One Microcap Stock I'm Buying Now

Taking a Look at Global Crossing Airlines (OTC: JETMF), Weekly Activity, & Portfolio Update.

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Not Your Ordinary “Airliner”

This week I'd like to introduce one of my top investment picks within the microcap arena: Global Crossing Airlines (Also called “Global X”). This is a U.S.-based charter and cargo airline, which operates profitably yet largely under the radar, trades on the OTC market under the ticker JETMF. Although currently it comes with its challenges, often described as having a lot of "fur", I'm confident that most of this will start to make sense to retail and select institutional investors. Once it does, I believe the market will fully recognize the outstanding growth and management performance of JETMF.

So, what exactly does JETMF do? Many investors have dismissed this idea simply because it's associated with the airline industry. Such a perspective seems rather simplistic and lacks depth. They run a charter service, ensuring that all their operational costs are settled in advance, setting them apart from conventional commercial airlines (which is why typical airliners are a poor overall business, operating expenses are at an extreme level).

The company is headquartered at the Miami International Airport, with a regional base in Atlantic City Airport, New Jersey, the business is solely dedicated to charter air and cargo service. Their foray into cargo services has revealed itself to be a valuable addition, which will be a major catalyst for them in the future. Over time, they've seen impressive growth, now extending their flight operations across the U.S. and reaching destinations like the Caribbean, Canada, South America, and Europe.

Here’s an image of their aircrafts for both charter and cargo.

For investors seeking clarity on why JETMF offers a more shielded investment compared to typical airline stocks, here's a distilled explanation:

1. Demand Volatility: Unlike commercial airlines, JETMF operates charter and cargo flights. Their charter services cater to recession-proof clients, including the Department of Defense and NCAA sports teams. This means demand remains consistent regardless of economic downturns, and cargo operations remain unaffected by fluctuating economies.

2. Fuel Price Uncertainty: JETMF adopts a “cost-plus” approach. Any fuel price hikes are directly transferred to the customer, mitigating the risk of unexpected cost surges.

3. Flight Schedule Vulnerabilities: Typically, airlines face losses when flights, whether full or not, are mandated to proceed. However, JETMF’s focus on charter services provides flexibility. If a route isn't commercially viable, they simply won't operate it, eliminating the risk of running unprofitable flights (where the difference lies).

Here is an excellent analogy about their business:

Imagine walking into a room where there's a large clear glass placed on a table, filled to the brim with marbles of different sizes. Each marble, with its unique size and design, represents a dominant player in the airliner market. These are the giants that have long-established their presence and have taken up most of the available space in the glass, just like the large airline companies have claimed their stake in the market.

Now, while it may seem at first glance that the glass is full and there's no space left for anyone else, this isn't entirely true. If you take a jug of water, representing JETMF, and start pouring it into the glass, something intriguing happens. The water effortlessly finds its way through the gaps and crevices between the marbles, filling up every nook and cranny.

The water doesn't push the marbles out or struggle to find its place. Instead, it coexists, utilizing the spaces that the marbles couldn't occupy. Just like JETMF in the airliner market, it finds opportunities and niches that the giants have missed or overlooked, filling gaps and serving needs that have been left unattended.

The beauty of this scenario is that it highlights the fact that even in a market dominated by giants, there's always room for innovative and agile players to carve out their niche and coexist, adding value in places others might have missed.

The Hidden Gem

Cargo operations for JETMF kicked off in Q1 '23, so this is a very new component to their business. Their clientele is diverse, encompassing the Department of Defense, package carriers, automobile firms (notably for hefty auto parts shipments, bridging supply chains from Mexico to the Midwest), and USPS. A unique facet of their operations is stepping in when others can't meet demands due to capacity constraints. For instance, if FedEx falls short on aircraft availability, this is where JETMF fills the void (This is where I see the potential for this business).

Their annual performance has been somewhat masked due to pilot hiring processes and extensive maintenance schedules. My analysis of Q1 and Q2 statements, along with clarifications from management, reveals that heavy maintenance has been the dominant theme this year, concluding in October. Consequently, Q3 and Q4 projections offer a transparent view of the company's potential earnings with 10-12 planes in operation. Moreover, profitability in Q3 is a direct assertion from their Q2 announcement.

The long-term vision for the cargo segment is ambitious, targeting an even split with passenger operations. Given cargo's profitability edge, my estimate pegs their EBITDAR margins closer to the upper limit of the industry average of 12-17%.

The quarterly performance indicated revenue of about $4M per plane, based on 7.8 net planes available. While assessing their Total Addressable Market (TAM), reaching the peak might be a stretch. This is compounded by the bankruptcy of some of their private competitors. Presently, JETMF's challenge isn't demand but supply, stemming from limited aircraft (which management is prioritizing) and a shortage of pilots (a concern they've addressed this year).

