Saker Aviation Services (SKAS)

Price: $8.45

Market Cap: $8.25M

Enterprise Value: -$0.3M

Investment Thesis

Saker Aviation is well-positioned to win the next operating contract for DMH, which, assuming it can continue self-managing the heliport, will allow it to generate at least $1.1M of FCF, at a 13% earnings yield, for the five years thereafter. With a negative EV and +$6M in excess cash, shareholder distributions will likely come much sooner and be much larger than what is currently priced in, resulting in a 26-37% 3-year IRR for investors.

Background

Saker Aviation is the contracted operator of the Downtown Manhattan Heliport (DMH). Saker charges those who use the heliport for landing fees, small supply items, refueling, etc. on behalf of the city. Prices for its offerings are suggested by the company in the negotiation phase of each period’s contract and then set by the city. It reports a roughly 70/30 split in revenue between “services and supply items” and “fuel and gasoline” revenue. 

DMH is one of three public heliports in New York City. By local law, DMH is the only heliport out of the three that tourist sightseeing flights can operate out of, which, by my estimate, makeup +80% of the flights out of DMH. This exclusivity has had the effect of insulating Saker nicely from most competitive pressures, with key competitors being Jersey City, Hoboken, and Kearny heliports — all based in NJ. This means the city’s interest in keeping NY tourist sightseeing flights within DMH — where they can regulate and charge those flights vs. those flying out of NJ heliports, where it is significantly more difficult to do either — is aligned with Saker.

Source: NYU Market Research (left), DMH Addendum Fall 2023 (right)

Since 2008, Saker has operated under an exclusive concession agreement with the NYC Economic Development Corp., whereby in exchange for having the sole right to service the heliport, it had to pay 18% of the first $5,000,000 of gross receipts and 25% of gross receipts in excess of $5,000,000 to the city each year. For context, historically, the final rate has varied between 21-23% of gross receipts.

Seeing that the concession agreement with Saker was set to expire in April 2023, the EDC launched a bidding process for a new request for proposal (RFP) in October 2022. In February 2023, the EDC announced that Saker had won the RFP for a five-year contract with a five-year extension at the option of the city and a new, flat concession rate of 36% of gross receipts. In March 2023, it was released that there was a possible conflict of interest due to a board member of the EDC being a partner at Saker Chairman William Watchel’s law firm. Upon further investigation, the EDC found that “no RFP submission materials from any respondent … were provided by [the EDC] to any other respondent during the course of this procurement process,” according to the chief contracting officer. 

Later, in March, the RFP was canceled with the intent to restart the bidding process in November 2023. The reasons cited by the city for the restart were new federal funding for the installation of a freight facility on the pier and the new desire to build out electric vertical take-off and landing aircraft (eVTOL) infrastructure. The cancellation of the last RFP will likely not affect Saker’s chances of winning the next one because 1) the new RFP requirements support the city’s explanation for canceling, mainly that there was a change of circumstances in funding that they wished to include in plans for the next five years, and 2) there was a similar controversy that occurred after Saker won the 2008 RFP regarding claims of unfairness but that resulted in no action on the part of the city.

The EDC finished accepting bids on the new servicing contract in January 2024, of which Saker was one, and is expected to announce the new operator in the spring. Meanwhile, Saker has continued operating the heliport through an interim contract with a concession rate of 30% of gross receipts.

Significant Developments

1. FBO Subsidiary Sale

Since 2008, Saker Aviation Services has been a combination of its heliport operations based in NYC and a fixed-based operator (FBO) subsidiary based halfway across the country, in Kansas. The subsidiary provided ground-based services for general aviation purposes, such as refueling, maintenance, and repair, strictly at the Garden City Regional Airport. Saker’s FBO subsidiary had much less pricing power than its heliport operations, with aircraft operators now routinely knowing the refueling prices of various FBO providers, which they actively compare and plan for, while also comparing this with carrying fuel and/or refueling themselves. The FBO subsidiary’s offerings were fairly commoditized as a result. As such, this had generally been a lower-margin, more SG&A-intensive operation, historically making up 30-40% of the company’s total SG&A, which itself was arguably inflated due to an overly high management contract that recently expired (covered later). This factored into the FBO operations reporting a 7% EBIT margin in 2021, roughly half that of the company’s consolidated EBIT margin, and negative EBIT in 2022, with a trend towards contracting margins.

