American media headlines portray industry volatility, lack of resiliency— the airline industry as helpless victim of market forces crippled by red tape, national tragedies, and federal regulation. The vox populi begrudges increased fares, fees, and foulups. But study global aviation market trends vis a vis private equity—and the upslope reveals the other side to the story. A story in which private equity is the perfect player, and the aviation industry is the perfect playground. Complete with twists, turns, and obstacles; and plenty of fun in the endgame.
The capital demands on airlines are steep. Fuel prices are high—fuel efficient aircraft is a must to keep costs down. Purchasing fleets of fuel efficient aircraft requires an outlay of capital that can be painful—or crippling—to bottom lines. So airlines have turned to leasing to mitigate cash flow demands—and private equity has seized the opportunity to be lessor.
Air travel is here to stay—the Airline Monitor projects a 4.8% annual increase in air traffic for the next twenty years. Consumer demand both nationally and globally remains strong, and history reveals volume has nearly doubled every fifteen years. Supply is low—airplane manufacturing is dominated by industry giants Boeing and Airbus—who’s waiting lists are years long. Given the capital demands, entrants to the supply side are unlikely—nodding to the stability of the supplydemand relationship.
Longterm, the transfer of assets (planes) between carriers is straightforward, lowering risk for investors and making it attractive to private equity.
“The aviation industry holds interest for private equity firms across the globe”, notes Alfred Zaccagnino, founder and President of the Samarian Group of Companies, a private equity firm headquartered in New York with a strengthening global presence. “The industry has proven resilient and demand has trended upward. The supplydemand relationship is interesting. All indicators show the number of private equity and aviation partnerships will continue to grow.”