In this podcast, Bill Mann, director of small-cap research at The Motley Fool, interviews Tal Keinan, CEO of Sky Harbour, which operates airplane hangars around the U.S.
They discuss:
- How Sky Harbour is building home bases for planes.
- The massive growth in private aviation and why it's poised to continue.
- Turning underutilized airports into hubs.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on March 10, 2024.
Tal Keinan: I think most chefs would tell you, go ahead and publish my recipe. It's all in the execution. So while there is no rocket science behind what we do, there is a lot more art than science in it.
Deidre Woollard: I'm Deidre Woollard and that's Tal Keinan, CEO of Sky Harbour, ticker SKYH. Sky Harbour develops, leases and manages general aviation hangers across the United States, focusing on airfield and large markets. The Motley Fool's Director of Small Cap Research, Bill Mann sat down with Tal Keinan to explore the world of private aviation and Sky Harbour's plans for expansion.
Bill Mann: I've seen Sky Harbour described as a turnkey hangar builder and to me that seems to miss the mark a little bit. So if you'll excuse the industry-related play on words, I was just wondering if you can give us like a 20,000 foot description of Sky Harbour's business.
Tal Keinan: Sure. We call ourselves a home basis solution. So we're an infrastructure provider. We do build hangers that's true. We manufacture, we're vertically integrated, but the called the end-to-end processes get lands at airports, develop these campuses of private hangers, which are to be used as home basis versus an FBO. We can get to that distinction afterwards and then operate them. We don't sell them, we lease them on a long-term basis to credit tenants and operate them, meaning, provide all of the line services that are required for conducting business aviation. That's really what it is. If you, and if you want to think of it in aviation terms, if the FBO is a hotel for aircraft, Sky Harbour is a home for aircraft. Which is a distinction. We don't we don't have a transient business. It's all based tenants.
Bill Mann: When you all came public two years ago, one of the things that you had spoken about was the the supply demand imbalances in the aviation industry. You've mentioned in infrastructure deficit many times in the past. So for people who are not in the industry, could you talk a little bit about what the choke points are and what factors you view as being potential opportunities for businesses like Sky Harbour.
Tal Keinan: Look, I don't know if anyone else measures this where we're probably the only ones because no one else really should care about this. But we we track the square footage of the U.S. business aviation fleet. Which is number of aircraft times lifetimes we expand.
Bill Mann: Of the fleet itself. You're not talking about ground space, you're talking about?
Tal Keinan: The actual air airplanes in the fleet, so if there is a figure on the order of about 90,000 airplanes in the fleet. What's important for us to track is the net growth in the square footage of the U.S. business aviation fleet. I'll just throw some numbers at you. In the 10 years that preceded COVID-19, we added about 30 million square feet net of airplanes. Net, meaning new entrants minus retirements, net 30 million square feet of airplane. That's accelerated dramatically and we don't have numbers post-COVID.
But if you can just go on many online resource, you'll see the OEMs, Gulfstream, Bombardier, DSO, Textron are breaking records in backlog right now. Some of these manufacturers, you order a new airplane today. It's a three or four-year wait period until you actually take delivery of that of that aircraft. Everything I'm saying for 10 years before COVID has accelerated dramatically since. A couple of things to think about for our business, unlike the FBO business, which was really driven by fuel revenues, we're really driven by what does the square footage of the fleet once an airplane gets manufactured, it needs to be housed.
It doesn't necessarily need to be flown, but it needs to be housed. If you take an extreme situation, you have a protracted at deep economic recession. Doesn't matter so much to us whether the original purchaser owns the aircraft or the bank OZ aircraft, it's still needs to be housed. There are a few areas where the supply demand mismatch is most acute and where that mismatches growing the fastest. The first of those is in for large jets. In that much of the current inventory of business aviation hangar in the United States has a door threshold height of 24 feet and down.
