Podcast: M&A, Gigantic Investments, Small Company Fortitude In MRO

The aviation MRO market is hot, hot, hot, which is drawing big investments. Listen as editors discuss M&A trends, billions of dollars of recent investments in the aftermarket and why smaller, niche companies are growing but not getting gobbled up.

Hosted by Lee Ann Shay with Michael Bruno, Aviation Week's executive editor for business, and James Pozzi,  MRO editor for Europe, the Middle East and Africa.

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AI-Generated Transcript

Welcome to the MRO podcast. Today's topic, money, specifically mergers and acquisitions, and big investments in the aviation aftermarket. I'm Lee Ann Shay, executive editor for MRO and Business Aviation for Aviation Week, and I'm here with my colleagues Michael Bruno, Aviation Week's executive editor for business, and James Pozzi, our MRO editor for Europe, the Middle East and Africa. Gentlemen, welcome to the podcast.

Michael Bruno (00:45): Thank you very much.

James Pozzi: Hi Lee Ann. Thanks

Lee Ann Shay (00:48): Michael, as our business editor, let's start off with you. What are you seeing in M&A in the aftermarket? What's the pace? Are you seeing any trends in particular, segments or asset types?

Michael Bruno (01:03): Alright, what I'm seeing is money, money, money, money, money is flowing. There's a lot of activity. It remains a very, very popular sector for deal making. A very popular sector for longtime investors and new investors. I don't think we need to rehash why MRO is so hot as a segment, per se, but for really quick, anybody who'd been hiding at the beach for the past five, six years. You know that aircraft are getting older. The OEMs are not able to create and deliver as many of the new aircraft. So that means you got to fly the old ones longer. All the pieces, parts, especially engine parts are getting used a lot more than people thought they would just a couple of years ago. And while MRO has long been a robust and stable segment of the marketplace, I think over the past couple of years it's become even more so.

(01:57): And that always draws investors’ interest. The paradigm in hockey in America about going where the puck is going to be, not where the puck is at. Well, for the past couple of years, the puck when it comes to good M&A deals has often been an MRO deal because you can see MRO growing, you just don't know how much. If you can get in on the ground floor of that before it really gets big, then you as an investor can make a lot of money. So engine parts, all sizes, all parts of the engine, whether it's the whole engine or specific parts that go into something, whether it's a hot section or whether it's just kind of like fasteners that hold the cowling on, or each one of those little individual niches have kind of ridden this rising tide of all things engines going up. Components, possibly less so, in regards to just by comparison, when it comes to interest of investors. Component parts and aircraft obviously go a bit longer generally than they do in engine parts that get used up quicker. And so deal making there is probably by comparison a little slower, but we continue to see big, big deals. Here we are mid 2025, and I'm thinking TransDigm of course one of the most acquisitive companies out there doing recently what it does best, it just bought a company called Simmonds for $765 million. Simmonds provides a fuel and proximity sensing capabilities. Of course, all the parts are highly engineered, very niche, sole sourced. This is what a company like TransDigm goes and looks for when it's buying another company because they want to take those individual niche parts, sole source, and then be able to go out and raise the prices on them to the customers who need them.

And those customers need them because there's nowhere else to go to. Another company making an acquisition reecently, HEICO probably second only, maybe to TransDigm depending on how you measure whether it's value or number of deals, but they just bought a company called Millennium. Both of these companies look for, again, highly engineered sole source, but they're looking for, believe it or not, companies that have probably been around for a while that unless you are deeply embedded in the industry, you wouldn't even know existed. And we may talk about that more in a moment, but especially when it comes to smaller companies. But just a lot of activity across the board, definitely at the high end with the large companies, some of whom I just talked about, others smaller companies are continuing to get looked at too.

Lee Ann Shay (04:52): Michael, thanks for those insights. There's just a whole lot to unpack there. And I love the hockey analogy, very interesting. But like you said, engine market, engine aftermarket, hot, hot, hot. And there have been some really big engine aftermarket investments slightly from MTU to Sanad. And given that Aviation Week data forecast that 49%, 49% of this year's $126 billion commercial MRO demand comes from engines. It's easy to see why investment is happening in this area. And then the fleet growth you talked about earlier too. So James, you've been writing a lot about this space. Over to you.

James Pozzi (05:34): And thanks for sharing those numbers, Lee Ann. You beat me to it, really. But yeah, MRO demand in the engine space it goes without saying is very strong. It's unrelenting, and it's going to continue for the long term and increase in terms of spend. Obviously new capabilities are needed in the market given the kind of new engine programs that are ramping up in terms of deliveries, but also capacity is needed in order to service these engines because there'll be more engines, I guess, than ever on the market, even taking into account retirements over the next five to 10 years of course. And with the new generation programs, a lot of this is narrowbody dominated, of course. Think the CFM Leap, obviously the successor engine to the CFM 56, and of course the Pratt & Whitney geared turbofan, the GTF, which is the follow-on engine from the V2500.

