It will be structured in five Parts:

• Part 1: The Aviation Ecosystem Behind HEICO

• Part 2: Why the Aircraft Aftermarket Creates a Structural Opportunity

• Part 3: Inside HEICO’s Crown Jewel

• Part 4: The Second Engine and the HEICO Operating System

• Part 5 (today): The Economics Behind the Compounding Machine

All parts are now available in one PDF. You can download it below.

Deep Dive Heico Corp

9.73MB ∙ PDF file

Download

Download

Download

Download

👔 Company Name: HEICO Corporation (“HEICO”)

🔎 ISIN: US4228061093 (Common Stock) and US4228062083 (Class A)

🔧 Business model: Aerospace and electronics serial acquirer

🌍 Geographic exposure: global (~62% U.S. and ~38% international sales across approximately 130 countries)

📈 Stock Price: HEI Common Stock: $339 | HEI.A Class A Common Stock: $253

💰 Market Capitalization: ~$40 billion

👨‍💼 Number of CEOs since foundation: 2 (one transition — Laurans Mendelson to Eric and Victor Mendelson)
since 1990

👨‍👩‍👦 Founder-/Owner-operator: Yes — owner-operated by the Mendelson family

📅 CEO tenure: Since 1990

🥇 Insider ownership: ~21.0% of shares

📊 10Y EPS CAGR: ~16%

🔁 Reinvestment profile: High

💸 Capital intensity: Low — capex-light, but inventory-intensive

🏰 Moat: Regulatory approvals, customer trust, installed-base scale, price and availability, culture

🧨 Main risks: Valuation, acquisition execution, aviation cyclicality, OEM countermeasures

🌳 Slow Compounding fit: Yes – high-quality (niche) serial acquirer

Business Model in a Nutshell: HEICO is a decentralized aerospace and electronics serial acquirer. Its Flight Support Group provides lower-cost aircraft parts, repairs, and distribution services, while its Electronic Technologies Group supplies highly engineered components for aerospace, defense, space, medical, and other demanding markets. Growth comes from new product development, market-share gains, and disciplined acquisitions of niche businesses that retain significant operational autonomy.

Subscribe now

11. Acquisition History

HEICO completed 112 acquisitions between 1990 and fiscal 2025. The annual pace was highly uneven: some years passed without a transaction, while particularly active years such as 1999 and 2019 brought nine acquisitions each.

This lumpiness is consistent with management’s approach. HEICO does not work toward a fixed annual acquisition target or allocate capital according to a predetermined split between FSG and ETG. It buys businesses when suitable assets become available at attractive prices.

The transaction history also shows how HEICO expanded beyond its original aerospace-aftermarket activities. FSG dominated the early acquisitions, adding replacement-parts manufacturers, repair capabilities, distributors, and other specialized aviation operations. ETG became an increasingly important destination for capital over time. After disposals, the accumulated business count is almost evenly divided between the two operating groups, with a slight majority in ETG.

HEICO’s acquisition history remains overwhelmingly U.S.-centered, reflecting both the depth of the American aerospace and defense supply chain and the company’s familiarity with the market. International transactions were rare in the earlier years but gradually expanded into the United Kingdom, France, the Netherlands, India, and other markets as HEICO developed a broader sourcing network and gained experience managing businesses outside the U.S.

HEICO has not pursued geographic diversification for its own sake. International expansion has followed the availability of suitable businesses rather than a requirement to enter specific countries. The company remains willing to deploy most of its capital in its home market as long as attractive opportunities continue to emerge there.

This geographic breadth also helps explain the importance of HEICO’s decentralized structure. The company has accumulated more than one hundred specialized businesses across different product categories, customer groups, and regulatory environments.

For most of its history, HEICO grew through relatively small and medium-sized acquisitions. Purchase prices were often modest or not disclosed separately, and multiple businesses were sometimes grouped within a single annual purchase-price allocation.

A limited number of transactions stand out from this pattern.

On the purchase-price-allocation basis used in the following chart, Wencor was by far HEICO’s largest acquisition, with total consideration of approximately $2.08 billion (see Chapter 8.5). It was roughly four times the size of Exxelia, the second-largest disclosed transaction, and materially larger than anything HEICO had previously completed. Exxelia, AAT, and Robertson represented other important increases in deal size. Switchcraft and Reinhold were also meaningful at the time, although their purchase prices now appear modest beside Wencor.

HEICO’s revenue development broadly tracks the expansion of its subsidiary base. Net sales increased from a small starting point in 1990 to more than $4.5 billion, while the portfolio grew from a handful of operations to more than one hundred businesses—equivalent to average revenue of roughly $45 million per subsidiary.

Perhaps the most unusual feature of HEICO’s acquisition history is how rarely it has sold anything. The company seeks to be a permanent home.

My reconstructed transaction history contains four disposal transactions: MediTek in 1996 and three disposals in 2000. The 2000 transactions included two asset sales involving recently acquired operations and the sale of Trilectron Industries.

This count requires explanation because management later stated that HEICO had sold only two companies during the Mendelson era. MediTek and Trilectron appear to have been the two complete-company disposals, while the other two 2000 transactions were asset sales rather than divestitures of entire subsidiaries.

MediTek was a profitable medical-services operation, but it was labor-intensive and outside HEICO’s intended direction. Its 1996 sale marked the company’s exit from that activity and allowed it to concentrate fully on FSG and ETG.

Management described the second full-company disposal as a business purchased for approximately $7 million and sold about four years later for roughly $72 million. HEICO did not name the company during the earnings call, but the timing and transaction history strongly suggest Trilectron Industries, acquired in 1996 and sold in 2000.

Management acknowledges that some acquisitions have performed better than others. When a business initially underperforms, HEICO generally seeks to improve it rather than prepare it for resale. This permanence supports the seller proposition: founders can reasonably expect their employees, identity, and operating platform to remain part of HEICO for the long term.

Historical disclosure is insufficient to determine the precise acquisition multiple for every transaction or cohort. HEICO usually reports aggregate purchase-price allocations for acquisitions completed during a fiscal year, while acquired revenue, EBITA, and EBITDA are rarely disclosed. Reconstructing precise multiples across the entire history would therefore imply more accuracy than the underlying data support.

I reconstructed HEICO’s acquisition consideration from fiscal 2010 through fiscal 2025. Disclosure becomes considerably less detailed before that period, but these 16 years account for more than 90% of total acquisition spending between 1990 and 2025.

Between fiscal 2010 and 2025, HEICO deployed approximately $6.0 billion on acquisitions. Only about $246 million was paid in HEICO shares, equivalent to roughly 4% of the total. Wencor alone accounted for approximately $161 million of the shares issued; excluding Wencor, stock consideration totaled only about $85 million across the entire period.

This illustrates management’s reluctance to fund acquisitions by issuing shares. Equity has occasionally been used when requested by a seller or helpful in facilitating a particularly large transaction, but cash has remained the dominant acquisition currency. Despite the enormous portfolio expansion, the acquisition program has therefore created relatively little dilution for existing shareholders.

The available evidence also fits management’s description of paying fair prices rather than relying on bargains. Although the multiple varies by business, an acquisition completed at approximately 9–11 times EBITA produces an initial pretax return on the purchase price of roughly 9–11%.

That initial return may appear unremarkable in isolation, but it is only the starting point. If the acquired business grows EBITA at a high-single-digit rate through organic growth and margin expansion without requiring substantial additional capital, the return on the original investment compounds rapidly. Depending on the initial multiple, the rolling pretax return on the original capital deployed rises over time. Based on my estimates, HEICO reinvested approximately 122% of EBITA between 1994 and 2025 at an ROIIC of roughly 15%, resulting in an internal value compounding rate of about 18%—somewhat below the actual EBITA CAGR.

12. Financials: The Underlying Economics

12.1. Growth and dilution

HEICO’s financial history is the numerical result of the system described in the preceding chapters. The company combines recurring aftermarket demand, continuous product development, customer penetration, and acquisitions with high margins and relatively modest capital expenditure. Cash generated by the existing businesses is then reinvested in new products and acquisitions.

The long-term record is remarkable. When the Mendelson family assumed control in 1990, HEICO generated $26.2 million in revenue and $2.0 million in net income. By fiscal 2025, revenue had reached $4.49 billion and net income attributable to HEICO had increased to $690 million, corresponding to compound annual growth rates of approximately 16% and 18%, respectively, over 35 years.

Net income grew slightly faster than revenue, showing that HEICO created value through more than acquired sales. Higher-margin products, operating leverage, portfolio changes, and disciplined capital allocation gradually increased the profit generated from each dollar of revenue.

HEICO achieved this growth with comparatively limited reliance on new equity.

On a split-adjusted basis, the combined number of Common and Class A shares outstanding increased from approximately 71 million at the end of 1994 to around 139 million by the second quarter of fiscal 2026. Although the absolute count nearly doubled, average annual dilution was only about 2.2% over more than three decades.

Dilution was concentrated in the earlier years. Since approximately 2006, the total share count has increased by only about 19%, equivalent to less than 1% annually, while revenue and earnings expanded many times over. Most growth therefore translated into higher per-share value rather than being financed through repeated equity issuance.

HEICO has occasionally issued Class A shares for acquisitions and employee compensation, but the issuances remained modest relative to the company’s growth. Most expansion was funded by internally generated cash flow and conservatively used debt. Even the large Wencor acquisition involved only a relatively small equity component.

The visible change in share-class composition in 1998 should not be mistaken for dilution. HEICO introduced Class A Common Stock through a 50% stock dividend, dividing existing economic ownership between two share classes rather than raising capital. Overall dilution has been a relatively small drag on shareholder returns, particularly during the past two decades.

HEICO Common Stock carries one vote per share, while each Class A share carries one-tenth of a vote. Class A shares therefore provide acquisition currency that can be issued to sellers with less dilution of the Mendelson family’s voting influence than an equivalent issuance of Common Stock.

12.2. Volume growth, product development and acquisitions

HEICO’s revenue growth has two main sources. Existing businesses grow organically by developing products, increasing their share with current customers, and benefiting from stronger end-market demand. Acquisitions add new products, technical capabilities, customer relationships, and cash flows.

The organic component distinguishes HEICO from a roll-up dependent entirely on acquiring revenue. A new PMA part or repair may contribute little initially, but its commercial ramp-up continues over several years. Successive product cohorts overlap, while mature products remain in demand as long as the relevant aircraft, engine, or component remains in service.

The same principle applies within ETG. A company can win content on a new defense, aerospace, or space platform; increase its content on an existing system; or adapt a technology for an adjacent application. Revenue then follows the production and aftermarket life of the larger platform.

HEICO’s organic growth has historically come mainly from volume rather than price:

“Again, for us, our sales, our organic growth is driven primarily or nearly exclusively from volume increases as opposed to price increases, whereas certain other suppliers have price embedded in there.” — Eric A. Mendelson, Q3 2016 earnings call

This distinction matters, because a supplier can report 10% nominal growth through a 10% price increase without selling another unit or increasing customer penetration, while growth driven primarily by price is generally less sustainable than volume-driven growth.

