CJI Americas 2020: The view from Wall Street

Investor sentiment for commercial aviation has been extremely bullish for the past seven to eight years, says Nick Fazioli, MD, Jefferies LLC, Aerospace & Defense Division.

Before the pandemic, the biggest issues affecting the growth of commercial aviation were the global pilot shortage and fuel, he said. Now, the lack of visibility due to Covid-19 has had a deep impact on airlines and the service supply chain.

In business aviation, Fazioli says investor interest has been positive for a number of years, but there was always a concern over what might happen in a recession.

“But no one saw a pandemic-driven recession coming, and it has really turned the tables on people’s view of commercial versus business aviation,” said Fazioli.

Despite a breakthrough with the vaccine, Fazioli says the demand for air travel in a post-Covid world is unpredictable. “If travel goes away because of Zoom, that is a massive impact on the business model for the airlines.

“On the other hand, this kind of disruption has investor more intrigued about the value proposition for private travel. The fact that you can move individuals and businesses in a more secure way is really resonating.”

It is more now more prudent than before to ask business travels to go private. “The sentiment is positive, and the supply of deal opportunities is still low,” he said.

Public versus Private Equity players

Fazioli is also seeing more interest from private equity entities traditionally invested in commercial aerospace. They are primarily looking at the business aviation and defence sectors.

Private equity players will typically go where the return on their time is greatest. “Time is the more precious commodity still, compared with capital. For debt and equity raises and certainly for IPOs, size is really important on Wall Street. Because scale and size usually mean liquidity.”

For a company to go public on the equity side, it would need enterprise values of several $100m to $1bn or more, advised Fazioli. And for a company seeking corporate financing, it would need $100m of debt. While growth equity is slightly lower, at $50m of cheques being written into the company.

Fazioli said private equity investors tend to make deeper dives into the companies they are investing in, whereas public equity investors look to compare a company of interest with its peers.

“The problem with bizav is that all the big players – NetJets, Flexjet, VistaJet and Wheels Up have institutional capital and debt. But they are on the private side and therefore not accessible to public markets.”

Fazioli says it will be interesting when any of the operators of FBOs decide to go public. At present, operators are positioning themselves as e-commerce marketplaces, similar to tech disruptors in other industries.

He also mentioned the benefits of Special Purpose Acquisition Companies (SPACs) for business aviation. “The SPAC is a better product for a lot of companies in this space, because the way you market a product to tell a forward story and show projections.”