There's an old joke that the best way to make a million dollars is to start with $10 million and invest it in the airline industry. But no matter how bad the economics of the airline industry, airplane usage is increasing, and that means airlines need to keep servicing their airplanes. That's good news for AAR (NYSE:AIR), an aerospace company that supplies aircraft parts, cargo systems, and maintenance services for commercial and military aircraft.  

AAR reported its quarterly earnings yesterday and continued its almost inexorable increase in earnings. Diluted earnings per share rose 24% over the year-ago quarter. Debt was up modestly to $342 million, but the company's debt-to-equity ratio remains below 1, which is quite conservative, considering how steady AAR's revenues are. Margins improved, but only slightly; gross margins improved to 18.5% from 17.9% in the year-ago quarter (after adjusting the 2006 margins for an impairment charge).

The company is also using its assets more effectively now -- current assets decreased to $616 million from $634 million a year ago. Most of this dip was driven by the company's spending $38 million in cash to buy two companies earlier this year. AAR still has $58 million in cash, and I anticipate that it will make more small acquisitions in the near future.

Total military spending provides 36% of AAR's revenue, while revenues from commercial aircraft companies supply 63%. (The always-exciting "other" segment accounts for the remaining 1% of revenue.) Broken down by type of service, 51% of revenue comes from aircraft parts, 20% comes from aircraft maintenance, and 4% comes from aircraft sales and leasing.

What will come next for AAR? I would be hard-pressed to think of a reason why it would not continue to grow. A couple of recently announced big contracts with the U.S. government should drive near-term growth. Considering the company's 20% earnings growth and sales growth of 16% annually since 2003, its current price-to-earnings ratio of 22 seems modest.

Other investors seem to agree that AAR is attractive: Out of 176 players who have rated it on Motley Fool CAPS, 175 rate the company as a buy, and 64 All-Stars unanimously rate it as a buy. Shares declined by almost 10% yesterday -- is this a good time to buy? Join CAPS and add your opinion.

Related links:

Fool contributor Michael Goode is an investor who lives in St. Louis. He is one of the top 50 players on Motley Fool CAPS, where he is known by the handle EverydayInvestor. He has no position in any company mentioned. The Fool has a disclosure policy.