AvAir has been very actively buying inventory from MROs and airline maintenance divisions over the past year. These include acquisitions from the likes of Lufthansa Technik, and more recently in January this year, buying inventory from HAECO including parts related to the Airbus A320 program. What was the motivation behind these acquisitions?
Our plan was always to invest heavily in inventory and when the crisis happened, we decided to move forward following a board meeting. We’ve made several sizeable investments over the past year, one of which was the HAECO inventory. The logic behind this, and its specific A320 pool, was that it was used for a power-by-the-hour program(PBH) which are great until there’s no activity going on from the airline and then it becomes pretty problematic – there’s no money coming in, yet there’s still costs and all of this inventory remains on the balance sheet. During the past 12 months, we’ve been approached by several big MROs who are basically telling us they have inventory related to PBH programs which aren’t currently being used and they are seeking cash injections so they can instead focus on their core competencies. Why the A320 specifically? We agreed that in a downturn situation, narrowbody aircraft such as the A320 and 737 would be the first segments to recover. We’ve focused on key accessories and rotable components, as well as consumables and expendables as demonstrated by our Sabena Technics inventory acquisition in early 2021. Things are in the process of returning to normal, and even if MRO market spend stays down, we believe we’re better placed to capture a better share of the business out there. We’re confident of achieving growth that isn’t reliant on how fast the market recovers.
AvAir has benefited in some respects from the current situation yet like many companies in the industry, it has also experienced challenges during this past year. As an aftermarket inventory specialist, what were some of these specific challenges the company faced?
Our customers are airlines and MROs, and when everyone suddenly hits the brakes on purchasing – that becomes a real problem. Everyone works well when there’s a lot of cash being spent, but when that stops then it’s a different picture. Our main challenge was always making sure there was enough finance in place to ensure operations for a long period of time in the event of a downturn. Maintaining payroll and staff to try and keep the culture preserved while less money is coming in was the priority. Preserving this environment was very important. Fortunately we had a 100% employee retention during the pandemic.
Do you see a long-term change in parts purchasing and what the customer is looking to buy? Will there be a desire for greater flexibility?
I think so. Look at how fast companies offloaded their PBH agreements. Whichever end of that agreement you are on comes with an element of risk. For an operator, they want to have flexibility and functionality without having the burden on the balance sheet. I believe there will be several airlines looking for alternative inventory solutions such as selling and leasing back their inventory. Moves like that will free up capital and keep their operations going yet still give them access to the material. We are positioning ourselves to the market as the source for this without the airline having to put the inventory on the shelf. There’s several carriers we have agreements with where we reserve several batches of inventory just for them, and I believe that’s something we’ll see more of in future.
Have you seen a spike in sourcing parts for cargo operators during the past year?
Absolutely. All through this pandemic, while there wasn’t a lot of passengers flying, there was a lot of people buying goods on the internet and packages being shipped. We also saw a significant spike in our military and defense operation – they’re moving troops and supplies. Both of these businesses are smaller than our commercial segment normally but we certainly saw a noticeable pickup in both. What we’re missing right now is international leisure and business travel so most of that widebody business is very quiet right now. I believe there’s a lot of pent-up demand there and as soon as we can get people feeling safe to travel again that will pick up accordingly.
Post-pandemic, consolidation is expected in many industry segments. Do you see opportunities for AvAir to expand through acquisitions in the component segment and if so, what sort of buys would you be looking to make?
Yes – pre-crisis, we had a couple of acquisitions quite far a long the line that we unfortunately had to hit the pause button on. In the three years prior to 2020, we saw 106% revenue growth over that period. We had looked at both organic and inorganic growth strategies before COVID-19, which was a curveball and we had to adapt to that. However, as things stabilize, the next three to five years will see further growth. In terms of acquisition targets, we’d be looking at smaller parts suppliers with a unique geographical position we don’t have or perhaps close ties with an operator we aren’t actively involved with. Our investors are patient and are taking a long-term approach for this.
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