Sky Harbor airport hangar construction bid analysis

Overview

Customer: Town of Leesburg Virginia

RFP Number – 100710-FY19-12

Location: Town of Leesburg, Virginia. 25 West Market Street, Leesburg, VA 20176

Product or Service: Hangar Land Lease at the Leesburg Executive Airport

With this proposal the town of Leesburg, Virginia is looking to solicit proposals to build, finance, maintain, and operate an aircraft hangar facility at the Leesburg Executive airport. Here, the proposal reviewed is from Sky Harbor Group LLC, which is newly formed publicly traded entity. The company went public on Jan 25, 2022 and is looking to create the first nationwide network of home-based solutions for private aviation aircraft. The company is looking to establish a location in Leesburg Virginia as a means of offering private hangar solutions for private jet operators within the immediate market. The proposal will look to establish a “Home Based Solution” for private jet operators where they have unparallel and unmatched access to their aircraft. The company will look to create an addition runway, 10, 28-foot private jet hangars, along with other amenities such as offices, kitchens, and bathrooms within each location. Image 1 below depicts the location of the hangars on the Leesburg airport.

Image 1 – Proposed Location of Hangars at Leesburg Executive Airport

Due to their recent IPO in the capital markets, the company shows a very strong financial position and balance sheet in which to construct the aircraft hangars. The bid looks to leverage the new acquired capital to demonstrate it ability to construct the hangars while maintaining an strong cash and liquidity position. The bid also establishes Sky Harbors past track record of constructing similar facilities for other municipalities around the country. Prior to the bid, Sky Harbor has established similar facilities is six different locations around the United States. These locations include Miami, Denver, Houston, Nashville, Phoenix, and Dallas. Each of these locations require very similar specifications as the Leesburg RFP, which provides much more credibility to the organization overall.

The bid also includes a timeframe from Sky Harbor in which it will complete the hangars. Here, hangar construction and land development typically take around 12 to 18 months to complete. Again, as the hangar format is the same at multiple locations around the country, the company has very strong clarity as to the input costs associated with each construction material. Here, the bid indicates the average construction cost of each hangar in detail. Impressively, the company has noted in the bid that it has very little change orders associated with construction of the facility due in part to its past history of construction. With a strong financial background, a track records of successful development, and clarity into individual unit costs, the company increases the likelihood of successful completion of the hangar development.

The bid also notes the strong track record of the Sky Harbor management team. The found and CEO Tal Keinan is a former pilot in the Israeli military. He has also had successful stints in investment banking. The CFO Francisco Gonzalez has a two-decade history of leadership at Goldman Sachs. He is particularly adept at real estate and infrastructure financing. In addition to these two individuals, the company has a very strong and leadership team with many decades of experience operating a public company within the aerospace infrastructure field.

Finally, the bid concludes with a summary of future develop potential as it relates to the aerospace sector. For example, the bid notes that the hangars will fitting to accommodate the emergence of electric aviation and the emergence of drones. These forward-looking perspective makes the bid even more attractive to the Leesburg municipality.

Background Statement and Scope of Work: Your analysis will need to include an assessment of what is needed and perhaps why it is needed. Each of these two sections will be 3-5 pages

As it relates to the assessment of what is needed, the town Leesburg, Virginia needs a company with expertise in hangar development to help the municipality accommodate the growing demand for private aviation. Private aviation, due in a part to the pandemic is growing exponentially. As the COVID-19 pandemic illustrated, flying within close proximity to one another creates an adverse circumstance for all parties involved. Here, individuals are often exposed to harmful diseases and viruses that could adversely impact their health. Likewise the overall flying experience is becoming much more burdensome for parties involved. Long wait times, flight delays, very tight sitting quarters, and unruly passengers all create a bad flying experience. As a result, businesses, corporations, governments, and high net worth clients are turning to private aviation as the solution. Here, private aviation provides many benefits without all of the negatives elements that occur with commercial aviation. For one, private aviation provides the shortest time to “Wheels Up” in the industry. By owning their own aircraft, businesses can quickly travel without incurring many of the flight delays associated with commercial flying. In addition, private airlines can better protect business travelers and high net worth individuals from COVID-19 and other airborne disease that can easily transferred on a commercial flight. Finally, for those that travel frequently, it can be much more convenient to quickly travel on the executives terms as oppose to finding a commercial flight that may not align with the business travel needs of the executive or the private jet owner. For these reasons the city of Leesburg is looking to capture this trend of private jet ownership by building hangers to accommodate increasing capacity.

From the cities perspective, the costs associated with zoning, construction, maintenance, and overall land improvements is costly relative to county tax revenues and income. In addition, the continually costs associated with property taxes, land development, and upkeep could be too large for the municipality to bear. Finally, the overall construction by the municipality will be very cumbersome and inefficient as government projects tend to have a high level of bureaucracy. Here, these high levels of red tape, approvals, and processes can be much more costly to the municipality as compared to private developers. Here, not only can the municipality improve its cost-effective operations by allowing private owners to the develop the hangers, it can also garner additional revenue in the form of taxes and fees. This allows the municipality to improve its cost structure while also improving its revenue sources. The municipality also has the ability to diverse its revenue stream by having a private operator develop the hangar campus.

