Pre-Flight: Emerging Commercial Aerospace Opportunities

Key Takeaways:

  • Rising commercial airline traffic is creating growth across the market’s three primary segments. 
  • Aviation services, aerospace aftermarket, and OEMs present investors with value-creation opportunities. 
  • Top performing companies in the space share several key attributes. 

With pandemic-driven restrictions subsiding, demand for commercial air travel is on a strong rebound—and so is the value chain supporting it. Here, the Harris Williams Aerospace, Defense & Government Services Group discusses why now could be an opportune time to create value. 

What’s driving increased commercial airline volumes?

Rogers: We’re almost back to peak pre-pandemic traffic volumes due to pent-up air travel demand and continued elimination of pandemic-related travel restrictions. The reopening of international borders was another crucial piece to the recovery, facilitating the return of leisure travelers. Now the moderator on growth isn’t demand from flyers. It’s the ability of airlines, maintenance providers, and airport infrastructure to accommodate this rapid acceleration in volume while navigating complex labor and supply chain challenges.  

Jones: So far, leisure travel has led the way. There's still room for business travel demand to fully recover, providing substantial runway for continued growth. Business travelers tend to be last-minute bookers, price takers, and premium service users. They’re also typically insulated from macroeconomic conditions and generate higher fees. Many airlines are continuing to expand their premium services to attract these more profitable business travelers.

Which commercial aerospace sectors stand to benefit the most?

Kinard: There are three primary segments of the market, each with different time horizons for fully harnessing commercial aerospace’s growth potential. On the front end, aviation services companies are the closest to daily flight operations. These companies staff people to load bags, clean planes, and operate fueling trucks. They plan months in advance to build out staffing schedules that accommodate flight schedules, and their revenue is benefiting from the increase in flights. Their revenue is tied to general operational trends, putting them in a good position to continue growing with the positive near-term outlook.  

The next segment is the aerospace aftermarket. Companies in this space plan their operations four to six months ahead, and revenue is contingent upon flight traffic translating to a range of non-discretionary and discretionary maintenance events. Again, as operations increase, they’ll continue benefitting more from aircraft in need of mandatory checks and maintenance. The companies we work with in the aviation aftermarket have significant momentum that we believe will continue over the balance of 2022 and into 2023. 

The last segment includes commercial aerospace OEMs—like Boeing, Airbus, and Pratt & Whitney—and their key suppliers. This group can't quickly turn operations on and off. Because of this, they will take the longest to accelerate into the embedded growth from large Boeing and Airbus aircraft backlogs. However, OEMs are fully dedicated to aircraft production rate increases and supplying the planes planned to be delivered months and years from now. Many businesses in the Boeing and Airbus commercial production supply chain have strong long-term outlooks thanks to positive tailwinds for air travel, the heightened need for more fuel-efficient aircraft, and other important demand drivers. 

Smith: That’s partially why we’re bullish on the opportunity for M&A value creation within the OEM production value chain. Many potential investors are waiting for clearer production visibility before making a big move. It's an opportune time for investors with industry expertise and familiarity with commercial aerospace dynamics to acquire and potentially combine solid businesses with attractive long-term outlooks. Investors will need to underwrite some level of near-term “timing risk” as the supply chain sorts through a period of disruption, and Boeing and Airbus finalize production rate ramp schedules. Even so, we see this as an opportunity for longer-term value creation. Business sellers will need to consider, among other things, the pros and cons of a potential sale in the near to medium term. However, sellers who are willing to reinvest or consider structured deals, like an earn-out, could benefit significantly in the future alongside their new equity partners. 

Which high-level company traits should M&A buyers prioritize?

Rogers: The characteristics long important in aerospace endure. Proprietary products, mission-critical services, and differentiated solutions translate to stronger margins, a lower threat of displacement, and increased visibility. With these differentiators in place, companies can tie themselves to build rates or establish exclusive contracts, creating strong customer and supplier relationships and positioning their business for healthy, long-term growth. 

Rohman: Diversification is also valuable. Companies can stand out in the space via broader geographic coverage or exposure to a variety of end markets, such as cargo or defense. They can also establish positions on different platforms to provide a more diversified offering of value-added solutions.

Jones: Another key component of winning companies is better management of the labor market. Recruiting and retaining professionals, especially in technical positions, is a costly endeavor and a major challenge facing the sector. With rising competition for experienced employees from other industries, aviation platforms are realizing that salary and benefits aren’t enough. Companies with a strong culture and vision that can create a greater sense of purpose for employees, while offering concrete career paths and frequent performance-based incentives, will be able to better keep their people and manage labor costs more efficiently. 

Proven M&A strategies are crucial for success, too. Further consolidation is going to be important in many of these markets, and platforms that have a target list of companies with the ability to execute and drive value post-acquisition are going to win. 

Conclusion

Beyond commercial air travel, the Harris Williams Aerospace, Defense & Government Services Group has wide-ranging expertise in other high-value subsectors.

To learn more, please contact our senior bankers.

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