R&D is central to this process. HEICO spent approximately $121 million on new-product research and development in fiscal 2025, equivalent to roughly 2.7% of revenue and broadly consistent with its historical rate. These costs were expensed through cost of sales rather than capitalized. Reported operating margins therefore already include meaningful investment in products that may generate revenue for many subsequent years.

Management has consistently treated this spending as part of the core growth model:

“Significant ongoing new product development efforts are continuing in both Flight Support and ETG as we continue to invest approximately 3% to 4% of each sales dollar into new product development. As we’ve told you many times, it is a basic driver of HEICO. We constantly spend money on research and development to develop new products and improve the existing products that we sell. And that’s a basic strategy that we will never give up.” — HEICO management, speaker unclear, Q2 2017 earnings call

Fiscal 2026 has so far continued the strong growth pattern. During the first six months, consolidated revenue increased by 20%, including organic growth of 18% in the second quarter. FSG generated first-half organic growth of 16%, while ETG grew organically by 12%. Both segments also benefited from recent acquisitions.

The current performance demonstrates the operating leverage available when demand is strong, but it should not be extrapolated automatically as a permanent growth rate. HEICO has experienced slower periods before, and individual markets and product lines will continue to fluctuate.

10.3. Cash conversion and capital intensity

HEICO’s margins are unusually high for a company that manufactures physical products and carries substantial inventory. This reflects the economic value of its products rather than manufacturing cost alone. Many HEICO components represent only a small share of the value of the aircraft, engine, missile, satellite, or medical system in which they operate, while reliability, availability, and certification matter far more to the customer than raw-material cost. This allows HEICO to earn gross margins in the 40% range while still offering meaningful savings relative to the OEM.

Acquisitions also affect reported margins through purchase accounting. HEICO allocates part of the purchase price to customer relationships, intellectual property, and other identifiable intangible assets. These assets are amortized through the income statement over their estimated useful lives, reducing reported operating income without an equivalent cash payment in the period.

Annual amortization is determined by acquisition accounting and does not necessarily reflect the economic deterioration of the assets. A customer relationship may strengthen after HEICO acquires a business even as the accounting asset is amortized mechanically. EBITA can therefore provide a useful view of current operating cash earnings, particularly when comparing acquired and organically developed businesses.

Neither measure should be used alone. EBIT is more conservative for reported profitability, while EBITA and cash flow help separate operations from noncash purchase-accounting charges. The full acquisition price, including goodwill, must still be included when calculating the return on invested capital.

The balance sheet shows how material this issue has become. At the end of fiscal 2025, HEICO carried approximately $3.66 billion of goodwill and $1.47 billion of identifiable intangible assets, together representing around 60% of total assets.

The company’s physical capital requirements remain modest. Fiscal 2025 capital expenditure was approximately $73 million, equal to only 1.6% of revenue and 7.5% of gross cash flow—operating cash flow before changes in working capital.

R&D and capital expenditure together amounted to approximately 4.3% of revenue. This provides a more complete view of the ongoing investment needed to support organic growth, although the accounting treatment differs: capital expenditure is recorded initially on the balance sheet and depreciated over time, while R&D is generally expensed immediately.

Inventory is the largest operating asset. HEICO held approximately $1.30 billion of inventory at the end of fiscal 2025, equivalent to nearly 29% of annual revenue. For FSG in particular, inventory is part of the customer proposition. The company develops thousands of relatively low-volume products and promises airlines, MRO providers, and distributors that required parts will be available when needed. A catalog has limited value if products are repeatedly out of stock.

Inventory therefore serves both operational and competitive functions. It protects customers from supply-chain disruption, supports rapid turnaround times, and allows HEICO to serve demand that is difficult to forecast by part number. The trade-off is that cash may remain tied up for long periods and some products may develop more slowly than expected.

Working-capital movements can consequently make annual cash conversion uneven. Rapid growth often requires additional inventory and receivables before the associated cash is collected. Slower inventory investment can produce unusually strong operating cash flow even when earnings growth is more moderate.

The long-term development illustrates both the absolute increase in working capital and its importance relative to the size of the business:

Working capital increased substantially in absolute terms as HEICO grew. As a percentage of revenue, however, it generally declined and has typically ranged around 30% to 40% since the mid-2000s.

HEICO’s strong margins translate into attractive cash generation. Between fiscal 1994 and fiscal 2025, gross cash flow—operating cash flow before changes in working capital—averaged 79.4% of EBITDA. Operating cash flow averaged 73.2% of EBITDA over the same period.

HEICO’s accounting earnings have historically converted into substantially more cash before working-capital movements. Between fiscal 1994 and fiscal 2025, gross cash flow averaged approximately 131% of net income. The persistent conversion above 100% mainly reflects noncash expenses, particularly amortization of acquired intangible assets, that reduce reported earnings without an equivalent current-period cash outflow.

HEICO has historically allocated most available capital to acquisitions, including earn-out payments and purchases of noncontrolling interests. Dividends have remained modest, while distributions to noncontrolling interests represent subsidiary dividends paid to minority owners and should reduce free cash flow.

Internally generated cash funded a meaningful portion of capital deployment in most years. Large acquisitions temporarily interrupt this pattern. Wencor pushed acquisition spending above $2.5 billion in fiscal 2023 and leverage to a historical peak, after which HEICO began reducing debt through cash flow from the enlarged group.

The chart distinguishes between definitions of debt. Interest-bearing net debt includes conventional borrowings less cash. The broader financial net-debt measure also includes redeemable noncontrolling interests and acquisition-related earn-out liabilities. These are not conventional bank debt, but they represent potential future cash obligations arising from acquisitions.

2.4. (Redeemable) noncontrolling interests

Redeemable noncontrolling interests (NCI) are an important accounting feature of HEICO’s acquisition model. The company often acquires control while allowing the seller or management team to retain a minority stake. Because HEICO controls the subsidiary, it consolidates 100% of its revenue, EBITDA, assets, and liabilities even though part of the economic interest remains with the minority owner.

Some minority owners also receive put rights allowing them to require HEICO to purchase their remaining shares in the future. The redemption price is generally based on fair value or a formula using the subsidiary’s future earnings. Because the eventual cash payment is outside HEICO’s sole control, the interest is classified between liabilities and permanent shareholders’ equity as redeemable noncontrolling interests.

This presentation can understate acquisition-related leverage if an investor focuses only on interest-bearing net debt. Some serial acquirers include comparable obligations directly in adjusted net debt; HEICO does not classify redeemable NCI as conventional debt, so investors must add it when constructing a broader measure of financial obligations. At the end of fiscal 2025, the balance was $467.4 million.

The annual movement can be understood through the following reconciliation:

• Comprehensive income attributable to redeemable NCI increases the balance by the minority owners’ share of subsidiary earnings and other comprehensive income. HEICO includes 100% of subsidiary profit in consolidated net income and then deducts the portion attributable to all noncontrolling interests to arrive at net income attributable to HEICO. This allocation is not a cash outflow.

• NCI assumed in acquisitions represents the initial recognition of a minority stake retained by a seller when HEICO acquires control. The recognition is part of purchase accounting, creates no immediate expense, and enters the calculation of goodwill. Because the seller retains the interest, the addition is generally noncash at the acquisition date.

• Adjustments to the redemption amount remeasure the position when the estimated amount HEICO may ultimately pay changes. HEICO carries redeemable NCI at the higher of its accumulated carrying amount and estimated redemption amount. Increases are generally recorded directly against retained earnings and create no immediate cash outflow.

• Distributions to NCI reduce the balance when subsidiaries pay cash dividends to minority owners. These distributions are financing cash outflows and should be included in total capital returned to minority owners rather than acquisition spending itself.

• Acquisitions of NCI reduce the balance when HEICO subsequently purchases part or all of a minority owner’s remaining stake. The purchases are treated as equity transactions; the related cash payment appears in financing activities and should be included in total acquisition-related capital deployment.

• Reclassifications, capital contributions, and other movements capture changes in the contractual status of minority interests, cash contributed by minority owners, foreign-currency effects, and other subsidiary-level equity movements.

In fiscal 2025, the balance increased from $366.2 million to $467.4 million. Comprehensive income attributable to redeemable NCI added $40.4 million, newly retained minority interests added $27.9 million, and remeasurement of expected redemption amounts added $72.4 million. These increases were partly offset by $36.6 million of distributions and $5.8 million spent acquiring minority interests.

The $101.2 million increase in the reported balance did not represent an equivalent current-year cash outflow. Most of it reflected earnings allocated to minority owners, newly assumed interests, and upward remeasurement of future redemption obligations. The cash burden arises gradually through distributions and when HEICO eventually purchases the remaining stakes.

13. Moats and Risks

13.1. Moats: the durable edge

HEICO’s FSG moat arises from the interaction of regulatory approvals, engineering knowledge, product breadth, availability, safety performance, and decades of customer trust. ETG’s moat rests primarily on qualified positions inside complex, long-lived, mission-critical systems. At the group level, HEICO adds another advantage through its decentralized operating model, ownership culture, and reputation as a permanent home for entrepreneurial businesses.

1. Regulatory and engineering know-how

   A new supplier cannot simply manufacture an aircraft component and offer it to an airline. The part must be supported by an approved design, produced under an accepted quality system, accompanied by the required documentation, and installed within a tightly controlled airworthiness framework.

   Obtaining one approval is possible. Building an organization capable of repeatedly identifying opportunities, reverse-engineering products, substantiating equivalency, navigating the FAA process, maintaining production quality, and supporting continued operational safety is considerably harder.

   HEICO accumulated this capability over decades and across thousands of products. Its advantage is not merely the approval attached to an individual part but the institutional knowledge required to repeat the process at scale.

   The same applies to repairs. Developing DER-approved repair data requires technical data, engineering judgment, regulatory acceptance, testing capability, and a repair station capable of executing the work consistently. These capabilities take time to build and cannot be replicated merely by hiring a small engineering team.

   Regulation slows HEICO, but it slows a new entrant much more. Once the engineering organization, approval history, and quality system are established, the regulatory framework shifts from an obstacle to a barrier protecting the approved supplier.

2. A safety record that cannot be replicated overnight

   Airlines operate where the downside from failure is enormous. An employee approving an alternative component may create meaningful savings for the airline, but that individual bears career risk if the part later causes a problem. Staying with the OEM is therefore often the safer institutional decision, even when it is much more expensive.

   HEICO has spent more than three decades reducing that perceived risk. The HEICO Parts Group has shipped more than 90 million parts without a Service Bulletin, Airworthiness Directive, or in-flight shutdown attributed to its products. Its Lufthansa relationship, successful operating history with major airlines, quality systems, and participation in airline failure investigations provide further external validation.

   A new competitor can obtain FAA approval; it cannot obtain decades of safe operating history at the same time.

