The pros and cons of consolidation in business aviation.

1. Swimming with Sharks and Playing with the Gorillas

2. The Business of Consolidation
The issue of consolidation has never been far from the surface in any
analysis of the business aviation industry for the last 15-20 years with it
often being clearly identified as the next big thing!
The introduction of ‘open skies’ and the increasingly global view of
business means that the potential benefits of industry consolidation have
long been recognised but until recently very little traction (if any) had been
achieved in the actual implementation of consolidation theories.
So why has progress been so slow?
In terms of business aviation one of the biggest factors may well be the
people involved in the industry. A large proportion of business aviation
companies are led by people with big personalities, who have built
successful businesses around their own style and characters. In these sort
of businesses there is always a perceived difficulty in ‘letting go’ and this
may well be a big factor in the slow pace of consolidation.
In more recent times blame can probably be attributed on the global
recession which led many to batten down the hatches to be able to
weather the storm.
Back to the present and over the last 2-years as the world starts to recover
from recession and it seems real consolidation has actually started to
happen.
In the European context we saw the acquisition of International JetClub by
Hangar8 which in turn has since been acquired by Gama.
In the last eighteen months Luxaviation has arrived on the scene acquiring
in the process – Abelag, Fairjet, Masterjet, LEA, Unijet and most recently
Execujet.
That means that we now have at least five operators around the world
with fleets of more than 120 aircraft.
So who is next?
Today if you are the leader of a successful small to medium sized operator
you might be forgiven for feeling that you are very much the diver in the age
surrounded by the circling and hungry Sharks.
Equally depending on shareholder perspective a business lunch with the
Sharks might be something to be encouraged. I guess that lunch carries with
it a health warning relating to the potential dangers of swimming with
sharks!
The Gorillas and the issue of whether size really does matter can be found
on the following pages!
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3. “The consolidation question is
topical because there are too many
operators chasing too few
customers.
While there are a few ‘800lb gorillas’
in our industry, there are many more
mid-size and small operators who
could conceivably benefit by
combining their strengths.”
Patrick Margetson-Rushmore
Founder, London Executive Aviation
The Gorillas are on the
Pitch….
The quote from Patrick was prior to the acquisition of London
Executive Aviation by Luxaviation which took place in 2014 as
part of a rapid series of consolidating acquistions across Europe
made by Luxaviation.
Clearly he considers consolidation as a process that may be
beneficial by allowing small operators to combine their
resources.
Given the current state of play in the market you may now
argue that in fact little has actually changed despite the spate
of recent acquisition headlines. Maybe we should now consider
the Gorillas to be of the 1000lb variety with the vast majority
of the mid and small size operators still operating in isolation.
Is their room for another Gorilla to enter the market or will we
inevitably now operate in a world where you are either a
Gorilla or a small operator with little middle ground?
What is the Gorillas game plan? Is there ambition confined to
building wealth through manipulating the mechanics of the
global finance markets or is there an agenda to actually turn
seemingly disperate operators into grown-up, connected and
globally dominating market forces?

4. Changing Landscape
By any measure and whatever your personal opinion there are
few things that could be judged as more spectacular than the
transformation that has seen the Dubai skyline grow out of
what was previously sandy dessert.
The sight of the Burj Khalifa pointing through the clouds is a
stunning visual representation of the oil driven economic
transformation from a relative small regional trading port in the
1960’s to one of the worlds few truly global hubs for both
people and business.
So is consolidation the catalyst for a similar level of
transformation in the world of business aviation? A sector
typically described cyclical in economic performance with a
volatile client base and a fragmented operator landscape.
What has really changed in business aviation?
Do we still have too few customers?
Are there still too many operators?
Will consolidation really make a tangible difference in financial
performance across the sector?
Consider this; according to Corporate Jet Investor data:
Fleets with 100+ aircraft still account for less than 10% of the
market while 75% of US & 80% of EU operators manage less
than 5 aircraft.
Is that sustainable or is consolidation the only answer?

5. Consolidation, why?
Moderates the excesses of price
competition
Reduces overhead costs
Economy of scale, purchasing
power
Marketing reach
Mixed fleets
Complimentary geographies

