While everyone is busy buzzing about AerSale's AerAware system and its potential to revolutionize flight safety, a quiet but significant shift is occurring within the company's core business. Buried in the minutiae of their Q1 2024 earnings call transcript [1] lies a story of strategic transformation, one that hints at a future where AerSale becomes far less reliant on the volatile whole asset sales that have historically driven their financial performance.

The company's CEO, Nick Finazzo, and CFO, Martin Garmendia, spoke at length about the challenges of the current market environment, characterized by intense competition for feedstock and extended lead times for repairs. Yet, amidst these headwinds, a deliberate move towards a more stable, recurring revenue model is evident. The clue? A growing emphasis on their TechOps segment, specifically the component MRO business.

For years, AerSale's success has been largely contingent on their ability to acquire used aircraft and engines, then either resell them as whole assets or dismantle them for parts. This model, while profitable, is inherently volatile. The timing of large deals can swing quarterly results dramatically, leading to the kind of unpredictable performance that spooked investors in 2023 and prompted the company to withdraw numerical guidance.

However, AerSale is subtly but surely shifting gears. They're leveraging their expertise in aircraft maintenance and repair to secure long-term service agreements with airlines and OEMs. This pivot is particularly evident in their landing gear and accessory overhaul businesses, where they're transitioning from one-off projects to recurring contracts that provide a predictable revenue stream.

"Garmendia hinted at the significance of this shift, stating that these new contracts "will help increase the volume at these shops and will also help us improve operational efficiencies and begin to monetize on the capacity expansion investments we have made." [1] The implications are clear: AerSale is building a foundation for sustained, long-term growth in a segment that's less susceptible to the whims of the whole asset market."

This transition is further underscored by AerSale's focus on increasing capacity within their component MRO facilities. They've tripled the size of their structural component shop, are close to bringing their Millington heavy MRO facility online, and are actively expanding their pneumatics capabilities. These investments signal a clear intention to capture a greater share of the component MRO market, a market that's experiencing robust demand due to the global surge in air travel.

TechOps Segment Revenue Growth

Here's a look at the recent performance of AerSale's TechOps segment:

Excludes one-time sale of AerAware demonstrator aircraft. [2] Organic growth. [2]

Projected Impact of TechOps Growth

While it's impossible to predict the precise impact of this strategic shift on AerSale's financials, one can make some educated hypotheses. Assuming that AerSale can maintain a 10% annual growth rate in their TechOps segment over the next few years, and assuming that their gross margin in this segment remains around the company's target of 25%, TechOps could contribute an additional $12 million in gross profit in 2024, with that figure growing to $25 million by 2026.

This incremental gross profit, flowing through to EBITDA, could significantly reduce AerSale's reliance on whole asset sales for profitability. It could also lead to a more stable and predictable financial performance, potentially making AerSale a more attractive investment for those seeking long-term growth with reduced volatility.

Conclusion

While AerAware remains a captivating story with tremendous upside potential, don't overlook the quiet revolution happening within AerSale's TechOps segment. This strategic shift towards a recurring revenue model, supported by concrete investments and a strong market environment, could be the hidden gem that propels AerSale to a new level of financial stability and long-term success.

"Fun Fact: AerSale's expertise extends beyond just commercial aircraft. They've played a crucial role in converting passenger aircraft into firefighting tankers, helping to combat wildfires around the world."