Falling Aircraft Demand And Rising Costs Will Erode Margins

Key Takeaways

• Dependence on aging aircraft amid regulatory, technological, and competitive shifts limits diversification, threatens margins, and constrains revenue growth opportunities.
  
• Volatile, transactional revenue mix and rising cost pressures increase earnings risk and expose the company to margin compression and asset value issues.
  
• Expansion in MRO and component services, strong demand for used materials, niche wide-body engine focus, regulatory tailwinds, and operational efficiencies are supporting profitability and growth.

Catalysts

Provides aftermarket commercial aircraft, engines, and its parts to passenger and cargo airlines, leasing companies, original equipment manufacturers, government and defense contractors, and maintenance, repair, and overhaul service providers worldwide.

• AerSale's business model remains heavily reliant on the availability and trading of aging and retired aircraft, a market that faces mounting pressure from new sustainability regulations targeting emissions reductions and more aggressive airline fleet renewal strategies, which are expected to depress both long-term demand for used aircraft parts and reduce recurring revenue from aftermarket services.
  
• The company has limited diversification beyond mature aircraft aftermarket services and faces significant technological obsolescence, as rapid advancements in next-generation aircraft and digital fleet management reduce the frequency and value of MRO work and used serviceable materials, constraining future revenue growth and compressing margins.
  
• Rising global labor and material costs, along with persistent talent shortages in the aviation MRO industry, will likely erode AerSale's cost advantages and squeeze net margins, especially as recurring efficiency gains from recent restructuring reach their natural limit.
  
• AerSale's revenue continues to be highly dependent on volatile, transactional sales of flight equipment rather than stable, long-term contracts, increasing the risk of significant earnings fluctuations in the face of any sudden decline in air traffic or global economic disruptions, with only incremental progress in recurring revenue from recent lease pool expansion.
  
• Intensifying competition and ongoing consolidation among airlines, OEMs, and major MRO providers threaten to shift bargaining power away from independent players like AerSale, which, combined with AerSale's high fixed-cost inventory model, leaves the company increasingly exposed to value-destroying price compression and potential asset impairments in future downturns.

AerSale Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on AerSale compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming AerSale's revenue will grow by 15.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.9% today to 7.5% in 3 years time.
• The bearish analysts expect earnings to reach $40.4 million (and earnings per share of $1.38) by about August 2028, up from $6.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 7.0x on those 2028 earnings, down from 61.7x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 34.2x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.43%, as per the Simply Wall St company report.

AerSale Future Earnings Per Share Growth

Risks

• AerSale's aggressive expansion of MRO capacity and its move into new component shops, coupled with tripling aerostructures capacity and adding pneumatics servicing, positions the company for incremental revenue and margin improvements, which may drive higher profitability in future periods.
  
• Secular trends like a growing global aviation fleet, the sustained extension of service lives for older aircraft, and an aging fleet-especially in wide-body aircraft-support high demand for Used Serviceable Material (USM) and part-out services, which could result in revenue growth and stable gross margins.
  
• The company's ability to capitalize on its established niche in wide-body engines and optimize asset monetization strategies, combined with steady feedstock acquisitions, suggests it can maintain or grow market share and generate improved earnings over time.
  
• The upcoming FAA Airworthiness Directive requiring fuel tank safety modifications by 2026 is likely to boost installations of AerSafe, given AerSale's significant backlog and unique FAA-approved solution, supporting recurring revenues and potentially expanding their margins through 2025 and 2026.
  
• Ongoing operational efficiencies and cost reduction initiatives are driving selling, general, and administrative expense reductions and improving operating leverage, which, alongside higher recurring lease pool revenues, are contributing to expanding EBITDA and net income, indicating potential upside for future financial performance.

Valuation

• The assumed bearish price target for AerSale is $6.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of AerSale's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $8.0, and the most bearish reporting a price target of just $6.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $540.1 million, earnings will come to $40.4 million, and it would be trading on a PE ratio of 7.0x, assuming you use a discount rate of 8.4%.
• Given the current share price of $8.51, the bearish analyst price target of $6.0 is 41.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.