Aviation Supplier AAR Bullish on Air Travel Recovery, Aircraft Production Delays
Aviation industry supplier AAR is optimistic on the future as the strong travel recovery coupled with production challenges at Airbus and Boeing are driving increased demand for its maintenance and other services.
Aircraft “that are bread and butter for us are going to be flying longer than people anticipated originally,” AAR CEO John Holmes said during an earnings call on Tuesday. “We think that’s one of the core favorable trends that gives us confidence in the growth we’re talking about.”
In addition, as airlines return to more normal levels of aircraft utilization, maintenance needs like engine shop visits will grow, he added.
Production delays at Airbus and Boeing have forced many airlines to extend the use of older models. In November, Air Lease Corp. Executive Chairman Steven Udvar-Hazy said that roughly 90 percent of aircraft leases were being renewed compared to a normal rate of around 60 percent. And the situation has forced airlines like JetBlue to use less than optimal aircraft on transatlantic flights, and Southwest to slow the retirement of older Boeing 737-700s as they wait for new planes.
AAR reported a $22.5 million net profit for its fiscal quarter covering September, October, and November. That was on $470 million in revenues, up 8 percent versus the same period a year ago. Sales to commercial customers alone jumped 21 percent as worldwide passenger flight activity rebounded following the Covid pandemic. This was offset by weaker trends in the government market, which accounts for roughly 40 percent of AAR’s total sales. The U.S. Defense Department, for one, has spent less with the company since withdrawing forces from Afghanistan.
But AAR’s chief business is maintaining, repairing, and overhauling aircraft. Aircraft manufacturers and leasing companies are important customers as well. The company is based near Chicago’s O’Hare airport, with key airframe maintenance facilities in Indianapolis, Miami, Oklahoma City, and Rockford (outside of Chicago) in the U.S., and Trois Rivieres and Windsor in Canada. Services include everything from airframe inspection to exterior and interior refurbishment to repairing components, landing gears, wheels, and brakes, etc. It’s also a major supplier of aircraft and engine parts both new and used.
Holmes spoke at length Tuesday of the commercial market’s revival. “I’m pleased that we continue to see progress in the recovery of our commercial volumes, notwithstanding the fact that global flights are still down approximately 20 percent from 2019 levels.” On the other hand, “we do continue to experience labor market tightness,” albeit “stabilizing” somewhat. Holmes said AAR is “engaging with our customers regarding price increases for calendar year 2023 in order to address the higher labor costs we are experiencing.”
Recent contract wins include a multiyear component support agreement with FlyDubai covering the airline’s growing fleet of 737 Maxes. Another new deal involved Cebu Pacific of the Philippines, which turned to AAR for a “full suite of services covering both aircraft, warranty management, and value engineering.” Overall, Holmes said “demand for… our maintenance, repair and overhaul services remained strong.” He added: “Looking forward, our largest North American airline customers continue to be confident about demand resiliency and expansion. We are also encouraged by recent signs of demand improvement in Europe, and early indications are that the easing of lockdown restrictions in China — where flying activity is still down 70 percent from pre-Covid … is already leading to an increase in flight hours.”
Airlines often find it more economical to outsource parts of their maintenance to companies like AAR, sometimes to avoid using in-house unionized labor. The trend accelerated after the September 11 attacks of 2001, when many North American airlines were forced to file for bankruptcy. One such airline was United, which abandoned a giant maintenance facility at Indianapolis airport as part of its court restructuring. The facility is today a critical one for AAR.
As for maintenance outsourcing more generally, the trend appears stable, according to Holmes. Labor shortages and higher wages, he explains, are a challenge for both airlines and MROs alike. “So I don’t know that it necessarily changes the calculus at the airlines in terms of whether to bring in work or outsource work. I think that’s a relatively stable relationship.” According to a recently published paper by Embry-Riddle Aeronautical University, roughly a quarter of U.S. airline maintenance spending was outsourced in 2004. By 2016, the portion had grown to more like three-quarters.Subscribe Now to Airline Weekly
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