Ex-PSA Owner Taking Wing in New Direction
When PS Group still owned Pacific Southwest Airlines, most people didn’t know that the San Diego-based holding company also ran an energy production and exploration business, an aircraft leasing operation and an airplane fueling company.
But that band of “also-rans” surfaced as the holding company’s main businesses on March 29, when PS Group completed the $279-million sale of PSA to USAir Group.
The San Diego-based company did not, however, use the $279-million cash infusion to fuel a buying spree. Its only acquisition so far has turned out to be an $18-million investment in a fledging business that is buying up travel agencies around the country. For the most part, PS Group has used the cash to reduce its debt and to invest in its existing subsidiaries.
But that doesn’t mean PS Group hasn’t changed dramatically.
As the owner of PSA, PS Group had 4,000 employees. Today, fewer than 15 employees work at the company’s headquarters office at Lindbergh Field. PS Group soon will move from its longtime offices in the PSA hangar to an office building in the Golden Triangle. PS Group gave “serious consideration” to relocating in Texas or Nevada, states that offer attractive corporate income tax rates.
PS Group has shed the high-visibility role it played as an airline holding company, according to industry analysts, most of whom stopped following the company after the PSA sale. PS Group has become a “relatively quiet, hopefully well-managed, holding company (that will) concentrate on maximizing the intrinsic value of the things we already own,” PS Group Chairman J.P. Guerin said.
During an interview last week, Guerin acknowledged that because of its size, Wall Street analysts “won’t be interested in us and we’re not going to be included in any major portfolios.”
Stock Tumbled
PS Group stock tumbled to the low 20s from the low 30s in the wake of the market crash on Oct. 19. However, Guerin suggested that the handful of investor groups that historically has owned about 35% of the company will continue to view PS Group stock as “attractive.”
PS Group’s greatest strength entering 1988 will be the “very clean balance sheet” that will result from the elimination of much of its $184 million in debt, he said. PS Group also is using hefty chunks of its remaining cash to bolster its capital-intense aircraft leasing and oil and gas discovery and production businesses.
PS Group finished the third quarter Sept. 30 with about $60 million in cash, but Vice President and Chief Financial Officer Lawrence A. Guske said that taxes, additional debt reduction and the acquisition of aircraft for PS Group’s leasing subsidiary will eat up most of that remaining cash.
“We’re not really a company that’s wallowing around in a lot of cash looking for something to buy,” Guerin said last week.
No Fear of Storms
With the debt reduction, PS Group “can go along without fear of storms now,” Guerin said. “The way it was before, a great storm could have knocked everything down.”
If those winds begin to blow, PS Group will be a decidedly trimmer operation than it was with its airline holdings. Revenue for 1987 will fall to about $300 million, well below the $895 million reported for 1986.
The company reported a $1.2-million net profit for the third quarter ended Sept. 30, compared to a $9.4-million net profit during the third quarter of the previous year. Because of the gain on the sale of PSA, PS Group will report a net profit for 1987.
However, Guerin has warned that the new company will not necessarily be immediately profitable because “none of our businesses are simple businesses.”
Competition Increasing
PS Group’s aircraft leasing business is proof of that point.
Analysts believe the leasing business will continue to be profitable, but Guerin acknowledged that PS Group faces increased competition from better-capitalized competitors “who are willing to live with razor-thin margins.”
Consequently, PS Group must “play an opportunistic kind of game . . . We’ll hunt and peck and pick up only a few kernels,” Guerin said.
PS Group also turns to the profitable leasing subsidiaries for tax benefits that reduce the holding company’s tax burden, according to Greg Kieselmann, an industry analyst with Morgan, Olmstead, Kennedy & Gardner in Los Angeles.
The near-term picture is not nearly as bright for PS Group’s oil and gas business, where the company has more than $130 million invested.
Gas Prices Depressed
“We’re heavily involved on the (natural) gas side and there’s still a gas bubble out there . . . (so) gas prices today are severely depressed,” Guske acknowledged.
Late in 1986, management of PS Group’s Pacific Southwest Exploration subsidiary was turned over to Statex Petroleum, a Texas-based oil and gas company that PS Group acquired earlier in the year.
In keeping with Barkley’s self-described role as a “contrarian,” PS Group has ignored depressed oil and gas prices and pumped several million dollars into bolstering its lease holdings.
Pacific Southwest Trading, which supplies jet fuel at more than 60 airports in the United States, will be profitable in 1988 despite PS Group’s recent decision to cancel a contract that would have added about $100 million to the company’s 1988 revenue.
35% of Volume
“That contract represented about 35% of our volume, and while it will have a significant impact on operations and reduce profitability, it will not make the operation unprofitable,” Guske said.
PS Group faces increased competition from the major oil companies for contracts with airlines such as Continental, Southwest, All Nippon Airways and others, according to industry analysts.
That leaves the fledgling travel agency operation, which will need cash to fuel its acquisitions. USTravel’s business plan calls for it to buy enough travel agencies to become one of the nation’s largest such companies by the end of 1989.
That acquisition will be successful if it can acquire enough travel agencies to compete with major companies like Thomas Cook, American Express and Ask Mr. Foster, Guske said.
