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Aircraft Maintenance Provider AAR Sees Supply Chain Woes Easing; Expects Strong Demand to Continue

Jay Shabat
July 19th, 2023 at 1:19 PM EDT

AAR, a major provider of maintenance and repair services to airlines worldwide, told investors that industry supply-side constraints are easing but remain problematic. The company, headquartered near Chicago, provided an update during its fiscal fourth quarter earnings call on July 18.

“We feel overall,” said CEO John Holmes, “that the supply chain environment is improving. And so, this should be a better year than last year for turnaround times.” Demand for aircraft maintenance has been strong, Holmes explained, and “our hangars have been mostly full for some time.”

AAR announced earlier in the week that it would expand its Miami airframe maintenance facility, in conjunction with a contract extension it just signed with United. Their agreement, in which AAR provides heavy maintenance and overhauls for United’s planes, will now run through 2030. Airlines, especially in countries with relatively high labor costs, typically outsource a substantial amount of their heavier and time-intensive maintenance work to third parties like AAR. “Expanding our relationship with AAR is an important step in building out our internal and external long-term heavy maintenance footprint to meet the demand for our growing fleet,” said United’s Managing Director of Base Maintenance Mike Arata, in a statement. When United restructured in bankruptcy during the early 2000s, one of its major cost-cutting moves was outsourcing much of its heavy maintenance, resulting for example, in AAR taking control of its large maintenance hangar in Indianapolis.

One supply-side constraint troubling airlines since the end of the pandemic: A shortage of skilled aircraft mechanics. Labor availability remains tight, Holmes explained in the earnings call. “But our attrition levels have stabilized and our many partnerships with schools and other sources of talent continue to serve us well.” Turnaround times, measuring how quickly AAR can complete projects for customers, have likewise improved. “In terms of turnaround times in our own hangars, I mean we’ve been running a pretty steady operation for the last several quarters… We feel that we’re actually operating quite efficiently.” AAR itself outsources some work to other maintenance providers, “and we have seen those turnaround times increase.”

In March, AAR agreed to purchase nine Boeing 757-200 passenger jets, along with their 18 Rolls-Royce RB211 engines, from American. The transaction provides AAR with a feedstock of parts to use for other 757 customers, specifically those using the plane for cargo operations. Still, “USM supply remains tight,” according to Holmes, “and our team continues to work to identify opportunities to acquire material to meet the robust demand.” USM stands for “used serviceable materials”—in other words, second-hand parts and components. AAR receives newly-built parts as well, directly from original equipment manufacturers (OEMs). Here too, supply-side constraints are a factor. “During the quarter, we did experience some delays from OEMs due to supply chain issues.”

As for future demand, AAR remains optimistic based on airline growth plans. “We expect our hangars will remain largely full throughout the year, and we are excited to be adding more capacity when the Miami expansion comes online.” Holmes said he’s “absolutely seeing airlines—because they anticipate capacity shortages for some time—being willing to sign multiyear agreements with us.” AAR also does a lot of maintenance and repair business with government entities including the U.S. military. In its latest fiscal year, the company grew revenues from commercial contracts by 23%. But revenue from governments dropped 10%, in part because of the U.S. military’s exit from Afghanistan.

On Thursday, AAR is scheduled to hold an investor day event to discuss its business in greater detail.

Jay Shabat
July 19th, 2023 at 1:19 PM EDT

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