I have previously discussed the Canadian regional airline market, and that consolidation is coming as family run airlines are looking to sell their airlines, as witnessed by Exchange Income Corporation (EIC) of Winnipeg (TSX:EIF), which has bought 5 Canadian private family regional airlines in the past 12 years, and surely eyeing more:
- Perimeter Aviation in 2004 for $C 17.2 million
- Keewatin Air in 2005 for $C 15.0 million
- Calm Air in 2009 for $C 59.0 million
- Bearskin in 2011 for $C 32.5 million
- Provincial Aerospace in 2015 for $C 246.0 million
These photos show the 5 airlines in Exchange Income Corporation’s (EIC) porfolio, the total fleet numbers over 100 jet and turboprop aircraft, making EIC the owner of the 4th largest fleet of commercial aircraft in Canada, after Air Canada , WestJet Airlines and Chorus Aviation..
So in the past 12 years EIC has paid out $C 369.7 million to gain control of Canadian regional airlines, and showing that money can be made from running small airlines if done professionally backed by the ability to finance expansion.
READ BLOG of January 31, 2013 on EIC acquisitions and valuations
With just a handful of ‘medium’ regional airlines now in family hands, the consolidation will continue as the families/individuals that own these airlines are in some cases 2nd generation and as is the ‘norm’ the 3rd generation of a family business is not looking to be in the airline business.
Right now, we have the following 6 privately owned Canadian scheduled service regional airlines with revenues over $C 12 million per year that could be for sale today or soon, if given a good offer:
- Pacific Coastal Airlines, owned by the Smith family runs 25 aircraft, SF340’s, Be1900’s, etc. in British Columbia.
- Northwestern Air Lease, owned by the Harrold family runs 8 Bae J31/J32 Jetstreams in the Northwest Territories.
- Transwest Air, owned by Pat Campling Jr. runs 52 aircraft, SF340’s, Be1900’s, DHC-6’s, King Air’s, helicopters, etc. in Saskatchewan.
- West Wind Aviation, owned by Dennis Goll runs 29 aircraft, ATR-42’s, Bae J32’s, Be1900’s, C402’s etc. in Saskatchewan.
- Pascan Aviation, owned by Serge Charron runs 26 aircraft, ATR-42’s, Bae J32’s, PC-12, King Air’s, etc. out of Quebec.
- Porter Airlines, owned by Robert Deluce and many other investors runs 26 Q400’s out of Billy Bishop Airport in Toronto, Ontario.
In late November 2015, Saskatchewan’s largest airline West Wind Aviation acquired the 3rd largest airline in Saskatchewan, Osprey Wings Ltd of La Ronge, and West Wind is keeping a King Air 200, 2 x Beech 1900’s and 4 x DHC-6 Twin Otters, and not interested in the DHC-3 Turbine Otters, DHC-2 Beavers and Cessna 185’s all on floats.
Based on the aircraft West Wind Aviation has retained from Osprey Wings, I estimate revenue of around $C 13.0 million, and a rough acquisition price of $C 9.1 million, based on price to revenue ratio of 0.7 (Calm Air acquisition was 0.7 and Bearskin was 0.65), while EBITDA multiples were 3.9 for Calm Air, 3.9 for Bearskin, 4.7 for Voyageur and 5.3 for Provincial Aerospace.
The acquisition should be good news for Transwest Air which operates 5 x DHC-3 Turbine Otters, 5 x DHC-2 Beavers and 2 x DHC-6 Twin Otters on floats in the northern Saskatchewan market. In fact, Transwest Air is believed to have been on West Wind Aviation’s acquisition radar for some time now, but till now it has not been successful with Mr. Campling in moving that forward. But I am sure that West Wind Aviation’s President Gord Gillespie will try and try again.
Current Transwest Air President and owner, Pat Campling Jr. is stepping back from the day to day operation of Transwest Air, and a sale of Transwest Air in the future is a real possibility, either to West Wind Aviation and possibly EIC as well.
My thinking is that West Wind Aviation will want to consolidate the Saskatchewan market, very much like EIC consolidated the Manitoba market with its acquisitions of Perimeter, Bearskin and Calm Air, as having pretty much a monopolistic control of a market is key to good profitability.
