MRO Gears Up To Be An M&A Bright Spot For Years

The combination of surging commercial passenger numbers, deferred maintenance and slower-than-expected aircraft manufacturing is fueling significantly more merger and acquisition activity in the MRO sector. Experts see this trend running for several years, with the drivers for deal-making expanding beyond just pandemic reactions.

Bullish moves and fresh commentary from strategic players, as well as the growing prevalence of private equity (PE) investors in aerospace and defense, illustrate the intense interest. In July, Apollo Global Management and Air France agreed to a €500 million ($561 million) investment by the PE giant into the airline’s engineering and maintenance unit, bringing Apollo’s total to €1 billion within a year.

On Aug. 4, Heico closed on its roughly $2.05 billion acquisition of Wencor—the largest deal Heico has ever pursued, and one of the largest ever in MRO. 

Veteran aerospace and defense deal-makers such as Stephen Perry, managing director and co-founder of Janes Capital Partners, tell Aviation Week the trend could be just warming up.

“There truly is this desire by people to travel, and you see this in the airports around the country and around the world,” Perry said July 19 during a question-and-answer session hosted by the Aerospace and Defense Forum. “As long as that boom continues, you will continue to see elevated MRO. Airlines have older airplanes because they can’t get ahold of the new ones they ordered.”

Short of a “black swan” event like another pandemic, the trend of heightened MRO deal-making naturally should run a cycle. “It’s at least three years, maybe more, maybe five,” he said.

Others see it, too. “Aftermarket and MRO M&A [(mergers and acquisitions)] activity has been a bright spot . . . and is expected to continue to be robust given rising fleet size and higher aircraft utilization and MRO spending strength,” says Michael Richter, managing director and global head of Lazard’s aerospace and defense investment banking group. Global spending on MRO is expected to recover this year to 2019 levels, partly due to robust airline traffic but also because of the need to perform deferred maintenance left over from the COVID-19 era.

Overall aerospace and defense industry M&A activity has regressed since peaking in 2021, but MRO-related M&A appears to be picking up steam. For deal-makers, MRO and support services generally include component repair, fixed-base operations (FBO) and general aviation support, overhaul and test, supply chain management and distribution, and cargo and flight services.

Over the last 13 quarters, MRO and logistics were responsible for 151 known deals, tying for second among almost two dozen aerospace and defense subcategories, according to Janes’ data. Only government services and information technology ranked higher. Still, the average deal multiple —measured as total enterprise value divided by pretax earnings—fell to the middle of the pack at 11.3X.

Attention is growing for good reasons, according to deal-makers at Capstone Partners in a midyear M&A report issued for the Paris Air Show. Western MRO specialists such as AAR and Lufthansa Technik saw record operating profits, up around 50% in 2022 and ahead of 2019 levels. MRO revenue drivers are a function of flight hours and fleet age, and the deferred maintenance related to COVID-19, production issues and resurgent passenger traffic are boosting both factors. In addition, part-out activity has been constrained, with fewer aircraft retirements than expected.

“The aftermarket remains as a source of sustainable cash flows that are relatively insulated from cycle timing, since operating results are more heavily dependent on stable fleet sizes as opposed to changing delivery schedules,” Lazard’s Richter explains.

That means businesses with aftermarket and MRO exposure are valued for that exposure, especially by outside investors hungry to put their capital to work.

Richter points to several recent examples, including Veritas’ acquisition of Chromalloy, VSE and Loar Group’s acquisition of Desser, ATL’s acquisition of Aero Accessories and the Sterling Group’s acquisition of West Star Aviation. Overall, more than half the acquirers in MRO deals were PE firms. But as the Heico purchase of Wencor shows, strategic players also are willing to step up more than before.

“There’s plenty of value out there,” TransDigm Group CEO and President Kevin Stein told financial analysts in May. “Given our ability to generate value, I think we don’t turn away when prices go up necessarily as long as we remain convicted with the individual property products.

“When you find a business that matches the criteria that we look for in highly engineered products, you’re going to have a successful run with those kinds of products over their lifetime,” he added.

In recent years through the COVID-19 pandemic, when private aviation and cargo demand spiked, investors focused MRO deal-making more on FBOs and general aviation support services, along with cargo conversions. Initially, deal-making seemed tepid and concentrated in those areas. Transactions in 2022 were 23% below pre-pandemic 2019 levels, according to Capstone Partners. Overall, aerospace and defense transactions dropped 14% in 2022 and were 13% below pre-pandemic 2019 levels, following a similar trend across all industries in North America.

But that has changed, especially in the MRO-related subsector. Stein says TransDigm’s deal pipeline over the next 12-18 months is stronger than it has been traditionally, likely because there are more businesses available for sale. TransDigm generally targets small to medium-size enterprises offering proprietary, critical parts.

“Proprietary aftermarket aircraft parts producers continue to be highly attractive acquisition targets not only to traditional acquirers, but also to companies who previously were considered distributors and are seeking to increase their value-add, profitability and importance to customers,” according to Capstone Partners.

The investment bank says another theme driving MRO M&A is digitalization: “Western operators’ focus has been on employee recruitment and training, following cutbacks during the downturn. They have also been expanding their digital MRO capabilities, with both AAR and Lufthansa Technik making related acquisitions.”

AAR acquired MRO and airline fleet maintenance management software, mobile and cloud provider Trax in March 2023 for up to $140 million, including earn-outs. Lufthansa Technik acquired maintenance and engineering software provider Swiss Aviation Software at the end of 2022, and it is combining the unit with its data analytics, digital records and asset management operations.

Lazard’s Richter also sees engine MRO generating investor interest. “Engine MRO is expected to exceed 2019 levels in 2023, driven by air travel demand and utilization,” he says. “Newer-generation engines, such as the [CFM] Leap and [RTX] Geared Turbofan, are larger than current-generation engines and made with more expensive materials, which in turn drives high maintenance growth over the long-term.”

Whether Richter is right remains to be seen. Regardless, the motivations driving MRO deal-making now include far more than just a pandemic surge in private flying. Final 2023 M&A results will not be known until January, but as a whole, aerospace and defense activity is expected to fare better than many other industries—and within that sector, MRO will do better than many other subcategories.

“For the commercial aerospace subsector, we expect the landscape to continue at a consistent level, with activity heavily tilted toward MRO and supply chain transactions,” PwC consultants said in their 2023 M&A outlook for the Paris Air Show.