The decisions that make or break investors

Last week I agonised over the technological threat faced by Castings. This week it's Air Partner's turn. You might question my dedication to companies that face challenges. All companies face challenges. Recognising those challenges and deciding whether companies can overcome them makes or breaks investors.

Air Partner is an admirable company. Let me count the ways, it's:

1. Profitable. It swings around quite a bit, but average return on capital since 2007 is 18%.

2. Straightforward. Air Partner is a broker. It knows the passengers and plane operators and arranges charters for a fee.

3. Specialised. The company has relationships with a large number of operators, enabling it to offer a wide range of planes and destinations.

4. Innovative. JetCard, a pre-paid membership scheme, guarantees flights at fixed prices within 24 hours.

5. Communicative. Air Partner's annual report is a good read, and its executives are keen to explain the business.

As an investment, Air Partner has attractions too. The shares cost about £4.00, which values the enterprise at £45 million, or about ten times adjusted profit. The earnings yield is 10%.

Yet, however you measure it, revenue, operating profit, operating capital, the company hasn't grown convincingly over the last 10 years.

Two theories

I have two theories about that.

The first is that demand for air charters from Air Partner's principal customer ten years ago, the Ministry of Defence, has collapsed due to the end of wars in Iraq and Afghanistan.

Private jet broking earned Air Partner over a third of gross profit in 2015-16Then Air Partner was transporting military and civilian personnel and equipment to war zones and political hotspots. The company has sought out growth markets, broking charters for package tour operators for example, but generally it's been replacing lost business.

My second theory is that improved communications make it easier for customers to arrange charters directly with plane operators and management companies, or through intermediaries that charge less, like online broking platforms.

Essentially, these technology companies are seeking to revolutionise private jet broking, the chartering of small planes by very wealthy individuals. Private jet broking earned Air Partner over a third of gross profit in the year ending in January 2016.

Quizzing the company

There's not much point in having a theory unless you test it, so I went to Air Partner's Annual General Meeting in June to quiz the company about the technological threat, and its evolving strategy, how it might profit in future.

Chief executive Mark Briffa thinks it's only a matter of time before one or more online brokers emerge with a viable (i.e. profitable) end-to-end technology solution. Already they are chipping away at the market for less profitable entry-level (two seater) planes. Air Partner though, offers a concierge service and the current generation of high net worth individuals, Briffa says, likes to know real people are looking after them.

The next generation of super-rich may be less attached to personal service than slick techThe next generation of super-rich, a generation that has grown up with technology, may be less attached to the personal service, but, perhaps Air Partner can give them convenience and service by developing an electronic front-end to its brokerage service. Rival Fly Victor has a website and mobile app that give customers instant estimates and allows them to request quotes.

Commercial jet charters, which earned Air Partner 50% of gross profit in the year to January 2016, are more complicated and varied, and Briffa does not think operators would allow online brokers access to their systems due to commercial and security sensitivities. The number of planes big operators like BA, Lufthansa and Monarch have idle, and their whereabouts, might be useful information for competitors, and terrorists.

Although the threat posed by online brokers may be limited to part of one third of the business, chartering planes is a very competitive industry. To grow, Air Partner is seeking to sell more services to its many and diverse customers.

Last year it acquired two businesses: Cabot aviation, an agent that remarkets (sells) and leases commercial and private aircraft, and Baines Simmons, a consultancy that also manages the Isle of Man Aircraft Registry.

Profiting from acquisitions

For the acquisitions to profit Air Partner, they need to bring more business into the group than it achieved as separate entities. Briffa gave me two examples of how they might.

A customer of Air Partner's broking business, like Thomas Cook, he says might benefit from regulatory advice or training from Baines Simmons. Aircraft owners using Cabot Aviation to sell their planes might 'park' their registrations cheaply in the Isle of Man, while the sale process goes through.

Briffa says the consultancy business could lead the company's global expansionThat is not to say it will be easy to cross-sell services in this way. Thomas Cook is a big company, I suggest to Briffa, and the people who lease planes through Air Partner will not be the same people that deal with regulatory compliance.

Briffa chuckles. In a people-, rather than technology-focused business, speaking to the right people is the main challenge.

There is a precedent for people-focused diversification. Shipbroker Clarkson grew by acquisition over many decades into a diversified shipping services company. In a competitive business set to become more competitive as aspects of it move online, Air Partner may be right to find niches it can expand globally, where people can still make a difference.

As a measure of his ambition, Briffa says consultancy Baines Simmons could lead the company's global expansion and one day be as big as the broking business. Between August, when Baines Simmons was acquired and Air Partner's year end in January, it earned £2 million in gross profit. Over the full year, Air Partner's broking businesses earned £23 million.

One more thought

One more maudlin thought on the pace of change. It's two weeks since ARM executives recommended an offer from SoftBank, a Japanese conglomerate. ARM was perhaps the best opportunity for UK private investors to get on the right side of technological change by owning shares in a company making it happen rather than responding to it.

I often considered investing in ARM, but never had the conviction required to pay the high valuations demanded by the stockmarket. Other investors had more confidence that because ARM had, by designing the microprocessors, enabled one revolution that put a supercomputer, the smartphone, in our palms, it quite probably would enable another - the so-called "Internet of Things".

No longer will I be able to say "one day I might own shares in ARM".

Contact Richard Beddard by email: richard@beddard.net or on Twitter: @RichardBeddard

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.