Transwest Air itself is the product of a 2000 merger between Pat Campling Jr’s La Ronge Aviation and James Glass’s owned Athabasca Airways, a merger of 2 long standing rivals, and I should also point out that in March, 2015 Chorus Aviation did acquire Voyageur Airways of North Bay for $C 80 million (4.7 x EBITDA), to create a “low cost” carrier for its older DHC-8-100/300’s, while Chorus will focus on CRJ-705’s and Q400’s in the future.
READ BLOG of March 13, 2015 on Chorus Aviation’s acquisition of Voyageur Airways
EIC has strict investment criteria:
- RIGHT VALUE. Never pay more than a company is worth-NEVER. Past performance is a good indicator of Revenue, Cash Flow and EBITDA that one can expect from acquisition. I will touch on this a further down.
- NICHE MARKETS. Want limited competition, strong barriers to entry and a market that does not fluctuate with every change in global markets, so that Cash Flows are strong to support commitments to stakeholders.
- STRONG MANAGEMENT. Run subsidiaries autonomously and make sure key executives have long term contracts to stay. Yet, EIC has put its own people in charge of Calm Air and surely had issues with Bearskin’s management during its tough restructuring and after its fatal Metro III crash in November, 2013 at Red Deer, Ontario.
- PLAN for GROWTH.Target companies must also have a plan to grow and retain its competitive advantage, and here in the case of EIC they are able to bring new capital for CAPEX and synergies to help each company with its individual problems
The above investment criteria has allowed EIC to acquire 7 aviation firms (5 airlines) in the past 12 years, and has shown that owning regional airlines that have niche markets and good management, can make money.
Financials for EIC show that the aviation business is good, it shows a EBITDA (earnings before interest, tax, depreciation and amortization) of $C 127.9 million (29.0% margin) for the first 9 months of 2015 on revenues of $C 582.8 million.
The “legacy airlines” side had a EBITDA of $C 55.1 million (43% of total EBITDA), a +50% increase over comparative period. The other sides of the business is Regional One which is a regional aircraft spare parts provider and lessor, which recently acquired 12 x CRJ-700’s from Lufthansa’s CityLine for onward leasing.
Though Regional One sure screwed up with Estonian Air, which had to shut down in November, 2015 due to illegal state aid from the Government, only 4 weeks after leasing 2 x CRJ700’s from Regional One (s/n 10083 ES-ACE and s/n 10085 ES-ACG), but the new Nordic Aviation in Estonia will lease them know (READ BLOG on Estonian Air). There is also the Provincial Aerospace (PAL) business which was acquired in 2015 and mainly comprises airline operations and providing specialized Maritime Patrol Aircraft (MPA) aircraft, which is and is going to be a big business as many countries are finding their ‘waters’ to have oil or valuable fishing grounds.
READ BLOG of December 12, 2014 on PAL
Now another smaller deal was done in November, 2015 in Vancouver, British Columbia, where local power house floatplane operator Harbour Air bought smaller Salt Spring Air that basically served the Salt Spring Island. I should point out that Harbour Air is advertised as the “World’s Largest Seaplane Airline”, and it really is.
Harbour Air, is owned by CEO Greg McDougal and partner Greg Davies and it operates 55+ aircraft from DHC-3T Turbine Beavers, DHC-3T Turbine Otters, DHC-6 Twin Otters all on floats and a PC-12 and a single EC120B helicopter.
The company, is not well known outside of British Columbia, but it is huge, with 60,000 annual flights, 420,000 annual passengers and 400 employees and I estimate its revenue to be just under $C 100 million per year, and surely very profitable as it has consolidated its niche market position.
The small Salt Spring Air deal was a small deal, as the operator had only 4 DHC-2 Beavers on floats, so at best $C 2.2 million in annual revenue, and the deal should have been in the $C 1.5+/- million, depending on debt and financial performance.
This is not the first acquisition the company has made, as Harbour Air has been slowly building up its market dominance of the Vancouver/Victoria area market with scheduled services to 8 destinations usually less than 35 minutes in duration, using Vancouver’s downtown seaport, Vancouver International Airport’s south terminal (seaplane base) and Victoria Harbour seaport.
