Away from the runways and away from the airline advertisements featuring happy cabin crew, there is a quiet kind of wealth-building. It takes place on the workbenches of aviation services firms that the majority of travelers are unaware of, in maintenance hangars, and in parts warehouses outside of Miami. One of the most unexpected stock stories in the industry revolves around AAR Corp, which has its headquarters in a modest complex in Wood Dale, Illinois. Over the previous five years, AAR’s stock returned about 192% while travelers bemoaned delays and commentators argued over airline profitability. That is more than any major US carrier you can think of, including Delta and United.
The difference in business models is what makes the comparison intriguing. Fuel spikes, weather disruptions, labor disputes, and the occasional pandemic are just a few of the shocks that airlines deal with in addition to flying the planes and selling seats. Nothing is flown by AAR. It manages maintenance contracts, distributes parts, and services engines. AAR observes an increase in work when an airline grounds a fleet for inspection. AAR’s parts business benefits when carriers prolong the life of older aircraft to postpone purchasing new ones. It’s the dependable, uninteresting cousin that no one invites to the party, but it keeps subtly outwitting everyone.
Even seasoned industry observers are taken aback by the five-year numbers. During the same period, Delta’s return was 63.42%. The Irish aircraft lessor AerCap Holdings achieved 161%. The UK-based defense and engineering company Babcock International reported 294%. Additionally, FTAI Aviation, an engine specialist based in New York, has seen revenue growth of 53.7% annually over the past five years due to a global maintenance bottleneck that Bain consultants predict will persist until the end of the decade. AAR’s 192% return ranks among these names due to a gradual, accumulating advantage that few headlines ever mentioned rather than a single breakout year.
It’s difficult to ignore how this performance illustrates a more profound change in aviation. The commercial fleet of the world is getting older. Turnaround times for engine repairs have increased, sometimes by 150% for more recent engines. Manufacturers like Boeing and engine manufacturers like Pratt & Whitney are still clearing the backlog caused by production halts during the pandemic. Due to labor shortages, supply chain hiccups, and parts shortages, anyone who can maintain aircraft in the air is now more valuable than the aircraft themselves. Although AAR’s annual revenue of about $2.8 billion and EBITDA margin of about 11.8% are not particularly impressive, they continue to grow as airlines compete for every basis point of margin.
The ability of AAR to maintain this pace is still questioned. The stock may be overpriced, according to valuation services’ discounted cash flow models, indicating that the recent surge has priced in a lot of optimism. Real synergies, not just press releases, must result from the acquisitions of HAECO Americas, American Distributors Holding, and Aerostrat. And as anyone who lived through 2008 or 2020 will tell you, aviation cycles can change drastically. As this plays out, it seems like AAR has earned its run but will continue to do so.
Five years ago, investors who purchased $1,000 worth of AAR stock would now be looking at about $2,653. In contrast, the same investment would have grown significantly less or, in some cases, hardly moved at all in the majority of legacy airlines. The company maintaining the aircraft’s airworthiness may prove to be a better long-term investment, even though the aircraft you fly may still be from American or United. Sometimes the most valuable seat on the aircraft is the one that no one reserves.
