Features Operations
One on one with Shawn Clarke, chief operating officer of Discovery Air

WHEN AND WHY WAS DISCOVERY AIR CREATED?
Discovery Air was created in 2004 by our chairman and CEO, David Taylor. David is also the president and CEO of Pacific and Western Bank of Canada. That’s a small schedule one bank  based  in London, Ont., and it focused on niche-market lending. Low-risk, low-spread, but very secure loans. It did a lot of financing in the Northwest Territories, public sector financing, things like that. And he came across some of these wonderful businesses through the Aurora Fund, a start-up fund for Northern-based businesses. He recognized that these were a group that had unique skills sets, that tapped into a fantastic market, had enduring competitive advantage, and that gave them pricing power. So they were able to generate very strong margins in the markets in which they participated, because not a lot of competition had the skill sets to participate in those markets.

He saw the challenge that they had, being in the aviation industry, which  is capital-
intensive. He thought the challenge that these groups would run into would eventually be that traditional lenders would get to a point where their exposure to these groups would become uncomfortable for them and they would no longer fund their continued growth. So David’s vision was to create a public entity that could provide access to cost-effective capital to fund the organic growth of these  businesses. And then, if you bring them together, there could be opportunities to realize efficiencies and economies of scale, because they’re operating in the same industry, but that could also help them expand their margins. So it became an opportunity to provide accessible financing with a friendly banker, and then there were opportunities for these companies to work together in some capacity to increase their margins.                

WHAT IS DISCOVERY AIR’S CORPORATE MISSION?
Essentially, to build shareholder value by creating an alliance of niche-market aviation service businesses, who together can realize synergies and economies of scale and deliver safe, effective air services to customers in niche markets. The exact language is available on our website. 

HOW DOES DISCOVERY AIR’S ALLIANCE STRATEGY BENEFIT ITS MEMBER COMPANIES?
We create an alliance for these businesses, and the reason we do that is because their brand equity is so strong, they’re so well established in their markets. These are operators who understand their marketplace, their customers. They understand the uniqueness of the services they provide, so to collapse those brands would be in our opinion a loss of a ton of equity that’s been built up over the years. So we’ve created an alliance of these businesses, and what we think the benefit to them is, again, there’s hopefully improved access to capital, notwithstanding the challenging credit markets right now. But as we were derived from a bank, a number of our corporate team members’ area of expertise is in structured finance – lending, capital markets, these kinds of things. It’s not necessarily issuing stock to raise funds, but just different kinds of structured finance mechanisms that we can put in place to assist the various operating subsidiaries in achieving their organic growth initiatives.

Also, when you bring these great companies together, we have some of the most capable aviation minds in the country assembled together. You put those folks in a room, and you have an opportunity to share best practices, to share different mechanisms and systems they’ve developed over the years, to share their experience. And even though they participate in very different areas – Top Aces is our military focus, Great Slave is our rotary-wing focused on resources, and then Air Tindi of course fixed-wing but focused on resources, as well as some tourism and emergency medical systems. These are a very diverse group, but they’ve all seen various aspects of the aviation industry and they can share their experiences with one another. And we think that’s a great opportunity to tap into that knowledge base that’s been built over decades.      

COULD YOU DESCRIBE THE FIVE SUBSIDIARIES OF DISCOVERY AIR AND HOW THEY CAME INTO THE CORPORATE FAMILY?
The first was a company called Hicks and Lawrence Ltd. Hicks and Lawrence came into the family, initially a 50-per cent position was purchased in the corporation in December of 2004, and then the final 50 per cent was acquired in August of 2005. Hicks and Lawrence at the time was primarily focused on the provision of aerial forest fire management services to the Ontario Ministry of Natural Resources, so you have two long-term contracts in place. The services they provide are to source fires, basically aerial surveillance, and then it’s what they call air space and aircraft management – working on fires that are found, and then based on different types of aircraft, working with water bombers to extinguish the fires. There are various other aspects as well, but that’s the core. They’ve provided those services in terms of Natural Resources for the last 20 years, and they’re certainly a long-standing niche player. That company was actually acquired before the company went public, so before Discovery IPO’d (initial privatization offer) in 2006.