In 2010, Harbour Air bought DHC-6 floatplane operator West Coast Air from Rick Baxter, who himself had bought West Coast Air in the late 1990’s and grew it quickly with DHC-6 Twin Otters, and in 2006 bought Pacific Wings Airlines of Sechelt and in 2007 bought Baxter Aviation (8 x DHC-2’s) from his father Tom Baxter.
The competition was very tough around Vancouver, lots of small operators, and one had to buy out competition to grow. Eventually in 2010 Harbour Air bought West Coast Air which remains a subsidiary today operating 2 x DHC-6’s and a EC120B helicopter.
Harbour Air has also gone into the charter business with a subsidiary named Tantalus Air that operates a single PC-12.
In 2012, Harbour Air bought Whistler, BC based Whistler Air which continues as a subsidiary today. While Harbour Air grew in Vancouver, it sold of its Prince Rupert, BC based North Pacific Seaplanes in 2013 to Inland Air, which has solidified it’s position in Prince Rupert having before hand bought Haida Gwaii based South Moresby Air Charters (1 x DHC-2 Beaver and 2 x C185’s) from Marvin Boyd.
I have to add here that several years ago when I was still living in Europe, I was going to buy South Moresby Air Charters from Marvin, as I really liked the business and Haida Gwaii (ex-Queen Charlotte Islands), and I thought it a great place to ‘get away’ and just fly in a beautiful tranquil place where only few venture. My plans were railroaded when certain business transactions did not materialize and I needed to stay in Europe a little longer, but what a life for someone who has been around the world helping aviation businesses in fast pace world, any way back to the article, sorry.
As you can read, the mergers and acquisition market has been key to growing in British Columbia market, its eat or be eaten there as the local market has struggled with a decline in lumber and fishing industries, and many operators have closed doors, seems the only way to survive is to dominate/monopolize a market in a particular region, this has been Harbour Air’s strategy for years.
Now, Harbour Air has tried going overseas, to spread its seaplane business model but the only place it managed to get a foothold was in Malta, flying from Malta to the local island of Gozo for a few years having replaced Bulgarian Mi-8 helicopters, but that did not work out well.
I should point out that I have been involved with seaplanes for years, as Marketing Manager for the Dornier Seastar 14 seat amphibian to working on the re-start of production of the Frakes/Grumman G-73T Turbine Otter, as well as working with a half a dozen seaplane airlines in the Maldives, USVI, Thailand, etc.
I am strong believer there is a market out there for more seaplane airlines, especially in SE Asia, one only needs to look at the tiny Maldives (3rd largest commercial seaplane operating nation in the world) with its 30+ DHC-6 Twin Otters to see that potential is huge if taken to Indonesia, Philippines, Vietnam, China, Malaysia, etc. I think highly of the Russian Beriev Be-200 a jet powered amphibian that can seat up to 65 passengers as the global tourist market has changed, people want to go to remote destinations and what better way then to arrive at your resort in a seaplane and to be able to go land to water or water to land, there is potential for larger amphibians, like a 28 passenger version of the CL-415. This topic is good for a whole blog on why seaplanes have a chance to make a come back today.
The problem is selling the concept of seaplanes today, 50+ years after they disappeared as more and more runways were built around the world. But a market remains but lacks the right aircraft. As well today the seaplane market in Canada is dying out, it is greatly reduced in British Columbia from what it was 7 years ago due to the decrease in lumber and fishing, and then there are just a few pockets of floatplane concentration left in Canada, Lake Winnipeg region, Northwest Ontario and parts of Quebec.
Sadly the days of career ‘bush’ pilots is all but gone, replaced by helicopters in most cases, as they are faster, can land anywhere, are modern and operating costs are now reasonable on many of the single turbine helicopters, and one can only see that in the number of commercial single engine turbine helicopters versus float planes today.
The problem is the limitation of aircraft, as there are no commercial amphibians being built, only fixed wing land aircraft that have high drag, high weight floats attached like the DHC-6 or DHC-3T Turbine Otter. The market needs new dedicated aircraft with more capacity then what a 18 passenger Viking Air Series 400 Twin Otter offers for $US 9.3+ on floats, run the numbers and profitability is hard to justify in most commercial cases.
