Up in the air
Back in June of 2023, we wrote about the resurgence of air travel following 3 years in which in-person events were canceled, and we all had to talk to our colleagues over Zoom. During the pandemic, the manufacturing of new airplanes had ground to a halt, but we believed production was about to ramp higher to satisfy this renewed demand.
We were bullish on anything that goes into airplanes. In particular, specialty alloys. We wrote:
On the demand side, the significant plane orders placed during the Paris Air Show reflect the continued resurgence of the aviation sector after multiple challenging years due to the 737 MAX issues and the COVID-19 pandemic. Air travel is once again booming and has nearly eclipsed pre-pandemic levels, thereby pressuring airlines to expand their fleets, especially in emerging markets. This boom has brought along a massive increase in demand for specialty alloyed steel and titanium products. These materials are critical for constructing aircraft components and are unique in their strength, durability, and resistance to extreme conditions.
On the supply side, meeting the increased demand for alloyed steel and titanium has proven challenging due to several factors. First, the COVID-19 pandemic caused temporary shutdowns and layoffs at steel mills, disrupting production and reducing capacity. This setback, coupled with the subsequent recovery of the aviation industry, has strained the supply chain. Additionally, global supply chain disruptions, including shipping delays and material shortages, have further hampered the timely delivery of crucial raw materials. Average lead times from steel mills are now upwards of 20 months compared to pre-pandemic averages of around 8 months.
Looking back on this trade almost 3 years later, the supply shortage that we flagged materialized. But while the recovery was real, the Air Alaska door incident in January 2024, as well as the Boeing strike later that year, slowed it down. Evidently, restarting one of the world’s most complex supply chains doesn’t happen at the flip of a switch.
Among our basket of Universal Stainless (USAP), Haynes Int (HAYN), ATI Inc (ATI), and Carpenter Technology (CRS), the first two companies were acquired at significant premiums. At the same time, ATI and CRS have gone up roughly 4-5x. Not bad for a trade built around metal nobody wanted to talk about in 2023.
Today’s trade
Fast forward to today, and the market has clearly caught on to the trade, with many aerospace names going parabolic in 2025 after it became clear that Boeing had finally gotten its house in order. Today, it has become hard to find value in the supply chain, with many value investors flocking to lower-quality names such as Montana Aerospace (AERO SW), a capital-intensive European aluminum melter that investors believe should trade at an aerospace multiple simply because that aluminum ends up in an airplane.
The shortage of tails has caused airplane prices to rise, benefiting lessors who are effectively long airplanes. Companies like AerCap now trade well above book value to reflect this.
Aerospace after-market
Despite the ramp-up in airplane production, 5 years of inadequate supply have caused the global fleet to age. When faced with the decision to retire an airplane or pay for another shop visit, the shop visit wins out, benefiting MRO providers as well as spare parts providers and distributors. In most of commercial aerospace, MROs make their money in the after-market, and the after-market is booming.
Over the last year, our interest has shifted from the aerospace supply chain to the aftermarket.
This industry tailwind for the aerospace aftermarket is a well-kept secret. Names like VSEC (VSEC), FTAI (FTAI), and AAR Corp (AIR) have rerated significantly. However, we do believe there are individual names that haven’t kept up with the trade, such as AAR, which is undergoing a company-specific transformation. We are also keeping a hopeful eye on our spin-monitor given the pending separation of Honeywell’s (HON) aerospace business (VIC writeup here).
We are equally interested in the traditionally high-quality engine manufacturers. Those companies tend to make their money in the aftermarket, selling the initial engines close to break even.
This shortage of planes and engines was exacerbated by quality problems with Pratt & Whitney’s Geared Turbo Fan (GTF) engine. The core problem stems from contaminated powdered metal used in certain engine components, which raised concerns about premature cracking and prompted accelerated inspections and removals well before expected service intervals. Airlines have been forced to park planes while waiting for spare engines and shop visits, while OEMs and suppliers scramble to expand repair capacity.
The Pratt & Whitney-led GTF consortium has understandably traded at a discount to the GE-led LEAP engine, given the costs associated with the engine recall. But with the GTF tails-on-ground having peaked in late 2025, Pratt & Whitney (RTX) / JAEC / MTU Aero (MTX GY) should probably see their valuation discount close.
Jet fuel crisis
Of course, the outlook for aerospace changed abruptly following the Strait of Hormuz closure and the resulting jet fuel shortage. The stress this brings to airlines is no surprise to anyone. However, after-market demand has been strong, and MRO capacity has been very tight. Is that really going to change overnight? Are airlines really going to retire airplanes at a fast enough rate to kill the tailwind in the aerospace after-market?
All after-market players recorded record Q1 earnings and would have raised guidance if it hadn’t been for the uncertainty caused by the Iran war. It wasn’t until GE’s Larry Culp started comparing the situation to the GFC.
“I think we are acknowledging that if there is sustained softness in departures, there is an effect typically in the commercial services, but with a lag. Let’s hope we’re not staring at something akin to the GFC.” Larry Culp, GE’s Q1 2026 earnings call
We are probably in the second leg of a bull market that should last until the end of this decade. This cycle increasingly resembles a classic aerospace super-cycle: too few planes, too few engines, too few mechanics, and too much demand. While we are seeing an acceleration in airplane retirements, we doubt this will be enough to kill the current bull market.
Besides, whenever you say aerospace, it almost always includes defense as well. Many of the companies listed above have significant defense revenues. Remember our write-up on European defense spending from 2 weeks ago? This should go a long way in offsetting any weakness on the commercial side.