How Trends like M&A Activity and Aging Fleets Drive Global Growth for MROs
Key Highlights
- Aging aircraft and engines create substantial demand for major overhauls, especially as airlines recover from COVID-19 impacts.
- Rising M&A activity among smaller, entrepreneurial MROs, driven by private equity, is fueling industry consolidation and growth opportunities.
- Strategic advice emphasizes long-term business planning, capital investments and engaging specialized M&A advisors to maximize valuation.
With significant growth in demand for maintenance, repair and overhaul (MRO) services around the world, reviewing trends in the industry and finance expertise could help maintenance organizations ride the wave and achieve new success.
In a recent episode of the Aviation Pros Podcast, Joey Smith, aviation director at Cassel Salpeter & Co., shared expert insight on growth and trends in the global MRO market.
Highlighting increased activity in mergers and acquisitions in this field, Smith also provided advice for repair stations that want to take advantage of the rapid growth in the industry.
What trends are causing growth in MRO globally?
Using the COVD-19 pandemic as a benchmark, Smith noted that demand for MRO has grown immensely, even after starting in a good place beforehand.
Here are a few key trends Smith outlined:
Aircraft delivery bottlenecks
Discussing issues with new aircraft, Smith said, “The lack of deliveries makes the current carriers—from the legacy ones, like Delta, United, American, to some of the newer ones—hold on to some of their older planes longer than they had planned…It’s been exacerbated by some of the production delays within Boeing and Airbus.”
Smith elaborated, “But as a result, we're seeing the average life of fleets being increased by a year or so over the last couple of years.”
He proceeded, “As they keep these older birds in their fleet, they need to have a scheduled repair for the airframe and the engines…They take the engines off of the airframe and send them out, and they cycle differently than the airframes needing to be looked at nose-to-tail.”
Smith explained, “But in both of those situations, you have lots of work to be done by MROS, in engine shops and heavy maintenance facilities that do the nose-to-tail and component shops doing accessories, and then all these different parts suppliers that provide the parts.”
Aging fleet and engines
Smith shared, “You have more planes flying every year, more traveling going on by the global middle class. More aircraft in the air leads to a tremendous amount of need for repairs to the fleet.”
He continued, “Once airplanes and engines are past five-to-ten years old and they start to become midlife, they're off warranty. Within every couple of years for engines and every three-to-five or seven years for airframes, they need to have major overhauls and shop visits at maintenance repair facilities.”
“During COVID, the airlines were not making money. They were trying to survive. But when they were flying, they were cannibalizing their aircraft and engines, parking a lot in the desert,” added Smith.
He explained, “They weren't spending a lot of money on repair shops and aftermarket parts. That changed dramatically once they got back to full capacity in 2021 and 2022, and it hasn't stopped since.”
Increasing M&A activity for independent MROs
Another key area of growth Smith mentioned was the rising frequency of mergers and acquisitions (M&A) activity among smaller, entrepreneurial MROs.
Smith stated, “A lot of the founders turned wrenches and started out as technicians and became entrepreneurs, so I really try to work with them as early as possible, even a year or two before they're ready to do a deal, to help them get ready to go to market, whether that be getting financials audited or reviewing financials beforehand to really to hone in on some of the ABCs of what it's really important to have in place before going to market, if possible.”
He continued, “Sometimes, the sales process comes along because they're doing so well and they're really not thinking of selling. Maybe they're thinking about it, but they really didn't take it that seriously, and a big boy comes in and makes an offer unsolicited, and they respond.”
How are mergers and acquisitions contributing to global MRO growth?
As Smith’s firm represents aviation companies on the “sell side” of financial transactions, he offered insight into the ways M&A transactions have given MROs opportunities to expand.
Smith said, “We're seeing a lot of large companies within the space, both private and public, making acquisitions.”
He continued, “In the last 10 years, we've seen a lot of private equity, a lot of companies buying MRO's and distributors as platforms and then growing those businesses.”
“And doing add-on acquisitions,” noted Smith, “We're seeing a lot of very large companies—like Boeing with their services side and Airbus owning services stuff besides just in manufacturing—doing a lot of services too.”
Smith added, “The lower middle market where we operate is typically less than 1 billion of revenue or enterprise value, and many times, even less than a couple 100 million.”
“Smaller, more entrepreneurial companies have been very active. They are primed for acquisition by private equity. There are so many private equity firms and billions, if not hundreds of billions of dollars of dry capital out there for acquisition,” explained Smith.
Elaborating on the different M&A opportunities for smaller MROs, Smith stated, “When we talk about airframe, some companies focus on widebodies, you have narrowbodies, the private business aviation space. All of those have companies that focus on that and buyers, whether it be strategics or private equities, could have an interest in it from an MRO perspective.”
He continued, “You have airframes, different types of engines…Some do everything, some focus on different platforms as well as airframes. Some might just be a Boeing shop or an Airbus shop or Embraer. It's vast out there, and we're seeing good activity in all in all of them.”
How can independent MROs pursue M&A valuation and transactions?
Smith advised, “My advice to entrepreneurs is to not be thinking as you're growing your business about selling it every day.”
He expanded, “You should be spending money on capital improvements or capital expenditures and what have you, keeping in mind that you're growing your business and you're building something really nice, hopefully.”
Smith added, “Run your business at your comfort level and with long term growth in mind, with your customers’ and your employees’ best interests in mind, as well as safety. If you do all of that right, good things will happen to you eventually when you want it to.”
Offering a second piece of advice, Smith said, “If and when you are thinking about doing something, be proactive. Hire an advisor, an investment banker that knows aviation.”
Smith continued, “Have accountants and attorneys, and don't use your human resource or real estate attorney for an M&A transaction. Get a mergers and acquisitions attorney who could really help you in your process.
“Just surround yourself with good people,” emphasized Smith, “Even if you have to pay up for it, because it'll come back to you in spades, just like every dollar of EBITDA that you keep in the business and that you're able to grow.”
“It's a beautiful thing seeing entrepreneurs cash in and make 10s of millions of dollars, and sometimes hundreds of millions of dollars, for their hard work and for them and their families,” said Smith, “And I really want them to maximize it.”