   This creates a reputation-based switching cost. Qualifying the first HEICO product may require considerable technical work and internal persuasion. Once an airline has approved and operated the part successfully, confidence in HEICO makes the next approval easier. The customer also has little reason to return to a more expensive OEM part that offers no corresponding operating benefit.

   HEICO already serves virtually every major airline. Its organic opportunity increasingly lies in selling more products to existing customers rather than finding new customer names. Each successful product makes the next approval easier and expands the maintenance events in which HEICO can participate.

3. Scale economies shared with customers

   HEICO’s customer proposition begins with price, but the moat comes from how the company uses that advantage.

   A new HEICO PMA part has historically entered the market at a discount of roughly 30–40% to the OEM equivalent. HEICO then generally raises prices only modestly, often in line with its own cost inflation, while OEM list prices can increase much faster. Over a long product life, the discount can therefore widen to 50%, 60%, or even 70%.

   HEICO could try to capture more of this value for itself. Instead, management deliberately leaves a substantial share of the benefit with the airline. The customer saves money, HEICO earns attractive margins, and the relationship generates additional volume and new product opportunities.

   This resembles Nick Sleep’s concept of “scale economies shared.” HEICO’s growing engineering base, catalog, and customer network make the company more valuable, but management does not capture every benefit through price. A meaningful share is passed back to customers, strengthening loyalty and encouraging airlines to bring HEICO more products they want developed.

   HEICO’s restrained price increases are therefore not evidence of weak pricing power; they are a deliberate reinvestment in customer trust and future volume.

   The company applies similar restraint toward OEMs. HEICO has historically targeted only a minority share—often around one-third—of the market for an individual part and generally avoids life-limited engine components that form the most valuable part of the OEM aftermarket.

   The OEM retains most volume at a high price, while HEICO earns attractive economics on a smaller share and creates substantial airline savings. This reduces the OEM’s incentive to cut prices across the entire installed base merely to eliminate HEICO’s position.

   The result has been rational coexistence rather than permanent price warfare. HEICO leaves value with both customers and OEMs, allowing it to repeat the model across thousands of products.

4. Product breadth, distribution and availability

   An approved product creates little value if it is unavailable when an aircraft needs it. HEICO’s catalog, inventory, repair stations, and distribution infrastructure therefore reinforce one another.

   HPG develops replacement parts; HRG can use those parts in component repairs; HDG supplies HEICO, Wencor, and third-party products to customers worldwide; and SPG and ETG provide additional manufacturing capabilities. Wencor added more PMAs, repair capabilities, logistics infrastructure, e-commerce, and customer relationships, bringing the combined catalog toward 20,000 PMAs.

   A small PMA competitor may be capable of developing a good part. Offering airlines a broad catalog, global customer support, inventory availability, repair capacity, distribution infrastructure, and a long record of reliable delivery is much harder.

   Catalog breadth also lowers the customer’s effective integration cost. An airline or MRO does not want to qualify, monitor, and manage dozens of marginal suppliers to save money on isolated products. HEICO can offer meaningful savings across a growing share of maintenance spending through an established commercial and quality relationship.

   Availability can create permanent share gains. A customer may initially approve a HEICO part because the OEM cannot deliver it. Once the alternative has performed successfully and remains cheaper, the customer has little reason to switch back when OEM supply normalizes.

   The moat is therefore the system rather than any single activity. Engineering creates the product; regulatory expertise makes it approved; inventory makes it available; distribution places it with the customer; repair operations provide another route to market; and service history makes the next product easier to sell.

5. Long product cycles and a recurring installed base

   Commercial aircraft, engines, and aerospace systems remain in service for decades. A platform can generate replacement-part and repair demand long after initial production ends.

   This gives HEICO an unusually long period in which to recover engineering and approval costs. A PMA part may take years to identify, develop, approve, and gain meaningful customer acceptance. Once established, however, it can generate recurring demand across many maintenance cycles and potentially for decades.

   The installed base also renews demand mechanically. Every flight hour, takeoff, landing, pressurization cycle, and engine run creates wear. Airlines can defer some discretionary spending, but they cannot indefinitely avoid maintenance required to preserve airworthiness.

   The durability of the demand stream matters more than rapid initial adoption. HEICO can in-vest in a part today, build airline acceptance gradually, and benefit throughout the remaining life of the underlying platform.

   This also increases the value of the existing catalog. A new entrant must do more than develop one competing product; it needs enough approved products, customer relationships, and inventory to matter to airline procurement and maintenance organizations. Replicating HEI-CO’s portfolio and service history would require many years—potentially decades—even with sufficient capital.

6. Mission-critical positions within long-lived platforms

   ETG’s moat follows a different mechanism. Its companies often supply small components embedded in much larger aircraft, missiles, targeting systems, satellites, ships, medical devices, and communications platforms.

   A component may represent only a tiny fraction of the total system cost, but its correct performance can be essential. Replacing it may require redesigning, qualification, testing, documentation, and customer approval. The potential savings from switching suppliers are often im-material besides the cost, delay, and technical risk of changing a component that already works.

   This is particularly powerful in defense and space. A failed satellite component may be impossible to repair after launch, while a component inside a missile-targeting, electronic-warfare, or aircraft-power system can be essential to the entire platform. Customers therefore place more weight on reliability, qualification, and continuity than on a small reduction in the component price.

   Many ETG products must also operate in harsh environments involving radiation, extreme temperatures, vibration, high voltage, or demanding electromagnetic conditions. The required technical knowledge is specialized, while annual production volumes may be too small to attract larger competitors.

   A defense prime could theoretically reproduce many of these components. In practice, it would need to replicate numerous small-batch products individually and assume the associated technical and schedule risk. Vertical integration is unattractive when the component represents only a small share of the overall system.

   Once designed into a long-lived platform, an ETG company can remain the supplier through production, upgrades, spares, and sustainment for many years.

7. Decentralization reinforced by ownership

   HEICO’s operating model preserves the advantages of a small entrepreneurial business inside a much larger group.

   Subsidiary presidents remain close to products, customers, engineers, and production. They can decide without waiting for a distant corporate hierarchy to understand a specialized repair procedure, microwave component, or customer program. Retained founder ownership and performance-based incentives keep managers economically exposed to the outcome.

   Headquarters focuses on areas where centralization creates value: capital allocation, acquisitions, financial controls, incentives, and the balance sheet. Operating decisions remain primarily with the people who possess the relevant information.

   The model supports faster decisions, protects customer relationships, and reduces the risk that an acquired niche business loses the characteristics that made it valuable. It also allows HEICO to own more than one hundred businesses without building a corporate organization that tries to operate every product line directly.

   Family ownership provides the long time horizon behind this structure. The Mendelson’s’ principal economic exposure comes from their HEICO shares, so the family benefits far more from durable per-share value creation than from maximizing annual compensation, acquisition volume, or short-term reported earnings.

   Employee ownership extends part of that alignment beyond the family. HEICO has created substantial wealth for many employees through its retirement plans, giving people throughout the organization a direct economic interest in product quality, customer satisfaction, inventory discipline, and long-term cash generation.

   Competitors can copy the language of decentralization. Replicating the incentives, trust, acquired-management network, and multi-decade operating history is far more difficult.

8. The seller proposition and acquisition reputation

   HEICO also has an M&A moat.

   The company offers founders something many strategic buyers and private equity firms cannot: liquidity without necessarily giving up the company’s identity, employees, autonomy, or future participation.

   A seller can monetize most of the family’s wealth, remain as president, retain a minority interest, and continue operating inside a permanent home. HEICO does not normally intend to resell the business after a predetermined holding period and is less dependent on aggressive restructuring or immediate cost synergies to justify the purchase price.

   The proposition does not appeal to every seller. An owner focused exclusively on the highest immediate price will often choose another bidder. Founders who care about employees, legacy, independence, and continued participation in future growth may prefer HEICO even when it does not submit the highest offer.

   HEICO’s history makes the promise credible. Potential sellers can speak with entrepreneurs who joined the group years earlier and ask whether management retained autonomy, employees were treated fairly, and the buyer behaved as promised.

   Each successful acquisition strengthens the proposition for the next. The best founders are more likely to select a buyer that preserves autonomy, and those founders continue running the acquired businesses, making decentralization more effective. Their subsequent experience becomes another reference for future sellers.

   This creates proprietary or less competitive deal flow and partly offsets HEICO’s refusal to match the highest private equity valuations. The seller proposition may be the hardest part of the acquisition model for another public company to replicate because it requires years of consistent behavior before the market believes it.

10.2. Risks: what could break (or delay) the compounding story

1. A serious quality or safety failure

   Quality is the foundation of the entire FSG proposition. A serious failure attributed to a HEICO product could damage customer trust, trigger regulatory action, create product-liability exposure and make airline employees far less willing to approve additional alternatives.

   The impact could extend beyond the product involved. HEICO sells under a wider reputation built across millions of installed parts. A highly visible incident could encourage OEMs to question PMA safety more broadly and give airlines, lessors and maintenance providers a reason to reconsider their approval policies.

   HEICO’s safety record and willingness to overspend on quality materially reduce this risk. They cannot eliminate it. Aerospace products operate in demanding environments, and a single event can have consequences disproportionate to the revenue generated by the component.

   The same principle applies within ETG. Its products can perform critical functions inside missiles, satellites, aircraft and medical equipment. Reliability is part of the moat precisely because the cost of failure is so high.

2. The equilibrium with OEMs could break

   FSG has benefited from rational competition with OEMs. HEICO usually targets a minority share, focuses on selected expendables and repairables and avoids many of the life-limited parts that form the core of engine OEM economics.

   This balance is commercially sensible for both sides. The OEM retains most of the market at a high price, while HEICO earns attractive returns on a smaller share.

   However, this equilibrium is not guaranteed to last forever. As HEICO becomes larger and wins more airline spending, OEMs may view the company as a greater strategic threat.

   An OEM could respond through lower prices, bundled service agreements, more restrictive long-term contracts, greater control over repair channels, improved availability, aggressive warranty positioning or stronger commercial pressure on airlines and lessors. It could also target the specific products generating the most attractive economics for HEICO.

   A broad OEM price reduction would hurt HEICO, but it would also reduce the OEM’s own aftermarket profit across the much larger share it retains. That economic deterrent has historically limited destructive competition. The risk increases if OEMs conclude that protecting long-term control of the aftermarket is worth a period of lower profitability.

3. PMA approval does not guarantee commercial access

   The regulatory right to sell an approved part does not mean that the part will reach the maintenance event.

   Lease agreements can prohibit or restrict PMA usage. OEM contracts and power-by-the-hour agreements may create financial penalties or remove warranty, pricing or technical-support benefits. Airlines that outsource maintenance can lose control over material selection, particularly when the maintenance provider is also the OEM.

