Content Published Last Week

1. IP RESEARCH: HEICO: Wencor Acquisition Synergies and Analysis

2. HEICO PMA and MRO: Airline Customer Perspective

3. Carvana: Evolution of the Inspection & Reconditioning Process

4. SpaceX: Understanding Starlink

5. Mainfreight Australia History and Turnaround

6. Keywords Studios: Competitive Analysis

HEICO / Wencor Synergies & Analysis

On May 15th, HEICO announced it had agreed to purchase Wencor, its largest competitor and the second largest PMA producer globally, for $1.9bn cash and $150m in HEI stock. Since the announcement, we’ve spent ~10+ hours interviewing Former HEICO, Wencor, and Airline MRO executives to understand potential implications of the acquisition.

It’s interesting how little is publicly disclosed about how the commercial aerospace aftermarket actually works. HEI management doesn’t explain too much about how PMA, MRO, DER’s, and distribution works together. The reporting is fairly opaque and it’s not clear exactly how much PMA or MRO drives HEI's EBIT. This is the first piece in a series of research we have planned to uncover the operational realities of the aerospace aftermarket.

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This analysis shares our learnings with a focus on the synergies between HEICO and Wencor’s PMA, MRO, and distribution businesses. We also explore the power of HEI and Wencor's vertically integrated models across the aftermarket - we share how HEI uses its PMA portfolio as bargaining power to win distribution relationships, launch private label PMAs, and offer alternate bills of materials to further displace OEM parts.

We quantify the overlap in PMA portfolios and MRO capabilities:

The overlap is incredibly small. From an ATA chapter perspective, my Air and Thermal Systems portfolio constituted approximately a quarter of Wencor's PMA portfolio and a larger portion of the overall revenue. This portfolio focused on air conditioning (ATA 21), pneumatics (ATA 36), and increasingly, electric power (ATA 24). We ventured into electric power because of Silver Wings' involvement with IDGs. While we had a variety of PMAs, hydraulic power was mostly repairs, not new parts. In contrast, Heico focused on power plant, namely ATA 71 and 72. Igniters (ATA 74) are typically avoided due to the dominance of Champion, Unison, and Woodward in that area. There's a slight overlap in cabin and plastic parts, such as ATA 44 for cabin systems. Wencor has a lot of content in ATA 49, where Heico doesn't have much. - Former EVP at Wencor and Honeywell

We also explore one overlooked strategic advantage of the acquisition: the ‘Alternate Bill of Materials’ (ABOM) strategy.

About two years ago, Wencor encountered situations where airlines would express interest in sending their air cycle machines for repair, but Wencor lacked four necessary parts. Each time, the airlines had to purchase these parts from Hamilton at a high cost due to the lack of a preferred discount…to meet this demand, Wencor began to PMA these parts, not because of their individual value, but to save their repair business and other PMAs. They adopted what they call the "alternate bill of materials'' approach, selecting discrete units and PMAing everything in them. The key is to assure the airline that they can move away from Eaton, Parker, or Meggitt on a particular unit because we have 100% part availability, unless the housing cracks, which is a rare occurrence. This new strategy will provide airlines with more choices than they've had in the past. - Former EVP at HEICO and Wencor

The Wencor acquisition widens and deepens HEI’s aftermarket service to save airlines money. Savings not only in PMAs, but more so in MRO and ABOM strategies. HEI can increasingly sell PMA parts that may not be individually highly profitable, but fill the gap in a larger repair of a subsystem of parts. This analysis explores in more detail how Wencor may deepen HEI's positioning as a leading partner to airlines to combat aggressive OEMs.

Carvana: Evolution of the Inspection & Reconditioning Process

This interview with a Former Director of IRC’s at Carvana explores how CVNA’s reconditioning process has evolved over the last few years and is an insight into the complexity of sourcing, reconditioning, and preparing thousands of vehicles for sale each month.