Because these hangers were built several decades ago when 24 feet was enough to accommodate the tallest tails in business aviation. So it turns out the growth in aircraft in that same 10-year period that is described earlier. The growth in aircrafts that have a tail height of more than 24 feet is about 16.5 million square feet. More than half of the growth and the fleet square footage is associated with aircraft that have that tall tail height. Those aircrafts can't fit in those legacy hangers.
That's I'd say in terms of the type of aircraft, that's where the supply demand mismatches the most acute and where it's growing even more acute because if you look at the backlog of orders at the OEMs, it's heavily weighted, historically heavily weighted toward heavy jets today. The second is the aircrafts aren't delivered, they're not spread evenly across the United States. There are specific areas where net fleet growth is the highest. Again, we track this very closely. I'm not aware of anyone else who really has any reason to track it. But that's obviously where our efforts are concentrated. That's where our company's growth is the highest, is where we see the supply demand mismatch growing the most acute.
Bill Mann: Now you said twice now that you don't know of anybody who else is tracking it and don't know why they would. Maybe give us a little bit of an idea of where you sit in a competitive landscape. Not so much the installed base, but is anybody else really focusing on what sound. It sounds to me like an opportunity that might be apparent to a lot of players.
Tal Keinan: Look first, I don't expect to be the only player in our space forever. We're posting our numbers on a quarterly basis. People can see it. It's hard to think of something in the infrastructure or real estate space for that matter that is even close to this compelling on the unit economics basis and the opportunity is deep. It's hundreds of airports in the country that fit the bill for us so I expect there will be others for the time being I haven't seen a national effort like what we're doing. I'd say the closest things, there's the FBO industry with which we overlap for sure.
Bill Mann: I'm sorry, could you could you give a quick definition of FBO? For those of us in the back of the room.
Tal Keinan: The FBO is a fixed base operator. That is the entity that provides fuel and ground services to business aviation. Fuel is the main story there. It's 70% to 85% of revenue. It's the essential service. The other stuff is nice. Catering, you can live without. Fuel is essential. The FBO industry certainly overlaps with us but I would say if you look at it as a venn diagram, it's maybe 10% overlap. We're not directly competing with those guys. You do have one-off efforts to develop hangers that we've seen. Nothing like what we're doing with a very well capitalized national effort, vertically integrated. We're constantly getting our cost of construction down. Our financing is really optimized for exactly this. Again, none of this is rocket science. It is a simple business, so I expect others will, but for the time being, we haven't seen it.
Bill Mann: Well, I you actually anticipated a question that I was going to ask later on, but it's fascinating to me, especially with smaller cap companies, the decision to go public, because in some ways, I'm always curious about an element of being a publicly reporting company, especially for a company that has unique service offering. As you say, it's not rocket science, you do expect other entrants to come down the pike at some point. Are there parts of your business that you might otherwise like to keep confidential, but the fact that you're a publicly reporting company, you have to come out and talk about? In some ways, from a negotiating standpoint and from a competitive standpoint, that public reporting process might not be 100% comfortable.
Tal Keinan: Yeah, I think obviously pluses and minuses to every decision. This is one that we struggled with. Frankly, I don't think it's a secret. We turned down a $1 billion private equity offer when we went public. Most days, I would say we made the right decision. Again, there are a lot of disadvantages. I'll tell you how we handle some of those. But what we see as the advantages as well. Publishing the recipe.
Tal Keinan: I think most chefs would tell you, go ahead and publish my recipe. It's all in the execution. While there is no rocket science behind what we do, there is a lot more art than science in it and say, for example, site acquisition. Nobody goes out and solicits cities and counties directly on a serial basis like this for leaded airports. That's not how the FBOs grow. The big FBO chains, Signature and Atlantic, grew up primarily through M&A. That's their model much more efficiently. I think that's appropriate for them, but there is a very deep bag of tricks involved and how do you make this a win-win? How do you tick the boxes that need to be ticked? Remember, most airports are owned by local government, no two are like everyone has their specific interests.