   These barriers are especially important for younger aircraft and engines. Operators often remain inside OEM warranty and service ecosystems during the early years, while lessors prioritize transferability and residual value. HEICO’s opportunity generally becomes larger as the platform matures, warranties expire and maintenance costs become more important.

   The structure limits FSG’s addressable market even when the technical and economic proposition is strong. HEICO has made progress with airlines and lessors, but these restrictions will not disappear completely.

   Patents create a related limitation. Reverse engineering is legitimate when a product is lawfully obtained and the replacement design is independently developed, but HEICO cannot infringe valid intellectual property or use confidential OEM data. New platforms may remain protected for years, delaying the point at which economically attractive alternatives can be developed.

   HEICO does not need access to every part, and the size of the overall installed base provides many alternative opportunities. Still, changes in intellectual-property protection, contracting practices or maintenance-channel control could slow new product development and penetration.

4. Commercial aviation remains cyclical

   HEICO is more resilient than a conventional aircraft manufacturer, but FSG is still exposed to flight activity.

   When aircraft fly fewer hours and cycles, components wear more slowly, repairs are deferred and airlines consume fewer parts. During COVID, the immediate volume decline overwhelmed the longer-term benefit of airlines becoming more focused on cost. Similar disruptions—from recessions, pandemics, geopolitical events or sudden travel restrictions—could recur.

   Financial pressure can help HEICO gain approvals and market share over time, but that does not prevent near-term earnings declines. Qualifying new products takes time and does not immediately compensate for a sharp reduction in industry volumes.

   Aircraft retirements create another form of exposure. A retired aircraft no longer produces aftermarket demand. HEICO spreads its catalog across many products and platforms, but engineering investment tied to a specific aircraft or engine can become less valuable if that installed base declines faster than expected.

   The current shortage of new aircraft is extending the lives of older fleets and supports HEICO. Over the very long term, a faster renewal cycle, a major technology transition or the retirement of an important platform could reduce demand for parts associated with the older generation. HEICO must continuously develop products for newer platforms to replenish the catalog.

5. Acquisitions may become larger, more expensive and harder to execute

   HEICO’s historical growth has relied heavily on acquisitions. The opportunity set remains fragmented, but competition from private equity firms and strategic buyers has increased the prices of attractive aerospace and defense suppliers.

   HEICO’s seller proposition can overcome a price disadvantage in selected cases. It cannot win every transaction. Some owners will choose the highest bidder, and the number of businesses available at returns consistent with HEICO’s framework may vary considerably from year to year.

   The company is also becoming too large for a small acquisition to move consolidated results meaningfully. HEICO can complete more deals, pursue larger targets or accept a lower acquisition contribution. Each option brings a trade-off.

   Completing more transactions increases the burden on due diligence and monitoring. Pursuing larger businesses increases the financial consequence of a mistake. Wencor demonstrated that HEICO can finance and manage a transaction far larger than its traditional bolt-ons, but it also changed the scale of the risk. A disappointing $20 million acquisition can be absorbed. A poor outcome on a transaction exceeding $2 billion would affect the entire group.

   Paying a higher multiple can still create substantial value if the acquired company grows organically for many years. It also leaves less room for disappointment. The danger is that HEICO begins underwriting optimistic growth or synergies because its increased size requires larger deals.

   An inability to find suitable acquisitions would not threaten the existing businesses, but it would reduce the company’s overall growth rate. Conversely, abandoning price discipline merely to maintain historical growth would be far more damaging.

6. Decentralization becomes harder with scale

   HEICO’s decentralized structure is a strength only when the local management teams are capable, trustworthy and properly incentivized.

   The group has accumulated more than one hundred businesses across different technologies, regulatory regimes and end markets. Corporate management receives limited public disclosure from individual subsidiaries, and outside shareholders depend heavily on the parent company’s controls and judgment to identify problems.

   As the organization grows, variations in performance and culture are inevitable. A local business can make poor investments, mismanage inventory, lose a customer, weaken quality controls or fail to comply with export, cybersecurity or regulatory requirements.

   Decentralization also duplicates some administrative functions and captures fewer immediate cost synergies than a centralized structure. HEICO deliberately accepts that inefficiency to preserve local knowledge and accountability. The trade-off becomes less attractive if corporate oversight fails to detect problems early.

   The model works best when HEICO buys the right business and retains the right people. If the initial selection is wrong, leaving the company autonomous provides fewer tools for correcting the problem afterward.

   The greatest risk is that decentralization survives as a slogan while the underlying incentives change. If headquarters begins rewarding revenue growth, deal volume or short-term margins rather than cash returns, quality and customer relationships, the visible structure may remain intact while the operating system gradually deteriorates.

7. Succession and dependence on the Mendelson system

   HEICO’s culture and capital allocation process remain closely associated with the Mendelson family. The long-term orientation, acquisition discipline, willingness to walk away and treatment of customers and employees have been reinforced personally for decades.

   The transition to Eric and Victor Mendelson provides continuity, and both have spent most of their careers inside the business. Nevertheless, the system will eventually have to extend beyond the current generation.

   Capital allocation remains centralized. Large acquisitions, financing decisions and the selection of subsidiary leaders depend heavily on judgment rather than a mechanical formula. These capabilities are difficult to transfer through a written handbook.

   As the group grows, the direct personal relationship between the family and each subsidiary also weakens. New managers may understand the visible practices—autonomy, retained minority ownership and limited central overhead—without fully understanding the reasons behind them.

   Family control reduces the risk of pressure from short-term shareholders, but it also gives minority shareholders limited influence if capital allocation or governance deteriorates. HEICO’s alignment has historically been excellent; the ownership structure makes the quality of the controlling owners particularly important.

8. Defense and space are political and program-dependent

   ETG reduces HEICO’s dependence on commercial aviation, but it introduces different risks.

   A significant portion of demand ultimately depends on U.S. government and allied defense spending. Budgets can rise or fall, procurement priorities can change and funding can move between programs. A broad increase in defense spending does not benefit every product equally.

   Program delays, contract protests, technical changes, customer inventory adjustments and shifts in production schedules can create volatility at the subsidiary level. A product may be designed into a platform for many years, but the value of that position depends on the platform proceeding as expected.

   Space activity is similarly uneven. Satellite constellations can be delayed, redesigned, reduced or canceled. Launch schedules, funding conditions and customer liquidity can move demand between reporting periods.

   Export restrictions and international trade controls add another layer of risk. Many ETG products have military or dual-use applications, making compliance essential and potentially limiting the customers or countries the businesses can serve.

   The breadth of ETG’s product portfolio reduces dependence on any single program, but it does not make the segment immune to political and program-level decisions.

14. Valuation

Since 1990, HEICO’s share price has compounded at approximately 20% per year. Over roughly 36.5 years, this translates into a total return of around 67,241%—turning an initial $10,000 investment into approximately $6.73 million (excluding dividends).

However, HEICO’s exceptional long-term return was anything but smooth. The stock went through several extended periods in which shareholders earned little or no return, while declines of 10-15% occurred in most years. More severe declines exceeded 30%. The most extreme episode came between the late 1990s and early 2000s, when the shares declined by more than 80% from their previous high and required several years to fully recover.

Interestingly, HEICO’s Class A shares have historically traded at a meaningful discount to the common shares, even though the two share classes carry the same economic rights and differ primarily in voting power. Each HEI common share carries one vote, while each HEI.A share carries one-tenth of a vote. For most minority investors, that additional voting power has limited practical value given the Mendelson family’s effective control of the company. As long as the discount remains substantial, HEI.A therefore offers the more attractive economic exposure to the same underlying business.

At first glance, HEICO looks exceptionally expensive at a forward P/E of more than 50x. However, the earnings multiple is distorted by substantial non-cash amortization of intangible assets created through acquisitions. On an EV/EBITDA basis, which is less affected by these acquisition-related charges, the combined company trades at roughly 26–27x forward EBITDA—still a clear valuation premium.

The discount of the Class A shares makes their implied valuation more attractive. If net debt and other enterprise-value adjustments are allocated proportionally based on the number of shares outstanding, HEI.A trades at approximately 27.6x LTM EBITDA and 24.2x NTM EBITDA, compared with materially higher implied multiples for the common shares. This allocation is illustrative rather than a conventional company-level valuation measure, but it highlights the economic benefit of buying the same underlying business through the discounted Class A shares.

As HEICO does not fund acquisitions with equity, I’m not expecting meaningful dilution from rising share count. That simplifies the return framework. You can think about expected returns as being driven by two levers:

• Earnings growth, and

• Multiple change (rerating or derating).

Earnings growth is where the 3-Engines model becomes practical. Long-term, earnings growth is primarily a function of how much capital HEICO can reinvest and how attractive the returns on that reinvestment are. Mathematically, that relationship is simple:

Earnings growth (IVCR) ≈ Reinvestment rate × ROIIC

If a company can reinvest large amounts of capital at high incremental returns, value creation compounds quickly. A business earning 20% on incremental capital and reinvesting 100% of earnings compounds intrinsic value at roughly 20%. A business earning 25% and reinvesting 100% compounds at 25%. Even combinations that sound less heroic still lead to very attractive outcomes: 30% ROIIC with an 80% reinvestment rate still implies roughly 24% value compounding, while 35% ROIIC with a 60% reinvestment rate still gets you to 21%. That is the real prize in this model. If the machine works, the business can outrun a lot of valuation noise over time.

The following matrix visualizes exactly that. The columns show different ROIIC assumptions; the rows show different reinvestment rates. Each cell shows the implied earnings growth rate (IVCR). The red area highlights scenarios with ≤10% earnings growth.

The second matrix shows the annualized tailwind/headwind from multiple change, depending on (a) the target multiple and (b) how many years it takes for the rerating to happen. If the multiple stays flat, the multiple contribution is ~0%. If the multiple expands (or contracts), it adds (or subtracts) from annual returns. I use the 27x Forward EV/EBITDA multiple as a baseline entry valuation multiple.

For instance, assuming an entry multiple of 27x EBITDA, a de-rating to 17.5x creates a huge one-year headwind of 35%, but over ten years that annualized headwind falls to 4.2%.

To make this tangible, here’s one example (not a base case):

Assume the reinvestment rate comes in at 100% over the next 10 years while HEICO can earn 15% ROIIC. That would imply:

Earnings growth (IVCR) = 100% × 15% = 15% p.a. (before any multiple change)

Now assume HEICO’s EV/EBITDA moves from 27x to 17.5x over 10 years. That multiple expansion would add roughly ~4% p.a. as a rerating headwind. Combined, that would imply an annual return of roughly:

~15% (earnings growth) – ~4% (multiple tailwind) ≈ ~11% p.a.

The point is not that exactly this scenario will materialize. The point is that HEICO’s setup creates a wide range of plausible outcomes, and you can stress-test your own assumptions transparently. Some investors will anchor on conservative reinvestment and ROIIC assumptions and assume limited rerating.

I’m deliberately not selecting a base-case scenario here. The matrices are meant to let each reader decide what they view as realistic.