The first large acquisition was Great Slave Helicopters in Yellowknife. A wonderful business, and as they’re exposed to the broad spectrum of industry sectors but their core being resources – oil and gas, forestry, base metal and mineral exploration, precious mineral production, that kind of thing. They also do some tourism through their wholly-owned subsidiary Hudson Bay Helicopters out of Manitoba. So they have a very broad range of services. That transaction occurred in June of 2006, and shortly after that, just six months, was the acquisition of Air Tindi Ltd. in December of 2006. Air Tindi’s markets are very well aligned with Great Slave, but of course providing fixed-wing services as opposed to rotary-wing services. Air Tindi is again exposed to the oil and gas market, the mineral and mining exploration and production markets, the mining sector. Forestry, a little bit of it, tourism, and then there are the emergency medical services they provide for their air ambulance contracts with the Stanton Hospital. So a very diverse business, and they operate the most diverse fleet in the North.

In March of 2007 there was the first “tuck-under” acquisition done by the subsidiary Hicks and Lawrence, and that was the acquisition of Walsten Air Services. Walsten Air operates in Kenora, Ont., and since 1976 they’ve provided air charter services to the Department of Justice moving judges, legal counsel, legal aid back and forth from the more southerly destinations to the various destinations throughout northwestern Ontario to conduct court services. That was a small “tuck-under”
acquisition, really not a platform company, but now it’s fully integrated with Hicks and Lawrence and it has allowed Hicks and Lawrence to expand their product and service portfolio.
In August of 2007 the corporation acquired Top Aces Inc., which is based out of  Pointe Claire, Quebec, the head office. They have operations at Dorval; Cold Lake, Alta.; Bagotville, Que.; and also bases in Halifax and Victoria. Top Aces provides combat airborne training services to the Department of National Defence, and they provide these services to the Air Force, the Army, and the Navy. Different services are provided to each, but they are the primary supplier of these services, and really it’s just a wonderful business. As an example, for the Air Force they provide what they call “Adversarial Support,” which is basically training against aggressors in the air, whereas with the land-based and the naval forces they provide close air support training, which means they’re simulating having air strikes being called in coordinated with a ground-based mission, and the same with the Navy. All sorts of electronic warfare training for these groups as well, which is very sophisticated equipment that’s actually in the aircraft, and during those types of missions they actually carry military personnel with them onboard the aircraft. We think that’s a huge testament to the safety and ability that Top Aces brings to the table.                          

Our last acquisition to date would have been in January of 2008 which was the acquisition of Discovery Mining Services. Little bit of a different story here, fairly classical vertical integration. Discovery Mining Services operates out of Yellowknife, but they are developing a fairly strong presence  in the northern ends of the provinces, particularly in Saskatchewan and Alberta. Some work in northwestern Ontario, some work in Newfoundland and Labrador as well, and they see opportunities in Nunavut which they are keeping their eye on. Those guys are a very busy group, and basically they would describe themselves as they are everything an exploration company needs out away from base. So they provide freight forwarding, expediting and logistics services, primarily in support of the remote exploration camps that they set up literally in the middle of nowhere. “First guys in, last guys out” – they support a complete camp infrastructure that  supports the exploration groups while they’re conducting their business in these remote regions. So they set it up, they manage the camp, they head all logistics associated with moving people, freight and equipment in and out of the camp, they demobilize the camp, clean up according to the environmental requirements at the end of it, and provide a full ‘turnkey’ solution. In 2007 I believe they moved 21 million pounds of freight, equipment, people, etc. and that was by almost 1,800 flights over the course of that fiscal period.

So we view this group as sort of our eyes and ears in terms of the exploration activity, certainly a channel for new business into our various operating subsidiaries that provide aviation services. We certainly don’t dictate that they would have to use these services, it’s an open market and that’s part of their business, and we wouldn’t want to compromise that. They go about their business, and it provides our aviation operators with better insight into what lift products should be developed, where the sweet spots are in the market, and how we can develop more comprehensive products and what the customer is demanding in terms of lift products as we go forward. It gives us huge visibility on where mining activity will be developing, and it gives us a better view of the life cycle of the various potential production projects down the road.  We can see where the exploration activity is happening, and we can sort of extrapolate from there. It allows us again to plan our service portfolio appropriately.             

WHERE DOES DISCOVERY AIR SEE ITS FUTURE GROWTH OPPORTUNITIES NATIONALLY – AND INTERNATIONALLY?
In Canada certainly we’ve got fairly reasonable exposure to the resources industry. We’re keeping a close eye on that. We see the North as a huge growth opportunity – we think there’s a ton of great businesses still in the Canadian Arctic that we think would benefit from the model that we’ve put together and from the expertise that our operators have established and that we’ve been able to bring into the fold. It gives you a number of things – one, it gives you geographic diversity. Two, it gives you access to new equipment, new markets, new services. So we’re looking forward to continuing to pursue opportunities in the North.

