Motley Fool Money - The Sky’s The Limit

Episode Date: March 10, 2024

Sky Harbour sees massive opportunities in the world of private aviation. Bill Mann, Director of Small-Cap Research at The Motley Fool interviews Tal Keinan, CEO of Sky Harbour, a company that operates airplane hangars around the United States. They discuss: How Sky Harbour is building home bases for planes. The massive growth in private aviation and why it’s poised to continue. Turning underutilized airports into hubs. Companies discussed: SKYH, GD, BDRBF, FDX Host: Deidre Woollard Guests: Tal Keinan, Bill Mann Producer: Dylan Lewis Engineers: Kyle Carruthers, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

This episode is brought to you by Indeed. Stop waiting around for the perfect candidate. Instead, use Indeed sponsored jobs to find the right people with the right skills fast. It's a simple way to make sure your listing is the first candidate C. According to Indeed data, sponsor jobs have four times more applicants than non-sponsored jobs. So go build your dream team today with Indeed. Get a $75 sponsor job credit at Indeed.com slash podcast. Terms and conditions apply.

I think most chefs would tell you, go ahead and publish my recipe. It's all in the execution. Got it. Right. So while there is no rocket science behind what we do, there is a lot more art than science in it. I'm Deidre Willard and that's Tal Keenan, CEO of Sky Harbor, ticker SKYH. Sky Harbor develops, leases, and manages general aviation hangers across the United States, focusing on airfields in large markets. The Motley Fool's director of small cap research, Bill Mann, sat down with Tall Keenan to explore the world of private aviation and Sky Harbor's plans for expansion.

I've seen Sky Harbor described as a turnkey hanger builder. And to me, that kind of seems to miss the mark a little bit. So if you'll excuse the industry-related play on words, I was just wondering if you can give us like a 20,000-foot description of Sky Harbor's business. Sure. So look, we call ourselves a home basics. So we're an infrastructure provider. We do build hangars. That's true.

We manufacture and we're vertically integrated, but the, called the end-to-end process is get land at airports, develop these campuses of private hangars, which would be used as home bases versus an FBO. We can get to that distinction afterwards, and then operate them, right? So we don't sell them. We lease them on a long-term basis to credit tenants and operate. and operate them, meaning provide all of the line services that are required for conducting business aviation. So that's really what it is. And if you kind of want to think of it in aviation terms, if the FBO is a hotel for aircraft, Sky Harbor is a home for aircraft, right, which is a

distinction. We don't have a transient business. It's all based tenants. When you all came public two years ago, one of the things that you had spoken about was the supply demand imbalances in the aviation industry. And so you've mentioned an infrastructure deficit many times in the past. So for people who are not in the industry, could you talk a little bit about what the choke points are and what factors you view as being potential opportunities for businesses like Sky Harbor? So look, I don't know if anyone else measures this. We're probably the only ones because no one else really should care about this, but we track the square footage of the U.S. Business Aviation Fleet, right, which is number of aircraft, times length, times wingspan.

Of the fleet itself, you're not talking about ground space. You're talking about the actual airplanes in the fleet, right? So the figure, you know, on the order of about 90,000 airplanes in the fleet. What's important for us to track is the net growth in the square footage of the U.S. business aviation fleet. And I'll just kind of throw some numbers at you. In the 10 years that preceded COVID-19, we added about 30 million square feet net of airplanes, net meaning new entrance minus retirements, net 30 million square feet of airplane. That's accelerated dramatically. We don't have numbers post-COVID, but if you kind of just go on any online resource, you'll see the OEMs, Gulfstream, Bombardier, Desso, Textron are breaking records in backlog right now.

You know, some of these manufacturers, you order a new airplane today. You know, it's a three or four year wait period until you actually take delivery of that aircraft. So everything I'm saying for the 10 years before COVID has accelerated dramatically since. A couple things to think about. For our business, unlike the FBO business, which is really driven by fuel revenues, we're really driven by what is the square footage of the fleet. Once an airplane gets manufactured, it needs to be housed, right? It doesn't necessarily need to be flown, but it needs to be housed.