Assuming HEICO’s EV/EBITDA multiple gradually contracts to 17.5x over the next ten years, the resulting valuation headwind would be approximately 4% per year. If we also assume annual dilution of around 1%, HEICO would need to compound its underlying earnings by roughly 17% per year to generate a 12% annualized shareholder return. HEICO has historically relied very little on equity issuance to fund acquisitions, so I do not expect substantial dilution. Nevertheless, I assume annual dilution of approximately 1% to remain conservative.

That is a demanding assumption, but it does not appear unrealistic in light of HEICO’s historical performance and the multi-year industry tailwinds currently supporting the business. I have therefore initiated a small starter position and plan to add further whenever the stock trades below 20x EV/EBITDA.

Selected Sources

This Deep Dive draws on company filings, management commentary, regulatory materials, industry reports, technical publications, and secondary sources. The list below contains the principal sources used throughout the analysis. Unless otherwise indicated, calculations, estimates, and charts are based on these materials and Slow Compounding’s own analysis.

Direct quotations in the text retain the name of the speaker and the relevant earnings call, interview, conference, or publication.

HEICO: Company Filings and Management Commentary

HEICO Corporation. Annual Reports and Forms 10-K, fiscal years 1990–2025.

HEICO Corporation. Forms 10-Q, quarterly earnings releases, and other SEC filings, selected periods through the second quarter of fiscal 2026.

HEICO Corporation. Quarterly earnings-call transcripts, third quarter of fiscal 2010 through the second quarter of fiscal 2026.

HEICO Corporation. Definitive Proxy Statements, selected years, including the 2026 Proxy Statement.

HEICO Corporation. Press releases, acquisition announcements, and historical company materials, selected years.

HEICO Corporation. Wencor acquisition materials, regulatory filings, and management commentary, 2023–2026.

Mendelson, Victor H. Presentation at the Gabelli Funds 30th Annual Aerospace & Defense Symposium, September 2024.

Mendelson, Laurans A., Eric A. Mendelson, and Victor H. Mendelson. Forbes interview, 2020.

Mendelson, Victor H. Fernway Insights interview, 2022.

British Airways and HEICO Aerospace. “British Airways Enters Into a Strategic Alliance With HEICO Aerospace.” May 3, 2007.

HEICO Corporation and American Airlines. Materials relating to the joint venture for the development and sale of FAA-approved replacement parts, 2001.

HEICO Corporation and Lufthansa Technik. Company materials and management commentary relating to their strategic partnership and Lufthansa Technik’s investment in HEICO Aerospace, selected years.

Commercial Aviation, Fleet Development, and the Aerospace Value Chain

International Air Transport Association. Global Outlook for Air Transport, June 2025.

International Air Transport Association. The Global Commercial Aircraft Fleet, August 2025.

International Air Transport Association. Air Passenger Market Analysis and related economic and fleet publications, selected editions.

International Air Transport Association. “More Aircraft Are Leased Than Owned by Airlines Globally.”

Airbus. Global Market Forecast 2025–2044.

Boeing. Commercial Market Outlook 2025–2044.

Oliver Wyman. Global Fleet and MRO Market Forecast 2025–2035.

McKinsey & Company. “Aviation Value Chain: Strong Recovery Brings Profitability into View.”

McKinsey & Company. “A Better Approach to Airline Costs.”

McKinsey & Company. “The Economics of an Airline Flight.”

Wipro. From Chaos to Harmony: The Future of Airline Disruption Management.

AirNav Radar. “Record Day in the Skies: Over 24,000 Flights Tracked Simultaneously.”

Reuters. Reporting on Rolls-Royce’s UltraFan development program and estimated investment requirements, February 2026.

TransDigm Group. Investor Day presentations and supporting industry materials, selected editions.

Regulation, Airworthiness, and Maintenance

International Civil Aviation Organization. Annex 8: Airworthiness of Aircraft, together with related international standards and recommended practices.

Federal Aviation Administration. Title 14 of the Code of Federal Regulations, including Parts 21, 43, 121, and 145.

Federal Aviation Administration. Regulations, orders, advisory circulars, and guidance governing type certification, production approvals, Parts Manufacturer Approval, maintenance, repair stations, and approval for return to service.

Federal Aviation Administration. Special Airworthiness Information Bulletin NE-08-40: Approved Replacement Parts for Type-Certificated Aircraft, 2008.

European Union Aviation Safety Agency. Easy Access Rules for Initial Airworthiness and Environmental Protection, including Part-21.

European Union Aviation Safety Agency. Easy Access Rules for Continuing Airworthiness, including Part-M, Part-ML, CAMO, CAO, Part-145, Part-66, and Part-147.

United States and European Union. Bilateral Aviation Safety Agreement and applicable Technical Implementation Procedures.

Wirths, Oliver. Doctoral dissertation on the commercial aircraft value chain, aircraft lifecycles, and the maintenance, repair, and overhaul industry, 2019.

CFM International. “Lufthansa CFM56-5C Engine Achieves 100,000 Flight Hours.”

Leeham News and Analysis. “Bjorn’s Corner: New Aircraft Technologies, Part 49 — Engine Maintenance.”

Construction Physics. Technical essays on aircraft engines, aerospace manufacturing, and the economics of complex industrial production.

PMA Parts, DER Repairs, and the Independent Aftermarket

International Air Transport Association. Alternative Parts webinar and airline survey, November 2025.

International Air Transport Association and CFM International. Agreement on Engine Maintenance Key Principles, 2019.

CFM International. Conduct Policies covering warranties, servicing, technical support, repairs, licensing, and contracting, following the 2018 agreement with IATA.

Modification and Replacement Parts Association. Review of Airworthiness Directives involving OEM and PMA parts on transport-aircraft engines, covering the period from 1992 onward.

FlightGlobal. “Sum of the Parts.” 2007.

Royal Aeronautical Society. Materials and industry commentary from “The Great PMA Debate.”

Federal Aviation Administration. PMA approval guidance and materials relating to identicality, licensing agreements, and tests and computations.

Federal Aviation Administration and European Union Aviation Safety Agency. Guidance governing the acceptance of FAA-approved PMA articles within the European regulatory system.

British Airways, HEICO Aerospace, and related industry publications. Materials concerning British Airways’ adoption of PMA parts and its strategic alliance with HEICO, 2007.

• Shopee is still growing GMV at close to 30% while several of the investments that weighed on margins over the past year are already showing improving unit economics, and revenue growth has continued to accelerate.

• Monee continues to expand its loan book at more than 60%.

• And Garena is still generating extraordinary cash flows from Free Fire in its ninth year.

Garena

Garena remains Sea’s cash engine. Bookings increased 15% year-over-year to $764 million, while GAAP revenue grew 34% to $747 million, and adjusted EBITDA increased 17% to $430 million, equivalent to roughly 56% of bookings.

The sequential comparison looks less impressive. Q1 bookings were $931 million and adjusted EBITDA was $574 million, so Q2 represents a meaningful step down from an exceptionally strong first quarter. But I would focus more on the year-over-year development and on bookings rather than GAAP revenue. Revenue recognition can lag the underlying monetization of the game portfolio, while bookings are a better indication of what players are currently spending.

The remarkable part remains Free Fire. The game is now in its ninth year and still attracts more than 100 million average daily active users globally. Very few mobile games ever reach that scale and even fewer sustain it for this long. According to the management team, Sea continues to refresh the core game with new content, local campaigns and collaborations rather than treating Free Fire as a title to harvest.

At the same time, management continues to work on reducing Garena’s dependence on a single franchise. Two newly announced mobile titles, Palworld Online and Monster Hunter Outlanders, expand the portfolio into new genres and globally recognized IP. Management expects the latter to launch across several of Garena’s familiar markets, including Southeast Asia, Latin America and Taiwan.

Shopee

GMV reached another record of $38.3 billion, up 28% year-over-year, while gross orders increased 27% to 4.2 billion. This was the eighth consecutive quarter of sequential GMV growth. Revenue reached $5.6 billion, and adjusted EBITDA increased 12% year-over-year to $255 million.

What I find particularly encouraging is that growth remains broad-based. Average monthly active buyers increased 18%, purchase frequency increased 8%, and average monthly new active buyers grew more than 35% year-over-year.

Monetization

Shopee’s revenue continues to grow significantly faster than GMV.

As the chart shows, revenue growth accelerated to 48.2% year-over-year in Q2, compared with GMV growth of (only) 28%. Marketplace revenue reached $4.9 billion, up 49%, while the higher-margin core marketplace revenue (i.e. primarily transaction fees and advertising) increased an even stronger 66% to $4.3 billion.

Q2 marked the fifth consecutive quarter in which Shopee's year-over-year revenue growth rate accelerated, reaching its highest level since Q2 2022. That is particularly impressive given that Shopee is operating from a materially larger revenue base today than four years ago. In absolute terms, Shopee added almost $1.8 billion of revenue year-over-year in Q2, the largest absolute quarterly revenue increase in its history.

The take-rate came in at almost 13% of GMV, up materially from the levels of only a few years ago. Keep in mind that my definition here differs from Sea's own reported take rate. I only include marketplace revenue, whereas Sea uses total Shopee revenue in its calculation. I think my definition is the more meaningful measure: given that product revenue, where Sea acts as the seller itself and holds the inventory, is a structurally lower-margin business and should, in my view, not be included when assessing the monetization of the marketplace.

Advertising remains a particularly attractive growth lever. Ad revenue grew more than 70%, while the advertising take rate increased by more than 90 basis points year-over-year. The number of ad-paying sellers increased around 45%, and average ad spend per seller grew more than 15%.

Logistics

Several of the most important highlighted comments in the call related to logistics and fulfillment.

In Indonesia, order volumes using instant delivery increased around 80% year-over-year, while the cost per order declined around 20%. Fulfillment volumes increased more than 20% sequentially. In some markets, more than half of fulfilled parcels now arrive the next day, and Shopee said listings moved into fulfillment experienced an average order uplift of more than 20% in Southeast Asia.

Importantly, Sea is pursuing fulfillment in a relatively CapEx-light way. They said that they generally rent fulfillment centers rather than owning the land and buildings. Management also said fulfillment economics continue to improve as utilization rises, operating processes are optimized, and fulfillment becomes more tightly integrated with SPX Express, Shopee’s logistics network.

Shopee VIP

Over time, Shopee VIP could become a much more meaningful part of the ecosystem.

Across Asia, VIP members already generated 24% of Shopee’s GMV in Q2, while average monthly retention was around 80%. Brazil only launched the program in April and already had more than one million members by June.

What I find interesting is how Shopee is evolving the program. VIP started primarily around benefits such as free shipping, vouchers, and discounts. It is now adding benefits in travel, dining, and entertainment, with Shopee sellers and external partners increasingly co-funding those benefits. That has already improved the program’s unit economics in Asia.

