The butterfly effect

President Reagan's bold decision in 1981 provided a huge tailwind for Adacel Technologies (ADA).

In August 1981, newly elected President Reagan found himself in a pickle. The 13,000 strong US air traffic control workforce was on strike, demanding higher pay, better conditions and a cushy 32-hour work week.

This posed a significant risk. The union-led workforce may have been small, but their bargaining power was anything but. If they didn't show up for work, they knew that planes wouldn't fly and that by grounding the nation's aviation fleet, they could hold the entire economy to ransom. They figured a few extra bucks to keep them happy would be nothing in the scheme of things.

But President Reagan was unperturbed, defiantly stating that the controllers were “ in violation of the law, and if they do not report to work within 48 hours, they have forfeited their jobs and will be terminated.”

Sensing a bluff, only 1,655 controllers showed up for work the following day. To the dismay of those who didn't, the President wasn't kidding. On August 5th, 1981, President Reagan promptly fired 87% of the nation's air traffic controllers on the spot. US labour relations would never be the same.

The US Federal Aviation Administration (FAA) now had an enormous recruitment task on its hands. Finding highly skilled employees at short notice isn't easy and it took the better part of the decade for the industry to return to normalcy.

The butterfly effect

President Reagan's bold decision was the proverbial flutter that, quite literally, sent a typhoon halfway around the world. Thirty-five years later, Adacel Technologies (ADA), a developer of air traffic control simulation software, has its sail already pitched, waiting for the breeze.

How could a decision made by President Reagan in 1981 benefit an Australian software company today? Let's start with a few quirks about the US air traffic control sector.

FAA regulation ensures that air traffic controllers have a career of around 30 years. They must be employed before the age of 31 with mandatory retirement at 56. As most of the controllers were replaced throughout the 1980s, a significant number have already retired or will soon do so.

This creates recruitment headache 2.0 for the FAA. Just 300 controllers were hired in 2013, but now 1,200-1,500 are projected to be hired each year until 2019. Meanwhile, increased demand for air traffic controllers has spurred the replacement of legacy technology at the training centres. This is a big tailwind for Adacel, which makes software used in the training of new air traffic controllers, focussing almost exclusively on North America.

Is it sustainable?

Since listing, Adacel's financial performance has been notoriously inconsistent. For most of its listed life, profits were lumpy and unreliable, if they were made at all. 

This appears to have changed in recent years. Numerous contract wins have resulted in the highest profits in Adacel's history, with the share price increasing more than 1,200% over the past five years. The question is though: is this newfound success merely a purple patch for an otherwise unreliable business, or a paradigm change? Current shareholders are undoubtedly betting on the latter.

However, we remain on the fence. While we admire the business achievements in recent years, we're mindful of the power of mean reversion. Where we can be certain is that Adacel's endearing qualities are now widely appreciated by investors, which isn't a recipe for mispricing.

One of the most important tools we possess as investors is the ability to pass on an investment. For us, Adacel is a pass today.

To get more insights, stock research and BUY recommendations, take a 15 day free trial of Intelligent Investor now. You can find out about investing directly in Intelligent Investor portfolios by clicking here.


Join the Conversation...

There are comments posted so far.

If you'd like to join this conversation, please login or sign up here

Related Articles