(06:26): So a lot of the investments this year so far I think are worth touching on have been OEM-driven. First Pratt & Whitney for the GTF. They've really made some strides in this program this year, and they've been very, very prominent. Whereas I think over the last few years, it's fair to say CFM Leap was perhaps moreso in terms of aftermarket ramp up and activity by adding new partners or investing in capacity in the internal network. So let's look at the GTF. You mentioned Sanad before, of course, early this year they have committed to a new facility to service GTF engines kind of close to the end of the decade, and they've joined the network for that. So they're part of that GTF network, which is of course a closed network where Pratt will, I guess, dictate where the engines are sent to and who receives the engines and allocates the work from the OEM side to the MRO.

(07:26): More recently this summer of course ITP Aero, a very interesting company that we followed extensively, of course, former Rolls-Royce business before they were spun off to Bain Capital a few years back. They are now the 21st shop in the GTF networks, a facility very near Madrid airport. We talked about them a lot before, Lee Ann, and reported on them because they have really been growing their commercial MRO outputs over recent years. That's not their kind of core services. They obviously do some manufacturing of parts on programs like the GTF. They're a risk revenue sharing partner on that program. So the capability is already there. But of course they've traditionally do military MRO, business jets and regional for example. So they're really making moves in commercial MRO. So they're going to set up their shop by 2027, early 2027. And I guess having that capability in terms of the knowledge of the GTF already in terms of manufacturing some critical parts for that program, that has put them in a fortunate position.

(08:38): They've obviously got test cells as well in Madrid. So that all kind of helps move the process. Yet it goes without saying, this is still a really big undertaking. They're investing around a hundred million euros, which is about 115 million U.S. dollars over the next four to five years. And the ramp-up numbers are pretty big. So by 2033, they want to be turning around 120-plus engines a year in Madrid. So yeah, a big investment undertaking, but no real surprises there given their association with that program that they're starting on that and obviously their MRO, or their commercial MRO intentions. Another interesting ramp up related to the GTF is EME Aero, of course a joint venture between MTU Aero Engines and Lufthansa Technik. Their facility in southeast Poland a few weeks ago opened a second test cell, which will help them reach their ramp-up targets of 500 shop visits annually by 2028.

(09:34): They've been investing multimillion euro sums into this. And that second test cell, which mirrors the first with the 60,000-pound thrust capacity is for the PW 1100, the 1500 and the 1900. So three different variants of that, and that certainly will help them reach their goals, but also give that necessary capacity to the GTF network because those deliveries are going to grow and grow. And I think now Pratt's look like they've got a measure of the issues that we've talked about so much with the durability and of course the recent announcement, the advantage upgrade and the hot section improvements. There's a bit more, I guess, stability over the next few years as it stands with that program. And now they are obviously building up their aftermarket more to reach that. But it'd be interesting how that further grows because it's probably not finished yet in terms of capacity.

(10:32): There's probably more shops needed either internally with the GTF capability or more partners as we've seen. Just worth touching as well, I mentioned obviously that's been prominent this year. I mentioned the Leap before too, still goes that saying there's been some developments there too. This year we're seeing, I think the biggest one to date was MTU Maintenance Dallas, of course, they'll soon be rebranded to MTU Maintenance Fort Worth, and they're going to upgrade their existing facility to bring online full overhauls for the Leap and also the GEnx, of course, GE Aerospace engine widebody engine, which, and of course GE Aerospace is a 50% partner in the Leap program with Safran, let's not forget. And that's an investment of $120 million. And of course, it's no surprise that this has been confirmed because MTU, I think we can just call them Fort Worth now or the name change later this year.