And if you take an extreme situation, you know, kind of a protracted, a deep economic recession, kind of doesn't matter so much to us whether the original purchaser owns the aircraft or the bank owns the aircraft. It still needs to be housed. There are a few areas where the supply demand mismatch is most acute, and where that mismatch is growing the fastest. The first of those is in for large jets, in that much of the current inventory of business aviation hangar in the United States

has a door threshold height of 24 feet and down because these hangars were built several decades ago when 24 feet was enough to accommodate the tallest tails in business aviation. So it turns out the growth in aircraft in that same 10-year period that it described earlier, the growth in aircraft that have a tail height of more than 24 feet is about 16.5 million square feet. So more than half of the growth in the fleet square footage is associated with aircraft that have that tall tail height. So those aircraft can't fit in those legacy hangers. That's, I'd say in terms of the type of aircraft, that's where the supply demand

mismatch is the most acute and where it's growing even more acute. Because if you look at the backlog of orders at the OEMs, it's heavily wet, historically heavily. weighted toward heavy jets today. And the second is, you know, the aircraft aren't delivered, they're not spread evenly across the United States, right? There are specific areas where, you know, fleet growth is the highest. Again, we track this very closely. I'm not aware of anyone else who really has any reason to track it. But that's obviously where our efforts are concentrated. That's where our company's growth is the highest, is where we see the supply demand mismatch growing the most acute.

Now, you've said twice now that you don't know of anybody who else is tracking it and don't know why they would. So maybe give us a little bit of an idea of where you sit in a competitive landscape, not so much the installed base, but is anybody else really focusing on what sounds? It sounds to me like a problem that or an opportunity that might be apparent to a lot of players? Yeah. Look, first, I don't expect to be the only player in our space forever, right?

We will have, you know, and look, we're posting our numbers on a quarterly basis. People can see it. Yeah, it's hard to think of something in the infrastructure or real estate space for that matter that is even close to this compelling on a unit economics basis. And the opportunity is deep. I mean, it's deep. It's hundreds of airports in the country that, that, that, that, that, that, that, the bill for us. So I expect there will be others. For the time being, I haven't seen a national

effort like what we're doing. I'd say the kind of the closest things, there's the FBO industry with which we overlap for sure. And could you, I'm sorry, could you, could you give a quick definition of FBO? Oh, sorry, yeah, of course. For those of us in the back of the room? The FBO is a fixed base operator, right? That is the entity that provides fuel and ground services to business aviation, right? And fuel is the main story there, right? It's, it's, you know, kind of 70 to 85 percent of revenue. It's, it's the essential service. The other stuff is, is nice catering. You know, you can, you can live without fuel is essential. So the FBO industry, you know, certainly overlaps with us. But I would say, you know, kind of if, if, if you look at it as a

Venn diagram, you know, it's maybe 10 percent overlap. We're not, we're not directly competing with those guys. And you do have one-off efforts to develop hangars that we've seen. Nothing like what we're doing with a very well-capitalized national effort, vertically integrated. You know, we're constantly getting our cost of construction down. You know, our financing is really optimized for exactly this. Again, none of this is rocket science. It is a simple business.

So I expect others will. But for the time being, we haven't seen it. Okay. Well, you actually anticipated a question that I was going to ask later on, but it's fascinating to me, especially with smaller cap companies, the decision to go public. Because in some ways, I'm always curious about an element of being a publicly reporting company, especially for a company that has a unique service offering. And as you say, you know, it's not rocket science. You do expect other entrants to come down the pike at some point. But are there parts of your business that you might otherwise like to keep confidential? But the fact that you're a publicly reporting company, you have to come out and talk about? I mean, in some ways, from a negotiating standpoint and from a competitive standpoint, that public reporting process might not be 100% comfortable.

Yeah. So, look, I think there are obviously pluses and minuses to every decision. And this is one that we struggled with. You know, frankly, I don't think it's a secret. We turned down a $1 billion private equity offer when we went public. Most days, I would say we made the right decision. Yeah, in that, right. And look, there are a lot of, again, there are a lot of disadvantages.

I'll tell you how we handle some of those. But what we see is the advantages as well. Fantastic. The, look, publishing the right. recipe, I think most chefs would tell you, go ahead and publish my recipe. It's all in the execution. Yeah. Right. So while there is no rocket science behind what we do, there is a lot more art than science in it. And say, for example, site acquisition, nobody goes out and solicits cities and counties directly on a serial basis like this for landed airports. That's not how the FBOs grow. The big FBO chains,

signature and Atlantic grow primarily through M&A. That's their model. Much more efficient. They should. I think that's appropriate for them. But there is a very deep bag of tricks involved in. How do you make this a win-win? How do you tick the boxes that need to be ticked? Remember, most airports are owned by local government. No tour alike. Everyone has their specific interests. How do you cater to those in the most effective way while still creating value for yourself? That's something that I don't think you're going to get reading our reports. And frankly, it would be a challenge even to articulate ourselves. It's a team that we've built.