The current time to fully recon a vehicle from sourcing to ready for website photos is 18 days (note this excludes the car available for sale which is dependant on receiving the title). And there is supposedly still room to improve the process by 4 days:

I believe the target should be 14 days from the time the car lands on your property to the time it's ready for website photos. The way we calculate this is by starting the clock when the car is brought in for inspection. That's what you can control. Because one week you might have 30 cars arrive, and the next week 700 cars could arrive. - Former Director of Inspection Centers at Carvana

Over the last few years, CVNA has reduced its recon cost per unit even in the face of higher inflation and aging inventory and as competitors have seen recon costs increase:

The main issue, which is being addressed, is the aggressive and rapid growth. We were the first to market and had to get the volume out there. This led to a high dependency on vendors for paint work, PDR, interior, cosmetic work, and even some mechanical work in many cases. When things slowed down at the end of 2022 and the expectations for 2023 changed based on volume, the focus shifted to training our associates to handle the volume and transition all the vendors out. It costs more to recondition cars today than it did 10 months ago, as other companies like AutoNation and Sonic have reported. However, Carvana has managed to reduce reconditioning costs…The way they reduced reconditioning cost was by phasing out and eliminating the vendors. - Former Director of Inspection Centers at Carvana

Also, there is an opportunity to increase software within the IRC’s to drive turns, similar to what KMX uses internally for recon:

Despite being considered a technology company, Carvana hasn't invested much in improving the inspection and reconditioning process. This process is still relatively simple and outdated, and there's technology available that could be leveraged. There's a lot of room for them to refine this process and increase efficiency. However, their priority is still to improve the front-end user experience. I'm not saying this is necessarily wrong, but there's still a lot of potential to improve the reconditioning process. It's far from being as good as it can be. - Former Director of Inspection Centers at Carvana

This interview is worth reading in full for anyone studying KMX and CVNA.

SpaceX: Understanding Starlink

In this interview, a Former Starlink Infrastructure Lead at SpaceX explores what potential competitive advantage Starlink may have over incumbent ISPs. In theory, laser networks could replace fiber ones, meaning that Starlink would be capable of replacing incumbent internet service providers.

Could we hypothetically support all the world's internet traffic with satellites if we had reliable laser networks that beamed directly onto data centers on the ground? Assuming not all internet content is stored on satellites, which seems reasonable, you'd need to retrieve some things from the ground. However, you could hypothetically have a system where the only fiber would be in data centers. Once you transition from sound of the antennas to light, you'd need some fiber. But for the most part, you could go from antenna at your house to satellite, then via lasers to a data center, and back up and around with virtually no ground fiber. Could this system support all the internet traffic in the world? Hypothetically, yes. - Former Starlink Infrastructure Lead at SpaceX

Mainfreight Australia History and Turnaround

One of the main concerns from MFT’s recent AGM was the decreasing profits in the US. Many investors suggested the company should exit the US market entirely. Mainfreight's CEO reminded everyone about the company's past challenges in Australia and how there are some parallels to the US today. One of the key catalysts in winning the Australian market was reaching critical mass and network density through strategic M&A.

The problem was identified when Chris arrived in 2000. He saw that the business didn't have a plan to escape its rut. Bruce, the founder, was keen on growing the business organically and with minimal risk. They were hesitant about investing more working capital from New Zealand into Australia. It was a cautious, steady strategy. However, Chris saw that this approach wouldn't work. He believed they needed to be more aggressive and bulkier, which led him to seek acquisitions. The challenge was convincing the board that this was the right strategy - Former Country Manager at Mainfreight

This interview with a Former Mainfreight Country Manager sheds light on the challenges the company faced in Australia, how they were overcome, and the lessons learned and applied to grow and succeed in the US.

Keywords Studios: Competitive Analysis

In last week's interview on Keyword Studios, a competitor who led a single service line explored how it competes with KWS. This week, a former Business Development Executive at PTW explores how multi-service line BPO's operate and the threat AI may pose to the industry.

There's always a business decision that goes with it. Some of them will want to have higher margins on what they're doing. But my belief is that game companies make games. If you look at a company like EA and how many games they produced a year over their life, there's a bell curve. If it gives them the opportunity to have more games and keep games live longer with a lower cost, I believe they'll be using that money to make more money out of it. - Former Business Development Executive at PTW

The interview explores who is best placed to benefit from potential AI efficiency gains and how incumbents can protect themselves from new BPO entrants attempting to enter with an AI-focused offering.