AAR Corp. sees solid growth in its commercial airframe and component maintenance businesses near-term, continuing a steady upward trend that is helping the maintenance, airlift, and cargo systems supplier offset declining demand from its defense customers.
For the 12 months ended May 31—the end of the company’s 2013 fiscal year—61% of AAR’s $1.6 billion in sales were generated by commercial business, up from 55% in 2012. The shift was even more pronounced in recent months, as commercial sales contributed 63% of the $553.8 billion in fiscal 2013 fourth-quarter sales, against 61% for the same period last year.
The change is due to both a focus on growing the commercial business and the sequestration-related drop in defense spending, company executives say.
A big contributor is AAR’s Duluth, Minn., commercial maintenance facility, which turned its first aircraft around in December 2012.
“Our Duluth facility is up and running with two lines, and expected to go to a third line in September,” acting CFO Michael Sharp told analysts during an earnings call July 25.
Already the U.S.’s largest independent airframe maintenance provider by man-hours generated, according to Aviation Week’s Top 10 MRO rankings, the Duluth facility added still more capacity—but not too much.
“We don’t have a lot more space,” Chairman and CEO David Storch told analysts. “We have some space, we can accommodate some additional demand, but we couldn’t accommodate a dramatic requirement as we sit here today.”
AAR’s five facilities—in Indianapolis, Miami, Oklahoma City, Hot Springs, Ark., and Duluth—generated “close to” five million man-hours of work in fiscal 2013, says Storch, which is “steady growth,” year-over-year.
The near-term outlook is for more of the same.
“We see steady demand for our products on the commercial side, and our view is that the spares market remains fundamentally healthy and is expected to pick up over the next several months,” Storch says.
Growth areas could include the widebody market as well as international business, where the company is looking to “grow its footprint,” Storch says. AAR points to its recently ramped-up parts distribution operation in Amsterdam and a fledgling office in Abu Dhabi as logical generators of more work outside the U.S.
Among the few negatives for AAR is a dip in KC-10 flying by the U.S. Air Force. The company has a multi-year support program withto support Air Force KC-10 operations. AAR generates revenue based on total flight hours and over-and-above work on components. Annualized flight hours dipped 28% in the second half of fiscal 2013, compared to first-half levels that
the company deems “historically low.” The difference between actual and forecasted hours flown forced AAR to take a $19.5 million fourth-quarter charge.
AAR ended 2013 with a $55 million net profit on sales of $2.1 billion. Overall sales increased 3.5%, led by a 5.0% bump in aviation services sales, to $1.61 billion.
The company’s fiscal 2014 projection is for sales of about $2.2 billion, with “continued strength” in repair and supply chain businesses.
The year is off to a solid start, with several deals already announced. Among them is an extension of AAR’s component supply agreement with Mesa Air Group.
The deal, which runs through 2021, includes maintenance and repair services for the airline’sand 900s. Under the agreement, AAR provides component support services, including guaranteed fill rates at the carrier’s six largest line stations.