Aftermarket services specialist AAR Corp. is bracing for a drop in demand for maintenance services as airlines scale back to cope with reduced flying amid the coronavirus pandemic, but is already seeing a rebound in markets that are now in recovery mode.
“In the last two weeks, we have seen some activity, particularly out of China,” AAR CEO John Holmes said on a Mar. 24 earnings call.
“About halfway through the third quarter, we started to see a meaningful decline in order volume out of China, in particular, and a bit less impacted across all of Asia. But in the last two weeks, we have seen some increased activity.” AAR’s fiscal 2020 third quarter ended Feb. 29.
The industry’s largest independent maintenance provider, AAR generates most of its $2 billion in annual revenue within its aviation services segment. Earnings within that segment are evenly split between traditional aircraft maintenance, parts supply services and an “integrated solutions” business that includes flight-hour component services and performance-based logistics. The global airline decline will hit each in some way.
AAR’s seven airframe maintenance hangars are busy now, but capacity will free up as airlines alter near-term schedules and seek to avoid paying for overhaul work they can defer. Parts and hourly support contracts will track with available seat miles, rising as aircraft fly more and falling as services are reduced.
The rapidly changing ramifications of the pandemic mean that, much like airlines scrambling to reduce capacity to match demand, MRO providers are in uncharted waters.
“Right now, we have a fair amount of work in the hangars. They’re largely full, but we anticipate a meaningful decline in that work as we head towards the summer,” Holmes said. “We’re getting different information out of different customers at this time in terms of the schedules that they’re putting together.”
AAR generates about 60% of its commercial business from U.S. operators, most of which have cut system capacity by 60-80% for the near future.
In China, traffic is rebounding after bottoming out in February, when the country had its peak number of confirmed COVID-19 cases. Near-term schedules have Chinese carriers flying nearly 90% of year-earlier domestic seats.
AAR said it took a $24.7 million charge in Q3 linked to various cost-cutting measures, and expects to spend an additional $15-20 million this quarter on similar moves. Among them: furloughs and consolidating facilities. It also got out of a commercial contract that was not delivering expected returns.
“We’re watching the situation closely. It’s still relatively early,” CFO Sean Gillen said. “We would be ready to take additional action if needed.”
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