(11:29): They joined the premier network for the Leap program. There were five founding members, and they became the sixth member. So yeah, they're ramping up for that as are Standard Aero. They're accelerating their ramp up and they're with the Leap in mind. They've got a lot of investments going on as well. Sanad, again, announced full Leap upgrades, and Turkish Technic are also, it's been reported, are in talks about Leap MRO too. I think it's worth mentioning too. Just before we continue a bit about the widebody space. Of course, GE Aerospace, they made some big aftermarket commitments last year, I think around a billion U.S. dollars over five years. And that's to upgrade their MRO network, their internal shops, and cited certain areas of the operations such as test cells, your equipment, and even technologies like AI-enabled inspection techniques. XEOS, of course, their joint venture with Lufthansa Technik I visited in March of this year in Poland, and that's got a Leap focus that's come online. So yeah, there could be more Leap shops to come, of course. I mean there's reports as I mentioned about Turkish Technic possibly being online with that. So we'll wait and see. And we can't finish without Rolls, of course. Obviously they're a great rival in the widebody space. They're also looking for as much capacity as they can get. They're upgrading their sites in Europe and Derby and Dahlewitz in Germany, of course, which resumed commercial activity end of last year, having been business jet engine focused previously. They've got a new facility coming online in China, possibly by the end of this year, if not early 2026 in Beijing. That'll be a big Trent focus. And of course their Singapore operation is growing capacity by around 40%, I believe. And of course, once again, Turkish Technic also were in the headlines. They signed a big deal with Rolls to invest in a new facility, and that'll focus on three engines, the Trent XWB-97, the XWB-84 variant and the Trent 7000 as well in Istanbul later in the decade. So only tip of the iceberg there, but a lot to unpack in the commercial engine space at narrowbody and widebody.

Lee Ann Shay (13:46):

Thanks for all that, James. We could have a whole separate podcast on just that, but I want to touch on two other topics before we run out of time. One is the operators, European and Middle Eastern airlines in particular. Lately have been investing in in-house MRO capabilities. James, this is your beat. What's driving it?

James Pozzi (14:06):

Essentially greater control of their maintenance. So we all know about the supply chain issues that have occurred over the last, since the pandemic, amazingly, which begun more than five years ago. The industry has spent the last few years catching up and getting to grips with this and adjusting. And overall it seems like that has become relatively smoother. Of course, it's not perfect, and there are still well-documented problems in the supply chain the airlines are experiencing, much to their frustration, but it has got better a bit. But essentially they're looking for greater control of their maintenance with this in mind. So base maintenance, slot availability, for example, that's difficult. In Europe, I'm hearing many carriers are booking up their seasonal slots more in advance than ever before. For example, this winter is pretty much booked up at every shop I've spoken to recently. And they say 26-27 winter period.

(15:06):

That's kind of starting from October next year through to the early year after. That's filling up already. Some as high as 70%, I heard one say. But they all seem to be over the 50-60% range at the moment. So airlines, of course, are looking for more lines of maintenance because slots are a premium. So there's that element, but also fleet expansion is playing a role. There are some airlines, of course, that have pretty substantial in-house capabilities. I'm based in London, of course. Oour national carrier, British Airways, they're a prime example of this. They don't do any third-party work, but they do a lot of in-house fleet work on their aircraft. And obviously their A320 fleet, they've got Neos as well, but there's more arriving. They've got a substantial Airbus narrowbody fleet, and they need more capacity for that, which is why earlier this year they bought Boeing's existing MRO facility from the Boeing Global Services Division at London Gatwick Airport.

(16:10):

And they did that with that capacity need in mind for the A320s. Obviously Gatwick after Heathrow, one of their big hubs as well. One of the more interesting ones as well, and very much against going against the grain, I think, but very bold and typically quite ambitious really is Ryanair. Now they've got plans to get into engine MRO and do some of their own engine maintenance in-house. And that's up to full overhauls too. So not something we hear really very much at all, an airline taking substantial engine capacities in-house. But again, they've cited a need for more control over this process, supply chain challenges as well. And yeah, they're going to announce two locations that should be sometime this year and over the next decade, it's going to be a long-term thing. They want to have two shops in place in Europe, possibly somewhere in North Africa as well.

(17:03):

They haven't ruled that out. Servicing 200 engines a shop every year, and obviously they've got a huge fleet expansion that will make them one of Europe's biggest. And just worth touching on, lastly, in the Middle East, very recently FlyDubai, another one who they typically outsource a lot of their maintenance, but they are building a new hangar. They're investing nearly 200 million U.S. dollars. And in the last quarter of 2026 near Dubai South, of course, which is near to the Al Maktoum International Airport, which in many decades’ time will become Dubai's main airport. They're building a hangar there. And again, fleet expansion was cited. So they operate 737-800s, and most of their fleet, or the majority of it is MAXs now. And they've got a lot more MAX aircraft coming into the fleet over the next decade. And of course, they're venturing into the widebody market.

(17:54):

They've got an order in place for  30 787 aircraft. So yeah, the fleet expansion and that greater control and maintenance seems to be driving a lot of this. And yeah, it's very surprising really, who is, I mentioned Ryanair was a surprise, but also FlyDubai investing in that capability itself was not something I would've seen maybe a few years ago, but we'll see more of it all around the world. In-sourcing plans are very much there. They're in the open. Airlines, ideally, would like to in-source more services themselves, just have a better oversight of their maintenance and maybe help reduce some of those TATs, which are still lagging a bit too much for their liking. No doubt.

