Viewpoint: Private Equity Investment In GA

Commercial air travel has become increasingly chaotic with more than one in five flights delayed in 2022, fueling demand for corporate jets and private air travel and a corresponding growth in private equity investment into the general aviation industry, which comprises privately owned planes and supporting infrastructure, including fixed base operators (FBOs), maintenance, repair & overhaul facilities (MROs), and specialty parts/original equipment manufacturers (OEMs).  

All of the major global private equity players--Carlyle, KKR, Apollo, Bain, Ares Management, Global Infrastructure Partners and others--have been involved in this investment trend, as well as many middle market and specialty private equity firms, such as Liberty Hall Capital Partners, Vance Street Capital, Mainsail Partners and ATL Partners. The transactions have ranged from acquisitions, add-ons, roll-ups to growth acceleration investments.

When investing in a specialized sector such as aerospace, thorough due diligence becomes critical, particularly around the management team and compliance functions. Additionally, market and business intelligence and stakeholder mapping are important to ensure an understanding of significant issues or potential impediments to the transaction. 

Three main areas of potential issues have come to light in recent years and include: 

1.    FBO disputes with local airport authorities

2.    Problematic FBO owners

3.    Fraud allegations at OEMs

Disputes Between FBOs And Local Airport Authorities

Tensions between local airport authorities and FBOs must be understood for a successful transaction, whether a roll-up of a number of FBOs or the acquisition of a single owner/operator shop. Recent examples of these conflicts highlight the expensive and time-consuming litigation that often accompanies them, which can quickly sour any potential transaction. 

In early 2022, the Town of East Hampton in Suffolk County, New York, after years of simmering tensions, announced its intent to close the East Hampton Airport and re-open it under its own control with significant new restrictions on flights. At least three lawsuits against the town were filed by East End Hangars, Hampton Hangars, the Coalition to Keep East Hampton Airport Open and Blade Air Mobility, according to reports. The litigation fight was extensive and bitter, including allegations that the town had submitted to the court two doctored FAA documents.

In late October 2022, a judge ruled that the Town of East Hampton could not close or privatize the airport and that the town had “acted both beyond its legal abilities and in an arbitrary and capricious manner.” It also violated New York environmental law. Various media reports indicate the town spent at least $2.5 million fighting litigation regarding the airport closing, despite the fact that 77% of town residents opposed the plan.

Business intelligence efforts, such as stakeholder mapping of governments, local business and neighborhood constituencies, and environmental groups can forewarn potential investors of local issues surrounding a potential acquisition. Reviews of local zoning disputes and noise complaints, for example, may allow investors to prepare and mitigate concerns and complaints and avoid turbulence in the deal.

Problematic FBO Owners/Operators

As in any industry with complex supply chains and high-value assets, there is always the potential for fraud, embezzlement, bribery and corruption. PE firms should consider the possibility that attractive acquisition targets could potentially owe their healthy balance sheets to off-the-books malfeasance.

In April 2021, Ruth Marie Phillips, one of the three owners of Attitude Aviation, an FBO with offices in South Point, Ohio, and Huntington, West Virginia, was charged with the conversion of $4.72 million in federal funds she allegedly embezzled from River Valley Child Development Services (“RVCDS”) in Huntington, where she was director of business and finance. She allegedly used the funds for her personal use and to fund Attitude Aviation, as well as to purchase airplanes, according to government documents. 

In September 2021, Phillips pled guilty to the theft of federal funds and was ultimately sentenced to seven years in federal prison and ordered to pay restitution of $4.65 million and forfeit substantial assets, including the proceeds from numerous property sales including a lake house in Ohio, multiple airplanes and several vehicles.

Because rogue owners and employees are intimately familiar with their own operations and are trying to hide their criminal activities, they are usually difficult to spot. However, true investigative analysis often provides warning flags that ordinary due diligence might miss.

In the example above, a review of personal property for Phillips and assets of the aviation business would have raised questions about how a director of finance at a non-profit child services organization could afford multiple homes, airplanes and personal vehicles. 

Fraud Allegations At OEMs And Others

There are many other types of fraud in the OEM business that often leaves paper trails for investigators and regulators to uncover.

In June 2022, Aman Khan of Riverside, California, pled guilty to two counts of fraud involving aircraft parts in interstate and foreign commerce and in September 2022 was sentenced to 46 months of federal incarceration, three years of supervised release and ordered to pay more than $1.5 million in restitution for aircraft parts fraud, government documents say.

According to a Department of Justice press release, it was Khan’s second conviction in California federal court for aircraft parts fraud and export violations, having previously been convicted in 2005 and sentenced to more than 15 years in prison for both falsely certifying aircraft parts as well as selling parts for Chinese military jets.

Digging deeper into the record, this appears actually to have been Khan’s THIRD federal conviction in California. In July 1996, he was sentenced to 4.5 years in federal prison for tax fraud, poor and falsified aircraft repairs for the U.S. Air Force and selling counterfeit aircraft parts. In the 1996 conviction, he was also apparently banned from dealing in aircraft parts in the future, ordered to serve three years’ probation and to pay approximately $700,000 in fines. This means Khan has been sentenced to prison for 24 of the 27 years since his first conviction in 1996 and yet continued to operate an aviation OEM business.

Investigative due diligence entails thorough identification and analysis of relevant public records as well as reputational intelligence conducted through human source inquiries. If public records are not available, conducting in-person interviews with knowledgeable sources is the best way to understand a counterparty’s bona fides, ethical reputation, and actual leadership or management qualities.

Numerous issues, including misogyny or other discriminatory behaviors, anger management, truthfulness, etc., may only come out in speaking face-to-face with people.

Although the last two examples highlight serious fraud that can affect any industry, they all demonstrate how the general aviation sector poses unique areas of risks, requiring expert knowledge and experience to avoid getting caught flying in unfriendly skies.

Peter Turecek, CFE, is a managing director of risk and investigations for FTI Consulting and is a private pilot. 

The views expressed herein are those of the author and not necessarily the views of FTI Consulting, its management, its subsidiaries, its affiliates, or its other professionals.