Needless to say, a sale of the FBO segment certainly made sense, and in September 2022, the company did just that and sold the assets of the subsidiary with a seven-year, 100-mile non-compete for $1.6M cash. Saker has netted $1.44M after closing costs, or just under $1M after subtracting the value of the assets sold.

2. Empire Savings

Saker management, since the sale, has been able to focus on the more profitable heliport segment, taking day-to-day control from a management contractor, Empire Aviation, which has resulted in $1M-$1.2M in annual savings. With the expiration of the management contract in April 2023, SG&A decreased by 68% yoy last quarter, increasing EBIT margins by over 2600 basis points. There is an obvious question here, which is: if Saker could in-house the heliport's management at 30-40% of the cost of contracting with Empire, why did the management contract ever exist?

There are two explanations for this: 1) As stated before, management had to handle two different businesses in two very different locations, requiring external management at the heliport; and 2) it was disclosed at the time of signing, in 2016, that Empire was owned by the children of the then-CEO, meaning contract costs may have been artificially expensive due to it being a related party transaction. This is corroborated by the fact that Saker and Empire were also both contributing to the Helicopter Tourism and Jobs Council, a lobbyist that happened to be managed by the then-CEO’s grandson. Assuming this is the case, management will be able to self-manage the heliport at just over $2M per year, or at ~25% of forward revenue versus 40-50% historically.

3. Expected Terms of the New RFP

The new RFP is for a term of five years, with two five-year extensions at the option of the city. Based on the concession rate of the canceled February RFP, at a flat 36% of gross receipts, investors should expect at least a 1600-1800 basis point decrease in Saker’s gross margin post-signing. There is a reasonable chance that the concession rate will rise above 36%, as the increase by Saker reportedly took rival bidders by surprise and was the subject of the controversy mentioned earlier. The new RFP also cuts down on the hours of the heliport’s operation from 9 a.m.-7 pm Mon-Sat to 10 a.m.-5 p.m. to reduce noise pollution in the Manhattan area. This will have a major effect on revenue next year, which I am estimating at a 15% decrease yoy.

Also disclosed in the new RFP is the $1.2M cost to the operator for the building of a “Marine Infrastructure Project,” of which $960K is expected to be reimbursed through federal funding, with the remaining $240K to be “the sole responsibility of the operator”. It is stated that on the off chance that federal funding is not received, the operator would be responsible for the entirety of the costs. Another requirement that is also a condition for the renewal of the first five-year extension is the build-out of eVTOL infrastructure, which is expected to be at the operator’s “sole expense”. It is unclear to us how much this will cost Saker. In my model shown below, I estimate Saker will pay $240K for its share of the MIP and an additional $1.8M for the eVTOL infrastructure through FY 2025.

Investment Case

1. Saker Advantaged to Win New RFP

Saker is currently priced at a slightly negative TEV value, and with only $1.8M in total liabilities, it is priced at 65-80% of its liquidation value. This discount indicates that the market believes that 1) the RFP is unlikely to be won and/or 2) the company is a value trap. I believe both of these reasons are far off the mark.

Source: DMH RFP Information Slides Fall 2023

In short, Saker is a top contender for this contract based on its DMH-specific operating experience, relationships with the EDC and the City of NY, and its cash-rich balance sheet. Although there is not a list of past or current bidders for DMH RFPs, the names of three bidders who have sued in the past due to a belief of unfairness in the process are known: Helo Holdings, Linden Airport Management, and Thoroughbred Sea & Air. To give the logic behind my thought process, I will explain Saker’s position in each section, comparing this with the known competitors:

In the Fee Offer section, a bidder offers a concession rate and is scored based on how competitive it is. Because this is likely to differ greatly from the last contract, it is difficult to compare Saker against competitors. Historically, however, Saker has been very strong in this section, as evidenced by their winning of the now-canceled February RFP through their offering of a flat 36% concession rate, 1.3% higher than the next highest competitor, Thoroughbred Sea & Air.