How do you cater to those in the most effective way while still creating value for yourself? That's something that I don't think you're going to get reading our reports and frankly, it'd be a challenge even to articulate it ourselves. It's a team that we've built. It's a set of methodologies. Some you employ in some circumstances, some in others and we continue to refine that. That's probably at the core of the value that we're creating here is that ability. Also fusing it all together. It doesn't work nearly as well if you don't have the type of financing that we've arranged for ourselves. If you don't manufacture your own hangers and it saves really significant margin on your construction.
The suite of services that you can offer is quite different from what an FBO can offer and it takes a while to work that out as well. Even I think a very well-funded competitor, there is a pretty protracted learning curve we think if you're going to compete directly. Again, I think it will happen and maybe we are offering a bit of a shortcut by being public. You can read a lot of it, but I think most of the relevant stuff is not really there. On the other side though, I think we have found a very efficient way to grow because we were a very capital-hungry business.
Figure each airport is, 30- $60 million of capital to develop and they're coming in now at a very fast clip. We're pulling down airports every month now, more or less. Raising a billion dollars in one shot would have been much more dilutive than what we've been doing, which is going out and getting more in the public eye. By the way, a lot of it is our tenant community who tend to be, in many cases, the large, sophisticated investors.
They see the model, they understand it. Maybe the rest of the market understand that we haven't quite done that yet, but our tenants certainly do and we have a great overlap between tenants and shareholders. That community is wonderful and the fact that you're on a constant roadshow and people are following you makes it quite easy to dip into the market, whether it's a pipe or a different type of mechanism and fund ourselves incrementally. That's far less dilutive than, for example, if they've taken billion-dollar checks from private equity. I think that's probably been the main advantage of being public.
Bill Mann: I don't know if you've just heard the sound, if my microphone just caught the sound, but from Cherry Point Air Station, they do low-altitude training with their F-15s and one just flew overhead.
Tal Keinan: I'm jealous.
Bill Mann: I am too a little bit, I'd wave at them. One of the things that you had mentioned was the concentration of the private fleet in the US. You are in the process of opening up in a number of different airports. I was wondering if you could talk about what types of factors you look at that make an airport facility an ideal market for Sky Harbour.
Tal Keinan: Great. Well look, fundamentally it is that supply demand mismatch and it will be expressed typically in what we call total basin cost. Which for us and we have a formula that calculates the two main factors are, what is the specific aircraft paying and rent? What is that same aircraft paying in fuel margin? Those are the two main components to that. If we hit a certain threshold, as you've probably read, we're seeking double-digit yield on cost in every project that we go into today, for the time being, we're only targeting airports where if what people are currently paying will produce a double-digit yield on cost, that's a valid airport for us.
Now there are other criteria, you don't want to build 500,000 square feet of hanger. If that's going to cannibalize most of the market, their size consideration, there are others, but the primary factor is what is the total basin costs today. Perhaps in the future, we'll get a little bit more speculative and say, here's an airport that's on a trajectory. I don't want to disparage anybody, but.
I'm thinking of a city right here where you're sitting right now, which if I had to bet five years from now that city is going to be firing on all cylinders. It's going to be right at the heart of our envelope, but it's not quite there today. For the time being, we're not doing that, frankly, just because there's so much low-hanging fruit in the country that we should be grabbing right now and hopefully we circle back and get to those markets afterwards.
Bill Mann: I want to make sure that I understand you properly, give you a chance to explain the definition of terms. You mentioned fuel margin rather than absolute cost of fuel. For the layman, what does that mean?
Tal Keinan: We purchase fuel from the same suppliers at the FBOs. Well, you've got campuses that are on a pipeline, so for example, our national international campus is on the Colonial Pipeline. It means fuel gets there typically a little bit less expensively than to other airports. Like the FBOs, we take a small margin on fuel. The FBOs take a large margin, it's their main business. But let's say the FBOs are pulling from a consortium in Nashville at, $4 a gallon and if I could look it up right now what their retail rates are for a jet, they might be $7 a gallon.
