Challenge #5: Wheels up, heads down for consolidation

22 Feb 2024

Between 1980 and 1999 the US aerospace industry went into merger overdrive; from a starting point of nearly 50 businesses, within 20 years  there were just 3 left standing!.

All sorts of reasons were given for this mass merge. The real reason was the industry was ripe for consolidation and investors were able to see the value of end-to-end market contact. Investors and business owners looked to purchase or merge with another businesses that could strategically supplement or complement existing operations, allowing them to integrate vertically into the supply chain and gain long-term benefits.

Industry consolidation is not isolated to any specific sector. During 2023, 91 of the 157 primary industries tracked by S&P Global Market Intelligence showed the five largest U.S. companies in each industry share at least 80% of the total revenue produced. Europe also had bumper M&A activity and PWC’s ‘2024 Outlook’ predicts further upturn in global deal-making.

The Consolidation-Endgame Curve framework was developed by the management consulting firm AT Kearney. It was based on research through 25,000 firms (98% of the global market capitalisation), and it found that all industries go through the same 4-stage life cycle:

• Opening
• Scale
• Focus
• Balance & alliance

It would be irrational to believe that business aviation will not and is not going through the same curve.

Stage one of the consolidation curve is the opening; this is the frontier of industry consolidation in which barriers to entry are generally low and there is sufficient innovation, opportunity, and risk to allow competition to thrive. The stage one environment can often also have elements of near perfect competition in the marketplace.

Investopedia describes perfect competition as “a concept in microeconomics that describes a market structure controlled entirely by market forces” and goes on to identify certain criteria for its conditions:

• Identical products sold by businesses.
• An environment in which prices are determined by supply and demand, meaning businesses cannot control the market prices of their products.
• Equal market share between businesses.
• Complete information about prices and products available to all buyers.
• An industry with low or no barriers to entry or exit.

When viewed through the lens of business aviation, it is clear there are market segments which are starting to move through stage one of the consolidation curve, aircraft brokerage being one of them. At CJI Miami 2023, brokers estimated that even the world’s largest brokerage business has only a 2.5% of global business share! They felt consolidation was inevitable and would start to create economies of scale.

Other forms of consolidation are already underway within business aviation – and  have had their fair share of success and mishap. The incredible 10 year rise of Wheels Up from start-up to third largest in business aviation is as well documented as its subsequent fall into loss, bankruptcy and rescue buyout by Delta in 2023.

One of the factors which changed the fortunes of Wheels up was the immense programme of acquisitions starting in 2019; as the new CEO, George Mattson explained “it grew rapidly and did not consolidate”. The plan to bring Wheels up away from the brink will be to use the commercial and business experience of Delta Airlines, which will start with the reduction of operating licences from 6 down to 1, and to streamline operations by consolidating their offices to a single hub.

The lessons of growing too fast are not restricted to Wheels Up – if a business grows by acquisition it must also consolidate duplicated and redundant functions. As the business aviation industry moves through the consolidation curve here are some of the challenges, both new and existing, which businesses will face:

• If the business strategy from the outset is to grow through acquisition, make sure the most appropriate corporate vehicle is chosen. Ownership structures differ and each have benefits and drawbacks. Equally one jurisdiction may be preferable from another in terms of market opportunities for growth.
• Decide in advance how fast the business is to grow both organically and through acquisition. There will be times when focus on portfolio building takes priority, however, this should be balanced against growing so quickly that customer service suffers.
• Set appropriate KPI’s in respect of growth and monitor these closely; reset these if KPI’s are not being met. This will provide a more stable ownership experience (both extreme and imperceptible levels of growth can be an un-stabilising factor for business).
• Embrace diversification together with risk planning and tolerance. Expansion into completely new jurisdictions may seem like a great idea until a business is faced with cultural, regulatory and client barriers to entry. Expanding into surrounding service areas may create better stability for the business (and clients) especially in times of economic turbulence.
• Culture: many small businesses act like a family, however, as a business grows there will be a pivotal point where it will need to become a team. Growth requires the business to embrace a continuous improvement programme and focus on client matters, high performance and teamwork. Culture must also be reviewed as the business grows to ensure it has unity in its mission and values.
• Often the most difficult part in growth by acquisition is people and ensuring both the existing and new teams are clear about the business strategy and any efficiencies that need to be made by the acquisition.

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