Seeking a Safe Touchdown
Hawker Pacific Aerospace has bloodlines rich in aviation history. But with consolidation in the aerospace industry, the company’s own history may be coming to an end.
Late last year, the landing gear maintenance company effectively offered itself up as an acquisition target by announcing it had retained an investment bank to advise it “on alternatives for maximizing shareholder value.”
“A sale is the primary alternative,” acknowledged Chief Financial Officer Phil Panzera, adding that no deal has been announced. “We’re not considering outside investment. If sold, we would like to be sold to another company in the aerospace business, as opposed to a financial buyer who would come in as a financial investor. We would prefer a strategic buyer as opposed to a financial one.”
Hawker Pacific is now the second-largest U.S. provider of landing gear maintenance services, behind only Goodyear. It maintains an inventory of landing gear “legs” for a wide variety of commercial jets.
When one of its clients needs a plane’s landing gear overhauled, it sends the entire set of legs to Hawker, which sends back a comparable set of reconditioned legs from its inventory.
The overhaul cost per plane typically ranges from $150,000 for a three-legged Boeing 737 to $500,000 for a five-legged 747.
The company was founded as Stellar Hydraulics in 1958--when aerospace was king in the San Fernando Valley.
Almost 30 years later, it was acquired by Hawker Siddeley, a British company that traces its roots to World War I. Its forerunner company, Hawker Engineering, was chaired by Thomas Sopwith of Sopwith Camel fame. It also built the Hawker Hurricanes used by the Royal Air Force in World War II.
After a series of mergers and acquisitions, the company became Hawker Pacific Aerospace in 1996 after a management-led buyout. The company went public in 1998, largely to raise money to acquire the landing gear maintenance business of British Airways.
The imperative to grow or be acquired is hardly unique to Hawker Pacific, said Jim Schwendinger, global director for aerospace and defense at consulting firm Deloitte & Touche. Schwendinger said a similar consolidation already has occurred among the largest aerospace companies, and now the pressure is building for smaller ones like Hawker Pacific to follow suit.
“It’s true all the way around the industry,” he said. “There are significant expectations around the [largest] companies that have consolidated. They all committed to their shareholders that they’d achieve significant improvement in their supply-chain costs. One way to do that is to improve their procurement” by dealing with fewer but larger suppliers that can offer greater efficiencies.
Few people who follow Hawker Pacific believe the company is being forced into selling itself for lack of financial performance. In the quarter ended Sept. 30, the company posted net income of $518,000 or 9 cents per share, compared with $32,000 or 1 cent per share the year before.
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Hawker Pacific posted a net loss of $2.42 million or 42 cents per share for the nine months ended Sept. 30, largely due to ongoing costs associated with its 1998 purchase of the landing gear services division of British Airways.
That acquisition and associated costs were effectively completed in mid-1999, leaving Hawker Pacific with a new British facility to complement its existing one in Sun Valley, and a $70-million agreement to provide landing gear servicing for all British Airways jets--including the Concorde--over the next seven years.
Hawker Pacific’s client list also includes American Airlines, U.S. Airways, Northwest, Delta, UPS and FedEx, and it recently signed service agreements with a number of Asian carriers, including China Southern Airlines and EVA Airways of Taiwan.
“At this point, we can handle just about anything,” Hawker Chief Executive Dave Lokken said. “We’re one of the few companies [in the U.S. and Britain] that handle [Boeing] 777s. Our strategy is to shift more and more of our products toward larger airplanes, not only the Boeings but also the Airbus planes.”
Hawker’s current trading price in the $7 range is near a 52-week high. The target was $6, set by Tom D’Amore, an analyst at First Union Securities, whose investment banking unit is also advising Hawker Pacific on the company’s possible sale.
“As the frequency of air travel increases, the companies in the business of servicing critical components of the aircraft should benefit from an increasing demand for their service,” D’Amore said. “[Hawker Pacific] can look to robust demand for their core business based on an increased level of air traffic and air travel in the U.S.
“To be honest, I think they’re self-sustaining as a stand-alone company. But their growth prospects would be improved if they were to partner or be sold to a larger company, which would allow them access to cheaper capital.”
Still, D’Amore said he sees a strong future for Hawker Pacific whatever course it takes.
“I think the company should be able to grow its earnings at 10% annually on a long-term basis,” he said.
“It’s better run today than it was, and the company has made some significant steps in improving its operational efficiency.”