Next, the Planned Operations section requests detailed plans for the entire facility, estimates including financial statements and employee count, and details on how the company would work with the EDC. Saker is clearly advantaged in this section relative to competitors, as they are able to describe their existing DMH operations and relationships with the EDC. There should be no reason why they don’t reach the full 20 points in this section. On the other hand, competitors have to estimate using external sources that may or may not be reliable for operations that Linden and Thoroughbred have no experience with and that are much larger than Helo’s Kearny heliport.

The Operating Experience section includes resumes and professional qualifications, safety records, references, and business with the city and/or NYCEDC. Again, Saker is a strong contender for the full 20 points in this section. Saker management not only has the preferred 5 years of operating experience, but they have over a decade of experience with the operations of DMH specifically, which includes dealing with the EDC and the city over the same amount of time. Although it requests experience with aviation and/or freight operations, I am unaware of any heliports with simultaneous “maritime freight and microdistribution” operations, including the Kearny heliport, so I don’t foresee a rival bidder having any major advantage on that front. All three known competitor companies are centered around a single owner/operator, adding an element of key man risk with choosing one of them versus Saker which has a larger and similarly experienced team. In the case of Helo’s Founder and CEO, Jeff Hyman, his experience building the first new heliport in 30 years in 2010 and operating it since certainly qualifies him as a potential operator of DMH. Linden Airport Management, similarly, has been run by the CEO and Founder, Paul Dudley, since 1989 and reportedly has great relations with the city of Linden. Linden is likely not as competitive for the next RFP as they were in the past, as there have been recent reports of the personal use of hangar space by Dudley and lax oversight on the part of Linden. Lastly, Thoroughbred is a new entity founded by Adam Trenk, the grandson of the past Saker CEO mentioned earlier who is also the owner of Air Pegasus, the company that has operated the West 30th Street heliport for 37 years. Adam has no direct operating experience in the aviation industry and is instead a partner at an aviation-related law firm. He has also lobbied for the helicopter tourism industry in the past few years. None of the known competitors have had significant business with the city or the EDC, as the two rivals with operating experience are both based in New Jersey. This is an important point, as a strong relationship with the city is needed for stable long-term heliport operation.

The main points of the Proposed Capital Investment section include a request for a detailed plan and timeline for the design and construction of the freight facility and eVTOL infrastructure and the commitment to pay for 100% of the costs of each. The freight facility was a part of the now-canceled February RFP, meaning Saker and rivals have had plenty of time to detail and refine their plans around the needed capital investments. Beyond the preparation, it is hard to know where Saker stands in this section relative to competitors.

Finally, the Established Financial Capability asks for the source of funds to pay for the capital improvements and the commitment to provide documentation to prove the capacity to pay for them if requested by the city. With $6.1M in cash and $2.4M in liquid investments, Saker is in a great position to maximize the points in this section. The publicly accessible nature of Saker’s financials likely weighs greater than rivals, who must be requested by the EDC to provide documentation in support of their capacity to pay. So, Saker likely reaches the full 15 points in this section. It is obviously unknown how competitors fare in this regard; however, it should be noted that none of the three known rivals exceed $5M in revenue, so their cash-building ability has likely been limited in comparison to Saker.

1. Operating Performance

In 2016, the City of NY negotiated a 50% reduction in the maximum number of tourist-related flights allowed out of DMH. Over the following three years, SKAS’s total revenue fell by ~24%. Assuming at least 75% of the company’s total revenue, based on the reported customer concentration, came from the heliport operations in 2016, there was a ~64% correlation between the flight count decrease and the total heliport revenue decrease. For the hours of operation decrease set to take place next year, I believe that some of the flights outside of the new hours will be scheduled to fit within, decreasing the correlation between flight count and heliport revenue. Additionally, with heliport revenue estimated to be up MSD next year, based on increasing tourism levels in NY, a 15% decrease in revenue with the 30% decrease in operating hours is reasonable to expect.

Regarding margins, I am estimating a 40% gross margin, which includes an assumed 36% concession fee that leads to a 1300 basis point compression in the total gross margin. With the discontinued FBO line reporting gross margins of 15-25% in 2021 and 2022, my 40% estimate, or 53% gross with the historical concession fee, is likely conservative against the historical 50-55% consolidated gross margin. Next, EBIT margins are dependent on the fact that management is able and willing to continue self-managing the heliport operations, which is probable for the reasons mentioned earlier. On a side note, with hours decreasing by 30%, it is likely SG&A will also see a decrease. This is not included in the EBIT margin assumptions, however, to remain conservative.

