AAR Corp., a leading provider of aftermarket services to the aviation industry, posted strong results in its fiscal 2024 first quarter (Q1) as sales rose 23% on an annual basis from $446 million to $550 million.

Sales increased across multiple business divisions. Year over year, they increased 34% to commercial customers and 3% to government customers, as well as 40% on a quarterly basis within its Parts Supply business. AAR’s fiscal 2024 first quarter ended Aug. 31.

“Parts Supply revenue grew 40% due to investments we made in prior quarters in anticipation of strong demand,” AAR CEO John M. Holmes said in a Sept. 26 statement. “Additionally, in Repair & Engineering our hangars were largely full throughout the summer and flight hours continue to recover globally, which drove growth in Integrated Solutions.”

AAR’s strong fiscal 2024 start shows that it is executing on its strategy of focusing the business on higher-margin offerings, Melius Research said in a Sept. 26 note to clients. While MRO work is historically labor intensive with mid-single-digit operating margins, AAR in recent years has made a concerted effort to boost its higher-margin Parts Supply business by signing aerospace OEMs to exclusive distribution agreements.

With that in mind, AAR’s fiscal Q1 margins rose 40 basis points to 7.3%, marking the 10th consecutive quarter of annual margin expansion. “As new parts distribution agreements continue to ramp, we see further runway for margins,” Melius Research analysts Robert Spingarn and Scott Mikus said in the research note. Noting that AAR’s Parts Supply segment reported fiscal 2023 11.4% margins, they added that “with scale, we think those margins can expand into the low-to-mid teens, which should provide a continued margin tailwind.”

Melius Research also expects that AAR will benefit from the Pratt & Whitney geared turbofan (GTF) engine problem, given that an average of 350 Airbus A320neos are expected to be grounded at any given time from early 2024 through 2026, while A320ceos and older Boeing 737s will need to fly longer than originally anticipated to backfill that lost capacity. “That should translate to higher sales for AAR’s MRO services and parts distribution/trading business,” Spingarn and Mikus said.

During an earnings call, Holmes discussed how the looming U.S. government shutdown could affect AAR’s business. He said that a shutdown would be unlikely to significantly impact the company’s Integrated Solutions business since it operates under previously awarded contracts. However, a shutdown might have some impact on AAR’s government distribution operations in terms of payment timing, orders and shipments.

“In any event, the situation is fluid, and we plan to remain flexible so that we can take action as needed to mitigate any impact,” Holmes said.

Looking ahead to its fiscal 2024 second quarter (Q2), assuming that the U.S. government shutdown is not prolonged, AAR expects both year-over-year and sequential sales and earnings growth.

“Specifically, we anticipate mid to high teens year-over-year sales growth with operating margins similar to or better than what we delivered in Q2 of last year,” Holmes said.