Additional reporting by Helen Massy-Beresford & Graham Warwick
Middle Eastern investors have poured financing into general aviation throughout this decade, funding programmes that Wall Street and others have shunned
The dot-com boom of the late 1990s - when Wall Street pumped billions into on-line start ups, only to take a pummelling when they all collapsed - was the not the best time for any general-aviation entrepreneur to go looking for capital. Moneymen dazzled by the prospect of an on-line retailing revolution, and adding several zeros to their investment in just a couple of years, were hardly going to be impressed by personal aviation - an idea that had been around since before World War II.
Alan Klapmeier, co-founder of Duluth, Minnesota-based Cirrus Design, had spent most of the 1990s getting the all-composite, four-seat SR20 piston single to certification, with 250 private investors providing the funds. By the turn of the decade production was under way and a second, uprated model - the SR22 - was certificated. But cash flow was negative and Klapmeier and his brother Dale needed a nine-figure sum to take the company to its next stage: volume production and serious marketing. "The worst part of my job was convincing people that the aircraft could be produced and there was a market. Nobody in the financial world believed it," he says.
Long-term investment
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Britten-Norman was on its last legs when Omani businessmen stepped in |
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Cirrus Design ended a long search for finance when it found |
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Liberty Aerospace needed backing to achieve its ambition of a global footprint |
Then, after endless fruitless meetings with New York investment banks and angel investors - individual risk capitalists - he met an Atlanta-based firm called Crescent Capital, owned by the First Islamic Investment Bank of Bahrain. In August 2001, Crescent [now Arcapita] provided a financing package worth $100 million in return for a roughly three-fifths stake in the manufacturer.
Unlike most US investors at the time, says Klapmeier, "they were interested in investing in something that was real - tangible properties and products". In addition, "they didn't have a short-term time horizon. They were in for four to seven years, but had no requirement to exit," he says. "If it had been a company that wanted immediate quarterly returns, it wouldn't have worked."
The funding allowed Cirrus to "ramp up the company", Klapmeier says, investing in tooling and inventory and "getting the cash flow situation under control". Now, with the company preparing to deliver its 3,000th aircraft in October - 80% of them SR22s - and planning to build a very light jet (VLJ), the company is a much-admired success story in general aviation. Cirrus, says Klapmeier, will probably need more funds to take the VLJ to certification and production, but this time round it is likely to find more willing suitors, and an initial public offering is a possibility.
Cirrus is just one of several general aviation companies to have benefited from the largesse of Gulf-based finance houses this decade. Two years ago, Melbourne, Florida-based start-up Liberty Aerospace sold a 75% stake to Kuwait Finance House (Bahrain) (KFH). Liberty had just certificated its two-seat XL2 with backing - as with Cirrus - from small investors. "We had a clear strategy of launching a global aviation product and we could do that with a group of private individuals," says co-founder and president Anthony Tiarks. "We needed to bring in a substantial partner." But, again like Cirrus, Tiarks met with a blank response from banks close to home. "There was not much evidence that the US investment community has an appetite for the global market in our sector," he says. "For decades, the GA market has failed to produce investor benefit."
Instead, Tiarks and his team took the new aircraft on a publicity tour of the Middle East and caught the eye of KFH - which already had an $800 million investment in the aviation sector through its Millennium Aircraft airliner leasing operation.
The investment has allowed Liberty to invest in production and establish a sales and marketing operation overseas. The company has an orderbook of 180 aircraft and is building up to 10 aircraft a month. However, with a surveillance variant of the XL2 on offer and flying schools in emerging markets such as China among key targets, Tiarks is confident of securing significant overseas sales and expects 60% or more of all XL2s to be registered outside North America.
European angle
Over in Europe, Piaggio Aero - the Genoa-based manufacturer of the P180 Avanti twin-pusher turboprop - was at a different stage of its development when it attracted Gulf investment. Formed in 1998 from the remnants of the old Piaggio business by a group of shareholders (including the head of the famous Ferrari sports car family), the company had a healthy orderbook for its revamped Avanti II, with most of the sales coming from North America, and was looking towards launching a stablemate, probably a mid-sized jet.
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Doncasters is one of the first forays by Gulf investors into aerospace |
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Ferrari family-backed Piaggio Aero has welcomed Abu Dhabi funding |
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SR Technics has been acquired by a group including Dubai's DAE |
In April, a 35% equity stake in Piaggio Aero was acquired by Mubadala Development, an investment company owned by the Abu Dhabi government and part of the consortium that has just bought Zurich-based maintenance, repair and overhaul house SR Technics (see feature P46). Piaggio was the first aerospace investment by Mubadala, established in 2002 to take strategic holdings in companies capable of generating sustainable economic benefits for Abu Dhabi. "We take direct stakes, and play an operating role," says chief operating officer Waleed Al Mokarrab Muhairi.
