CJI lunches with John Matthews
Maltese operator AirX is hoping to IPO in 2019. John Matthews, its chairman, explains why and takes us through the ups and downs of his business aviation career.
IN THESE DAYS of press training, prepared statements and cautious comments, John Matthews, chairman of AirX, stands out. On the day we meet for lunch at The Reform Club, he was surrounded by his public relations, finance and operations managers. But despite the formal setting, he is at ease, likeable and open.
At the start, he asks me how far I want to go back. I tell him I want to know everything. After a brief pause, he looks up and says “OK, so this is warts and all then.” He does not hold back.
Matthews grew up in England, close to Redhill Aerodrome (an airfield 20 miles south of London). His first aviation job was assembling microlight engines on his parents' front lawn. His stepfather, a Concorde engineer by trade, ran a microlight flying school at the aerodrome and Matthews was keen to help out.
After finishing school, he saw an opportunity to make some money cleaning planes, so quickly put together a small team to wash aircraft. With aviation already in his blood, he wasted no time taking flying lessons, initially learning on microlights, but graduating to a Cessna 152 on his 17th birthday.
After becoming ops manager for the microlight school, Matthews realised that he could offer charters on his twin-engined aircraft. Although he started by offering £500 ($700) sightseeing flights over London, a chance call one evening from the operations manager of Caledonian Airlines changed the course of the fledgling operator. Caledonian was having trouble getting a Lockheed TriStar back from Sharm El Sheikh, Egypt. It was facing strong headwinds and had to divert to a secondary airport to take on extra fuel. Once on the ground it was unable to leave due to a dead battery.
Caledonian wanted Matthews to get a spare battery out to the TriStar as quickly as possible.
“My first charter was flying 12 hours south in the middle of the night, flying this piston engine Navajo Chieftain with a TriStar battery and a Caledonian engineer on board,” he says., “It was so amazing to deliver it. That mission opened my mind to the possibilities of chartering .”
Once back, the calls from Caledonian came more frequently, and he often found himself flying the airline’s staff around. He decided to set up his own operation.
“More like doing a bombing raid than an executive aircraft”
MAS Airways was launched in November 2000, with £32,000 that Matthews had managed to save up. Initially the new operator struggled to find business which, Matthews says, was largely due to its only aircraft, a 1979-build Navajo Chieftain. “It was more like doing a bombing raid than an executive aircraft,” he says.
After finding a stretcher in the back of a hangar one day, Matthews quickly realised that he would be able to adapt the aircraft when needed into a MediVac role. Although the MAS had originally stood for Matthews Air Service, it quickly changed into Medical Air Service, thanks to the volume of work it was getting flying to ski resorts and bringing back injured skiers.
Another chance meeting would change the course of the company again. At Biggin Hill, Matthews met a hedge-fund manager who would later become his backer. The hedge-fund manager was frustrated because his proposed flight to Blackpool had been postponed due to a technical problem. “I somehow managed to negotiate with him to go up to Blackpool in my Navajo,” says Matthews. “The heater broke down on the way and I had to give him loads of blankets.”
Despite the uncomfortable flight, the hedge-fund manager invited Matthews to come and pitch his expansion plans. “That’s how we ended up with a Citation Excel. We made the leap from the Navajo, a piston-driven aircraft, to the latest Citation standup cabin jet.”
Shortly after MAS took delivery of the Citation the UK Inland Revenue changed its rules on the taxation of private jets as assets.
“If the aircraft flew for less than 600 hours per year, half of the aircraft could be treated as a short-term asset, which created rapid depreciation, which, so long as the asset was owned by an LLP (Limited Liability Partnership), essentially served as an offset against the personal income tax of the partners.”
So, Matthews went back to the hedge fund and gave it the choice between tax or aircraft. The hedge fund chose aircraft, and Matthews accepted a minority stake in the operation with the majority going to the capital provider, the hedge fund, although Matthews left his home, car and other personal assets registered with the company. MAS Airways then embarked on a build-up of its fleet, eventually becoming one of the largest private jet operators in London.
In 2008 the partnership with the hedge fund came to a difficult end, exacerbated by the stress of the financial crisis and a tightening of the rules on depreciation of aircraft. Matthews, having neglected to remove his assets from the company, was taken to court and ultimately forced to declare bankruptcy.
Matthews says that that episode taught him two key lessons at a young age: Never rely on handshake deals; and always get a good lawyer.
Dispirited at having lost his charter operation, Matthews foolishly denied having been at the wheel when he had a minor prang whilst driving at night on a country lane. He subsequently pleaded guilty to perverting the course of justice.
AirX has flown Queen
At that point Matthews felt that he was unable to get a job in the UK, so worked for operators in the Middle East. After returning to London, Matthews says that a friend, who is now the CEO of AirX, put him up for a while in his apartment in Munich.
Shortly after arriving, there was a knock at the door. It was the next-door neighbour asking him to pass on a message to his friend to see if they could look after their dog as the neighbours were going skiing. He started chatting with the neighbour. She told him that together with her husband they ran an airline, but that it wasn’t doing well.