The OpenAI partnership is a good example of where this could go. Sea and OpenAI have used ShopeeVIP to distribute access to ChatGPT products, and their expanded partnership explicitly includes bringing OpenAI products to more ShopeeVIP users.

In other words, VIP can gradually become more than a paid free-shipping program. If Shopee can aggregate attractive 3rd-party benefits at relatively little incremental cost, the membership itself becomes another layer of the ecosystem: it increases switching costs, purchase frequency and share of wallet while potentially becoming less dependent on Shopee-funded subsidies.

Content

The third major investment pillar is content. TikTok Shop had been one of the biggest perceived competitive threats to Shopee and a central part of the bear case around the stock for several months. The concern was straightforward: TikTok had already captured enormous consumer attention and appeared well-positioned to convert that engagement directly into commerce. Shopee’s response has been to build content more deeply into its own commerce ecosystem while also extending distribution through external platforms.

Orders generated through livestreaming and short-form video increased more than 50% year-over-year and now account for more than 35% of physical-goods orders in Southeast Asia. Shopee is also broadening distribution beyond its own app: affiliate orders generated through creators on Facebook increased more than 85% sequentially, while the Instagram partnership has now been expanded across all eight core markets.

Profitability

Shopee generated $255 million of adjusted EBITDA in Q2, compared with $223 million in Q1 and $203 million in Q4 2025.

Adjusted EBITDA as a percentage of GMV therefore increased to roughly 0.7%, after bottoming around 0.5–0.6% during the latest investment cycle.

This is still far away from management’s medium-term 2–3% EBITDA margin ambition. Management highlighted three levers:

• some of today’s growth investments will mature and require less spending,

• logistics and fulfillment costs should continue to decline with scale,

• and take rates (particularly advertising) still have room to increase.

However, Sea is not interested in maximizing the margin as quickly as possible (and I’m sure they could if they wanted to). Management repeatedly emphasized that the balance between growth and profitability remains dynamic. As long as the market offers attractive growth opportunities, Sea is willing to reinvest incremental economics in order to grow rather than immediately extrating profits from the ecosystem.

I think that is the right decision as long as the returns on those investments remain attractive (I think they are).

The competitive environment appears supportive for now. Management described competition as relatively stable. They said that Shopee has maintained or gained share in parts of Southeast Asia and Taiwan, and they believe they can continue to grow faster than the market in Brazil.

Monee

Revenue increased 59% year-over-year to $1.4 billion and adjusted EBITDA grew 13% to $288 million. Consumer and SME loans outstanding reached $11.1 billion, up 62%. Despite that growth, the 90-day NPL ratio actually declined slightly to 1.0%.

The quarter showed progress on all three of Monee’s growth levers:

• adding more borrowers,

• increasing engagement with existing borrowers,

• and expanding the number of places where Monee’s credit can be used.

Monee added around 5.3 million first-time borrowers in Q2. Active credit users increased 34% to more than 40 million, while average loans outstanding per user increased approximately 20%. Off-Shopee SPayLater (Monee’s buy-now-pay-later product (BNPL)) has now grown to more than 20% of the overall SPayLater portfolio, reaching as much as 35% in some markets.

The standalone ShopeePay app is part of that transition. Monthly transacting users more than doubled in Q2, the app is already operating in Indonesia, Thailand, Malaysia and Vietnam, and will be rolled out in Brazil next.

FY2026: Is the Guidance Becoming Conservative?

At the beginning of the year, Sea targeted approximately 25% Shopee GMV growth for 2026, while guiding for full-year adjusted EBITDA to be no lower than the $881 million generated in 2025. The market reacted very negatively to that outlook, as investors had expected more earnings growth after Shopee's profitability improvement in 2025. The prospect of another year of heavy reinvestment with EBITDA potentially remaining roughly flat despite strong GMV growth became one of the main reasons for the sharp sell-off in Sea's shares following the results.

After Q2, the GMV guidance remains unchanged at around 25%. However, management is now optimistic that Shopee will generate at least around $1 billion of adjusted EBITDA.

Shopee’s GMV grew 30% in Q1 and 28% in Q2 year-over-year. With 2025 GMV of approximately $127 billion, 25% full-year growth would imply roughly $158.8 billion of GMV in 2026.

Back-solving the numbers, Shopee only needs approximately 22% year-over-year GMV growth in the second half to reach the 25% full-year target.

That would be a meaningful deceleration from 29% in the first half of 2026.

Management gave two sensible reasons for remaining cautious:

• several local currencies have weakened against the U.S. dollar,

• and the comparison base becomes more difficult in Q4.

At the same time, management said the current operating momentum has continued and remains healthy across Southeast Asia, Taiwan and Brazil.

Closing Thoughts

Garena continues to demonstrate that Free Fire can behave more like an evergreen franchise than a conventional mobile game. Monee is using Sea’s ecosystem data to expand its addressable credit market. And Shopee is increasingly showing that its growth investments can reinforce each other: better logistics improve conversion, higher conversion makes advertising more valuable, better monetization funds additional user acquisition, VIP raises retention and share of wallet, and higher density improves logistics economics again.

The Q2 call gave several indications that this flywheel is gaining momentum.

It will be structured in five Parts:

• Part 1: The Aviation Ecosystem Behind HEICO

• Part 2: Why the Aircraft Aftermarket Creates a Structural Opportunity

• Part 3: Inside HEICO’s Crown Jewel

• Part 4 (today): The Second Engine and the HEICO Operating System

• Part 5: The Economics Behind the Compounding Machine

All parts are now available in one PDF. You can download it below.

Deep Dive Heico Corp

9.73MB ∙ PDF file

Download

Download

Download

👔 Company Name: HEICO Corporation (“HEICO”)

🔎 ISIN: US4228061093 (Common Stock) and US4228062083 (Class A)

🔧 Business model: Aerospace and electronics serial acquirer

🌍 Geographic exposure: global (~62% U.S. and ~38% international sales across approximately 130 countries)

📈 Stock Price: HEI Common Stock: $339 | HEI.A Class A Common Stock: $253

💰 Market Capitalization: ~$40 billion

👨‍💼 Number of CEOs since foundation: 2 (one transition — Laurans Mendelson to Eric and Victor Mendelson)
since 1990

👨‍👩‍👦 Founder-/Owner-operator: Yes — owner-operated by the Mendelson family

📅 CEO tenure: Since 1990

🥇 Insider ownership: ~21.0% of shares

📊 10Y EPS CAGR: ~16%

🔁 Reinvestment profile: High

💸 Capital intensity: Low — capex-light, but inventory-intensive

🏰 Moat: Regulatory approvals, customer trust, installed-base scale, price and availability, culture

🧨 Main risks: Valuation, acquisition execution, aviation cyclicality, OEM countermeasures

🌳 Slow Compounding fit: Yes – high-quality (niche) serial acquirer

Business Model in a Nutshell: HEICO is a decentralized aerospace and electronics serial acquirer. Its Flight Support Group provides lower-cost aircraft parts, repairs, and distribution services, while its Electronic Technologies Group supplies highly engineered components for aerospace, defense, space, medical, and other demanding markets. Growth comes from new product development, market-share gains, and disciplined acquisitions of niche businesses that retain significant operational autonomy.

Subscribe now

9. Electronic Technologies Group (ETG): The Second Engine

ETG receives far less attention than FSG. Flight Support has an intuitive proposition and identifiable competitors: HEICO develops approved alternatives to expensive OEM parts. ETG is harder to summarize because it owns dozens of specialized businesses selling electronic, microwave, electro-optical, and power-related products into aerospace, defense, space, medical, and other high-reliability markets.

The variety can make ETG appear to be a collection of unrelated industrial assets. A laser-rangefinder receiver seems to have little in common with an underwater locator beacon, satellite power converter, cockpit display, or high-voltage connector used in a CT scanner. The common thread is the function these products perform and the environments in which they operate. They are generally small, highly engineered components embedded in much larger systems, where reliable performance matters far more than the cost of the individual part.

ETG is less visible than FSG but far from secondary. In fiscal 2025, it generated $1.41 billion of revenue and $325 million of operating income, for a 23.0% margin. The segment contributed approximately 30% of consolidated revenue and roughly 30% of segment operating income before corporate costs.

Its importance extends beyond reported numbers. ETG exposes HEICO to defense, space, and other markets that do not depend directly on commercial flying, generates cash that can be redeployed across the group, expands the acquisition universe, and provides technical and manufacturing capabilities that may support Flight Support companies.

Victor Mendelson has led ETG since its establishment in 1996. While FSG grew from HEICO’s original aerospace-parts business, ETG was deliberately assembled as a second platform through acquisitions and subsequent product development. It applies the same broad philosophy—niche products, demanding applications, high margins, and strong cash flow—to markets where the advantage does not depend on PMA.

9.1. A broad portfolio with a common economic logic

HEICO describes ETG’s strategy as designing and manufacturing highly engineered, mission-critical subcomponents for small niche markets. These products often operate under severe heat, vibration, radiation, pressure, or electromagnetic conditions and are integrated into much larger systems used for power, targeting, tracking, identification, testing, communication, medical imaging, and other essential functions.

The portfolio can be grouped broadly into data and microwave technologies, electrical products, and electro-optical systems. The categories overlap but provide a more useful framework than cataloging every subsidiary and product.

Data and microwave products include radio-frequency amplifiers, transmitters, receivers, filters, switches, antennas, electronic-intercept equipment, memory modules, and other components that transmit, receive, process, or store information. They are used in satellites, spacecraft, aircraft, unmanned aerial systems, electronic-warfare equipment, and communications platforms.

A microwave switch or amplifier may represent only a small fraction of a satellite’s value, but failure can compromise communication or the entire mission. The asymmetry is especially pronounced in space, where a defective component cannot simply be removed after launch. Established designs, extensive testing, and a proven supplier record therefore carry substantial value.

Electrical products include power supplies and converters, high-voltage connectors, cable assemblies, circuit protection, power-distribution systems, backup batteries, harsh-environment connectors, and fuel-system products. ETG companies supply satellite and military-avionics power converters, backup power for cockpit voice recorders and emergency aircraft systems, and high-voltage components for medical imaging and industrial equipment.

The end user rarely notices these products. A passenger never sees the backup power supply keeping a flight recorder active, and a patient never notices the high-voltage connection inside a CT scanner. Yet the larger system may fail if that component does not work.

Electro-optical products convert, detect, simulate, or process light and infrared signals. ETG manufactures laser-rangefinder receivers, photodetectors, infrared test systems, and related products used in targeting, reconnaissance, missile testing, medical lasers, and other applications. Infrared simulation equipment allows customers to test missile seekers and sensor systems in a controlled environment rather than repeatedly conducting expensive live-fire tests.

A laser rangefinder illustrates ETG’s role. A targeting system emits a pulse toward an object; the receiver detects the reflected light, allowing the wider system to calculate distance and confirm targeting accuracy. The receiver is only one component inside a much larger weapons or observation system, but its performance is essential.