The overall community benefits as it leverages the expertise of a proven developer with a strong financial position and a track record of success within the industry. This allows the campus to be built, developed, and operational within the shortest amount of time. Through more efficient operations, the municipality can more quickly collect taxes which can then be used to further develop the surrounding community.

To summarize what is specifically needed, the municipality needs a competent and proven develop to create a hangar campus on its airport. The municipality needs 10 hangars that can accommodate the growing size of aircraft along with the large demand occurring in the private aviation sector. The hangars need to include an additional runway and a commitment to future development on the airport if needed. The hangars also need to have accommodations for future innovations in aviation which include electronic aviation and drone technology. The municipality needs the developer to have a very strong financial position, in the event that unforeseen circumstances arise in the construction of the facilities. The sponsor needs to possess the financial position to continue construction of the facility without a significant financial impairment. Here the municipality requires the prior 3 years of financial statement data and history. The debt to equity ratio cannot be more than 1.5. The company must possess a debt service coverage ratio of at least 2. Here, the company through its existing revenue sources should be able to cover at least 2 times its interest expenses in any given year. Finally, the municipality needs a development plan that is consistently with the requirements of the Leesburg airport. Here the hangars must be at least 28 feet high, the company cannot sales products that compete directly with existing tenants on or near the facility. For example, the company can develop hotels on its hangar campuses nor can its sell concessions as both compete directly with existing airport tenants. The city of Leesburg also requires the develop to create water and sewage lines on the property, have all applicable businesses licenses up to date, and have appropriate insurance coverage.

As it relates to why the airport hangar is needed, much of this was discussed above. To summarize, there is a significant disconnect between the square footage of aircraft as compared to the infrastructure needed to house aircraft. Image 2 below indicates the increase in the overall growth in business jets within the United States over the past decade. In addition Image 3 below indicates the overall growth in US Business aircraft square footage. What both images indicate is that business aircrafts are becoming much more prevalent while also becoming much larger in size. As noted above the COVID-19 pandemic only exacerbated this trend and more businesses and high net worth clients are turning to private aviation as a permanent solution to their overall travel needs. This trend looks to be permanent as the overall investment require to purchase a private aircraft is very extensive. Due to this once a business purchases a private jet or experiences private aviation, they are extremely less likely to go back to commercial aviation. Here, the city of Leesburg requires the development of hangars to better accommodate this trend while also attracting businesses, corporation and high net worth clients to their city. The hangers are also needed to better accommodate business travel to the city overall. As noted above, more companies are elected to use private aviation as a form of business travel. Unfortunately, there currently isn’t enough hangar capacity to support the use of private aviation. As a result the city of Leesburg is requesting aid to develop a campus at its airport to help alleviate this problem. To summarize why the hangar is needed, it first helps provide addition income, tax revenue, and fees to the municipality. The hangars attract businesses, corporations, and high net worth individuals to their airport and city. The hangars help to alleviate the large imbalance between private jets in circulation as compared to the overall storage required to house them. Finally, the hangars provide a cost-effective method in which the city can further develop its transportation infrastructure.

Image 2 – Number of Business Jets in circulation within the United States

Image 3 – Cumulative Square Footage of Business Aircraft in the United States

Key Resources: List the resources required for the project and provide your analysis of their significance to the project (why is the resource needed for the project). Key Resources should also include any subcontractors or partners.

To begin, the key resources required for the project are a budget, contractors, permits, construction plans, and other administrative documents needed to construct the hangar. The budget within the bid is relatively straightforward. Here, each hangar is being built in exactly the same manner as previous hangars. As mentioned before, Sky Harbor already has a track record of constructing aviation hangars in six previous locations. The budget will include construction materials and trades that will be required to construct the campus in a timely fashion. The budget will also have a contingency balance built into it for any unforeseen events or circumstances during the construction process. The budget is significant as it allows both the municipality and the private business owner to benefit. Here the municipality has a vested interest in having the hangar completed timely, within a good workmanlike manner. The private company also has a vested interest in completing the hangars in a cost effective and profitability manner. If the hanger is constructed with large budget overages, this could impact the ability of the private enterprise to pay taxes and fees to the municipality. Likewise a delay could disrupt the ability to the municipality to attract businesses and high net worth clients to its airport to store their private aircraft. A budget allows all parties to stay abreast on construction progress while also taking any corrective action if needed. This could include amending the agreement with the municipality to account for any disruption that adverse impact both parties involved. We have seen this occur historically when COVID-19 occurred causing many construction projects to be delayed. These delays caused large financial impacts to builders, their employees and municipalities around the country (Jerome, 1992).