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Thursday, April 19, 2007

Avantair (AACQ)

AACQ, Avantair, website, sec, yahoo, chart, Com ($0.0001)

This is absorbing, after a reverse merger, a fractional jet (actually turboprop) company along the same lines as Warren Buffett's Berkshire Hathaway's NetJets, but much, much smaller. Avantair is the fifth largest fractional aircraft company. That's a pretty lousy spot on the totem pole. Seems like it would be best if they define some niche to become dominant in rather than just being yet-another-fractional-jet company, especially against one backed by Berkshire.

Avantair is the exclusive fractional provider of the P-180 turboprop, small twin engine plane, composite materials, with a canard wing, which a lot of people might find odd looking. Speed of 458 mph. The plane's development started in 1982 but hit snags, Avanti ran out of money in 1994 and went nowhere until 1998. They have 25 planes with 58 on order.

273 employees.
Offices in Clearwater, FL

They did a reverse merger "IPO" Mar 2, 2005, offering 6 million units (one share, two warrants at $5). Another 900K units sold two days later. Units were sold for $6. Raised a net $37 million.

Press release about getting a Gold Rating from the Aviation Research Group US CHEQ System.
To receive a Gold Rating ARG/US evaluates data on the aircraft operated and the pilots employed. Operators who meet or exceed the established ARG/US standards for equipment, crew experience, and ratings are assigned the Gold Rating. The emphasis is not only age of aircraft, but also on modern avionics, progressive maintenance, and proven safety devices such as TCAD/TCAS, FMS, and TAWS/GPWS.
The 10-K just came out on April 6, 2007. Jumping quickly to the balance sheet.

Executives and Directors own 22% of the business, mostly Jonathan Auerbach of Hound Partners, NYC, Steven Santo, CEO, and Paul Sonkin of Hummingbird Value Fund (you never see names like "Turkey Vulture Fund").

Goldstein Golub Kessler auditors.

There are no operations yet as the merger hasn't actually completed. So the balance sheet mostly just shows the cash in a trust fund. No operations in the financial statements.
On October 2, 2006, we entered into a Stock Purchase Agreement with all of the current stockholders of Avantair, Inc. We are the surviving corporation in the merger and will change our name to “Avantair, Inc.” Avantair, a Nevada corporation, is engaged in the sale and management of fractional ownerships of professionally piloted aircraft for personal and business use. Avantair operates fixed flight based operations, aircraft maintenance, concierge services to customers from hangars and office locations in Clearwater, Florida, and Camarillo, California. Avantair is the fifth largest company in the North American fractional aircraft industry.
The 8-K from Oct 4, 2006 has the info on the fractional turboprop business.

Finacials are here.
Revenues were $7.7 million in 2004, $26.2 million in 2005, $49.2 million in 2006. They're running at a loss, which is no surprise given how stubborn NetJets was at reaching profitability. Losses were $5.0 million in 2004, $8.7 million in 2005, $20.7 million in 2006.

Current assets are $14.8 million, most than half is some property held for sale.
Planes are $100 million depreciated to a net $68 million.
$13 million in deposits.
Total assets are $108 million.

Current liabilities are $39 million (revolver, AP and accrued liabilities, some notes payable).
$94 million in deferred revenue related to the fractional ownership of the planes.
Total liabilities are $144 million.

I don't need to say much about the equity.

Income Statement:
They've been running at about half of revenues from aircraft sales and half from maintenance and management fees for all three years.

The gross margins on aircraft sales is close to zero if you factor in selling expenses.
The cost of flight operations for 2006 was $32 million vs associated revenue of $23 million.
$13 million G&A.

Given the trouble that Warren Buffett had getting NetJets at a profit, I don't think I'd want to risk betting on this company. And being the exclusive fractional provider for the P-180 might not be all good. I don't get the sense that the airplane is a big success and I wonder how much of the airplane developer's costs are being loaded into Avantair.
A new Avanti II obtained European and US certification in November 2005. Six months later, seventy planes were already ordered (36 by Avantair).
The P.180 makes a distinctive square wave noise when passing overhead, similar to the Beech Starship, due to wing wake and engine exhaust effects on the propeller. It is relatively noisy compared to most turboprop aircraft.
A square wave is pretty close to what the movie Dumb and Dumber claimed was the most annoying sound in the world (ok, maybe not, but it's pretty damned annoying). As an engineer, as a matter of principle, I would want to avoid owning machinery that consistently emitted anything close to a square wave, as this sound contains a large amount of power in the very high frequencies which seems like it would be inherently self-destructive over time. I mean, just look at the waveform.

Mainly, I just think this company is likely to fail.

Not interested

Spent April 20-23 in the hospital. No losses. Finished re-reading Deep Survival and Blink.

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