They're capturing $3 of margin on that fuel. That's really what matters to us, it's not the $7 that the customer is paying, it's the $3 that the FBO is making. Call that available revenue from an aircraft or available net revenues, maybe a more precise way to express that. That's really what matters to us. Again, we've reversed the order but in some cases, it's zero margin on fuel. All of our revenues come in the form of rent from the tenants. In some cases some mix, but it's always heavily weighted, call it 80, 90% rent a little bit of fuel margin. In some cases that makes the deal easier with the tenant.
Bill Mann: Sounds a little bit like the old Jeff Bezos line your margin is my opportunity.
Tal Keinan: Yes. That's good. I might start using it.
Bill Mann: I didn't come up with it, but I don't know if you've heard of Jeff Bezos. He's done OK for himself.
Tal Keinan: I've heard of the guy.
Bill Mann: You're mentioning the types of airports that you're looking at. I assume that what you're talking about here is the home base for four planes because they are in every way imaginable, an asset that can move around the globe. Are there opportunities for a company like Sky Harbour in seasonal markets or destination markets. I'm thinking a Vail, Colorado or an Aspen or Bar Harbor, those types of markets.
Tal Keinan: That's a great question, so far we have not touched those, maybe toward the end of the COVID episode we looked because we saw people starting to enroll their kids in school in Aspen and in Jackson Hole and places like that and thought, maybe these are becoming interesting home-basing markets. We haven't moved on that. I still don't think they are deep enough to accommodate. We're putting people on 5,10-year leases, 12 months a year.
Those are great FBO markets. Aspen pumps, fuel like crazy, great margins, it's great. They're not really Sky Harbour markets. The other side of the coin though is we announced our ground leases at the end of the last quarter. Our first two New York area airports are Bradley, Connecticut, and Hudson Valley, New York. Those are terrible FBO markets. If you're visiting New York for meetings, you don't want to land in Hudson Valley and then drive.
Bill Mann: You need another flight to get downtown.
Tal Keinan: Exactly. You land in Teterboro. That's where do you want to be if you're visiting New York, however, it feels like every hedge fund in midtown Manhattan has called us since that announcement, we need space in Bradley and those planes will reposition. Most of the Manhattan-owned aircraft that depart from Teterboro and arrive to Teterboro, don't live at Teterboro. They repositioned because there's no room there. You can't get anchor space at Teterboro.
Those guys are paying, even for those repositioning airports like Bradley, Connecticut, they're paying much higher rents they would in almost any market in the country for a primary airport. For an airport where their plane lives and the same airport that it departs from and arrives to. Those aren't great FBO markets, but there are great home-basing markets. There's a natural shake-down in the industry.
Bill Mann: I was joking a little bit about the you'd need a flight, but that's exactly the case, isn't it? There's land in Teterboro and then reposition.
Tal Keinan: Yeah.
Bill Mann: In Bradley.
Tal Keinan: That's right. A lot of people are doing that. By the way, some people fly to the airplane, helped by helicopter.
Bill Mann: I watched Succession. I know how it works.
Tal Keinan: I looked. For some of these big corporate flight departments, I get it, it makes sense.
Bill Mann: It absolutely makes sense. When time is money at that scale 100%, it is more of a necessity than it might seem. Maybe this is a bizarre question. I know that's got to be a great, an alarm bell goes off in your mind when someone says, here's a bizarre question. But I was actually putting some thought into what other risks to private aviation there might be. You didn't name an entertainer, but I will, but it's one of the big cultural zeitgeist over the last 18 months or so has been the Taylor Swift tour. She's come into some criticism for her dependence upon a private plane to get her point-to-point. Is there the risk of a drumbeat being loud enough that people began to identify away from having private aircraft?
Tal Keinan: We watch that. By the way, it's a lot stronger in Europe than it is here. There definitely is an environmental movement that has taken issue with private aviation.
Bill Mann: They laugh at Davos when all of those people come in with their private jets like, you're here to save the planet.