It's a set of methodologies. Some you employ in some circumstances, some in others. And we continue to refine that. And that's probably at the core of the value that we're creating here is that ability. Also, fusing it all together, it doesn't work nearly as well if you don't have the type of financing that we've arranged for ourselves. If you don't manufacture your own hangers, right, and saves really significant margin on your, you know, on your construction. The suite of services that you can offer is quite different from what an FBO can offer. And it takes a while, I think, to work that out as well.

So even, I think, a very well-funded competitor, there is a pretty protracted learning, we think if you're going to compete directly. Again, I think it'll happen. And maybe we are offering a bit of a shortcut by being public. And you can read a lot of it. But I think most of the relevant stuff is not really there. On the other side, though, I think we have found a very efficient way to grow. Because we're a very capital-hungry business.

You know, if you figure each airport is, let's say, $30 to $60 million of capital to develop. and they're coming in now at a very fast clip, right? We're pulling down airports every month now, more or less. Raising a billion dollars in one shot would have been much more delusive than what we've been doing, which is going out, again, we're in the public eye. By the way, and a lot of it is our tenant community, you know, who tend to be, in many cases, kind of the large, sophisticated investors. They see the model, they understand it.

It's our job to make maybe the rest of the market understanding. We haven't quite done that yet, but our tenants certainly do. And we have a great overlap between tenants and shareholders, right? That community is wonderful. And the fact that you can kind of, you're on a constant roadshow and people are following you, makes it quite easy to dip into the market, you know, whether it's a pipe or a different type of mechanism and fund ourselves incrementally. And that's far less dilutive than, you know, for example, taking a billion dollar checks from private equity.

I think that's probably been the main advantage of being public. I don't know if you just heard the sound, if my microphone just caught the sound, but from Cherry Point Air Station, they do low altitude training with their F-15s, and one just flew overhead. I'm jealous. I am too a little bit. I go ahead and wave at them. One of the things that you had mentioned was the concentration of, you know,

of the private fleet in the U.S., you are in the process of opening up in a number of different airports. I was wondering if you could talk about, like what types of factors you look at that make an airport facility an ideal market for Sky Harbor? Great, all right. Well, look, fundamentally, it is that supply demand mismatch,

and it will be expressed typically in what we call total basing cost, right? Which for us, and we have a formula, that calculates the two main factors are, what is the specific aircraft paying in rent? And what is that same aircraft paying in a fuel margin? Those are the two main components of that. And if we hit a certain threshold, you know, as you've probably read you, we're seeking double digit yield on cost in every project that we go into today.

for the time being we're only targeting airports where if what people are currently paying will produce a double-digit yield on cost, that's a valid airport for us. Now, there are other criteria, you know, like you don't want to build 500,000 square feet of hanger, you know, if that's going to cannibalize most of the market. You know, so there are size considerations. There are others. But the primary factor is what is the total basin cost today. perhaps in the future we'll get a little bit more speculative and say, look, here's an airport that's on a trajectory.

I don't want to disparage anybody, but I'm thinking of a city right near where you're sitting right now, which if I had to bet five years from now, that city's going to be firing on all cylinders. It's going to be right at the heart of our envelope, but it's not quite there today. For the time being, we're not doing that, frankly, just because there's so much low-hanging fruit in the country that we should be grabbing right now. And hopefully we circle back and get to those markets afterwards. I want to make sure that I understand you properly, give you a chance to explain the definition of terms. You mentioned fuel margin rather than absolute cost of fuel. So, again, for the layman, what does that mean?

Yeah, so the FBOs, and we purchase fuel from the same suppliers that the FBOs will. You've got campuses that are on a pipeline, right? So, for example, our Nashville international campus is on the colonial pipeline. pipeline, it means fuel gets there typically a little bit less expensively than to other airports. We will, like the FBOs, we take a small margin on fuel. The FBOs take a large margin there. It's their main business.

