Tuesday 22 August 2017

New Stobart Group boss has ambitious plans to see London's Southend airport flying high

A former EasyJet and Ryanair executive, Warwick Brady is keen to grow Stobart's aviation platform - and the company's franchise agreements with Aer Lingus and Flybe are key to the plan, writes John Mulligan

Graeme Buchanan (left), chief executive, Stobart Air, and Warwick Brady, CEO Stobart Group
Graeme Buchanan (left), chief executive, Stobart Air, and Warwick Brady, CEO Stobart Group

Had providence ordained a different path, Warwick Brady would be running Aer Lingus right now. In late 2014, the former EasyJet executive was poised to succeed Christoph Mueller at the Irish carrier.

But then along came Willie Walsh, the CEO of British Airways owner IAG, making what would be a lengthy but ultimately successful €1.34bn bid to buy the former state-owned airline. Brady retreated, not willing to take the plunge, it seemed, when uncertainty over the future of Aer Lingus's ownership loomed.

Yet, as one door closed, another creaked open.

In late 2015, EasyJet chief executive Carolyn McCall held talks with retailer Marks & Spencer to succeed Marc Bolland as its CEO. It appeared that Brady, who had been with EasyJet for eight years and was its chief operating officer (he also worked with Ryanair between 2002 and 2005 as its deputy operations director) was in the ascendancy.

"It's no secret that I was the internal succession plan and I had a broadly in-principle agreement with the board," he says. "Then it was announced that Carolyn was not going to M&S. Mid-summer, Brexit happened and she recommitted to the group for five-plus years, which obviously meant I was at a decision point."

Was he annoyed or frustrated about it?

"I wasn't annoyed; all the best-laid plans and all that. If I was going to be a chief executive, I had effectively several options: either go and be a corporate CEO somewhere in a non-airline business - or CEO of an airline (he had been CEO of Indonesia's Mandala Airline between 2008 and 2009), but there were restrictions about that for 12 months. Or I could do something a bit more entrepreneurial and take a FTSE-250 company and grow it."

And so Brady, a one-time acrobatic flying team tutor, landed at the Stobart Group last summer, initially 'consulting' and soon afterwards confirmed as its deputy chief executive. Following the Stobart Group's annual general meeting last week, he was formally appointed chief executive of the stockmarket-listed company, taking over from Andrew Tinkler, who now heads Stobart Capital, a connected unit that will hunt for investment opportunities, primarily in aviation.

Brady may not have got the Aer Lingus job, but ironically the Irish airline is now one of the most important elements of Stobart's business, which also includes a retained 12.5pc stake in Eddie Stobart Logistics, the now stockmarket-quoted company that runs the famous green, red and white trucks up and down the UK motorway network (it lost a €45m Tesco distribution contract in Ireland last year).

Stobart Air - whose previous incarnation was Aer Arann, before Stobart and other investors took control in 2010 - has a franchise agreement that started the same year to operate the Aer Lingus Regional network for Aer Lingus.

It will carry almost 1.5 million passengers on the turboprop service this year.

Aviation is the designated linchpin of the energy-to-engineering Stobart Group, whose assets include London Southend Airport - a facility the company is hoping can eventually be transformed into a significant gateway for the sprawling city.

But can Stobart make it work?

It has owned the airport since 2008 and has struggled to make inroads. Data from the UK's Civil Aviation Authority show that Southend handled 874,000 passengers last year, compared to 901,000 in 2015, and just 42,000 in 2011, when it was still being upgraded. Stobart hopes to handle 2.5 million passengers there by 2018.

There are 6.4 million potential consumers within an hour of Southend - about three times the catchment in Milan, according to the enthusiastic Brady, whose was born in South Africa and whose great-grandfather emigrated to the country from Ireland. But why haven't all those potential holidaymakers been using Southend, if it is so convenient?

"Southend was always a play on London capacity," he says, speaking at Stobart Air's office just a short distance from Dublin Airport, while admitting that the airport suffered from a lack of savvy marketing and that growing it takes time.

"I think it does take a few years. It has been lack of PR, no strategic view with the airlines. We're looking at all the airlines in Europe and asking, strategically, who fits this airport?"

Stobart Group has previously indicated that it has been in talks with a number of airlines, but Southend is still only served by Flybe (with flights operated under a franchise agreement that Stobart Air has with the regional carrier) and EasyJet. Brady insists that Stobart is now very close to luring others.

"By the end of the summer, we'll be announcing - or not," he says. "Two airlines are in deep negotiations and with two others we're talking money and the proposition."

Brady and Stobart Air's recently-appointed chief executive Graeme Buchanan, who is sitting in on the interview, both say Stobart can generate better returns at Southend than other operators can at other airports because the group owns the value chain. Stobart built a railway station, terminal and hotel at Southend and owns handling services there. Also, of course, it has the Flybe franchise.