Lee Ann Shay (18:36):

That sounds good. And last question, I recently interviewed Randy Herber, who's the CEO of Herber Aircraft. It's a hose-and-harness distributor in MRO in California. His dad started this company in 1978, and now it's getting closer to a hundred million dollars in annual sales. We often write about OEMs and big companies, but the aftermarket relies on lots of smaller niche companies. And during the pandemic, there was lots of speculation of consolidation in this space. I thought that would happen too, but instead it was more on the top side, the really big mergers. So my question is, are the smaller companies more resilient than we thought? What do you think?

Michael Bruno (19:22):

I'll jump in on this. It picks at something I think that has been talked about for quite a long time in our industry, which is waves of consolidation and whether one is coming or we're in the middle of it. And the answer is always yes, but no, or yes, but not really. I mean, we do go through iterations of consolidation, and we did have one coming out of the pandemic, perhaps not as big as everybody thought. And I'm talking across the board, not just MRO, but there are differences that matter when it comes to the size of a company and why companies get rolled up or acquired and by whom. A couple of things to point out. First of all, size matters when it comes to doing a deal. If you're a large company to begin with, a TransDigm or even one of the airframers, Airbus, Boeing, you tend to be looking at other large companies to swallow because that's where the return on the investment of your acquisition dollars are going to come from.

(20:29):

As a large player, you're not going to go out and try to sweep up a million little companies. It would just not be a very rewarding investment approach to take. And frankly, nobody would, no banks, and nobody's going to really get behind you because it's not only not exciting, it's a great way to kind of lose money when you go buy a thousand different companies and then try to integrate them. But those smaller companies get more attention from private equity. And private equity is really where a lot of the M&A activity is being driven over the past several years, especially since the pandemic. Private equity, first of all, just has a ton of money. I was looking at a report from B. Riley Securities. An old friend of Aviation Week, John Stack, who's a deal maker and kind of the middle market companies, he kicks out a report every quarter. His latest one says that there's $2.6 trillion worth of dry powder in the private equity sector, and some of it points toward A&D specifically. And dry powder is kind of this term of art used for the amount of money that private equity could tap into if they wanted to go make deals. That's a lot of money. I mean, the strategics, the actual companies in A&D only “only” have about $83 billion worth of dry powder to go play with. So private equity here has the money. They have the interest in going toward the smaller companies, but they don't go to the mom-and-pops because again, that's not a great return on your acquisition dollars. They tend to go to the middle market. So when a company becomes bigger, a hundred million, couple hundred million, somewhere between millions of dollars and a billion dollars is now sort of the middle market, believe it or not.

(22:18):

And that's where acquisitions and specifically private equity want to jump into because they feel like that's somebody who's proven they're growing but haven't grown all the way. And so those are the people to go get. The other thing that I mentioned is maybe we've talked about before, but the smaller companies, the ones owned by the mom-and-pops, they are not companies that are necessarily for sale until they're for sale. And what I mean by that is they're run by the moms and pops who want to keep that business going till the day comes typically, typically that they want to retire and get out of it. And that's what drives their timeline for getting out of a business. And it's really hard to be tapping into all those moms and pops and just trying to keep track of when they want to retire. If you're a bigger player, like a private equity or a strategic, you're going out there and you're doing market analysis about what part do I need?

(23:19):

Who's got a great sole source position? How can I utilize that and make a better return on my investment? You go out and do that kind of homework rather than trying to stop in at every mom-and-pop and FBO and saying, “Hey, what's your retirement timeline? When are you going to get out?” So that's a reason why we haven't seen a lot of those smaller companies rolled up, but time marches on and those companies, those owners want to retire, and a lot more of them are getting swept up into middle market players, and then those middle market players get swept up by the big players. So we are seeing more of it. It's why MRO is considered to be one of the hottest areas for M&A, probably for the next several years.

Lee Ann Shay (24:04):

That sounds like a wave of consolidation, but maybe not. We'll see. We go to any MRO exhibit, you see a lot of smaller companies, and they're thriving, they're doing great, so the industry needs them. So stay tuned. Right. We're out of time. Michael and James, thank you so much for your insights. And thank you to Cory Hitt for editing this podcast. Don't miss the next episode by subscribing to the MRO podcast wherever you listen to them. And one last request. Please consider leaving us a star rating or writing a review. Thank you so much and have a great day.