But let's say the FBOs are pulling from a consortium in Nashville at, you know, let's say $4 a gallon. And if you could look, I could look it up right now, what their retail rates are for a jet A, They might be $7 a gallon, right? So they're capturing $3 of margin on that fuel. That's really what matters to us is it's not the $7 that the customer is paying. It's the $3 that the FBO is making, call that available revenue from an aircraft or available net revenues. Maybe the more precise way to express that.

So that's really what matters to us. Again, we reverse the order, by there in some cases, it's zero margin on fuel. All of our revenues are coming in the form of rent. from the tenants in some cases that some, you know, some mix, but it's always heavily weighted, you know, call it, you know, 80, 90 percent rent and, you know, a little bit of fuel margin. In some cases, that just, you know, kind of makes the deal easier with the tenant. Sounds a little bit like the old, the old Jeff Bezos line, your margin is my opportunity. Yes. Yes. Yeah, that's good. I might start using it. I didn't come up with it, but I don't know

if you've heard of Jeff Bezos. He's done okay for himself. I've heard of the guy, yeah. So you're mentioning the types of airports that you're looking at. I assume that what you're talking about here is the home base for planes because they are in every way imaginable an asset that can move around the globe. Are there opportunities for a company like Sky Harbor in seasonal markets or destinational markets? I'm thinking. making, you know, a Vale, Colorado or an Aspen or Bar Harbor, those types of, those types of markets. Listen, great question. So far, we have not touched those. You know, that we, you know, maybe toward the end of the kind of COVID episode, we looked because we saw, we saw people starting to enroll their kids in school in Aspen and, you know, in Jackson Hole and, you know, places like that and thought, you know, maybe these are becoming interesting home basing markets. We haven't

really moved on that. I still don't think they're deep enough to accommodate, you know, look, we're putting people on five, 10-year leases, you know, 12 months a year. So those are great FBO markets. Aspen pumps fuel like crazy, great margins. It's great. They're not really Sky Harbor markets. The other side of the coin, though, is, you know, we announced our ground at the end of the last quarter, our first two New York area airports are Bradley, Connecticut and Hudson Valley, New York. Those are terrible FBO markets, right? Very few people are going to land in, you know, if you're visiting New York for meetings, you know, you don't want to land in Hudson Valley and then drive, I don't know, where you need another flight to get downtown. Yeah, exactly. So you land at

Teterboro. That's really where you want to be if you're visiting New York. However, it feels like every hedge fund in Midtown Manhattan has called us since that announcement, you know, we need space, you know, in Bradley. And those planes will reposition, right? Most, most of the Manhattan-owned aircraft that depart from Teterboro and arrive to Teterboro, don't live at Teterboro. They reposition, you know, in order, so, because there's no room there. You can't, you can't get hangar space at Teterboro. So those guys are paying, you know, even for those repositioning airports like Bradley, Connecticut, they're paying much higher rents that would in almost any market in the country for a primary airport, you know, for an airport where the airplane lives at the same

airport that it departs from and arrives to. So those aren't great FBO markets, but there are great home-based markets. So there's kind of a natural shakeout in the industry. I was joking a little bit about you need a flight, but that's exactly the case, isn't it? There's a land in Teterboro and then reposition at Bradley. That's right. So a lot of people are doing that. By the way, some people fly to the airplane, right, by helicopter. That's also kind of a big New York. I watch succession. I know how it works.

Yeah. I look for some of these big corporate flight departments, you know, I get it. It makes sense. It absolutely makes sense. I mean, when time is money at that scale, it 100% that is, it is more of a necessity than it might seem. So maybe this is a bizarre question. I know that's got to be a great, you know, an alarm bell goes,

off in your mind when someone says, here's a bizarre question. But I was trying, I was actually putting some thought into what other risks to private aviation there might be. And so you didn't name an entertainer, but I will. But, you know, it's one of the big cultural site guys over the last 18 months or so has been the Taylor Swift tour. And she's come into some criticism for her dependence upon a private plane to get her point to point. Is there the risk of a drumbeat being loud enough that people begin to say, you know, identify away from having private aircraft? Yeah, look, so we watch that. It's, by the way, and it's a lot stronger in Europe than it is here, right?

There definitely is an environmental movement that has, you know, take an issue with private aviation. Right. They laugh at Davos when all those people come in and, you know, in their private jets, like, oh, you're here to save the planet? Okay. So, okay. So that's my point. In many cases, it's the same people who are using the system, which, you know, not to be cynical. Yeah.