Management Team

At the helm of JETMF is a leader with an unmatched pedigree in the airline industry, CEO Ed Wegel. A strong leadership is the foundation of any successful microcap business, and in this context, Ed's track record is unparalleled.

With over 35 years of experience straddling both the airline industry and investment banking sectors, Ed's accomplishments are vast and varied. His journey encompasses:

• Foundational Roles: He co-founded Atlantic Coast Airlines (United Express) and was instrumental in crafting the initial business plan for JetBlue, highlighting the potential of Airbus A320s and pinpointing JFK as its operations hub.

• Turnaround Expertise: He led the revival of Eastern Air Lines, acquired the intellectual property rights for the brand, and executed a $15 million equity raise. Under his leadership, Eastern Air Lines ordered new fleets and was eventually acquired by a top-tier charter airline group.

• Restructuring Prowess: Ed's stints as the Chief Restructuring Officer of OneTravel and the President and COO of Tower Airlines showcase his adeptness at reviving and scaling airline businesses.

• Innovative Ventures: His role as the CEO of BWIA International Airways stands out, where he led the company to its first-ever annual operating profit in over five decades.

• Investment Banking: In the late 80s, he was a key player in Lehman Brothers' investment banking division, managing a portfolio of commercial jet aircraft.

• Military Background: Ed's leadership qualities were honed during his active military service as a US Army combat arms commander, followed by a pivotal role at Eastern Air Lines.

Educationally, he's an alumnus of the revered United States Military Academy, West Point, complemented with an MBA in Finance.

Complementing his rich professional narrative, JETMF under his leadership is carving a niche for itself (and this important being a “start-up” in the microcap realm. They are strategically positioning themselves with a fleet of fuel-efficient A320 planes, which offers advantages like lower fuel consumption and increased cargo capacity. Their financial acumen is also evident in the lease deals they're striking, securing aircraft at almost a third of the market rate.

A testament to their agility and commitment, JETMF responded to a governmental call in August 2021 for evacuation flights from Afghanistan, initiating operations within just 36 hours. This agility also fast-tracked their international flight authorization.

Achieving profitability within the 4th quarter of full operations further underscores the operational efficiency and strategic direction of the company under Mr. Wegel's leadership. Simply put, with a leader of Ed's caliber and an evident commitment to excellence, the company stands head and shoulders above many in its league.

Financial Review

As of their most recent quarterly financial report, it showcases impressive growth and strategic movements:

Key Performance Indicators:

• Revenue Growth: Q2 2023 witnessed an 80.5% YoY growth in operating revenue, amounting to $31.5M, a significant surge from Q2 2022 by $14M.

• Operational Expansion: There was a 70% increase YoY in revenue block hours, reaching 3,585 in Q2 2023. This also marked a 14% sequential growth from Q1 2023's 3,134 block hours.

• Financial Metrics: Adjusted EBITDAR stood at $5.3M. However, Adjusted EBITDA and Adjusted EPS noted a dip with figures at approximately ($1.5)M and $(0.05) respectively.

• Margin Improvements: While revenue saw an 80% upswing, costs saw a smaller increase of 59%, emphasizing the company's enhanced operational efficiency.

Challenges Addressed:

1. Crew Expansion: Preparing for a hectic 2023 summer, the company accelerated cockpit crew hiring and training, incurring an additional $4.2M in training expenses.

2. Aircraft Delays: A postponement in the delivery of the second A321 freighter led to an approximate revenue loss of $2.4M in ACMI.

3. Maintenance Hiccups: Scheduled maintenance delays rendered 26% of the company's aircraft unavailable for the quarter.

Highlights of Q2 2023:

• Successful Letter of Intents (LOIs) signed for two A320 passenger aircraft and two A321 freighters.

• Human resource expansion with the recruitment of 35 pilots, 22 undergoing training, and an addition of 36 flight attendants.

• Achievement of UK TCO clearance.

• Forged collaborations with European ULCC Wizz and Canadian Lynx Air, flying 250 block hours and starting a wet lease contract respectively.

• Successful induction of a second A321 freighter into revenue service.

Liquidity: The end of Q2 saw a healthy 53% increase in cash and restricted cash, totaling $8.4M, compared to December 31, 2022.

Looking Ahead - Q3 2023:

1. The quarter is expected to see the arrival of one A319, one A320, and one A321 freighter.

2. The company will finalize the financing for a maintenance facility at Ft. Lauderdale Int’l Airport.

3. Anticipation of over 6,000 block hours operation.

4. Signing of LOI for two additional A321 freighters scheduled for 2023 delivery.

2023 Revenue Forecast: Aiming high, the company updates its revenue guidance for 2023 to $150M, marking a 54% hike from 2022. Remarkably, 75% of this target ($112M) is already contracted. Currently, the company is bidding on an average of contracts worth $2M daily and has a potential contract pipeline approximating $50M for 2023.

My Take