BBA Aviation set to fly

In Britain, private jets tend to get mentally pigeon-holed next to bankers' bonuses and jewel-encrusted skulls by Damien Hirst - tasteless emblems of probably ill-gotten gains. Not so in the US. There, private jets are merely the most convenient way for groups of businessmen to get around. They are more expensive than commercial business-class flights, but that’s generally offset by the time saved and the benefit of avoiding draconian airport security measures.

There's one UK company whose shares offer investors exposure to this market: BBA Aviation. Although its shares are in the FTSE 350 index, BBA is widely ignored by UK investors. That's partly because its present form is also pretty new - BBA only became a dedicated aviation-services group when it demerged its industrial fabrics supplier Fiberweb in 2006.

That low profile may offer canny investors the opportunity to pick up a sound, cash-generative growth story on the cheap. BBA’s shares are currently trading on about 11 times this year's expected earnings, with a forward dividend yield of 4.4 per cent. That’s hardly a stretch for a company with decent long-term prospects, now in full recovery swing.

BBA's largest division, Signature, provides support services, such as refuelling and staffing, to private jets. With the overwhelming majority of its operations in the US, Signature started to rebound at the end of 2009 along with the North American market for business flying. But the growth figures have so far been relatively modest - 8 per cent for the first half of 2010, excluding fuel prices - and volumes are still well below their 2007 peak. Comparatives will be tougher this year, but the cyclical recovery will probably continue.

Moreover, BBA's cluster of after-market businesses, which do engine repairs and engineering support work, have also started to grow again. Their sales cycle tends to lag Signature's by about six months, because jets that have been laid up in hangars don't immediately need an MoT. But repairs can’t be deferred for long and, sure enough, two of BBA’s three aftermarket businesses reported a return to growth in the third quarter of 2010.

In the longer term, there's reason for cautious optimism. BBA's core profits depend ultimately on business flying in the US, which is closely tied to economic growth. BBA's share price last year waxed and waned with confidence in the US recovery. Yet few experts believe in a ‘double dip' scenario in the US. Unemployment may be high, but that doesn't matter much for BBA, which depends on corporate spending.

Indeed, BBA's core market should grow slightly faster than the US economy, as more and more business flyers trade up. Private-jet flying hours grew at about 5.5 per cent per year between 1991 and 2009, trough to trough. Combined with overcapacity in the airline industry, that growth has gradually pushed down the cost of hiring a jet, particularly for groups of fliers, to little more than a premium commercial flight.

The fractional ownership model developed by NetJets - BBA's largest client by far, accounting for 19 per cent of sales - has also helped. With private jets now more affordable, company bosses are increasingly attracted by the flexibility and comfort of flying directly from start point to destination without security hassles or connecting flights.

A further source of growth could be acquisitions. BBA's two largest competitors are both owned by private-equity companies, which may be looking to offload their holdings. Management says it is monitoring the situation. BBA's debt pile is significant, but could probably rise further given the group's strong record with cash generation over the downturn.