BlueSky: Industry consolidation: will it fly?
By Patrick Margetson-Rushmore, chief executive, London Executive Aviation (LEA).
Industry consolidation, long forecast in Europe, is finally happening. Informally, through alliances, and more formally, through mergers and acquisitions, various business aviation companies – mine included – have opted to combine their talents with erstwhile competitors. So, what is the rationale for such activity, where are the potential pitfalls and what should you consider if you were thinking of following suit?
Despite their differing approaches, the various proponents of consolidation in our region, including alliance groups, Luxaviation Group and Ségur, see broadly the same attractions in bringing businesses together. Most obviously, economies of scale offer significant potential cost-savings in areas such as fuel, FBO fees, insurance and pilot training. When operators work together, there is also the chance to achieve better fleet utilisation and to access the aircraft of partner companies cost-effectively – the latter benefit is particularly welcome when working with operators in other European markets. Lastly, but just as importantly, there is the chance to pool expertise with peers who have faced similar challenges, whether in operations, regulatory compliance or marketing: an opportunity many of us, working away within our own small businesses, have seldom been able to experience.
So far, so very compelling. Consolidation not only offers us the chance to turn a better profit in a notoriously low-margin industry, but also means we can better meet the evolving needs of our customers. Furthermore, larger organisations generally find it easier to ride out the challenges of volatile markets, which is of renewed interest given the recent worsening of the Eurozone’s economic outlook.
However, while the potential benefits of consolidation are attractive, there are some significant attendant risks. Perhaps the greatest danger when combining two or more companies is when their leaders do not share the same vision: it can quickly become frustrating and self-defeating if partners are pulling in opposite directions; at minimum, decision-making can become painfully slow, putting you at a competitive disadvantage.
There is also a potential contradiction around the issue of scaling up. Our industry offers highly personalised services, so relationships – with aircraft owners, charter customers, brokers, FBOs and others – are fundamentally important to our stability and growth. If consolidation is done in a way that interrupts or hinders those relationships, such as by adding too many layers of management, standardising services in an impersonal manner or centralising the wrong processes, there’s every chance a grouping could become worth less than the sum of its parts.
Furthermore, it is widely recognised that most mergers and acquisitions destroy rather than create shareholder value. To succeed over the long term, partners needs to place a realistic price on their own businesses, because groups that overpay soon run into trouble.
So, will Europe’s new business aviation groupings succeed? Figures such as EBAA CEO Fabio Gamba believe their success is important, seeing the market as still too fragmented. Personally speaking, my experiences to date with my new colleagues within Luxaviation make me very optimistic. However, none of us believes the integration process will be entirely smooth and simple: we are practical realists and are readying ourselves for many new lessons to be learned.
To those readers considering whether to collaborate or merge with others, I would make the following recommendations. Firstly, all parties must be absolutely clear why they are joining forces and must have a shared view and strategy for what they should achieve together. Ensure you spend time getting to know your partner before you jump into bed with them, so as not to be disappointed! Secondly, be realistic about the ‘ego factor’ in bringing business founders together and ensure the management structure has adequate checks and balances to keep everyone happy. And, thirdly, take a realistic view of the value of your business and think about the returns you would like to see over the long term. The hungry man who consumes everything in a single meal will soon feel hunger again; the wise and hungry man instead prefers a more modest dish and the knowledge that many more meals lie ahead.
Published in: BlueSky 12 June 2014