Tal Keinan: That's my point, in many cases it's the same people who are using the system. Not to be cynical, but I don't think that movement has the legs that's going to impair the industry. I don't think we're shutting down business aviation. First of all, just mounted on the straight logical basis. There's about a 100 things you want to target in the world if climate changes is your top agenda item. There is a 100 things you want to get to before you actually get to this. This is not enough leaving a major mark. Again, the entrenched interests here are powerful. I don't see that happening, but certainly something we watch and of course.
Bill Mann: What can you tell me about your background? What led to your insight or your teams inside that there was this market out there, where Sky Harbour is doing sampling that is at least on some levels, has no equal within the industry?
Tal Keinan: Well, I had a plane, and couldn't get hangar space, and this got me curious. I spent a few years with this back of mine curiosity. It's strange. You've got this little market, they're not little, very large market. A lot of money flows through. How is it that the market hasn't solved this supply demand mismatch? At first, I thought this was a New York area issue. Pretty quickly became clear, it's most major metro centers in the country, to varying degrees have this imbalance, and it's getting much worse. I used to run an asset management business called Clarity.
We got professional management running Clarity, and I'd take it some time off to write and wanted to get back to work in this curiosity drew me in. I come from military aviation, originally, got a bunch of actual US navy pilots the beginning and that's still the core team. That's really who does the site acquisition. We got together and figure this out, and low and behold. We wanted to go through the whole cycle before we open the after burners on the whole United States. But we're running three campuses now, our numbers are coming in significantly better than we projected.
The unit economics work, and now it's really become a question of scale. You want to continue to work on the unit economics. If we can get our construction costs down by 20 $30 a foot, everything looks much better for sure. But even if we don't, we're in a really exciting position. Now, it's, can we get to 50 airports? Can we get to a 100 airports? We're on 10 today. I think we gave guidance that we'd announced three more in the first half of this year. I think we're going to blow that out of the water. That's really how we got here.
Bill Mann: I'm going to ask. You were talking about repositioning airports before. Do you see an opportunity? I'm always fascinated by Fred Smith and his model at FedEx where he said, we're going to be in Worthington, Ohio and we're going to be in Memphis, these underutilized airports. Is there a repositioning business whereby you are hankering planes in an underutilized airport and then turn that basically into a Sky Harbour driven facility in some ways?
Tal Keinan: A 100%, for example, Hudson Valley, New York is that. Bradley, Connecticut to a great extent is that, you have the Hartford insurance industry that uses Bradley as what we call a primary airport. Primary meaning, the airplane lives at the same airport that it operates out of. But it's still mainly repositioning. Most of those Bradley aircraft are going in New York, some of them to Boston. That's where they're meeting their passengers and off they go. That is a huge piece of our business. Especially in, call it the top half dozen markets in the country. Where there's really no room at the primary airport. There's no land. This repositioning market will increasingly claim a bigger stake of the home basing pie in the United States. That is big for us.
Bill Mann: I've been invested in some of the Mexican airports for a long time, and one of the cliches about investing in an airport is that they're just not about to build another airport. But it may not actually be true in the private industry where you can simply reposition and make the home airport something that's not necessarily convenient or even relevant to the end-user.
Tal Keinan: Categorically, you can't build a new primary airport. That is true. Where there's land, there's no use for an airport. Where there's use for an airport, there's no land, and that's right. It is beachfront property 100%. It's a little bit less the case on the repositioning airports. But even there look around, again, New York City's the densest business aviation environment in the country. Where's there even land for repositioning airport. It's really all client. Maybe out west there are a few places, but that's a little bit different. But in many markets there's no room for either.
Bill Mann: Tal Keinan, and this has been a fascinating conversation. Thank you so much for coming in, spending time with us here at The Motley Fool, and we're anxious to see where you all go for here.
Tal Keinan: We're really excited as well for that. Thank you for the opportunity, Bill.
Deidre Woollard: As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy yourselves stocks based solely on what you hear. I'm Deidre Woollard. Thanks for listening. We'll see you tomorrow.
