From M&A To Aircraft Lives, Private Money

Private investors continue to weigh in and affect industry outcomes

From aircraft lifespans and parts inventories to corporate valuations, private equity continues to alter the aviation industry and the maintenance, repair and overhaul (MRO) sector.

Bottled up by the Great Recession and the slow, subsequent economic recovery, private investors could be becoming more active. Evidence remains anecdotal, but they are being cited by industry observers for both overt and indirect influences.

Recently, for example, aircraft aftermarket provider Wencor Group unveiled its purchase by private equity firm Warburg Pincus. Rumored for weeks in news articles, Warburg and current Wencor owner Odyssey Investment Partners unveiled the deal May 21 Terms were not disclosed.

The transaction should close this quarter, they said. All three parties praised Wencor’s growth potential as underpinning the deal.

Wencor CEO Greg Beason said Odyssey left Wencor “well-positioned” to add to its existing offerings. “We are excited to have Warburg Pincus as our partner for the next chapter in the company’s growth, given their deep aerospace investing experience and focus on supporting growing businesses.”

Dan Zamlong, a Warburg managing director agreed and said, “There is significant opportunity to build on Wencor’s success by developing new product and repair offerings. Wencor offers airline and MRO customers a compelling source for aftermarket components and repairs and we look forward to working with the management team to pursue organic and acquisition growth initiatives.” 

Indeed, aircraft parts companies are experiencing a run-up in M&A activity, fueled in part by private equity’s desire to claim a stake in the commercial aviation growth being forecast worldwide, according to Michael Richter, head of the aerospace and defense investment banking group at Lazard. While private investors’ bids can lead to higher M&A-related costs for industry buyers like Precision Castparts—which has been on an acquisition spree, advised in part by Lazard—the growing interest of private investors also  confirms the strength of the market and forecasted demand, he told Aviation Week.

Elsewhere, the surge of private investment is having more inadvertent— albeit tangible—effects. For instance, the useful life of a commercial aircraft is increasingly tied to two variables: who owns it and what type it is.

Aircraft can fly for 25-30 years, but as lessors become a bigger segment in the ownership market—from 40% to possibly 50% in coming years, driven in part by growing ranks of private investors—the shift can make all the difference for some mid-life aircraft.

Airline owners may see value in overhauling an aircraft and upgrading elements like cabin interiors. But lessors see money to be made in cannibalizing and selling parts versus spending on mid-life MRO, Aircastle CFO Mike Inglese explained at the RBC Capital Markets investor conference in mid-May.

“By and large, it’s not necessarily [airframe] life that matters,” said Inglese when asked if the industry should change its view of lifespans. “It’s kind of how you are thinking about that value curve along the way, and what you’ll realize when it’s at age 18 versus what you might have realized had you had another lease-turn and getting it deeper into its economic life,” he said.

“For us it is simple economics and cash . . . and what am I going to do with that cash if I realize it today. In a number of circumstances over the course of the last year and a half, we’ve found that it is much better to take that cash and invest in a new asset rather than recycle an out-of-favor asset into a tough rate environment.” 

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