Keeping a Hold on AIR

AIR’s Sales & Leasing Segment Takes Gas!

AAR Corp. (AIR - Analyst Report) reported Q3-09 results. Revenues of $338.8 million (we had forecast $349 million) were down by 10.0%. Operating Income was off by 22.4% as the Operating Margin declined from 10.1% to 8.7%. Net Income was essentially flat, but only because the Tax Rate dropped from 35.0% to 27.0%. EPS were also just about flat at 48¢ (our estimate was 45¢; if the Tax Rate hadn’t dropped, the EPS would have been 43¢).

Aviation Supply Chain Sales were off by 8.3% to 138.7 million, MRO [maintenance, repair and operation] Sales rose by 2.9% to $77.0 million and Structures & Systems Sales rose by 8.7% to $120.0 million.

The big loser in the quarter was Aircraft Sales and Leasing, where Revenues declined 92.4% from $40.2 million to $3.1 million; AIR is essentially out of this business as demand for used aircraft has nearly evaporated and the segment will probably disappear from the Company’s reports starting with F/Y 2010.  

AIR has 33 aircraft in its Aircraft Sales and Leasing portfolio, 26 of which are in joint ventures, with the balance being wholly-owned by the Company. Three of the aircraft are 767s, one is a 747, three are A320s, one is a 737-500 and the balance is 737-300/400s. It may be difficult to find homes for these aircraft as they come off lease, and the Company might have to disassemble more aircraft as it did in Q3-09.

During the 3rd quarter, the Company had an FAA-induced disruption at its Miami, FL landing gear MRO operation, which probably reduced Revenues by $3 million to $3.5 million, with Operating Income impacted by some $1 million, which shouldn’t be repeated in the 4th quarter.

The Company is still targeting a 10% Operating Margin, even with the virtual disappearance of its Aircraft Sales and Leasing operations. The hope is that it will not have to take additional write down on its aircraft portfolio. However, with domestic air travel off by at least 10%, that might be wishful thinking.

Zacks has a Hold on AIR.