2. Management Returns Capital

If all goes well, Saker will generate $2.2M in FCF through 2025 on a market cap of $8.2M for a FCF yield of 13% in 2025 on a negative TEV. Although this smells of a value trap, management has distributed large amounts of excess cash in the past through both dividends and small opportunistic buybacks, and I believe they will do the same post-RFP. In 2019, for example, Saker declared a $0.50 dividend, distributed in $0.125 amounts over the following four quarters, at a price of ~$4 at the time. This was with a $4.2M NCAV on a similar-size market cap. After declaring the special dividend, the company saw a 30-40% increase in its stock price, much greater than the amount distributed. When Saker’s financials suffered with the elimination of most tourism in 2020, the company reserved its cash, explaining the lack of distributions since.

With historically high excess cash on the balance sheet, there is a plausible explanation for management’s lack of shareholder payouts in the last year: management is attempting to maximize their points in the Financial Capacity and Proposed Capital Investment section of the new RFP by reserving cash, viewing the liquidation that would result from a loss of the RFP as a reason not to rush distributions. I am modeling a gradual return of capital after winning the RFP over the next two years. However, if the explanation were to be the case, a payout could come much sooner and be much larger than what is currently priced in. Shareholders would see an accelerated return of capital, both in the form of dividends and the price of stock, resulting in a 50-100% annualized return. As management and the board of directors own ~34.7% of the common stock, which they have increased by 3.9% yoy, they would certainly benefit as a result.

The following valuation includes a multiple-based value of the 2025E FCF, less the interest income generated from the cash assumed to be distributed, and the 2025E NCAV of $1.56 per share. I believe a 7-10x FCF multiple is realistic and encapsulates the uncertainties of the business as well as the illiquid nature of the security.

Liquidation Scenario

Though again, I believe it is unlikely, if Saker does not win the RFP, it will have to let go of its twelve full-time employees, cease all operations, and presumably liquidate. Management has not explicitly stated their plans if the RFP is not won, but with a near 35% ownership of the company (worth far more than their individual $25k compensations), their interests would be aligned with those of shareholders. With the alternative being to burn cash through the next 5 years for the possibility of winning the next RFP, assuming the city doesn’t use either of its two five-year extensions, liquidating would be the best option.

Concerns

1. Legal Risk

The noise pollution over Manhattan as a result of the sightseeing flights coming out of DMH has inspired locals to lobby the NY government for greater regulation. The most significant of these lobbyists, the organization Stop the Chop, is responsible for the 2016 flight reduction and next year’s hour reduction, among dozens of other changes. In 2022, two bills were introduced in the NY City Council with 10+ sponsors each time for the ban of non-essential helicopters out of DMH. Both of the bills failed. A similar bill was introduced in February with five sponsors. Though based on the historical success of similar bills and the jobs, spending, etc. brought to Manhattan by these flights, a ban seems incredibly unlikely, further regulation is guaranteed. This will be brought about in the form of further tourist flight reductions and is even mentioned as a requirement in the Fee Offer section of the new RFP.

2. Unknown eVTOL Economics

eVTOLs, known for their noiselessness, offer a solution to both the concerns of residents as well as the ever-reducing flight count allowed out of DMH. However, with ~30% of Saker’s revenue coming from offering traditional fuel, it is unclear whether the increased flight count with eVTOL will be more profitable than the reduced-count traditional flights. In a positive light, there has been speculation that eVTOLs will be used predominantly for higher-frequency flights (termed ‘Air Taxis’), such as to and from nearby airports, which would increase the utilization of the heliport and landing fees taken by Saker. However, it is simply an unknown with this company and something to discount for as a result.

Key References

DMH RFP Fall 2023

https://bit.ly/43gI7Cx

DMH Addendum Fall 2023

https://bit.ly/3SYKPYu

DMH Informational Slides Fall 2023

https://bit.ly/3IgXUaG

Stop The Chop NY NJ Legislation

https://bit.ly/3SXScQ0