6. The Benefits…
If by a process of consolidation you reduce the number of players in the
market then economic theory would suggest that the issue of price
competition should be reduced with the peaks and troughs being
smoothed. This should be good for everybody left in the game whether big
or small. Reduced price competition meaning operators are better able to
predict income more effectively, better control margin and increase profit.
But take a step back a moment, controlling price volatility is in the interest
of the operators and not necessarily the way to attract new customers who
may find price competition to be an attractive proposition, they get more
for their money. One of the key factors supporting the need for
consolidation was the issue of too many operators chasing too few
customers – Does this really help?
Any successful business needs to have a greater sales income than its cost
of sales; so reducing overhead costs, with potential to combine two or
more into one has to make sense and represent a significant opportunity.
The ongoing implementation of EASA regulation may well offer
consolidated groups to reduce their regulatory costs significantly by
potential combining AOC’s and certainly sharing the post-holder
responsibilities centrally as opposed to maintaining existing multiple
AOC’s.
Savings on infrastructure costs also represent an opportunity to reduce
costs with the potential to consolidate individual facilities into a
consolidated head office environment.
Again common sense economics makes economy of scale an attractive
benefit to the Gorillas. If you buy any product then the unit cost of the
product decreases as the quantity of the product increases!
Think for a moment about the potential benefit that may therefore be
derived when the Gorilla considers its chunky cost items such as fuel,
insurance and crew training. A sensible procurement policy with supply
focussing on volume purchasing offers good saving potential which should
also be relatively simple to achieve.
Business aviation tends to conform to one of two approaches; less is more,
following a low profile approach focussing on clients directly or the full-on
glossy approach. Both approaches have their benefits if done correctly but
the key requirement is to ensure that whatever the budget that it must
delivered measured results. In general terms the bigger the Gorilla the
bigger the reach that your spend will be able to deliver. In the business
aviation or private jet environment then widespread brand awareness has
always been difficult, the growing Gorilla has a real opportunity to build
solid brand value.
Smaller aircraft operators may traditionally have focussed on either a
specific category (short, medium or long-range) or even specific type of
aircraft (Cessna, Gulfstream etc.); this allows the operator to manage costs
and focus on providing a specific type of service.
The real value of developing a brand is to build loyalty amongst your
customers and if you can meet the evolving needs of a client then you gain
real value. So the Gorilla with a combination of short, medium and long-
range aircraft that are also geographically dispersed is able to meet the
changing requirements of a client from a short business day trip through to
a long-range intercontinental needs.
Of course all of these benefits are purely theoretical if the management
structure is not capable of maintaining the highest levels of service,
satisfaction and value to retain and attract new clients. Not always easy….

7. Does Small Still Work? Not Just Another Gorilla
Absolute focus
Value proposition
Niches are good!
Ruthless cost control
Excel at service
Utilise technology
Deliver client value

8. So Does Size Really Matter?
So can the little guys live quite happily alongside the Gorillas and still make
enough out of business to make it worthwhile?
Well yes is the simple answer but it will be tough and you need to be very
clear on how you intend to compete with the Gorillas. Business aviation is
never a simple proposition whether big or small; as the small guy you have
all of the problems of the Gorilla but you will have significantly less
resource available to deal with them and your cashflow may well be less
able to deal with market shocks than that of the Gorilla.
Absolute focus on your business and its objectives is absolutely key. Focus
on your product, service and quality at every level. Focus on a specific
sector may well be advantageous; the aviation jack-of-all-trades in the land
of the Gorilla may be an uncomfortable place to be.
Think carefully about your value proposition and then embed it through
every part of your business culture and operations. What do you do? What
value do you create for your client?
Niches can be good, if you are in a niche to the market then exploit it. A
European based air ambulance/charter operator recorded 30 and 10%
increases in profit and turnover respectively by focussing and exploiting
their particular niche.
We may operate in the high value world of business aviation but that
shouldn’t stop you managing your costs as if you are Ryanair. Understand
your margin and controlling costs are always going to be critical.
Balancing costs while delivering unbelievably good customer service is the
ultimate key to business success. If you deliver outstanding value to your
client they will love you and the business will grow.
Think about the role that technology might have to play within your
business. You don’t have to dig far into the digital world to discover
mentions of disruptive technology changing markets.
Disruptive technology is an innovation that helps create a new market and
value network, eventually disrupting existing markets and displacing earlier
technology. By utilising a the latest mobile communications technology
Uber has created a disruptive impact on the global taxi hire market. What
form will that disruption take in the business aviation market?
Look also at the impact that the latest aerospace technology can make;
improvements in design materials, production techniques and efficient
technology we now have the latest aircraft that offer significantly reduced
operating costs over earlier generation aircraft. Reduced operating costs can
increase both margin and market competition.
The technology improvements in aircraft do create an issue in that the
typical lifecycle of an aircraft might now typically considered to be 25-30
years in engineering terms but in some charter markets we already see
strong client preference for aircraft being less than 5-years old. This is an
issue which the industry will need to address in the longer term.
Finally, think for a moment about why your clients make use of business
aviation. The clients end use might vary considerably around the world but
what they are actually buying or benefitting from is flexibility, time and
value.
Always deliver unbelievably good service, go the extra mile and
demonstrate value to your clients and make the clients love you.

9. Mango offers tailored solutions to aviation.
Let’s start the conversation now.
Andrew Hughes
Partner, Principal Business Aviation
+44 7720 089897
andrew.hughes@mangoaviation.com
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