A Very Complicated Set of Transactions Involving Surf Air, Southern

Southern Air Express

You may have seen one of the three press releases issued last week by Surf Air — now called Surf Air Mobility — announcing a slew of transactions. If you’re like me, you started to read, your eyes glazed over, and then you just gave up. But then I was able to make some calls, and now I understand what’s happening. There are five different entities involved, and the end result is a really big commuter airline with a plan for hybrid power.

I haven’t thought much about Surf Air in a long time. The airline made something of a splash when it started flying within California as a subscription service. It went through all sorts of headaches when it decided to have a third party operate flights for it. There were lawsuits flying around about who owe money to whom, but it eventually settled down. It bought RISE back in 2017 and expanded to Texas.

Today, Surf Air is still flying with schedule operations mostly if not entirely in California — I think the Texas stuff is gone — along with charter operations that can go anywhere. The airline currently uses four Pilatus PC-12s which are operated by Advanced Air.

From this modest position, Surf Air is planning for big change. First up, it’s going public in a very roundabout way that is also quite fashionable. It is merging with Tuscan Holdings Corp II. I’m sure you’re all familiar with Tuscan, right? Of course you aren’t, because it’s just a SPAC.

For those who haven’t followed the whole SPAC (special-purpose acquisition company) trend, this is basically the idea of pooling money and then looking for a place to put it. Tuscan raised money through an initial public offering in 2019, and it has now found its target in Surf Air.

Who are these people? The company’s SEC filing says, “Our management team consists of experienced deal makers, operators, and investors who have worked with blank check companies and in the legal cannabis industry.” Since Surf Air has been repeatedly calling itself “a company working to accelerate the adoption of green aviation,” Tuscan probably got confused and thought “green” meant something entirely different.

Tuscan’s CEO, it turns out, made his money in propane (but probably not propane accessories) before creating a private equity fund in the ’90s.

I’m getting on a tangent here. The point of even saying this is that Tuscan has no aviation background, and it is coming into this as an investor. Surf Air Mobility will now be the surviving public entity, and it will have nearly $500 million to grow and do things that it might not otherwise be able to do.

So, what exactly does it want to do? Well, that’s where we get into the next piece of the puzzle. Surf Air will acquire Southern Airways Corporation, the large Grand Caravan operator that flies under the Southern Airways Express brand in mostly-essential air service (EAS) markets as well as under the Mokulele name in Hawai’i.

This does a couple of things for Surf Air. First, it provides an actual operating certificate which Surf can and will use to operate its fleet of PC-12s. The deal with Advanced Air will presumably disappear as soon as Southern can get those airplanes on its certificate, after closing of course.

This will then do the same thing that Southern was able to do for Mokulele. Using the 9X code, Surf Air flights will now be able to be sold in global distribution systems like Sabre, and they will work with Southern’s interline agreements with the big guys.

Didn’t I say Surf was a membership organization? Yes, but that is likely also changing. The existing product isn’t going anywhere, but if the planes are going, why not also sell those through the GDS if people prefer to buy a one-off? That’s the plan, as I understand it.

This will result in all brands being kept, so you’ll have Mokulele dedicated to Hawai’i, Southern as the primary EAS operator with lower fare flying, and Surf Air as the higher-priced, often more corporate-focused offering. And it’s that last piece where they think there’s real opportunity to grow. They’ve signed a deal with Signature Aviation to help support Surf Air’s growth.

The problem, however, is that to really figure out how to grow, they need to reduce their unit costs to make markets viable. And that’s where the next prong of this deal comes into play.

Surf Air has also entered into agreements with both MagniX and AeroTEC to produce a hybrid power option for the Caravan. MagniX has already developed an electric powerplant for the Caravan and it has flown, but it doesn’t work well if you’re a charter operator that needs charging capabilities in every airport.

The solution for now is the same solution that propelled the Prius to fame before Teslas and all the rest of the electrics showed up on the roads. MagniX will build a hybrid powerplant that will reduce fuel cost by at least 25 percent. This requires no external charging, but it will also make, in Surf’s estimation, a bunch of new routes feasible with this lower cost structure. Eventually, electric will be an option too, but the hybrid piece will be ready in 2 years, much sooner.

Surf is developing this as a proprietary technology. MagniX will build it, AeroTEC will do the engineering and work required to get it approved by the FAA, and then Surf can put this on the Southern/Mokulele Grand Caravans. The airplanes will fly for all three brands with Surf being able to grow the most.

As an added bonus, since Surf is developing this with the other two vendors, it will be able to make money by selling this powerplant to other operators who want to use it as well. I assume but have no confirmation that this structure is because MagniX needed money to develop this, and Surf is now flush with cash thanks to the weed SPAC.

It’s all clear as mud, right? I now understand the rationale for this whole deal, or, well, I suppose there are multiple rationales depending upon which angle you’re coming from. This is somewhat risky since it requires new technology to work and get approved, but… there seems to be plenty of money out there right now.

7 comments on “A Very Complicated Set of Transactions Involving Surf Air, Southern

  1. Thank you very much for this explanation. I too had read several of the various reports and couldn’t make heads or tails of it. I hope, for Surf Air’s sake, that the whole thing doesn’t rely exclusively on the new engine technology. While a very cool idea, I can see it taking forever to get past the FAA. Hopefully they have enough money to keep running for the long haul. I have no idea if Mokulele and Southern are profitable with their EAS routes, but if so that may help keep them in the black while the rest of it gets sorted out.

  2. Total non-sequitur here. Did I read that Delta is in some type of bidding war, fighting to invest in the latest iteration of Alitalia??? How many billion will they throw at that? Let’s hope no one in Italy orders any bees.

  3. I had to double-check the date. It’s not April 1, is it? What could possibly go wrong with this plan? Let’s make the Caravan really expensive, but save on the fuel costs! Somehow weed had to be involved. Call me skeptical.

  4. I wonder what the Surf Air pax will think of the “upgrade” from a PC-12 to the Caravan. I have seen some very nice Caravans, but can it really match a Pilatus?

    I had totally forgotten the recent Southern – Air Choice One tie up, too. What a mash up. That plane in the picture needs one more tattoo.

  5. Surf Air has a history of making really great press releases and following up with zero action. Check out their “travel coin” offering or their “Surf Air Express” campaign on IndiGoGo (which I hear had to be totally refunded to everyone who paid in because the service never materialized. Also left out was their “acquisition” of AmpAire, a hybrid electric aircraft designer that just quietly got un-acquired a few weeks ago before this big announcement.

    I expect that the AmpAire acquisition was structured like the RISE acquisition….RISE was out of cash and could either be acquired (in an all-stock deal) or go out of business. Made for a good headline and some splashy valuation numbers, but in the end it was meaningless.

    Hope the Surf team does well with this, but I wouldn’t want to bet my money on it.

Leave a Reply to Hank Hill Cancel reply

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Cranky Flier