"As an investor, we look for commercial gain, we look to expand the economy of Abu Dhabi, and we look at how to tie the two together," says Muhairi. "What attracted us to Piaggio was the product, the management team and that we share a vision for growth. There is tremendous potential for Piaggio in the region." There was also a pre-existing connection - Mubadala owns 5% of Ferrari.
Underlining the investment firm's plans to take an active interest in Piaggio's operations, the company delayed the launch of its next model to let its new investor participate in the decision on what type of aircraft to develop. The two are also looking at the possibility of moving work to Abu Dhabi. "As part of our investment rationale, there has to be a strategic tie-back to developing some aspect of the Abu Dhabi economy, such as technologies or skills," says Muhairi. "We are looking at this together, as it has to be a winning prospect for Piaggio and Abu Dhabi."
Six years before Mubadala's acquisition of its stake in Piaggio, Britten-Norman, one of the UK's last remaining independent aircraft manufacturers, faced much bigger problems. The company was in receivership - not for the first time in its turbulent history - and there appeared to be few prospects for its 19-seat Islander in a market saturated with these rugged workhorses.
Then two Omani brothers, the Zawawis, bought the Isle of Wight-based manufacturer - renamed B-N Group - and together with new chief executive William Hynett refocused the business on the defence and homeland security sector with the Defender, a special-mission variant of the Islander. Although sales have been modest, the Bembridge factory has been refurbished and additional businesses, including the reassembly of Cirrus aircraft for the European market, have ensured a steady cash flow. For the first time in more than two decades, the manufacturer's future seems secure.
The willingness of Gulf investors to back general-aviation projects has seen a steady stream of would-be partners knocking at the doors of the region's finance houses. UK-based Farnborough Aircraft (FACL) is looking for more than $100 million to develop its Kestrel single-engine turboprop, a proof-of-concept (PoC) version of which made its first flight in July. It is promoting the aircraft - a modified version of the F1 designed by Richard Noble's defunct farnborough-aircraft.com - as a way of opening up a market in the Middle East for air taxis.
At the Dubai air show last year, FACL signed a memorandum of understanding with Abu Dhabi-based Gulf Aircraft Maintenance (Gamco) to produce the aircraft. This November it will take the PoC aircraft to the United Arab Emirates on what commercial director Richard Blain describes as a "flag-waving exercise". Blain is hopeful of attracting interest both from potential customers and financial backers. "It's always a problem getting aircraft funding, but the Gulf is a region that can afford to take the risk of getting involved in these sorts of projects," he says. "There is an interest there in getting high intellectual-property projects into the country: projects that aren't concrete or oil."
General aviation is not the only area of aerospace attracting Arab investment. The SR Technics takeover is highly significant in that it is tied into Dubai Aerospace Enterprise's (DAE) strategy to build an aircraft maintenance business focused on the Middle East and Asia-Pacific regions. However, the £700 million ($1.3 billion) takeover from the Royal Bank of Scotland in May of Doncasters, a UK precision-engineering group with a substantial presence in aerospace, showed that Arab investors are also interested in less glamourous manufacturing businesses further down the supply chain.
Political opinion
The deal had to be approved by the US government because Doncasters has an expanding presence there, with nine factories and a workforce of around 1,000, many of them manufacturing components used in defence equipment. The US angle is a sensitive one after legislators earlier this year blocked an attempt by Dubai ports operator DP World to take over several US container ports - a debate that whipped up barely-disguised post-9/11 paranoia over key US interests being controlled by Arabs.
Doncasters chief executive Eric Lewis says the company's first US acquisition under Middle Eastern ownership could "test the water" of political opinion. "Until then, we won't really know if it will affect our US strategy," he says.
B-N Group is targeting the US homeland security and law enforcement markets with its Defender 4000, but chief executive Hynett sees few problems with the company's Middle Eastern ownership, because "we are UK-based and UK-controlled". The company's Omani chairman is denied access to any security-sensitive information. "I can show him balance sheets," says Hynett. "But I may not be able to show him a drawing sheet."
Bank of America analyst Robert Stallard says that, while further Middle Eastern involvement in the commercial aerospace industry would meet little resistance, any overtures into the defence market - particularly in critical technology areas - would have to overcome "a high level of political and regulatory scrutiny". But this would be the case if the investor was Chinese, Russian or even from some European countries, he says, adding: "US sensitivity about technology transfer is universal, and not just focused on the Middle East."
Source: Flight International
