Air Cargo World Magazine - Departments
Aviation companies have seen rising revenues during the first and second quarter of 2011, but this monetary boost hasn’t increased multiples or private-deal activity. Although the total enterprise value (TEV) (or the market value sum of debt and equity) reached a new high in the first quarter of 2011, the EBITDA multiples (TEV/earnings before interest, taxes, depreciation and amortization) have reached new lows so far this year.
Higher interest rates, rising unemployment and ballooning fuel costs, mixed with potential changes in the tax code at the end of 2012 and the likelihood of future inflation, have depressed earnings expectations; discount rates have been increased and multiples are down. With multiples at their lowest level in the past six years and private merger and acquisition activity relatively low, issues remain. Will these numbers stay depressed, or will they start to recover? If so, for whom?
Capital Alliance has analyzed data from public transportation and logistics companies and individual deal transactions reported by CAP IQ. There were approximately 27 public aviation companies in the data. The companies included the six major carriers with more than $10 billion a year in revenues; 13 regional companies; and eight cargo-and-specialized companies, two of which were FedEx and UPS. An additional 150 aviation-related mergers and acquisitions during the past several years were reviewed as well.
This exploration found that public valuations should increase for all segments, perhaps substantially, as they revert to mean levels after having been driven down due to numerous uncertainties and risks. The largest opportunity appears to be in companies in the regional and cargo-and-specialty categories.
Perhaps the most attractive opportunities are in the private-specialty companies. Whether acquired by public or private companies, private transactions offer real promise. True, they just may take a little longer to identify and close, but they still should be worth the effort for all parties.
PAST TRENDS AND PERFORMANCE
The U.S. recession dealt a huge blow to airlines. Fortunately, these carriers are starting to rebound financially. In fact, revenues rose steadily through 2008, declined in 2009, and resumed their upward trend, reaching new highs into 1st half of 2011.
EBITDA started falling earlier than revenues. It dropped precipitously in 2008 and remained there through most of 2009 before rebounding to its current high. TEV started its descent the earliest; it hit its lowest level during the first quarter of 2009, then climbed to a new high in the first quarter of 2011, only to decline slightly in the second quarter.
Despite all of the record-high financial measures, valuations have declined. Two common measures of value include the price-to-earnings ratio, which measures the value of equity, and the EBITDA multiple, which assesses the total value of the firm. The price-to-earnings ratio rallied from its bottom early in 2009 to a new high in the third quarter of 2010, then declined rapidly. EBITDA multiples also rallied off their 2008 second quarter low, stalled in 2009, then declined. At the end of the second quarter of this year, they reached a new low of 5.2 times.
A review of aviation-related mergers and acquisitions confirms the lack of industry excitement. More than nine deals per quarter were closed between 2006 and the middle of 2008; this dropped to five deals per quarter through year-end 2010. In 2011, four deals were completed in each of the first two quarters. In addition, while financial buyers closed 25 percent of the deals in the past, they only completed 12 percent this year.
There are hundreds of smaller and mid-sized specialty companies with strong market positions and excellent finances. Niche markets like cargo handling, flight training and maintenance services offer substantial opportunities for future growth, industry consolidation, cost economies and EBITDA expansion. Those with above-average growth prospects will be more highly valued than the average competitor. Transaction volumes should pick up over the next year.
Valuations are determined by expected future cash flows adjusted for risk. Looking at the industry, it is difficult to see how the major and regional airlines will significantly change their past patterns. As such, their valuations will likely stay within historic ranges.
A few regional players will offer significant future growth and returns, faring better than average. The cargo segment offers above-average growth — particularly internationally — and much stronger balance sheets. Expect to see some of these cargo companies do very well over time.
— Michael S. Galardi is a senior vice president of Dallas, Texas-based Capital Alliance
Cargo theft has impacted nearly every industry, from paper products to electronics. Experts estimate that cargo and equipment theft costs stakeholders $30 billion to $50 billion annually worldwide, although there are no records of these thefts, so this number is just an estimate.
Security is a necessity today. With the nation on heightened alert, the transportation and air cargo industries must be prepared. By its very nature, the airfreight sector places goods in a more vulnerable environment than when they are at a shipper’s or receiver’s facility. It’s not like having your goods in a warehouse; you cannot post a security guard, install lights and a closed-circuit TV system, or build a fence around your freight.
Expensive freight is moved along highways and by air and sea everyday, and security procedures and devices are becoming more necessary for carriers and other companies involved in transporting goods. Today, many security-conscious firms have taken steps to combat theft of their equipment and products.
Although there are some trends in what type of commodities are stolen, theft has affected nearly every type of product from childrens’ toys to pharmaceuticals. Some cargo categories that are especially vulnerable include electronics, metals, apparel, pharmaceuticals, appliances and auto parts.
The traditional days and times of cargo theft occur during the weekend period; holiday weekends also tend to be attract a higher rate of theft due to facilities sometimes being dark for a longer period of time with limited personnel.
Geography also also has a lot to do with theft. Among all transportation types in the U.S., 12 states — among them, California, Georgia, Florida, Texas, Tennessee, New York and Illinois — account for 80 percent of all freight theft. What’s more, a number of cargo thefts occur in the trucking industry when the vehicle transporting cargo is stopped in an unsecured location. A good rule of thumb is “freight at rest is freight at risk.”
Typical areas for these types of theft include truck stops, unsecured drop yards and restaurant/shopping center parking lots. Terminals and distribution center yards are now becoming a more popular target as well, illustrating a need by companies to provide security within these areas.
All stakeholders that bear the burden of cargo should be involved in the security process as much as they can, as they all share in the monetary loss should a load go missing.
Shippers need to take care in selecting their transportation partners. They should also consider the implications of supply chain/logistics decisions. Requesting specific delivery times narrows down the options available to the trucking company and driver. If you want a relatively local shipment to arrive at a specific destination early in the morning, this may well cause a driver to pick up the load the previous day in order to make the narrow appointment window.
It is important for companies to familiarize themselves with local and national law enforcement agencies. Taking the time to meet these agencies — specifically the personnel involved with investigating cargo theft — is important for the recovery of your product and assets. There are several cargo theft task forces in Illinois, Georgia, Florida, California, Tennessee and Texas that specifically focus on cargo-theft crimes. Networking with these groups is important, as they receive intel everyday on stolen loads and can assist in finding missing goods if they are reported in a timely fashion.
There are many measures companies can take to secure their freight whether they are shipping by land, sea or air. Security of products is every company’s responsibility. Knowing that cargo theft is a real issue in the supply chain is the first step; combating the problem with security solutions, intel, law enforcement involvement and analytics is the next step.
— Nick Erdmann is business development manager at Minnesota-based Transport Security, Inc. ENFORCER®