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Expect More MRO M&A Activity In 2016 Than 2015

As airline industry returns to profitability, MRO providers consolidate to provide more advanced capabilities for new-gen aircraft.

Investors are following the money—in civil aviation MRO—so expect more capital to pursue aviation assets as well as industry consolidation.

The aftermarket has captured investors’ attention because of strong market fundamentals—including airline restructuring and capacity discipline.

Carriers are making money, mature aircraft are not retiring as quickly as some expected, and traffic growth projections are healthy. Supporting this is the aftermarket—pegged at $63.2 billion for 2016 and growing to $90.5 billion in a decade, according to Aviation Week’s latest forecast. 

Just look at Aviation Technical Services. In mid-2013, ATS’s senior leadership team and “a handful of aerospace investors,” NewSpring Capital and Greenpoint Technologies, purchased the MRO from Macquarie Group. Two years later, JLL Partners, a private equity firm in New York, purchased the majority stake while the leadership team, along with the aerospace investors, retain “a significant portion,” says an ATS spokeswoman. Greenpoint and NewSpring have transitioned out.

Jim Johnston, a partner at Moelis Capital, sees private equity players that traditionally would not invest in the aftermarket now doing so because of “increased awareness and interest” in maintenance. He says JLL Partners “has been trying to find something on the maintenance side,” which it accomplished with ATS. He also points to the fact that Blackstone Group recently announced plans to buy MB Aerospace from Arlington Capital Partners, “which is a little bit smaller of a deal than they normally would do.”  Blackstone expects to close the purchase of MB, a Tier 1 engine component manufacturer and repair company, by year-end, pending regulatory approvals. 

Johnston predicts 2016 will be even busier for M&A than 2015. He thinks companies will want a mix of capabilities—including manufacturing exposure because of expected growth in new aircraft deliveries, “especially Boeing and Airbus,” but also “diversity in the aftermarket business, focused on either rolling up manufacturing or parts providers, because people want more of a one-stop opportunity.” They also could invest for “the opportunity to capitalize on the expected growth in the aftermarket maintenance business,” whether engine overhauls or heavy maintenance, because “there is a good solid outlook over the next several years.”

He also sees great opportunities for companies with engineering and intellectual property assets—especially organization designation authorization (ODA) and parts manufacturer approval (PMA)—because “people look for good replacement parts that aren’t as costly as going to the OEM.”

He points to Warburg Pincus’s purchase of Wencor last year as an example. Johnson thinks Wencor’s PMA and ODA approval increased its value. Wencor expanded its capabilities in April by purchasing PHS/MWA Aviation Services, an FAA and EASA repair station with designated engineer representative (DER) repair and PMA solutions, for an undisclosed sum.

Moelis, which Johnston says is always looking for engineering and IP asset companies, saw PATS Aircraft Systems’ ODA and engineering services as “a jewel.” Since Moelis bought it in 2014, he says “we’ve made excellent strides to grow that part of the business.” Moelis’s other MRO holdings include Mxi Technologies and Flightstar Aircraft Services.   

“Barring something unforeseen or a massive market correction or increase in interest rates, as I look into 2016, I expect it to be as active or more active in the deal front,” he concludes. 

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