Boeing (NYSE:BA) disclosed Monday that it will pay $1.7 billion in cash, or $48 per share, for airplane parts and services provider Aviall (NYSE:AVL) and assume $350 million in net debt as part of the transaction. At a 27% premium to Aviall's closing price on Friday, the purchase price certainly seems like a good deal for Aviall shareholders. But given the dynamic in global commercial aviation, it's hard to argue that it isn't a good deal for Boeing's shareholders, too.
Last year was a bumper one for the world's two giant airplane makers, as Boeing and Airbus each recorded more than 1,000 orders. Granted, this year is likely to be slower, but nevertheless, the medium-term view is pretty clear. As China, India, and other developing economies expand, they are going to be buying lots more planes, which means more jets in the sky in the coming decades. This certainly bodes well for sales of new aircraft, but it would seem to be a strike against buying a parts and services company like Aviall, given that newer planes generally need fewer spare parts and less maintenance.
However, at the same time Asian countries are taking off, the giant North American market has been relatively sleepy, as new competitive dynamics play out. So-called "legacy" carriers are putting off new purchases and trying to make do with existing fleets. This, of course, fuels Aviall's business. Aviall's revenue rose 11% last year to $1.3 billion, and its operating margin was higher than that in Boeing's commercial airplane business, which includes new planes and parts and services.
Eventually, of course, more North American airlines will return to buying new planes to replace older ones. By that time, though, developing markets probably will have an increased need for parts and maintenance services. And over the long term, the parts and services probably will remain vibrant. Fewer all-new planes are likely to hit the market in coming years because the cost of launching them is gigantic. Consequently, planes coming into service now and in the future are probably going to have to stay in service longer, meaning greater demand for parts and maintenance.
With commercial aerospace taking off, it's natural that Boeing is seeking to capture a larger piece of the business. And by paying 26 times the 2006 earnings estimate for Aviall, Boeing seems to be making this move at a reasonable price.
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Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.