“I basically said to her that if she gave me food and a place to live, I’d run her airline.” Says Matthews: “So I went into the family home of the owners of AirX. Three months later they asked me to be CEO. Three months after that I offered to buy the company from them.”
So, Matthews bought AirX in 2010 for Eu30,000 (with the company under debts of Eu4 million) and Matthews began building up the operator.
“The corporate colour was fluorescent pink, there were three aircraft, all under repossession orders, eight members of staff and a whiteboard in the corner,” he adds.
Matthews says that in the early days of his ownership, the team used to meet around the whiteboard every week and work out what they needed to turn over to continue operating. In those days it wasn’t about making profits, it was all about survival.
Says Matthews: “We used to write down what we needed in revenue, and we’d all get together and say ‘can we do it?’ Then we would all say ‘yes we can!’. And if we got that money, then somehow, by the grace of God, we managed to continue operating that week.” Matthews says that he still has that whiteboard. Battered and broken, it now sits proudly in the corner of his Malta office as a reminder of AirX’s past. Having been involved in business aviation in various roles for many years, Matthews says that the main problem the industry faces is rapid loss of value of aircraft assets, along with ineffective maintenance and a lack of synergy amongst operators. Rather than running AirX as a business jet operator, Matthews decided that the best way forward would be to treat it in the same way as he would as if it was an airline. That meant having airliner aircraft types, airliner fuel flow, airliner parts, airliner pilots and airliner cabins. “So, the majority of the aircraft in our fleet are in fact airliners which have been reconfigured” he says. “The Legacy is an Embraer 135, the Challenger is a CRJ200, the 737 and the A340. The exception are our Citations."
The other hard-and-fast rule that AirX follows is never to get involved with new aircraft. “Before the financial crisis, business jets held their value pretty well over time. But now almost every model will lose 40%-50% of its resale value within five years – even though that is only a quarter of its working lifespan,” says Matthews. “The huge requirements for capital that new aircraft require are something AirX avoids – we view that as a burden that is too heavy to bear in such a competitive marketplace.” Matthews believes that he can provide a great service, using aircraft that are acquired and operated at a lower cost base. “We have demonstrated that we can provide an excellent service for brokers and end clients, which is what drives our huge amount of repeat business,” says Matthews. “I don’t believe in the strategy and the massive deployment of capital of some of my larger peers. But I do respect the people who work there, and I respect the service.”
He gives the example of a Challenger 850 that he could purchase for between $7 million and $8 million.
Because of the lower cost base, that aircraft could effectively compete in the charter market with seven- to 10-seat aircraft, but with a much larger cabin that can take up to 16 people, and with a bedroom.
“That is a real competitive advantage,” notes Matthews. By early 2011 Matthews and his team had overhauled AirX’s operations and fleet and were looking to move the business away from high-cost Germany. The same day that the AirX management team started a serious conversation about relocating, Matthews received an email from Transport Malta. “It said ‘quick decisions, small CAA’ and I thought, great, let’s go there!”
After going to Malta and meeting with the authorities, the decision to move there was simple. “From there, we have grown from eight staff in the office to over 300. And from revenue of $8 million a year to just shy of $100 million,” says Matthews. “We have always spent our profits and more into the growth of the business. I’ve always said air charter is a slowly growing business, so we have to take market share.”
“I want to vertically integrate this industry”
Part of the problem of growing for AirX has been its ability to secure affordable finance. Matthews admits that the company pays high interest rates because nobody else was willing to lend money to it at the time it was needed.
“Even though the volume of capital we need is far less than if we were buying new aircraft, If I truly want to grow AirX and realise the dreams and aspirations that I have, which is to vertically integrate this industry, then we have to start at the bottom,” says Matthews. “From the top you have the consumers booking. I don’t think any of the clients realise that the brokerage community they interact with to book charter travel is entirely unregulated.
"The brokers are making commissions that are usually not transparent, by pushing prices down with operators that are often operating aircraft which are on repossession orders or certainly in a negative-equity situation, because financial health is not a component of European transport regulators’ remit. There is certainly room for positive change in the industry,” he adds.
Having grown the fleet as quickly as he can, Matthews is now looking at the next step in taking AirX forward.
His plan is to take the company public, with the aim of accessing capital at a rate lower than the 14% to 18% it is currently paying for debt. He also wants to find some long-term shareholders that can bring value to the business and who understand what Matthews is trying to create.
Towards the end of 2018 the company hired the legal services of Norton Rose and the banking expertise of Investec to help it prepare for its IPO. The aim is to raise up to £200 million ($250 million). Matthews says he would rather not have all the money at once. However, he accepts that it is up to investors.
“Ideally we would like to find like-minded companies that agree on the dysfunctionality of the industry. And as long as we have likeminded leaders, then we can form a conglomerate of companies that is more successful than we can be independently” he says.
If it seems that Matthews is on a mission, it is because he is. Having already raised an initial tranche of the money that it set out to raise, the company is now going out looking for a second and third tranche. On the day that AirX floats, Matthews says he will be watching quietly from the corner. He is not looking to cash out or leave. It will be just another day in his remarkable career, up there with the dog sitting or the stranded aircraft in Egypt.