RBC Capital Markets foresees a strong year for the commercial aerospace aftermarket in 2024.
The commercial aerospace aftermarket is set for a year of brisk growth, RBC Capital Markets said in a recent report following its annual South Florida tour, during which it spoke with several of the largest industry players.
While pricing power for OEMs may be moderating, large backlogs, a robust air travel market, and recent supply chain disruptions boosting demand for servicing of legacy aircraft augur well for the aftermarket in 2024, RBC said.
Of the Boeing 737-9 grounding, RBC expects “the impact to be a near-term benefit to the AM [aftermarket], but we continue to view the grounding timeline as weeks and not months, and we are maintaining our 2024 525 [Boeing] MAX delivery estimate.”
While the investment research firm believes HEICO is well positioned to benefit from aftermarket strength, it notes there is apparent concern among investors that the company’s “hands-off operating strategy will prevent it from capturing as much of the cost synergy potential from its Wencor acquisition as possible, considering the market overlap between the two companies.”
That viewpoint differs from the sentiments expressed by HEICO regarding the acquisition. In August 2023 following the acquisition, HEICO emphasized that Wencor’s performance put it on track to exceed an expected $153 million in earnings before interest, taxes, depreciation and amortization in 2023. “Wencor is a perfect and highly complementary fit with HEICO,” HEICO Chairman and CEO Laurans A. Mendelson said in December, adding that in 2024, “we plan to actively work on Wencor’s ongoing integration into our business and operations.”
Investors seem to have fewer concerns about VSE Corp. (VSEC), which is likely well-positioned to win new distribution agreements this year with its OEM focus and ability to add value to partnerships. Also boding well for the Alexandria, Virginia-based company are the business jet and commercial transport market recoveries.
“We believe investors will remain supportive of an accelerated investment strategy” by VSE, RBC Capital Markets said in its report, adding the company’s 2023-24 facility and infrastructure investments in the Aviation and Fleet segments will support better incremental margins as volumes continue to rise.
Meanwhile, in the case of AAR Corp., investors are focused on the possible dilution from an equity issuance, impact of the announced Triumph Product Support acquisition, and softer-than-expected fiscal guidance that came with results reported for the third quarter of 2023.
AAR’s management has expressed confidence in the $10 million cost synergies they mentioned when the Triumph acquisition was announced. They will work to achieve that target in part by reducing head-count cost and paring back other redundant resources.
