Daily Memo: With IPO, StandardAero Aims To Ride Aftermarket Growth Wave

Kicking off its IPO process on Sept. 23, independent engine MRO specialist StandardAero signaled that it intends to strike while the iron is hot.

The commercial aviation aftermarket is booming—some analysts describe it as a “supercycle”—with stocks performing well year-to-date and trading at healthy valuations.

But StandardAero’s debut as a publicly traded stock is more than just an exit ploy by investors: It shows the consequences of the ongoing shortfall in new aircraft production by Airbus and Boeing—especially the latter. The pendulum has swung enough in favor of increased reliance on older aircraft in coming years that savvy financiers smell opportunity and want to gain a first mover’s advantage in the market.

StandardAero’s business has momentum. In the first half of the year, it posted an $8.6 million profit with sales of $2.6 billion, an improvement over its $12.6 million loss on $2.3 billion in revenue in the first half of 2023.

The company is benefiting from its heavy exposure to the engine MRO segment, which is booming given ongoing delays in new commercial aircraft deliveries by the large original equipment manufacturers (OEMs). The shortage of new jets has translated into more shop visits for older planes once pegged for retirement. StandardAero’s key customers include Rolls-Royce, GE Aerospace and Pratt & Whitney as well as major airlines.

Consultancy Bain & Co. estimates that the near-term peak for aircraft engine MRO demand will not occur until 2026. An IPO in the next few months by StandardAero will tap into investor demand that still has room to grow.

Since the shares of OEMs are not performing as well as MRO focused companies, “some investors will look to do rotation, from commercial OE to aftermarket,” one market insider said.

Most analysts expect that the StandardAero deal will raise $1.38 billion at a valuation of up to $7.7 billion, but some observers believe the valuation could be as much as $10 billion.

Backed by Carlyle Group and Singaporean sovereign wealth fund GIC, StandardAero decided to go public in line with Carlyle’s preference. Carlyle had explored selling the company but was seemingly underwhelmed with the bids it received. Carlyle believes StandardAero’s valuation will be higher in an IPO, according to Bloomberg News.

Filings for the listing show that funds affiliated with Blackrock, Janus Henderson Group and Norway’s $1.8 trillion sovereign wealth fund have respectively signaled interest in buying shares of StandardAero at the IPO price.

StandardAero’s decision to go public comes less than a month after its acquisition of military MRO provider Aero Turbine from PE firm Gallant Capital for an undisclosed sum. Founded in 1978, California-based Aero Turbine has a customer portfolio that includes the U.S. Air Force, U.S. Navy, foreign militaries, Magellan Aerospace and Textron-owned ATAC. It is StandardAero’s 15th acquisition since 2015.

If there is any reason for caution about StandardAero’s IPO, it has less to do with idiosyncrasies of the company than broader market trends. On the one hand, consumer demand for air travel appears to be finally softening. According to IATA, passenger demand grew 8% year-on-year in July, compared to 9.1% in June, 10.7% in May and 11% in April. If growth continues to moderate, there will be a knock-on effect for MRO shop visits.

Additionally, at some point, Boeing and Airbus will speed up the delivery of new commercial jets that will need little to no significant aftermarket support for several years. Many will replace older, maintenance-hungry airframes and engines. While the retirements will help bolster used serviceable material stock that MRO shops need, it also will reduce demand for shop visits and repairs.