Buffett from the airline industry has gone for the long haul

Bill Franke has spent 20 years rebutting Warren Buffett’s adage that airlines are a “death trap for investors.”

But as a newbie private equity executive touting his first fund in 2002, he struggled to persuade large investors and pension funds to invest money in a notoriously cyclical and unpredictable industry. “They were all like ‘not in the airline industry’,” Franke recalled in an interview with the Financial Times.

Two decades later, the 84-year-old Franke is considered by some to be the most successful airline investor in history after buying stakes in a group of small carriers and pushing them into rapid growth by installing the very low cost business model developed. by Southwest Airlines in the United States and Ryanair in Europe.

While passengers often resent the no-frills model, which includes stacking seats on planes and billing for add-ons, this part of the industry is expected to emerge strengthened by the pandemic, further bolstering Franke’s reputation as than Buffett of the airline.

Franke’s Indigo Partners has interests in six airlines, including Frontier in the United States, Volaris in Chile and Enerjet in Canada. But it was the Hungarian airline Wizz Air, 40 percent owned by Indigo and chaired by Franke, that caught the imagination of a battered industry.

Wizz is hoping to use the crisis for a dizzying growth spurt, and his ambitions were underlined when a bold offer for easyJet was revealed and rejected last week.

Franke would not discuss easyJet, but said Indigo “is actively looking at opportunities” as the airline industry emerges from the chaos sparked by Covid.

“Now is the time for the industry to look at consolidation, and we would clearly want to be a consolidator. [buyer],” he said.

Wizz CEO József Váradi has been offered a big bonus if he can more than double the share price © Akos Stiller / Bloomberg

Wizz chief executive József Váradi has also been offered an eye-catching £ 100million bonus if he can more than double the share price in the next five years.

“It’s typical of Bill,” said John Leahy, the former sales manager of aircraft manufacturer Airbus, who had direct experience negotiating with Franke as a seller of passenger planes to his airlines. . “It will only pay off if [Váradi] pound and if he doubles the share price then Bill is ready to share, ”he said.

Yet surprisingly given his success, Franke never intended to end up in the airline industry.

It wasn’t until the early 1990s, when he was in his mid-fifties, that he first took an interest in airlines after an approach from the Arizona state governor; the politician had followed the businessman’s successful but low-key career turning business in the paper and retail industries, and asked him to help save bankrupt carrier America West.

“I didn’t know from top to bottom about Airbus or Boeing or any part of the company. . . I had to go a fast lane to be educated, sometimes the hard way, ”Franke said.

Aided by capital put in place by billionaire private equity businessman David Bonderman, the newbie airline boss once again demonstrated his golden touch in restructuring, making America West a low-profile operator. -cost thrives over the next decade.

He then left the airline and followed his friend Bonderman into private equity, founding Indigo Partners in 2002.

With the early backing of the Singapore sovereign wealth fund, which is still an investor today, the fund’s investments have varied across continents, but have always been guided by the consistent approach of seeking out assets with sustained costs. low, which served Franke well in his recovery days.

“In almost all cases, management had let the balance sheet fly away in a handcart,” he said of the companies he has restructured, something he has never forgotten as ‘He was looking for investments for his new private equity fund.

“There was a really good relentless focus on costs,” said Ben Baldanza, managing director of Spirit Airlines, supported by Indigo, between 2005 and 2016. “It’s the only thing an airline can really control. . “

However, there have been some missteps. Spirit, which Franke sold in 2013, was sued by customer complaints about the no-frills model, while an investment in Russia failed.

And it is difficult to determine how successful Indigo and Franke himself have been in his private equity group, as he hardly discloses any financial information.

Franke would go no further than saying that Indigo would be “definitely in the top 10 percent” of the industry for ROI over the past 20 years. He also refuses to disclose his investors, although they include a European bank and high net worth individuals.

However, the group clearly made money with Wizz, a steadfast success in terms of share price, which climbed to almost £ 50 from £ 11.50 in 2015 when the airline is listed in London. . During that time, Indigo has slowly reduced its stake in the carrier, including a £ 400million sale of shares this year.

Leahy, who sat across from Franke during negotiations for one of the biggest aircraft orders in history, is certainly impressed.

“He’s a very tough negotiator, but he’s not one of those guys who hammer tables and gesticulate in the press. We found a compromise, I would say in the middle, but maybe it was a little more in his direction, ”said Leahy, referring to Franke’s order for 430 planes on behalf of four of his airlines for an overall price of $ 49.5 billion in 2017..

“I would say his batting average is very good, not too many disasters and hugely successful. He made a ton of money.

He also tended to do whatever he wanted, Leahy added. “If you’re one of Bill’s airlines, I don’t think you’ve been stubbornly independent for long, followed Bill’s instructions or whatever.”

Baldanza agreed that Franke was keeping a tight grip on his airlines, pitting his CEOs against each other.

“I was joking with Joe [Váradi, Wizz Air boss] that Bill would always say to Joe, “You are way late, you have to do what Spirit is doing,” and he would always tell me, “You are very late, you have to do what Wizz is doing. Said Baldanza.

Michael O’Leary, the outspoken boss of Ryanair, a tough negotiator of airline deals, is also impressed. “Very smart and very rich,” he said of Franke, who also has stamina and shows no signs of slowing down.

“It’s an interesting and difficult company, but it’s part of what keeps me intellectually engaged,” said Franke, clearly with the aim of continuing to mark a company that he helped grow over the course of his career. decades as an investor and turnaround specialist.

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