days as the economies improve there, especially those that have capitalized on the high commodity prices of the past few years. In the past few years we are seeing countries like Uganda and Chad buy SU-30 and Mig 29 fighter aircraft and modern T-72 tanks to Ethiopia, in fact Africa is arming itself with spending on arms up 65% the past 10 years over the previous 10 years.
Countries with long coastlines are investing in modernizing their navies, this includes Cameroon, Senegal, Tanzania, Nigeria, Mozambique and Angola which has even looked at buying a used aircraft carrier from Spain and to build its own naval ships, as its defense budget tops $6 billion annually the largest in Africa and Nigeria needs more MPA and vessels to protect its offshore oil installations, and I can talk about dozens of other opportunities out there.
The market for MPA aircraft is big, they range from the above Reims Caravan II (left) for fisheries patrol to the Bombardier Challenger 604 business jet (center) being used as a Maritime Patrol/Surveillance Aircraft now being designed by Boeing, that will be equal in capabilities to its own P-8A Poseidon (B737 MPA) and eventually incorporate the Bombardier 605 business jet and the Dornier 228-200 (right) still used for fisheries/maritime patrol by several nations like the Netherlands, India and Germany and now produced by RUAG in Switzerland, which is building 8 new one’s for the Venezuelan Government, some will be MPA capable. Othersmall aircraft types commonly still used, are the DHC-6 Twin Otter, GAF N22B Searchmaster (Asia only) and Beech King Air 200’s.
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We recently saw the huge $US 564 million contract in Australia by the Australian Maritime Safety Authority awarded to Cobham to operate 4 specially modified Bombardier Challenger 604’s for SAR missions from Perth, Cairns, Melbourne to replace 5 x Dornier 328’s, Canada is still deciding on its Fixed Wing SAR aircraft, C-27 Spartan or Airbus C-295, who will operate it and who will provide the specialized equipment ? There is lots of potential out there, from King Air 200’s to DHC-8-Q400’s, Challengers to Boeing 737’s. There is big money in such contracts, one only has to look at the money CHC Helicopters and Bristow make in providing large sophisticated SAR helicopters around the world, now its the fixed wing aircraft operators turn.
The Icelandic Cost Guard DHC-8-314Q (left) was modified by Field Aviation in Toronto. As were the 3 Japanese Coast Guard DHC-8-300’s (center) and the 3 Swedish Coast Guard DHC-8-300’s, all modified for maritime surveillance and reconnaissance. These plane have been extensively modified by Field Aviation to carry a modern Mission Management System and suite of surveillance sensors, air operable door and communications/navigation equipment.
In Australia, 6 DHC-8-200’s and 4 x DHC-8-300’s fly maritime patrols, while the USA has 4 DHC-8-200’s and 3 DHC-8-300’s flying maritime patrols.
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Now, I understand Field Aviation which did the DHC-8-300 MPA for Iceland, Sweden and Japan is out of the game, as the out of production DHC-8-300 is hard to find on the second hand market, very popular right now with the US Government as is the DHC-8-200, looks like Bombardier pulled out too early, and now the ATR-42-600 is alone in the 50 seat market and ATR is having the best sales year in its history !
The two finalist for Canada’s fixed wing Search and Rescue (FWSAR) tender, the Airbus CN-235 and the Lockheed Martin C-27J, each has its pluses and minuses, it will come down to politics and industrial offsets, who will design and integrate these aircraft to Canadian specs ?
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This is all exciting, and I wish EIC and PAL a bright future, this is what aviation is about, growing and having a plan for growth and business development, Canadian companies wake up and be the best you can be, go out and be bold don’t get stuck and be content you are in business, grow the business so many opportunities around, just need to see them.
Thank you for reading my blog, as always good comments welcome !