Southern Canada – when you look at, in Canada alone there are just over 700 commercially registered air operators, both fixed- and rotary-wing, across the country. Of course all 700 wouldn’t be our targets, but even when one cuts that into half, maybe even into a quarter, you’re still into a very plentiful sort of acquisition landscape that we think we can certainly benefit from. We’re extremely fortunate that we have a number of wonderful businesses continuously coming to us, assessing our model, and having a look at what we can bring to the table. It brings a number of opportunities for these operators. Although we have a focus on the North, we look at the entire Canadian landscape as a growth opportunity for us simply because the Canadian geography dictates that any kind of infrastructure development in areas that haven’t been developed at this time are going to require specialized aviation services. We certainly want to be there to capitalize on that. Of course in government services, we see the Canadian government embracing sort of an outsourcing model a little more positively then they have in the past. We’re seeing that model being adopted well in the U.K. and overseas, and Top Aces certainly is a wonderful example of how the government is using to its advantage the outsourcing of these capital-intensive aviation services.

We see Canada as offering plentiful, robust, wonderful opportunities for us, and as for moving abroad, we certainly have our eyes on it. At Top Aces in particular we keep our eyes closely peeled on the U.S. military market, but once you cross borders you’re dealing with a whole different range of regulatory agencies, processes, procedures and what not. We certainly think we have the expertise to manage that, but we think probably before we start looking into cross-border activities we’ll continue to focus on the Canadian aviation industry because we’ve developed some expertise in it. We see a global vision medium to long-term, but certainly short-term we see plentiful opportunity throughout Canada.            

WITH THE RECENT ANNOUNCEMENT BY PRIME MINISTER HARPER THAT CANADA WILL ACQUIRE 65 NEW FIGHTERS BY 2017, WILL THIS MEAN NEW OPPORTUNITIES FOR YOUR TOP ACES SUBSIDIARY?
We think so. Top Aces certainly have their fingers on the pulse of DND and how that program is emerging, and this can provide new opportunities for new adversarial training programs. It could mean different equipment or new equipment. One thing Top Aces certainly have going for them, currently they are the only external provider of these services to the DND, they’ve distinguished themselves and established very strong, highly functional relationships with the DND. Quite frankly, they bring a product to the table that we don’t see anyone in the market emulating. The aircraft platform is one thing; they were able to source a brilliant platform in the Alpha jet. There are well-capitalized businesses out there that could think of bringing a similar platform, but Top Aces’ complement of fighter pilots have come out of the military, they’re retired, typically 20 years experience. They have some of the top CF-18 fighter pilots in the country now working for them. The government views this as very, very favourable, because they still see the value and the investment they’ve put in these folks now coming back in a training capacity. We have no doubt that there are opportunities for outsourcing of these services that are precipitated from this new equipment, and we believe Top Aces will certainly be first and foremost to capitalize on those.    

WHAT ARE YOUR MAJOR AVENUES FOR ACHIEVING GROWTH?
Our growth strategy is two-pronged. Our goal is to provide access to capital to the existing companies to fund their organic growth. Organic growth for one of the subsidiary companies could still mean an acquisition, they could look at penetrating new markets through an acquisition or maybe just services they don’t provide or that would be too difficult to develop from the ground up. So they would go and acquire a target, bring that target in. You might see a higher level of integration, because that’s an organic growth initiative for a subsidiary opportunity. That could be one side, or as you said it could just be equipment expansion, you know maybe there’s a need for Air Tindi to operate larger equipment to deal with the heavy-lift market, or maybe there’s a niche market in there somewhere or a gap in the market that nobody’s servicing that they’ll need specific equipment for to get into. Or it could be infrastructure expansion, to have a jump-off point to new markets that have been unexploited. The organic growth initiative is realized through various financing initiatives and allows the individual companies to be able to continue to grow their service portfolios.

To pinpoint it, we very much like operating in the resources sector, we believe that’s sustainable demand, especially with the massive demand we’re seeing coming out of the emerging economies like China and India. So we think that the demand for the base metals that Canada is so fortunate to have is going to be consistent and sustainable, so we’re happy with that exposure. Oil and gas, you get tired of reading that oil is spiking again. We think the demand for oil is going to be long-term as well, that the exploration sector is going to remain robust, and we want to participate in that. Canada, when it comes down to it  the fundamentals look amazing. These are aligned with the businesses that we have been so fortunate to bring into our alliance; the services they provide are absolutely aligned with the fundamentals of the Canadian economy.