I do note that Harbour Air, has very high yields on its scheduled routes, in fact a Downtown Vancouver to Vancouver Harbour flight of 100 Km (54nm) or 0:30 costs $C 205.37 today, of that $C 185.23 is net fare for a net yield of $C 1.852 per RPK ($US 2.146/RPM), that is formula for good profits (profit = yield $/RPM – CASM).
This is a super yield, and hats off to Harbour Air, they are getting a great yield, taking business from Helijet International a Sikorksy S-76 IFR operator offering scheduled services between Vancouver and Victoria offering fares between $C 159.00 (off peak) to $299.00 (peak fare), a new service to Nanaimo Harbour was started on March, 2015.
Helijet was once a high flier with its S76 scheduled service, but times have been tough, its stock (TSX-V-HJI) is at $C 0.18 for a market capitalization of only $C 2.85 million (16 million outstanding shares) with annual revenues around $C 31 million with a fleet of 10 x S76C++/A, 3 x Bell 206L-3, 2 x Learjets (EMS) and 1 x AS350B. Most of it’s revenue is from the BC government for EMS contracts now. I have always believed that they missed the boat on getting into the offshore oil support work, they have the IFR capabilities and experience and other possible areas where a helicopter services could be viable.
Now back to Harbour Air, as this company is looking beyond Canada, which is good to see as few local companies venture from Canada as few aviation executives have any international experience or knowledge and are missing out on big business opportunities overseas (e.g. Regional 1, Voyageur Airways, etc.).
In June, 2015 Harbour Air Seaplanes entered into a strategic partnership with Zongshen Industrial Group of China to export its commuter seaplane business model to China, and sold 49% of the company to Zongshen Tianchen General Aviation Company, and making the two owners of Harbour Air Seaplanes very rich, with much more potential for the future.
The owner of the Chinese company is Zuo Zongshen wo rose from being a motorcycle mechanic to running a large conglomerate from building motorcycles to mining, machinery and real estate. The plan is for the new venture to open 8 routes in China, taking advantage of many of the cities being on water and lacking proper airport facilities.
The aircraft will be new as China limits import of aircraft over 10 years old, so it’s the Viking Twin Otter and the AVIC Y-12E, both high wing 18 passenger turboprops. Harbour Air has the know how and pilots to make this happen, and the potential in China is huge as the people’s Liberation Air Force is now allowing access to airspace below 10,000 feet for General Aviation, and many Chinese cities lack connection to nearby cities.
Seems interesting, but I have witnessed the Chinese “black hole” for General Aviation, they have bought up a lot of GA aircraft programs and several foreign GA OEM’s have gone there, but then you never here about them, as business is so difficult and very corrupt in China, its why the Chinese President has begun a drive to stamp out corruption. The same applies for many GA air service programs, though several Cessna Grand Caravans on floats are now active in China, and others are looking to follow that success.
In June, 2015, a Chinese company Reignwood Group ordered 50 Viking Air Series 400 Twin Otters for land and seaplane operations in China, not sure if it is related to the Harbour Air deal, but its shows the interest in China for seaplanes.
Canadian firms have been very active in promoting seaplane operations around the world for many years, Kenn Borek Air’s DHC-6 aircraft and pilots with Trans Maldivian Airways-TMA (Maldives) is well known (in 2013, TMA and Maldivian Air Taxi were bought by the large US private equity fund The Blackstone Group (NYSE:BX), for what they call “The World’s Largest Seaplane Airline” with 44 seaplanes, but Harbour Air is bigger by the number of aircraft and Trans Maldivian Airways is the bigger by seats offered and passengers carried.
The Blackstone Group investment has gone pretty much un-noticed by the aviation community, but it is a huge boost to the credibility of seaplane airlines as a real investment that pays of very well, when managed, operated and financed professionally, The Group manages $35.5 billion in assets and in 2014 had a return on investment of 20.8%.
