Warren Buffett famously warned that airlines had an “insatiable” demand for capital that required investors to pour money “into a bottomless pit.” After buying airlines in mid-2016, Berkshire Hathaway dumped them in May 2020 as prices reached their lows. Since then, many airlines have taken off – with many airlines up triple-digits from their lows.
While many airlines struggle with high fixed costs and elastic demand, there’s a subset of the market that’s much more predictable. Charter and cargo flights involve fixed contracts with sports teams, corporations, and other entities that purchase flight hours, providing predictable revenue. And, leasing a portion of a fleet reduces fixed costs and adds flexibility.
Global Crossing Airlines Group Inc. (NEO: JET) (OTC: JETMF) may be too small for Warren Buffett – with a market capitalization of around $50 million – but its unique business model makes it worth a second look for value-conscious growth investors.
Predictable Revenue
Many airlines rely on spot market demand with high fixed costs – a recipe for disaster. When there are fewer passengers or less cargo to move, these airlines must reduce prices while still paying the same fixed costs, putting pressure on margins. And worse, many airlines carry a significant level of debt, creating thin profit margins.
GlobalX operates a charter airline serving the U.S., Caribbean, and Latin American markets. Unlike commercial airlines, many of its customers have to fly regardless of economic conditions. For instance, its client base includes college sports teams and government officials that don’t have a choice but to regularly fly to and from their destination.
Since getting certified in 2020, the airline has operated over 700 flights and recently reported first-quarter revenue that rose 45% to $16.3 million. The company’s existing bookings (letters of intent) have also locked in more than $70 million in 2022 revenue. As a result, the company has significant visibility into 2022 and even 2023.
Uniquely Scalable
GlobalX’s business model provides easy scalability with few variable costs. In general, it generates $1.5 million to $2.2 million in annualized gross profit before overhead per passenger aircraft and $4.2 million to $5.5 million in annualized gross profit before overhead per cargo aircraft – meaning its revenue scales with new aircraft.
While fuel costs significantly impact most commercial airlines, GlobalX uses mostly full (cost-plus) contracts for its flights, which pass on the cost of fuel to its customers. As a result, the company removes volatile fuel prices as a significant risk factor in its financial models. And it projects reaching profitability by Q3 2022 despite record jet fuel prices.
GlobalX plans to scale from 10 passenger aircraft in 2022 to 25 by 2025. At the same time, the company aims to have two cargo aircraft operational by October 1 with plans to expand to 25 by 2025. Since aircraft are a marginal expense, the company will become more profitable as its fleet expands due to economies of scale.
Using the company’s estimated annualized gross profit figures, a fleet of 50 aircraft could generate between $142.5 million and $192.5 million in gross profit. With a current market capitalization of less than $60 million, the present value of these potential profits could make the stock significantly undervalued at current levels.
A Hidden Gem
Most investors don’t seek out airlines for the same reason Warren Buffett doesn’t like them – especially during a pandemic with record fuel prices. But, Buffett also said, “buy when there’s blood on the streets.” In other words, investors often find the best opportunities in hard-hit industries, where there are hidden gems with solid fundamentals.
Global Crossing Airlines Group Inc. (NEO: JET) (OTC: JETMF) only secured its certification in 2020, meaning it remains under the radar for most of the investment community. The recent turnaround in the stock price suggests that investors may be starting to take notice, but there’s still a long way to go before it reaches a fair valuation.
For more information, visit the company’s website and download the investor presentation.
