Reappraising John Menzies now it is a pureplay aviation services group
For a business which ranks number two in the world for its industry, John Menzies (MNZS) has an image problem. Folk memories of its high street origins mean that few people realise it is now a global support services firm.
Nor do they appreciate that it has a long growth runway ahead of it although a ‘no-deal’ Brexit may do it no favours in the short term.
WHAT'S IN A NAME?
Even though the retail business was sold more than 20 years ago, for many people it’s a name which evokes the heyday of the high street when Menzies stood proud with the likes of Littlewoods and Woolworths.
Today, Menzies is in fact one of the world’s largest aviation services firms with almost 35,000 employees and operations at 200 airports in over 30 countries.
BREAK WITH THE PAST
The company’s founder opened his Edinburgh store in the early 1830s, after which the firm expanded into wholesaling in the late 19th century and logistics in the first half of the 20th century.
In the 1980s the firm moved into the international courier market and then into air freight, cargo handling and ground services at Heathrow airport.
Sensing that aviation services offered better long-term growth prospects than retailing, Menzies sold its shops to WH Smith (SMWH) in 1998 and pushed further into ground-handling services around the world.
The final break with the firm’s roots came last September with the sale of the media distribution arm to private equity investors.
UK TRAFFIC GROWth
The global aviation services market generated $60bn of turnover in 2017 and is estimated to reach $95bn by 2025.
However the industry is highly fragmented with top half-dozen firms controlling around a quarter of the market and three quarters in the hands of small operators who are increasingly struggling to keep up with the demands of the airlines and the regulators.
Menzies’ biggest location is Heathrow where it employs 3,000 people and services nearly 300 flights a day, providing ground services including baggage handling and aircraft lounges, cabin cleaning, cargo, trucking and de-icing.
In cabin services alone it has 37 customer airlines and turns around over 52,000 flights a year which requires a mind-boggling level of organisation.
According to Government forecasts, even without a third runway and with only a 2% rise in flight numbers, passenger traffic at Heathrow would rise by nearly 20% in the next 20 years as airlines use larger aircraft and occupancy rates increase.
With a third runway, the number of flights could increase by more than 50% and passenger numbers could rise by 70% assuming larger planes and higher occupancy.
This means huge potential for Menzies to add to its customer roster not just at Heathrow but at its hub operations where these flights originate such as Cape Town, Los Angeles, Sydney and Toronto.
GLOBAL EXPANSION PLANS
Historically it was under-represented in Asia but it has now added Air China, Capital Airlines, China Eastern and Hainan Airlines to a Heathrow roster which already boasts Korean Air, Japan Airlines and Singapore Airlines.
The global aircraft fleet is seen growing by 3.5% a year to 2037 while traffic is seen growing by 4.7% and the biggest driver of this growth is Asia.
Menzies is also investing abroad, buying US aviation services firm Asig from BBA Aviation (BBA) in 2017 for a net $195m. Within a year of purchase, Menzies’ management had made synergy savings of $20m, equal to Asig’s operating profit.
CARGO VOLUMES AND MARGINS RISING
Global cargo volumes are forecast to grow by around 4% per year for the next 20 years and like passenger traffic most of the growth is seen coming from Asia.
For the major airlines Menzies manages their warehouses air-side while for smaller carriers and at secondary airports it offers a one-stop shop for cargo management.
Margins are already improving and there is a good pipeline of opportunities to make small bolt-on acquisitions at higher margins.
BREXIT RISKS MITIGATED FOR NOW
The most obvious risk for Menzies is the impact on UK and European air travel in the event of a no-deal Brexit.
Last December the EU ruled that flights from the UK into and over Europe would be allowed to continue for 12 months to allow ‘basic connectivity’ in a no-deal scenario. Along with this 12-month guarantee was a proposal to extend the ruling by nine months to ensure that certain licences were still valid.
This month the UK Government agreed to match the EU’s offer, bringing relief to the airline industry and firms like Menzies, but the company could still see its growth targets challenged by the UK’s exit from the European Union.