Kenn Borek Air also lease DHC-6 Twin Otters to Seabird Airlines (Turkey), Harbour Air had a DHC-3T Turbine Otter in Malta, while Canadians are behind the start up of Turtle Airways (Fiji) 30+ years ago as well as Pacific Seaplanes (Fiji) 10+ years ago. Presently, Giles Cardinal a Canadian is helping Indonesia’s start up BlueWater Seaplane (Denpasar) with Cessna Grand Caravan 208EX’s. Today, there are seaplane airlines in countries that only 5 years did not have any commercial seaplane history, like Croatia (European Coastal Airlines with DHC-6’s), Vietnam (Hai Au Aviation with C208B’s), China (Waterfront Air with DHC-6 amphibians), India (Mehair with C208B’s, C206’s) and many new planned start-ups all over the world.
The seaplane business is coming back, just need real seaplanes, not land planes fitted with bulky and heavy floats, then the industry will grow very fast. Till then the market is limited to the 18 passenger DHC-6 Twin Otter as the biggest seaplane available, while the Chinese Y-12E will soon follow it, then their is the Cessna Grand Caravan and the Quest Kodiak, both 10 seat turboprops and that is it for turbine powered seaplanes with 10+ seats. The Czech built Evektor EV-55 that I have worked on for years (twin PT6 10-14 seat utility aircraft), will have a seaplane version, once it is certified.
READ BLOG on Evektor EV-55 program
The Chinese have their AVIC Y-12E regional aircraft similar to Viking Air’s Twin Otter, but a whole lot cheaper, and recently AVIC ordered 100 floats from EDO so big plans by AVIC for their Y-12E on floats as well, but is China ready for all these floatplanes, remember they have had NO exposure to small aircraft, aviation was not open to the public like it is here, very few have flown in small aircraft, but I may be wrong, always hard to predict the Chinese.
READ BLOG of March 30, 2014 on The Global General Aviation Market the Chinese are quietly taking over, step by step
Below is a photo of Y-12E (left) and Viking Series 400 Twin Otter (right), pretty similar aircraft and capabilities, both powered by P&W PT6A engines (135’s for Y-12E and 34’s on Series 400), but the price difference is significantly less for the Y-12E.
READ BLOG of November 27, 2014 on AVIC Y-12E
Lastly, harbor Air is building a floating terminal for Victoria and it will be towed into place come March, 2016, another development that will solidify Harbour Air in the local market, the only big question is what can replace the 21 very old DHC-3T Turbine Otters one day ?
Lastly, the valuation of privately owned airlines can take 3 forms:
- Income Approach, where the present value of future cash flows is used to determine the value (using free cash flow, capitalized cash flow and residual income/excess earnings).
- Market approach, where one uses pricing multiples from sales of similar companies (e.g. like price to sales I talked about above).
- Asset based approach, where the value is based on the assets minus liabilities.
For small airlines I use a simple Excess Earnings method for small/medium airlines for the fact that it allows me to see the actual return on investment in the airline itself above and beyond the return on investment in the assets of the business (current assets and long term assets), as a true investment will give you a return on assets and then a return from the operation of the business.
By recasting your pretax net profit (from recast Income Statement) and subtracting your expected return on current and on long term assets from that recast pretax net profit, you get excess earnings and that you multiply by the number of years in which you expect to recapture your investment (capitalization) the multiplier is a cap rate.
So let’s say your excess earnings are $400,000 and you capitalize that over 5 years (20% return) so $2,000,000 is what you value the excess earnings at. If your book value (from recast balance sheet) was say $800,000 (net current assets + net long term assets), you would value the airline at around $2,800,000 ($2.0m for excess earnings and $0.8m for book value of assets).
So many ways to value an airline, in the end “beauty is in the eyes of the beholder”, and a buyer will pay what he/she thinks its worth but you want to make sure the business is going to generate excess earnings above the return on the assets in the business. The EBITDA multiples and price to sales ratio are just good quick ratios of roughly where the business value is.
Some analyst use all 3 methods and then get a range of valuations, in the end it is the seller to make the best case for a higher price, and if you are looking to sell sometime soon, it is worth the extra investment to clean up areas of deficiencies and restructure before the buyers start knocking. Every company can use a little change, just like when you try and sell your car, you clean it in and out and fix the minor things and maybe deal with some esthetic deficiencies, before a buyer comes and looks, well the same applies when you sell your family business.
Anyway, I look forward to reporting on more development news at Harbour Air, EIC and West Wind Aviation, as consolidation is a must in the regional airline market.
Thanks again for reading my blog, till next time, cheers. Keep those comments coming.