Sector Spotlight: Commercial Aerospace Aftermarket Services

While the commercial aerospace aftermarket services sector was significantly affected by the decline in passenger air travel during the pandemic, data and anecdotal evidence suggest a rapid recovery is now underway.

Here, Harris Williams Aerospace, Defense & Government (ADG) Services Managing Directors Chris Rogers, Doug Kinard, and Chris Smith, and Directors David Jones and Mike Rohman, share their thoughts on why the commercial aerospace aftermarket services sector is appealing to buyers and investors, the key trends signaling M&A opportunities, and what to look for in potential assets.

Why is this sector appealing to buyers and investors?

Global recovery of air travel continues to gain momentum, underpinned by both consumer-driven and regulatory-driven factors. Pent-up consumer demand for air travel combined with the easing of pandemic lockdowns is spurring the resurgence. In turn, demand for aftermarket services began to build in the third quarter of 2021 and has been building momentum since. According to the International Air Transport Association, total traffic in February 2022 (measured in revenue passenger kilometers, or RPKs) was up 115.9% compared to February 2021. That is an improvement from January 2022, which was up 83.1% compared to January 2021. [i]

Domestic air travel within the U.S. is now at more than 85% of 2019 levels, although recovery in other regions has trailed due to stricter lockdowns. [ii] International travel will be an additional growth driver as restrictions ease. Beyond commercial air travel, air cargo and private aviation have been highly resilient throughout the pandemic, and both sectors continue to exceed pre-pandemic levels. These trends bode well for the aftermarket services sector.

"Commercial aerospace aftermarket services has historically been an attractive sector for buyers because of consistent commercial air travel and growing fleets, which are drivers of demand for aftermarket services,” says Kinard. He says that although the pandemic temporarily disrupted those tailwinds, the sector is regaining strength. For the first time in two years, adds Rogers, there’s confident consensus on a sustained recovery of commercial air travel: “Optimism about the sector was very visible at the recent MRO Americas conference, and we believe aftermarket activity will return to pre-pandemic levels by 2023."

What are some of the key trends signaling M&A opportunities?

Senior bankers from the Harris Williams ADG Group highlight four prominent trends that indicate the commercial aerospace aftermarket services sector should be an area of buyer and investor focus.

Higher fidelity in global air travel outlook is creating strong tailwinds for aftermarket services.

“Following a pandemic-driven pause in M&A activity, confidence in the outlook for global air travel will bring investors off the sidelines looking for quality platforms in the aftermarket space,” highlights Rogers. “As aircraft start flying more, there will be a growing and sustained need for maintenance, which puts MRO and other aftermarket services businesses back in the spotlight.”

The pandemic also caused a backlog in maintenance needs, as many planes, particularly older ones, sat idle. Smith notes that most of the parked aircraft were not serviced where possible over the past two to three years, nor were they retired. In fact, 2021 saw the lowest number of aircraft retirements since 2007. [iii]

“The few planes that were flying during the pandemic were the newer, more fuel-efficient airplanes within the fleet,” he adds. “Now, as demand for air travel resumes, carriers are bringing back the older aircraft that will need more service. This means the demand for repair and maintenance capabilities will rise considerably over the next 12 to 24 months.”

Aftermarket labor shortages and supply chain challenges favor those that can fill specialized needs.

The acute labor shortage and fight for talent within the aftermarket stretches from aircraft mechanics to ground handling and catering staff. “Companies providing technical workforce staffing solutions, such as through variable staffing models, will be increasingly important,” notes Jones. “There’s a finite pool of mechanics and machinists, and there are many businesses competing for those resources,” he adds. “Companies that can attract and retain talent and utilize it in a way that’s as cost-effective as possible are going to win.”

“Buyers need to understand a platform’s go-forward cost structure,” says Rogers. “It will be important for aftermarket services providers to be able to demonstrate that their business model can account for wage inflation and that they can attract and retain the skills needed to sustain their growth.”

Additionally, companies focused on specialty distribution and supply chain management are attracting buyer attention, as they play a critical role in the larger aviation ecosystem.

Continued pressure on carriers’ operating costs is driving interest in OEM-alternative solutions.

Rising costs, including labor rates and fuel prices, are reinforcing carrier interest in companies that can provide cost-effective, high-value solutions in the aftermarket. “Component repair shops, for instance, allow operators to remove a part from the aircraft and send it out to a third party for repair,” says Kinard. “These businesses are typically not capital intensive, and they have healthy margins. OEM-alternative businesses, such as Parts Manufacturer Approval firms and companies providing Designated Engineering Representative repairs, are often able to provide lower-cost solutions than in-house OEM repair shops.”

There is a continued focus by airlines and OEMs on expanding outsourced services.

Prior to the pandemic, there was a clear desire by large market participants to expand reliance on outsourced capabilities. According to Rohman, a combination of production supply chain pressures, balance sheet management, and reassessment of core functions by airlines and OEMs is likely to renew that focus on outsourcing: “Over the past decade plus, we’ve seen everything from aircraft painting to ground handling to flight crew training being outsourced. And that’s a trend that will continue.”

“Airlines are also looking for opportunities to reduce cost and increase efficiency through use of digitalization,” explains Smith. “Technology-related aftermarket services that make MROs more efficient, such as predictive maintenance, drone-based aircraft inspection, digitalization of maintenance workflows, and documentation, will continue to attract buyer interest.”

While these tangential segments may not be directly aligned to the aftermarket, the general trend toward outsourcing of non-core functions reinforces the solid market positioning of aftermarket services providers and creates interesting opportunities for portfolio expansion. 

What should buyers and investors consider when searching for assets?

“There’s an under-met need for platforms of scale that can service aircraft in a large variety of locations and perform a wide range of services and repair a wide range of parts,” says Kinard. He adds that scale matters, as does customer access and leverage within the supply chain, whether that’s through unique capabilities, proprietary authorizations, or intellectual property on certain parts. “Each of these advantages is difficult to build organically, making M&A more appealing. After an unprecedented couple of years, commercial aerospace aftermarket services platforms are becoming financially stronger and will continue to become more valuable.”

The Harris Williams ADG Group combines deep industry knowledge and relationships with superior M&A advisory services. As a pure-play advisor with no conflicts of interest, our ADG Group offers differentiated strategic advice and seamless execution to a global base of leading aerospace, defense, and government services clients.

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[iii] Aviation Week Fleet Discovery, mid-March 2022

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