HEICO describes ETG as “making the things that make things work.” The shorthand is apt. ETG does not generally manufacture an entire satellite, missile, aircraft, scanner, or communications system; it supplies selected components that enable those platforms to perform critical functions.

This positioning creates attractive economics. The component usually represents a small share of the customer’s total bill of materials, while failure or redesign can be costly. A defense prime contractor has little reason to save a small amount on a connector, converter, or microwave component if switching requires additional engineering, testing, qualification, and documentation.

The supplier’s position becomes particularly durable once the component is designed into the larger system. During development of an aircraft, satellite, missile, or medical device, the customer selects parts meeting defined requirements. The supplier provides samples, engineering support, test data, and production documentation. Once the design and larger platform are qualified, replacing the component may require part of that work to be repeated.

The switching cost therefore sits primarily in the surrounding system rather than in the physical difficulty of copying the part. A capable competitor may be able to manufacture a similar connector or power supply; the more important question is whether the customer wants to redesign, retest, and requalify a complex platform to save a relatively small amount on one subcomponent.

This is especially relevant in defense and space, where programs may remain active for decades. Once a HEICO component is incorporated and performs reliably, the company can supply it through production and, in some cases, the aftermarket. Unlike PMA, ETG can participate from the beginning of the platform lifecycle rather than waiting for an aircraft to mature.

Products also tend to be manufactured in relatively small volumes. A large defense prime may possess the engineering capability to produce many internally, but doing so across thousands of specialized part numbers would consume resources better used on the higher-level system. ETG occupies a layer in which individual products are too small to attract broad attention but collectively generate attractive revenue, margins, and cash flow.

Portfolio breadth is deliberate. Demand for a specific satellite component, medical device, or defense program may fluctuate, but ETG spans numerous products, platforms, and customers. Its resilience comes from owning many small positions inside long-lived systems.

Organic product development remains important even though ETG was largely assembled through acquisitions and is more sector-agnostic than FSG. Existing businesses must adapt products to new platforms, improve performance, and develop adjacent technologies. HEICO has historically reinvested a portion of revenue in new products across both operating groups:

“Significant ongoing new product development efforts are continuing at both Flight Support and ETG as we continue to invest between 3% 4% of each sales dollar into new product development in order to support our future growth strategies.” — Laurans A. Mendelson, Q3 2014 earnings call

An acquisition provides the initial technical capability, customer relationships, and portfolio; continued development allows the business to expand after the transaction.

ETG’s competitive position therefore rests on reinforcing elements: specialized engineering, product qualification, long platform lives, proprietary technology and processes, small but critical components, demanding operating environments, and customer reluctance to introduce unnecessary risk into a functioning system.

9.2. Defense and space

Defense and space form ETG’s core. In fiscal 2025, they generated approximately $717 million, or just over half of segment revenue. Aerospace contributed another $276 million, while approximately $421 million came primarily from medical and other electronic markets. HEICO also reports that roughly 51% of ETG revenue derived from military agencies, defense prime contractors, and commercial or defense satellite and spacecraft manufacturers.

The categories overlap substantially. An airborne antenna may be classified as aerospace but installed on a military aircraft; a microwave component may serve a commercial satellite or electronic-warfare system; and a high-voltage power supply can be used in both medical and defense imaging. ETG technologies often cross markets because reliability and performance requirements are similar.

Within defense, HEICO deliberately concentrates on technologically intensive applications rather than businesses tied primarily to troop deployments or the daily operating tempo of a military campaign.

Victor Mendelson described the focus in 2022:

“About defense. I’m also optimistic about our defense businesses. Long term, the world is not going to be a safer place, unfortunately, and that’s just a sad reality. Free people like we are in this country need to defend ourselves, and we need to help our allies defend themselves. The things that we do at HEICO generally focus on higher technology, defense products and systems, things like electronic warfare detection, threat detection, reconnaissance, surveillance and standoff warfare, as opposed to, let’s say, the operations tempo, the proverbial boots on the ground. And we think that that will continue to be important as we see some of these major nation state threats in addition to the terrorist threats that we were dealing with not long ago.” — Victor H. Mendelson, Fernway Insights interview, 2022

Electronic warfare involves detecting, disrupting, or protecting against electromagnetic signals. Reconnaissance and surveillance systems collect information from sensors, aircraft, satellites, or unmanned platforms. Standoff warfare allows targets to be detected or engaged from a distance rather than moving personnel directly into the threat area. These applications rely heavily on sensors, antennas, microwave systems, power electronics, computing, and communications—the types of components ETG produces.

HEICO therefore participates in defense spending without manufacturing the largest visible platforms. It need not win the contract for an entire missile, aircraft, or satellite; its companies supply selected components to government laboratories, OEMs, and prime contractors building those systems.

This position can create long revenue tails. Defense programs often require years of development before production, followed by many years of deliveries, upgrades, spares, and sustainment. Once qualified, a component supplier may remain associated with the platform as long as performance, quality, and delivery remain acceptable.

Low component cost relative to the total system reduces the incentive to switch. A prime contractor might replace a HEICO product to capture additional margin, but potential savings may be immaterial beside the cost of redesign, documentation, testing, and the technical and schedule risk of replacing a proven supplier.

Defense-contract structures may further reduce pressure to squeeze every subcomponent. Early development contracts can reimburse part of the contractor’s costs, while later production contracts often become more fixed. By the time cost incentives strengthen, components are already embedded in a qualified system. Re-engineering the platform to save a small amount on one part may offer an unattractive risk-adjusted return.

HEICO also benefits from a fragmented defense supply chain. Large platforms rely on thousands of specialist suppliers, many small and founder-led. These businesses may possess valuable intellectual property and long customer relationships but lack the scale, capital, or succession plan to remain independent indefinitely, creating a continuing acquisition universe for ETG.

The current defense environment provides an additional tailwind. Governments have increased procurement, expanded certain priorities, and sought to replenish equipment and munitions consumed or transferred in recent conflicts. This demand reaches ETG through the order books of prime contractors and platform manufacturers.

Management was seeing this directly by the second quarter of fiscal 2026:

“In defense, our country and its allies have recognized the need to invest more in defense and to replace depleted stocks. We are now experiencing this in our defense sales, in our defense orders, and in our defense backlog. We expect this to continue and to have a multi-year tail for which we are very well-prepared.” — Victor H. Mendelson, Q2 2026 earnings call

The effect varies by product and program. Higher national budgets do not translate equally into every HEICO subsidiary: funds can shift among programs, projects may be delayed, and inventory may move unevenly through the supply chain. ETG’s broad exposure reduces dependence on any one platform but does not eliminate program-level volatility.

Space follows similar economics with a different demand base. ETG supplies microwave equipment, memory modules, power converters, radiation-tolerant electronics, antennas, and other components used in satellites, launch vehicles, and spacecraft.

The operating environment imposes unusually demanding requirements. Products must withstand launch vibration, wide temperature changes, radiation, and long periods without physical maintenance; weight, power consumption, and size may also be critical. A failure after deployment may be impossible or uneconomic to repair.

HEICO components have appeared in prominent programs. Subsidiaries supplied critical parts for the Curiosity Mars Rover, while another ETG company provides power converters for newer GPS satellites. HEICO does not build the rover or satellite, but selected systems inside them depend on its technology.

Commercial space has broadened the customer base beyond traditional government programs. More launches, earth-observation systems, communications constellations, and privately developed spacecraft create additional demand for high-reliability electronics. The pace can be uneven, however, as launch delays, funding issues, and changes to constellation plans shift revenue between periods.

Victor Mendelson summarized the opportunity alongside defense:

“And then in space, space is a growing market, growing business. You see it all the time. New products, launches, satellites, earth sensing spacecraft as well. So that’s a nice growing business for us.” — Victor H. Mendelson, Fernway Insights interview, 2022

Defense and space are attractive because they combine structural demand, long product cycles, and high switching costs, but they are also political and program-dependent. The U.S. government is the ultimate end customer for a substantial share of ETG revenue, and changes in budgets, procurement priorities, export rules, or program schedules can affect individual businesses.

9.3. Growth and economics

ETG’s financial history reflects how the segment was built. Unlike FSG, which grew from an existing aftermarket business, ETG was assembled largely through acquisitions. Each transaction added a technical capability, product family, or customer relationship, after which the acquired companies continued developing organically under HEICO ownership.

By the second quarter of fiscal 2026, ETG generated approximately $460 million of quarterly revenue.

The long-term trajectory is striking but uneven. Early percentage growth partly reflects a small starting base, when one acquisition could double or triple quarterly revenue. Growth moderated as the segment became larger.

The history also illustrates ETG’s diversification value. Commercial aviation downturns have generally affected it much less than FSG. ETG weakened during the early-2000s downturn and Global Financial Crisis but did not collapse during COVID-19 because defense, space, medical, and other electronics demand followed different drivers and stabilized the segment.

Since fiscal 2018, HEICO has disclosed ETG revenue in two broad categories: defense, space, and aerospace equipment; and other industries.

Defense, space, and aerospace equipment represent the clear majority, recently contributing roughly 80% of ETG revenue. The remaining 20% comes primarily from medical, telecommunications, and specialized electronic and industrial applications.

The first category is broader than it appears. It includes products sold to military agencies, defense primes, aircraft manufacturers, satellite companies, and spacecraft programs. The same microwave component, power converter, or high-voltage connector may be used in a military aircraft, commercial satellite, or another demanding aerospace application.

“Other industries” is similarly diverse, including medical imaging, industrial electronics, telecommunications, and other markets requiring highly reliable power, sensing, interconnect, or electro-optical products. These activities are smaller but add customer and end-market diversification.

The growing share of defense, space, and aerospace revenue helps explain recent acceleration. Defense customers and primes have increased orders, space activity has expanded, and commercial aerospace production has recovered, exposing ETG to several structural growth markets at once.

Organic growth and acquisitions:

Reported ETG growth combines organic development, acquisitions, occasional divestitures, and foreign-exchange movements.

Acquisitions have played a larger and more persistent role in ETG than in FSG. In many periods, acquired growth equaled or exceeded the organic contribution because M&A created the platform and remains central to its development.

The extreme growth rates of the late 1990s and early 2000s require caution. ETG operated from a very small base, so modest transactions produced unusually large percentages. As the segment grew, acquisition contributions became less dramatic but remained frequent.

Organic growth has been more modest and volatile.

Based on the quarterly series, ETG’s organic growth has generally been in the mid-single digits and much more erratic than FSG’s. The arithmetic average appears to be approximately 5%. A reasonable normalized range is 5–7%, with individual years capable of materially stronger or weaker results.

This is below FSG’s roughly low-double-digit normalized rate. ETG depends more on new platform wins, production schedules, defense procurement, program timing, and customer order releases.

Organic growth is consequently uneven. Strong demand or a defense or space program ramp can produce double-digit growth, while project delays and weaker markets can push the figure below zero. The Global Financial Crisis produced the most severe historical decline, with organic revenue falling more than 20% in one quarter.

