Outsourcing can be a great gig: Find something that other people or companies don't really want to do and isn't core to their business, build some leverage, and make some money. If there were ever an industry in need of help from the outside, it would be the American aviation business. The question remains, though, how many companies will see the light and how much aerospace outsourcer AAR
Results for the company's third quarter certainly didn't look too bad. Revenue rose 14%, as reported, and would have been up more than 23% if you exclude about $15 million from an aircraft sale that was booked as revenue in last year's quarter. Profitability also improved significantly, and AAR's operating income rose 84%.
This is an interesting opportunity, but I have some concerns. The company gets about one-third of its revenue from the government, and outsourced operations related to defense are a big factor here. In fact, in this quarter, defense revenue grew 22% while commercial revenue grew 11%. That's fine when our military is still as actively deployed, but I wouldn't expect that revenue to keep growing if or when things settle down a bit.
And while it would seem a natural opportunity for commercial aviation companies to offload their maintenance operations, the reality isn't so simple. Sure, AAR has attractively priced and competent non-union labor, but many commercial airlines are hamstrung by existing union contracts and/or substantial existing investments in facilities that aren't worth so much on the open market. So, while companies like Southwest
All that said, I think more and more commercial airlines will realize that Southwest's success is not just luck and will try to emulate more of its model. What's more, AAR has opportunities to further entrench itself as a "partner of choice" for defense contractors like Northrop Grumman
For more Foolish flights of fancy:
- The Decline of Southwest and the Rise of JetBlue
- JetBlue Seeing Red
- Hedging Trims Alaska Air's Losses
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).