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Profit by borrowing a billionaire’s jet
Owning a private jet may be beyond the means of most penny share investors. But there's money to be made looking after them, says Tom Bulford. And this small-cap company is doing just that.
Sprawled out on a recliner, I found myself looking around the confines of a leather-upholstered cabin. My first thought was: where is the champagne? My second: this is what penny sleuthing is all about.
There's just one small problem: I'm not en route to an obscure Caribbean island, the plane is sitting in a hangar in Kidlington airport. In the jet with me is Dustin Dryden, the founder, chief executive and 63% shareholder in AIM listed Hangar 8 (AIM:HGR8).
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Dryden strikes me as a natural entrepreneur. He began his career by selling aeroplanes. He soon realised that once he'd sold a plane, the owners didn't know what to do with it. So he figured out that it would make sense to run a management company and that is what Hangar 8 is today.
The jet I was on was not owned by Hangar 8. Neither are the29 other aircraft that it looks after. But on behalf of the owners, Hangar 8 will house and maintain the planes, have them available at any time and rent them out. Contrary to my preconceptions, these jets are not the preserve of rock stars and professional golfers - most of them are owned by big businesses. If your client is a Middle Eastern oil sheikh he is, Dryden explained, "hardly going to agree to travel on Easyjet".
And there are some parts of the world where private air travel is the only realistic option. This is especially true with natural resources: oil and mineral projects are often in remote places and alternative means of transport are unsatisfactory if they exist at all. Take Nigeria: "Driving from Lagos to Abuja takes three days", explained Dryden. "You can fly in 45 minutes."
Hangar 8 has two hundred staff, and it sounds like a nice place to work. If flying a 747 is the equivalent of flying a bus, the cockpit of a private jet is the driving seat of a Ferrari. The cabin crew, usually university students, get good money, plenty of tips and a chance to see the world. "They just have to be able to converse with high net-worths", said Dryden.
Hangar 8 is poised for a big expansion
Outside of the United States, there are 900 business jets, but they have 300 different managers. Dryden reckons that you need at least 15 jetsto break even, and Hangar 8 has been buying up rivals in order to achieve economies of scale in maintenance, overheads, insurance and fuel. "I buy $20m of fuel every year", said Dryden. "I get a 40% discount on that."
So one part of Dryden's strategy is to expand the fleet size and keep things in-house wherever possible. With a fleet of 30, the fees that are earned simply by maintaining the fleet are enough to cover Hangar 8's costs, even if the planes never get off the ground. But of course they do, and that is where the extra cash comes from.
I was intrigued to know how much rental costs. South of France and back in a day? "About £20,000", said Dryden, "but that is for eight people. It does not cost that much more than first class travel with British Airways." And the private jets are more flexible: no crowded airports, just a quick call to Hangar 8's booking department and you can be airborne within two hours "the best we have achieved is 45 minutes", Dryden told me.
But it's a competitive industry. Through a software pricing mechanism called Avinode, it is possible to check prices offered by rivals, and a £20,000 flight can be won or lost for the sake of £100. Rates are a factor of supply and demand, and the latter collapsed when the financial sector fell off a cliff. Even if they can afford it and it is cheaper than the alternatives, these are hairshirt times, and our business leaders are wary of conspicuous consumption.
Dryden is looking elsewhere: in Mongolia, for example, where the new mining industry is ill-served by transport infrastructure; and in Asia, although the latter "needs to be educated to be more flamboyant", according the Dryden.
The shares are illiquid, but on a forecast price/earnings (PE) ratio of just seven, they certainly look cheap. And you may never get any closer to owning your own private jet. I'm going to be keeping a close eye on this company.
This article is taken from Tom Bulford's free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.
Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by Fleet Street Publications Ltd.
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Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International, he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund.
