A Transformative Acquisition

May 4, 2016
What does the BBA-Landmark merger mean for the industry?

With the integration of former Landmark Aviation locations in full swing, what does BBA Aviation’s acquisition of that FBO network represent to the industry? For those personally affected by the transaction, such as employees, customers or vendors, the changes may feel very personal indeed. The back-office employee made redundant likely holds a different view of their now-former employer than the customer who may benefit from an expanded customer loyalty program, or from the supplier whose business doubled overnight, simply by being on the fortunate side of the transaction. For airports, the acquisition by BBA Aviation of the 68 Landmark locations — and their associated leaseholds — may be the start of a new relationship with a heretofore unknown entity. Collectively though, while BBA Aviation PLC’s Simon Pryce quite accurately referred to the transaction as “transformational” for his group, it actually isn’t for the FBO industry at large. The Signature signage being hoisted atop FBO terminals and hangars today is simply the outward manifestation of changes to the industry set in motion by airports as much as 70 years ago. These changes were predicted; no Monday morning quarterbacking required.

Briefly, in 1946, the return of airports from military hands after World War II was coincident with both a baby boom, and a surge in general aviation aircraft manufacturing — numbers that respectively had never been seen before — nor have since. Airports were “sold” by the government to cities and municipalities for the princely sum of $1 and civilian airport administrators in turn executed ground leases with upstart aviation businesses. Little did they know at the time that those lease terms; often 30 to 35 years, would coincide with a second generational wave of FBO ownership and interest in general aviation. In the years between 1976 and 1981, those boomers — now adults — were at thecontrols for the second largest growth year of general aviation in 1978. New leases were executed, again 30 to 35 years and with that set of leases, airports themselves unwittingly laid the ground work for a future wave of mergers and acquisitions activity, the largest in FBO history. The cumulative effects of two lease terms after World War II meant that a disproportionate number of ground leases expired in the years 2006 to 2016 — precisely the same years the boomers were retiring.

Returning to the Landmark transaction, owner Carlyle Group wasn’t exactly secret about its plans to build and flip the FBO chain. After all it had done it before in 2007, with the same chain. This time around however, most insiders could read the tea leaves. Bought back by Carlyle in 2012, Landmark’s expansion was rapid, particularly so toward the end, so to speak. In a six-month period in 2014 alone, Landmark added RSS Jet Centres, Ross Aviation and others, swelling by some 20 locations. With various acquisitions of its own, the aircraft management arm of Landmark also grew, quickly becoming second only to Executive Jet Management in total aircraft managed. Then, months prior to formerly announcing the FBO chain for sale, Carlyle Group filed an S-1 with Securities and Exchange Commission on Landmark Aviation, signaling to some its intentions to exit — a mere three years after buying the chain back.

Landmark was built for sale, and built to complement other chains’ networks. It was not built to last. To be sure a few of the FBOs acquired by Landmark in 2014 were only fleetingly rebranded — some having received cursory vinyl banners for signage by the time the BBA acquisition of Landmark was announced.

So what did BBA Aviation buy exactly? Curiously, a recent M&A announcement within the airline sector is analogous, for it provides context for the BBA acquisition of Landmark and the subsequent rebranding of those locations to Signature Flight Support. In April, Alaska Airlines announced its intent to acquire relative upstart Virgin America in a transaction valued at $2.6 billion. As a backgrounder on Virgin America, the airline operates 60 aircraft and earned some $201.5 million last year — meaning Alaska paid a nearly 13 multiple on earnings to purchase Virgin America. But as airline analyst Dan Reed notes, the devil is in the details. Virgin America only owns seven of those 60 airplanes — it leases the others. And those airplanes are Airbus A320s — in no way common with Alaska’s Boeing 737 fleet. Incredibly, Virgin America doesn’t even own its brand — in a brilliant strategy by the British billionaire, it leases the brand from Sir Richard Branson. Reed concludes that to Alaska Airlines, Virgin America is worth more dead than alive — and its route structure — not its assets — make for a viable transaction. The coming costs to Alaska to either integrate fleets and/or retrain crewmembers on a new type are difficult to say, but they are not included in the $2.6 billion transaction price. Nor does the price contemplate the cost of re-branding, which most decidedly will be Alaska Airlines.

For BBA Aviation, the Alaska Airlines-Virgin America transaction is oddly representative, with the notable exception that Alaska is purchasing Virgin with cash on hand and a portion of BBA’s transaction involves a debt instrument. BBA Aviation paid $2.065 billion, an approximate 14 multiple of earnings for Landmark Aviation. And with very, very rare exceptions, most FBOs sit on leased land, so like Virgin America, assets are thin in that transaction price. Even Landmark’s managed aircraft are lease-backs, not owned. For BBA, it was Landmark’s network — not its assets — that made for a viable transaction.

During a BBA Aviation PLC earnings conference call with investors this March, BBA Aviation PLC group Chief Executive Simon Pryce made this point clear, noting post acquisition “…we have FBOs on airports from which nearly 50 percent of all business and general aviation flights in America start or finish. And actually those airports pump over 70 percent...of all B&GA gallons pumped in North America…and of our 195 locations we own 149 of them. And of the 149 that we own 57 of them are sole-source locations.”

It is the latter of these points that may incense some customers — 57 sole source locations. Yet, those customers may not fully appreciate why they are sole source in the first place, or the aforementioned historical reasons they changed hands. Many were always sole source, they just weren’t owned by a chain. Some were family-run FBOs for two generations; say 1946 to 2016, only to find the upcoming leasehold renewal required a development investment beyond their financial means. To give context of the cost of leasehold investment requirements for FBOs, while not a sole source location, the former Landmark facility at Boeing Field (KBFI) is sitting on a relatively new lease; one that yes, was executed in the aforementioned 10-year span and yes, was sold by the second generation of owners. The minimum required reinvestment called for in that lease is $6.9 million, of which BBA will bear the entirety of the cost, post transaction. Imagine buying a leased car, continuing to pay the monthly lease to the manufacturer, and then installing a new engine, transmission, and interior, plus painting it, prior to lease turn in. That, in a nutshell, is FBO “ownership.”

While surely transformative for BBA Aviation, the acquisition of Landmark Aviation doesn’t signal a broader transformation within the FBO industry at large. Nor for that matter, should one assume BBA Aviation was the only suitor of Landmark, for there were other parties pursuing the acquisition. Moreover, the M&A activity in FBOs of the past 10 years was largely preordained by airports themselves.

Airports began the lease cycle in 1946. The subsequent creation of minimum standards and leasehold investment formulas; both of which are reasonable doctrines, indirectly create barriers to new FBO entrants and create financial hurdles for incumbent FBO leaseholders at renewal time, respectively. For the FBO industry to truly transform, a disrupting force is required at the airport level. Otherwise, FBOs are merely actors following the airport’s script.

Doug Wilson is the president and founder of FBO Partners LLC, an aviation consulting firm that provides asset management of hangar facilities for FBOs, and offers specialized consulting in due diligence, contract life-cycle management and other FBO disciplines. Wilson can be reached at douglas.wilson@fbopartners.com.