Printed headline: The Muscle To Go Global
If 64% of MRO revenue is related to capital-intensive activities—i.e., components and engines—it is easy to see why MROs that are trying to diversify beyond airframe and line maintenance need access to capital.
As labor-rate disparities between countries and regions diminish, MROs that rely on lower labor costs are going to lose their cost advantage. This is true in Eastern Europe and the Baltics, which used to have much lower rates than their Western European counterparts.
This is why Magnetic MRO, based in Tallinn, Estonia, decided to diversify. One way it could differentiate itself was having “access to capital,” says Jonas Butautis, who is on the MRO’s supervisory board and is a partner at Australia’s Heston MRO.
In its initial quest for capital, it found that local banks and funds did not have the scale or aviation-industry knowledge that capital sources in places such as the UK, U.S., Japan, South Korea and China do—so it sought global investors, says Butautis.
Speaking to regional aftermarket players at MRO Baltics, Eastern Europe and Russia on May 22, he advised MROs seeking capital to make a case by telling their stories. For Magnetic, that meant showing how the company manages technically complex projects and end-of-life assets while also illustrating the company’s track record. Butautis says Magnetic documented more than 20 low-scale asset transactions with ad hoc financial partners to demonstrate that it could generate returns. Then it “formed a dedicated team to face investors” and hired a Tier A advisor, KPMG UK, which was able to help Magnetic “sharpen its story” and “open some serious doors,” he says.
“Your first serious fundraising doesn’t happen by accident,” he notes.
While Magnetic was initially hoping to raise $300 million, it settled for $40 million—its investment partner wanted to test the MRO to make sure it could return its investment, which is fair. Butautis says Magnetic did—within 12 months, which was sooner than the investor expected.
Because it delivered, Butautis says the investor was willing to invest more, and capital from other sources became available. “Execution becomes easier because you gain scale,” he notes. Magnetic MRO is now approaching projects of $150-200 million backed by its original capital partner and is only limited by internal resources, he says.
“There are billions of dollars out there to be invested in capital-intensive projects like components and engines, but [investors] don’t see MRO—you need to bridge the gap,” advises Butautis.
In the last 24 months, Magnetic has transformed from “being a cheap C check,” as he put it, to blending MRO and financial services—with capability for multimillion-dollar projects, including power-by-the-hour, lease and engine trading, says Butautis. Using this strategy, Magnetic makes more money than it did performing straight C checks and provides customers a broader range of services. It also helps the MRO scale up to go global. “Dream big and execute,” he suggests.