Buffett of the airline business is in for the long haul
Bill Franke has spent 20 years disproving Warren Buffett’s adage that airlines are a “death trap for investors”.
But as a novice private equity executive touting his first fund in 2002, he struggled to persuade big investors and pension funds to pour money into 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 clutch of small carriers and pushing them into rapid growth by installing the ultra-low-cost business model pioneered by Southwest Airlines in the US and Ryanair in Europe.
While passengers often chafe at the no-frills model, which includes piling seats into aircraft and charging for add-ons, this part of the industry is expected to emerge strengthened by the pandemic, reinforcing Franke’s reputation further as the Buffett of the airline business.
Franke’s Indigo Partners owns stakes in six airlines, including Frontier in the US, Volaris in Chile and Canada’s Enerjet. But it is Hungarian airline Wizz Air, which is 40 per cent owned by Indigo and chaired by Franke, that has caught the imagination of a battered industry.
Wizz hopes to use the crisis for a breakneck growth spurt, and its ambitions were underlined when an audacious bid for easyJet was revealed, and rejected, last week.
Franke would not discuss easyJet, but said Indigo was “actively considering opportunities” as the airline industry emerges from the chaos unleashed by Covid.
“It is a time for the industry to look at consolidation, and we would clearly want to be a consolidator [buyer],” he said.
Wizz chief executive József Váradi has also been offered an eye-catching £100m bonus if he can more than double the share price over the next five years.
“That’s typical Bill,” said John Leahy, the former head of sales for aircraft manufacturer Airbus, who has had first-hand experience in negotiations with Franke as a seller of passenger jets to his airlines. “It won’t pay out unless [Váradi] delivers and if he doubles the stock price, then Bill is willing to share,” he said.
Yet, surprisingly given his success, Franke never meant to end up in the airline business.
It was not until the early 1990s, when he was in his mid-50s, 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-profile career turning round businesses in the paper and retail industries, and asked him to help save bankrupt carrier America West.
“I did not know up from down about Airbus or Boeing or any parts of the business . . . I had to get on a fast track to be educated, sometimes the hard way,” Franke said.
Helped by capital put up by private equity’s billionaire businessman David Bonderman, the novice airline boss again demonstrated his golden touch in restructuring, turning America West into a successful low-cost operator over the next decade.
He then left the airline and followed his friend Bonderman into private equity, founding Indigo Partners in 2002.
With early backing from Singapore’s sovereign wealth fund, which is still an investor today, the fund’s investments ranged across continents, but were always guided by the consistent approach of seeking assets where costs were kept low that served Franke well in his turnround days.
“In almost every case, the management had permitted the balance sheet to go to hell in a handcart,” he said of the companies he restructured, something he never forgot as he hunted out investments for his new private equity fund.
“There was a really good, relentless, focus on costs,” said Ben Baldanza, the chief executive of Indigo-backed Spirit Airlines between 2005 and 2016. “That’s the one thing an airline can really control.”
However, there have been missteps. Spirit, which Franke sold out of in 2013, was dogged by customer complaints about the no-frills model, while an investment in Russia failed.
And it is difficult to determine how well Indigo, and Franke himself, have done at his private equity group as it discloses almost no financial information.
Franke would go no further than saying Indigo would be “for sure in the top 10 per cent” of the industry for returns over the past 20 years. He also refuses to disclose his investors, although they are understood to include a European bank and high-net-worth individuals.
However, the group has clearly made money out of Wizz, an unmitigated success in terms of share price, which has rocketed to nearly £50 from £11.50 in 2015 when the airline listed in London. Over that period, Indigo has slowly reduced its stake in the carrier, including a £400m share sale this year.
Leahy, who sat across the table from Franke during the negotiations for one of the largest aircraft orders in history, is certainly impressed.
“He is a very tough negotiator, but he isn’t one of these guys who pounds the tables and gesticulates in the press. We found a compromise, I would like to say in the middle but maybe it was slightly more in his direction,” Leahy said, referring to Franke’s order of 430 aircraft on behalf of four of his airlines for a headline price of $49.5bn in 2017.
“I would say his batting average is very good, not too many disasters and an awful lot of successes. He has made a tonne of money.”
He also had a tendency of getting his way, Leahy added. “If you are one of Bill’s airlines, I don’t think you were stubbornly independent for long, you followed Bill’s directions or else.”
Baldanza agreed that Franke kept a tight grip on his airlines, playing off his chief executives against each other.
“I used to joke with Joe [Váradi, Wizz Air boss] that Bill would always tell Joe: ‘You guys are way behind, you have to be doing what Spirit is doing,’ and he would always tell me: ‘You guys are way behind, you have to do what Wizz is doing,’” Baldanza said.
Michael O’Leary, the outspoken boss of Ryanair, a tough airline deals negotiator himself, is impressed, too. “Very smart and very rich,” he said of Franke, who also has staying power and shows no signs of slowing down.
“It is an interesting, difficult business, but that is part of what keeps me intellectually engaged,” Franke said, clearly with an eye to continue making a mark on a business he has helped evolve over his decades-long career as an investor and turnround specialist.