And despite this asset, as well as biomass-energy-generating stations coming on stream and its railway engineering division, Stobart Group's latest annual report shows that it had assets, excluding cash, of £124.9m (€142.3m) at the end of its last financial year in February.

Net assets, including intangibles, amounted to £387.5m. The group has about £140m of net cash. Revenue last year edged just 2.1pc higher to £129.4m, and it generated underling ebitda (earnings before interest, tax, depreciation and amortisation) of £35m, which was up 16.8pc. But why is the company boasting a £1bn market capitalisation and its shares are hovering at a record high?

The gregarious Brady anticipates the question, nodding his head as the stats are ticked off.

"The valuation is based on a few things," he says. "It's taking the operating businesses and doing a multiple on them, which is a small valuation. But this is why the valuation is £1bn: we have said we're going to return cash to shareholders through a regular dividend. The dividend will be about a 5pc or 6pc yield. We'll distribute that cash and we're divesting of non-strategic infrastructure, so we've got enough money to pay a dividend past 2022, at which time the operating cash will absolutely simply support the dividend."

So basically, Stobart is selling off non-core assets, reducing its cash balance to support the dividend payment in the anticipation that everything pans out within five years.

"We will take the cash and work with Stobart Capital and generate a 15pc investment rate of return with the cash we have," he adds. "In 2022, we'll have an operating cash flow of about £100m ebitda. We'll still have a £400m-plus balance sheet. We're trying to combine an entrepreneurial PLC with some of the off-balance sheet work."

This time last year, Stobart Air was on the cusp of being sold to Dublin-based CityJet, the regional carrier founded by Pat Byrne, who is now its executive chairman after the airline was acquired by him and backers last year from Germany's Intro Aviation.

It was expected that the deal would see Stobart Air valued at about €80m. The plan also unleashed a move by Stobart Air's chief executive at the time, Seán Brogan, to mount a management buyout of the operator. That was rebuffed and Brogan left. But the undercarriage later collapsed from beneath the proposed sale to CityJet too. It was no coincidence that the plug was pulled just a couple of months after Brady became involved with Stobart.

"We've got this airline that was going to be sold to CityJet," says Brady. "We had a price X, which then got chipped away with Brexit to Y. Clearly, I didn't think it was in the strategic interest of this business, when you've got a valuable franchise to the end of 2022 (in the poisonous aftermath of the deal being pulled, Byrne vowed to fight for that franchise when it comes up for renewal).

"These guys run a really good low-cost operation," Brady says of Stobart Air. "If you've got a well-run business that has a low cost base and a partner in Aer Lingus that's growing at 20pc across the Atlantic, and we've got exclusivity on 18 routes into the UK, why would I give that up? Why would I not optimise the value of that?"

Buchanan chimes in that the takeover by CityJet could have been sealed if things had moved more quickly. "The end of June was very achievable if they had approached it in the manner in which they said they were going to approach it, which was with very light-touch due diligence.

"They kind of got lost in the detail. We had a bit of a hiatus over July, with holidays. We tried to pick up the momentum again and in fairness, it was me trying to push it to conclusion through August. We had a close-out meeting in September. Everybody agreed that two weeks from there was achievable. Two weeks came and went and no-one was getting upset. We asked what was the problem? They were hard to communicate with. It got close, close, close and then never."

So is the relationship unsalvageable? The takeover itself would be tougher now, for sure. Stobart Air is now a wholly-owned unit of the Stobart Group (investors Invesco Perpetual and Cenkos, as well as Pádraig Ó Céidigh sold out their stakes in the aviation unit this year), so harder to prise away, especially when Brady has made it a key strategic plank of the group's overall growth plan.

"The two businesses are complementary, in that they're very much focused on wet lease and we're taking commercial risk," says Buchanan. CityJet has focused on growing its wet-lease business, where it supplies aircraft and crew on contract to other airlines, such as SAS and Brussels Airlines.

"We're different parts of the aviation spectrum. Ireland is a small market. I'd say their business is fundamentally growing outside of Ireland. Our business core is in Ireland and the UK. We're open to co-operation," he adds.

Brady also leaves the door ajar, saying that "absolutely" he would welcome CityJet flying out of Southend (a deal to do so prior to the takeover crumbling was canned once everything went sour).

"We have control of our decision-making," he adds. "Anything that helps us strategically grow, and bring us to a £2bn market cap by 2022, of course we'd be interested."

Within five years, says Brady, 60pc of Stobart Group's business will be aviation, 30pc will be renewable energy and 10pc rail. Stobart Air generated revenue of €122.5m in 2015 and a €483,000 pre-tax profit, compared to a €17.1m loss the year before. For 2016, revenue increased by a low, double-digit percentage and it posted a small loss.

"We'll do less flying, carry marginally less passengers, but be substantially more profitable in 2017 over 2016," says Buchanan.

Brady interjects: "We're not into big. We're into profitable."

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