AAR Corp And Air New Zealand Sign PBH Partnership Deal

Renowned aviation service provider AAR Corp. (NYSE:AIR) recently announced the signing of a long-term strategic Power-by-Hour (PBH) partnership with Air New Zealand. Per the terms of the deal, AAR Corp. will offer nose-to-tail, cost-per-flight-hour rotable inventory support to the airline.

This transaction falls in line with the company’s recently adopted strategy to transform itself with a major focus on its service business. The financial terms of the deal have been kept under wraps.

Deal Details

Under the terms of the deal, AAR Corp will provide inventory support to Air New Zealand’s 740 parts and 15 B777 aircraft. Moreover, this partnership will help Air New Zealand serve AAR Corp as its exclusive component repair provider for select regions in Asia-Pacific. Air New Zealand will also be AAR Corp’ preferred supplier for select parts worldwide.

Benefits of the Deal

Being a national airline, Air New Zealand offers air passenger and cargo transport services to more than 15 million people every year. Thus, the partnership with the airline is sure to boost AAR Corp’s revenues, in days to come.

Also, Air New Zealand's competitive advantage lies within the Pacific Rim where its network expands from New Zealand to Australia, Asia and the Americas. Consequently, management at AAR Corp expects this deal to substantially expand the company’s footprint in the fast growing Australia-Asia region.

Further, this contract has established a component inventory and repair partnership for AAR Corp in the growing Asia-Pacific region with an AAA-rated carrier manufactured by aircraft major The Boeing Company (NYSE:BA) , i.e. B777.

Our View

With the rapid globalization over the last decade, business activities across nations have increased manifold. Naturally, rate of air travel has increased, as is evident from the 6% rise in global air passenger traffic in the first half of 2016.

Consequently this has turned out to be beneficial for maintenance, repair and overhaul (MRO) service providers like AAR Corp, since rising air travel calls for accelerated maintenance spending by airlines on aircraft. Currently, AAR Corp. is the largest independent MRO provider in North America and we expect the aforementioned deal to expand its footprint in the MRO services business across the Asia-Pacific region.

Moreover, managing inventory cost has always been a crucial strategy of cost cutting in the highly capital-intensive aviation industry. In recent years, PBH agreements have been a resort for companies aiming at minimizing inventory expenses with no requirement of aircraft spare parts storage. The supplier provides the parts directly to the operator’s facility.

Notably, the aforementioned deal is the first PBH contract signed by AAR Corp which is likely to help the company over the long haul.

Zacks Rank & Key Picks

AAR Corp currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the aerospace-defense space include Spirit AeroSystems Holdings, Inc. (NYSE:SPR) and B/E Aerospace Inc. (NASDAQ:BEAV) . Both these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Spirit AeroSystems has gained 11.8% year to date. On an average, the company posted a positive earnings surprise of 11.60% in the trailing four quarters.

B/E Aerospace has gained 40.1% year to date. On an average, the company posted a positive earnings surprise of 2.49% in the trailing four quarters.

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