But I don't think that movement has the sort of legs that's going to impair the industry. We're not, I don't think we're shutting down business aviation. First of all, just kind of on a straight logical basis, there's about 100 things you want to target in the world. If climate change is, you know, is your top agenda item, there's 100 things you want to get to before you actually get to this. This is not something is leaving a major, major mark. And again, the entrenched interests here are powerful. And so I don't see that happening, but certainly something we watch. And, you know, of course.

What can you tell me about your background? What was what led to your insight or your team's insight that there was this kind of market out there where Sky Harbor is doing something that is at least on some levels, has no equal within the industry? Well, you know, I had a plane and couldn't get hangar space. And this got me curious. And I spent a few years just kind of with this as sort of a back of mind curiosity. It's kind of strange. You've got this little market, not little, very large market, a lot of money flows through.

How is it that the market hasn't solved this supply? demand mismatch. First, I thought this was a New York area issue. Pretty quickly became clear its most major metro centers in the country, to varying degrees, had this imbalance, and it's getting much worse. I used to run an asset management business called Clarity. We got professional management running Clarity, and I'd taken some time off to write and wanted to get back to work, and this curiosity kind of drew me in. from military aviation originally, got a bunch of actual US Navy pilots at the beginning.

And that's still the core team. That's really who does the site acquisition. We got together and sort of figured this out. And lo and behold, we wanted to go through the whole cycle before we got, you know, just kind of open the afterburners on the whole United States. But we're running three campuses now. Our numbers are coming in significantly better

than we projected. It works. The unit economics work. And now it's really become a question of scale. Yeah, you want to continue to work on the unit economics if we can get our construction costs down by $20, $30 a foot. Everything looks much better for sure. But even if we don't, we're in a really exciting position.

Now it's, can we get to 50 airports? Can we get to 100 airports? If we're on 10 today, I think we gave guidance that we've announced three more in the first half of this year. I think we're going to blow that out of the water. So that's really how we got here. I'm going to ask, you were talking about repositioning airports before. Do you see an opportunity?

I'm always fascinated by Fred Smith and his model at FedEx, where he said, okay, we're going to be in Worthington, Ohio, and we're going to be in Memphis, these underutilized airports. Is there a repositioning business whereby you are, you are hangering planes? in an underutilized airport and then turn that basically into a sky harbor driven facility in some ways? 100%. So that, for example, Hudson Valley, New York is that Bradley, Connecticut, to a great extent, is that you have the Hartford insurance industry that uses Bradley as a, what we call a primary airport. Primary meaning the airplane lives at the same airport that it operates out of. but it's still mainly repositioning. Most of those Bradley aircraft are going to New York, some of them to Boston.

That's where they're meeting their passengers and off they go. So, yeah, that is a huge piece of our business, especially in, you know, call it the top half dozen markets in the country, where there's really no room at the primary airport. There's no land. You know, this repositioning market will increasingly claim a bigger stake of the home basing kind of pie in the United States. So, yeah, that is big for us. I've been invested in some of the Mexican airports for a long time,

and one of the cliches about investing in an airport is that they're just not about to build another airport. But it may not actually be true in the private industry where you can simply reposition and make the home airport something that's not necessarily convenient or even relevant to the end user. Yeah, so I would say you almost categorically, that you can't build a new primary airport, right? That is true, right?

Where there's land, there's no use for an airport. Where there's use for an airport, there's no land. And that's, right. So it is beachfront property 100%. It's a little bit less the case on the repositioning airports. But even there, kind of look around, you know, again, New York City is the densest, you know, business aviation environment in the country. Where is there even land for a repositioning airport, right?

It's really all claimed. Now, maybe out west there are a few places, but that's a little bit different. But in many markets, there's no room for either. Yeah. Well, Talcane, and this has been a fascinating conversation. And thank you so much for coming and spending a time with us here at the Motley Fool. And we're anxious to see where you all go from here. We're really excited as well for that.

Thank you. Thank you for the opportunity, Bill. As always, people on the program may have interests in the stocks they talk about. And the Motley Fool may have formal recommendations for or against. So don't buy ourselves stocks based solely on what you hear. I'm Deidre Willard. Thanks for listening. We'll see you tomorrow.