They say timing is everything in venture capital – get in when you've spotted an opportunity nobody else has, and then get the hell out before the competition arrives (or alternatively before people realise it's not such a great idea after all).
When you look at the European low-cost airline sector, you'd have to say the timing doesn't look perfect to start investing. Competition has flooded in (some industry observers estimate that as few as five out of 50 airlines will survive a predicted shakeout); fare wars are crippling most operators' P&Ls; and we now have fuel prices at their highest level for 13 years. Even two of the industry's most prominent players are experiencing severe turbulence: Easyjet recently issued a profits warning, while Ryanair's battle with EU competition regulators has put some of its routes under threat.
But two private equity deals in the sector this month show that venture capitalists have not lost their ability to be daringly contarian. Apax Partners has led a group of investors committing &€30 million to Barcelona-based Vueling Airlines, which will connect Barcelona with various domestic and European destinations “at very attractive prices”. At the time of the deal it was reported to be the largest funding of a start-up airline since 1995.
Then just a few days later along came US-based airline-focused private equity firm Indigo Partners to lead a &€40 million investment in Wizz Air, that will fly Eastern Europeans to various destinations in the West from its bases in Budapest in Hungary and Katowice in Poland. “We think the Wizz Air low fares model is a long overdue answer to the enormous demand in Hungary and Southern Poland for affordable air travel,” says Indigo principal Bill Franke.
Both the new airlines are intriguing prospects. Wizz CEO Jozsef Varadi claims first-mover advantage in Central and Eastern Europe, while Vueling is the first into Barcelona, a major European air hub with good growth prospects. There'll be a lot of people watching how these companies fare – some with memories of the stellar exit achieved by 3i when they sold discount airline Go to EasyJet. But many will be inclined to think that it will be a long climb before the seatbelts light goes off.