68 Locations, and Not Done Yet

PLANO, TX — For some ten years Louis T. Pepper served as president of the Million Air franchise chain of fixed base operations from the Addison Airport located just south of this north Dallas suburb. In 1997, Pepper began putting together a team of investors to explore establishing a new chain of FBOs, ones all owned by the same parent company. In the decade since, he has engineered the buyout of the Atlantic Aviation chain and a subsequent plethora of takeovers that has led to the company now operating at some 68 locations. The Lou Pepper story is today a microcosm of the private equity buyout frenzy that has overtaken the FBO sector this century. Today his home office sits just a few miles from Addison, but what he is charged with overseeing is light years removed.

While Atlantic Aviation, originally owned by the DuPont family, has a long history in general aviation, this isn’t your granddaddy’s FBO chain. It has become a predominant player among North American FBOs, alongside Signature Flight Support. In fact, the Atlantic Aviation of 2008 may be much more than Pepper himself envisioned when he embarked on this pursuit in 1997.

Recalls Pepper, “I always felt as though the industry is fragmented. It’s a beaten up, over-used term, but we did feel that way. We felt there was a big inconsistency in service. In the locations where we had consistency, our customers felt very comfortable to go from one FBO to another with common service goals, common training.

“I felt that you could add more consistency if you actually owned the FBOs. Common ownership would add consistency in service and amenities, and safety. That was the genesis behind trying to work this deal forward.”

Back then, he relates, the top priority was finding investors. That led to him teaming up with CD Ventures, which he credits with getting the new venture on its feet, particularly the subsequent acquisition of the five-base Atlantic chain.

“We started targeting certain strategic acquisitions; they were strategic to us if we could afford them. Now it’s obviously changed; nowadays, we really do look for strategic enhancements because we are well-funded; our ownership group has a great appetite. But back then, we were just looking for whatever we could afford that we felt would somewhat fit into our chain.”

Despite the inauspicious beginning, the goal was never to build something small, or regional. “If you have three, four, or five and they’re all regional, you’re taking a baby step and you’re not really relevant. We felt that there was a certain geographic footprint that we needed, so we could then truly offer consistency in a moderate to large area of eventual destinations for our customers.”

Enter Macquarie
Pepper knows as well as any that today’s FBO industry is far removed from the 1990s. He acknowledges that it was the fractional ownership programs that served as the catalyst, both in growth and in bringing to the sector new money.

“We spent a lot of our time raising capital; it was very difficult. Today, more people know about FBOs; more banks and investors are comfortable with the resiliency of the business and the fact that it’s here to stay. Back then, in 1997 to 1999, it was a little bit different. So, it was a bit harder getting the message through, that these were good businesses [even though] you’re paying money for something on leased land — to convince investors that general aviation was not just a hobby.”

The Atlantic Aviation FBO mini-chain was acquired in 2000. Though Pepper’s company was officially Executive Air Support, it retained the Atlantic brand. The firm acquired five more FBOs before entering a deal with Macquarie Infrastructure Company [NYSE: MIC], part of an Australian-based megacorporation that has airport and aviation service interests worldwide, in 1994. Macquarie had previously acquired Avports, which manages airports under contract, and its affiliate AvCenter FBOs.

Having Macquarie as the new owner changed everything, says Pepper, who today serves as CEO. “When Macquarie acquired us, it was magical. They have all these divisions and these departments — they have an M&A [mergers and acquisitions] group; they have a group that raises capital. All those things are taken care of. Now my role is to identify good properties; to oversee the due diligence process, to make sure they’re an enhancement. Then of course, to make sure my team feels we can effectively manage these properties and integrate them. Integration is a huge part of my team’s role.

“All that other stuff is handled by the Macquarie internal team. There is no way that you could ever grow as rapidly as we have without Macquarie.”

Since the deal with Macquarie, Pepper has overseen the acquisition of various individual FBOs as well as two major deals — the buyout of the Tragen Flight Support 23-FBO chain in 2006 and the purchase of Mercury Air Centers’ 24 operations in 2007.

The acquisitions have happened so quickly, he jokes, that even he has trouble giving the exact number of FBOs he oversees. “We call it around 68 locations; we have three locations where there are two at one airport.” He explains that the company is primarily focused, at least momentarily, on absorbing what they’ve acquired — a reason that Atlantic wasn’t a serious player in the recent selloff of the Landmark Aviation FBO chain.

But that doesn’t mean more acquisitions aren’t in the offing. He expects this train ride to continue, and says the company will continue to focus on buyouts in North America.

Still A Seller’s Market
Much has changed since Pepper began his quest. The FBO sector has seen a deluge of private equity money enter the marketplace, and investors remain bullish on FBOs despite volatile fuel prices. Pepper says this is evidence of the resiliency of the industry, although an obvious caveat remains the nervousness in the global financial markets of late.

Comments Pepper, “The biggest difference in buying them today is, back then, even though it was harder to raise money and harder to tell your story, you weren’t hardly competing with anybody. There were very few private equity groups out there trying to buy these up. If you had a good platform and plan and money, you could pretty much continue to acquire.

“And you could buy them for a much lower multiple. The demand wasn’t there.

“Fast forward ten years — it’s my opinion that the industry has demonstrated such tremendous resiliency, starting with 9/11 and coming back from that. Let’s give a nod to our good friends, the fractionals. They’ve been a tremendous driver of growth for our industry. And, obviously, Mr. [Warren] Buffet’s deciding to get into the business gave enormous credibility to our industry.

“Considering all that, it’s a lot harder to buy them these days because you have so many more groups that have money, that like the space, that want to get into the business. The competition is much greater, which of course has pushed up the multiples quite a bit.”

When asked if the multiples have gotten unreasonable, he says ‘no,’ and cites the Signature buyout of the AMR Combs chain as an example of how industry did a collective sigh at the purchase price, but that in retrospect Signature has made it work.

“The industry’s always thought the prices were too high,” he says. “We don’t think the prices are too high.

“We are still active and we think there’s still great value in assembling mass.

“It’s still kind of a seller’s market. If there’s a property out there that can enhance our chain, we’re interested. We’re very aggressive, and we move very fast.”

Indeed.

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