COVID-19 was much less damaging. Organic growth weakened and turned negative in some periods, but declines were comparatively modest and partly offset by M&A. This resilience supports ETG’s role in reducing HEICO’s dependence on commercial flight activity, although the segment remains exposed to economic and program-level cycles.

Recent quarters show renewed momentum. Defense, space, and aerospace demand have strengthened, while commercial aerospace production has recovered. Organic growth reached double digits in several periods and accelerated sharply in the second quarter of fiscal 2026.

Such quarterly strength is not a permanent baseline. Shipment timing for a relatively small number of customers can affect ETG’s organic growth, and strong periods may be followed by normalization. A mid-single-digit long-term assumption is more consistent with the broader history than extrapolating the latest result.

Acquisitions provide the second and historically more important growth layer.

The acquired contribution has appeared in repeated waves, with major increases around fiscal 2006, 2010, 2012, 2016, and 2023 and smaller additions in many other periods. Unlike Wencor in FSG, no single ETG acquisition dominates the chart. Growth has instead come from repeatedly adding specialized businesses over many years.

This pattern reflects fragmented target markets. Defense electronics, microwave components, connectors, power supplies, sensors, and other high-reliability products are often made by small, founder-led companies. No single acquisition must transform HEICO; the accumulation of niche positions gradually expands revenue, technology, and customer relationships.

Reliance on M&A also creates risk. ETG’s future depends partly on HEICO continuing to find specialized businesses at prices that produce attractive cash returns. Competition from private equity and strategic buyers can raise valuations, while technical complexity makes due diligence critical. HEICO must retain key engineers, managers, and customer relationships after closing.

Margin development:

ETG combines long-term growth with unusually attractive profitability.

The earliest margin figures are highly volatile because ETG was still small and a limited number of companies, products, or acquisition effects could materially change the result. From the mid-2000s onward, the profile becomes more representative of the mature platform.

For much of 2005–2022, ETG’s quarterly EBITDA margin remained around 30% or higher.

The margin reflects ETG’s position inside customer systems. Its products are usually small relative to the value of the aircraft, missile, satellite, medical scanner, or communications platform, yet may be critical to operation. Customers therefore focus less on absolute component price than on reliability, qualification, technical performance, and delivery.

Recently, a temporary slowdown in certain higher-margin satellite components weighed on ETG, partly offset by stronger growth in lower-margin defense products.

Once an ETG product is designed into a platform, replacement may require engineering, testing, customer approval, and documentation. Potential supplier-switching savings can be small relative to the cost and risk of requalifying the larger system. These switching costs support pricing and margins without requiring ETG to manufacture the end product.

The EBITDA margin recovered to approximately 32% in the second quarter of fiscal 2026 as revenue accelerated, demonstrating the operating leverage available when higher volume flows through ETG’s existing engineering and manufacturing base.

10. The HEICO Operating System: “Do the Right Thing”

HEICO’s operating system explains how the company expanded from one aircraft part into more than one hundred specialized businesses without losing the economics that made those businesses attractive.

“How was our 36 year, 23% compound annual growth rate and share price possible, especially when we were rarely leveraged at more than 2 times EBITDA? First, we have to thank God for these results. Second, we realized that Dad always had a saying, “Do the right thing,” which was our mantra 24/7, 365 for the past 36 years. It wasn’t just a saying, it was embedded in every single decision, every part sold or repaired, every company acquired, and simply everything we did. Obedience to the unenforceable became our DNA from the time Victor and I were small children to now, when we are 60 and 58 years old. Doing the right thing means making honorable choices when nobody’s looking.

It means spending tens of millions of dollars on quality systems, not because our customers or regulators require them, but because we know it’s a good investment that protects our brand. It means properly reserving for obsolete or excess inventory, not because our auditors require it, but because we know it’s needed and mistakes must be learned from, recognized, and never repeated, not swept under the rug in order to protect reported earnings. These are just two of the many things that HEICO has done routinely over decades, and why we’ve never had a one-time unusual charge to earnings, whereby the economic earnings of the upcycle are largely erased following a black swan event, and investors don’t realize much of the earnings never existed in the first place.

HEICO was built for long-term and sustainable cash generation, which permits our earnings and cash flow to compound decade after decade, not just year after year. We are not into programs of the year, buzzwords, or comparing ourselves to others, hoping to get a higher multiple on our shares. We’re designed for long-term, challenging, but sustainable earnings increases” — Eric A. Mendelson, Q1 2026 earnings call

The group combines family ownership, decentralized operating responsibility, subsidiary-level incentives, and centralized capital allocation. Acquired companies generally retain their identity, management teams, and customer relationships. Headquarters controls the balance sheet and allocates capital, while day-to-day decisions remain with the people closest to the product and customer.

Culture and structure are closely linked. Decentralization works only when managers are capable, properly incentivized, and trusted to act in the business’s long-term interest. HEICO’s acquisition process therefore screens not only for attractive products and financial characteristics but also for owners and management teams capable of operating with limited supervision after the transaction.

M&A reinforces this culture. HEICO generally acquires small entrepreneurial businesses, preserves their autonomy, and often leaves a minority interest with the seller. The group thus adds companies that already possess the small-business mentality it wants rather than trying to impose that mentality on a large centralized organization afterward.

This combination is the HEICO operating system. It allows a public company with more than 11,000 employees to retain many characteristics of a collection of family-owned businesses.

10.1. Ownership, culture and decentralization

The Mendelsons approached HEICO as owners from the beginning. The family invested a meaningful portion of its own capital, fought for control of the company, and remained exposed to the consequences of every major decision.

Family control is balanced by a demanding internal decision-making process. Although operating responsibilities are clearly divided within the family, major decisions are not made unilaterally:

“All major decisions must be unanimous.” — Laurans Mendelson, Forbes interview, 2020

Requiring agreement may occasionally slow decisions, but it also provides an internal check on large acquisitions, financing choices, and other commitments affecting the family’s capital alongside that of outside shareholders. Each major decision must withstand scrutiny from several owner-managers with different responsibilities.

The family’s principal financial outcome comes from the value of its HEICO shares rather than from maximizing annual salaries or bonuses. A transaction that increases reported revenue but destroys per-share value would therefore work directly against its interests.

“In our case, we own a large number of shares. So, if the stock goes up 10 points […], we make $140 million or $200 million in equity value. Now do I care if my salary goes up $3 million? Of course not. So, to answer your question, we will make transactions that generate cash flow, accretion and stock value.” — Eric A. Mendelson, Q4 2020 earnings call

The figures in that historical statement are no longer current, but the incentive remains: the family is rewarded primarily through long-term equity appreciation. Outside shareholders participate in the same outcome.

This ownership perspective also explains management’s focus on cash flow. Acquisition accounting, amortization, working capital, and other assumptions can influence reported earnings without necessarily reflecting the cash available to reinvest. HEICO follows the required accounting rules but evaluates internally whether its businesses are actually producing cash.

“So it’s to me and to us and our team, it’s all about the cash flow return. And that is more important than the earnings per share. Although we know if we have cash flow, we will have earnings per share. We can have earnings per share, but no cash flow, as you very well know. So that’s what we will continue to focus on that strategy.” — Laurans A. Mendelson, Q3 2020 earnings call

The ownership culture extends beyond the Mendelson family. HEICO consistently refers to employees as “team members,” reflecting the role it expects them to play. A team member should understand that individual decisions affect customers, colleagues, and the value of the wider company.

“And as always, we’ll continue to focus on intermediate and long term growth strategy with an emphasis on acquiring profitable businesses. And just one personal comment, what doesn’t appear in 10 ks’s, 10 Qs, financial statements and presentation is the incredible capability of our team members. These are the people that make these results possible. These are the people that strive for growth. Of course, we incentivize them with what we believe are great incentive plans, but these are exceptionally talented people.” — Laurans Mendelson, Q2 2017 earnings call

HEICO reinforces this culture through financial ownership. Its U.S. retirement plan has historically matched employee contributions with HEICO shares. Over decades, the appreciation of those shares has created substantial wealth for factory workers, shipping clerks, administrative staff, and other employees far below the executive level.

Victor Mendelson described the effect in 2018:

“But it’s also how you treat the team members, the employees. And I think you know this, a number of years ago, we sold a block stock to the 401(k). People defer 6%. They can defer 6% in the 401(k).

They have a whole menu of mutual funds that they invest in. And we match that annually with 5% in HEICO stock. And the thing that and the reason […] why I’m bringing this out and why it’s so important. We have […] approximately 4,000 U.S. employees. Most of them are in the 401(k). 10% or a little more have between $750,000 and $1,500,000 in their 401(k), principally as a result of their gift or of HEICO stock to the 401(k). Another 40 or 50 of them have between $1,500,000 $6,500,000 in their 401(k), principally HEICO stock. I am not talking about senior executives. I am talking about shipping clerks, factory workers, secretaries and people who work hard for manual labor for a living. Now what has happened is that we now have a good majority of those 4,000 people think of HEICO as their company. It’s no longer, ‘oh, yeah, well, we’re working for some rich guys on Wall Street and mutual funds and the CEO, he’s getting all this money, we’re getting nothing.’

When I retire, I have social security, I can’t even make ends meet and so forth. And the last thing I want to tell you is that about 6 months ago when I sent out the quarterly reports, I received an email back from one of our secretaries. And the comment, I’ll paraphrase, ‘Dear Larry, thank you so much for sending the report. We are doing so well.’ We meant she. It wasn’t HEICO. She didn’t write ‘HEICO is doing so well’. We are doing so well. And she further went on to say, ‘and it’s wonderful to know that someday when I retire, I will retire as a millionaire as a secretary’. So when you put that in perspective and understand that the people who are building this company and supporting it and doing the great things that we can do, they look at it as their company.” — Victor H. Mendelson, Q3 2018 earnings call

The most important part of this story is not the exact number of employee millionaires. It is the difference between asking employees to think like owners and giving them a meaningful economic reason to do so. When the value of a person’s retirement savings depends partly on the company’s long-term success, product quality, inventory management, customer satisfaction and operating cash flow become more personal.

Eric Mendelson explicitly connected HEICO’s incentive system to its willingness to deemphasize lower-margin business, while also making clear that higher profitability should not come at the expense of the customer value proposition:

“Our team members and our leadership are incentivized and focused on operating income. We try to keep things very simple. And they’re not focused on revenue. They don’t get compensated on revenue, they get compensated on earnings. So I think what we continue to see is a shift where we deemphasize lower margin products and we focus more on higher margin products. And I think that really is the driver of the improvement in the operating income that we’ve seen […] We continue to maintain a very low price increase model, so we make sure that our customers appreciate it and that they want to come back and want we’re the vendor of choice and they want to develop more items with us.” — Eric A. Mendelson, Q1 2020 earnings call

Ownership alone cannot create the culture. A widely distributed stock plan inside a heavily centralized organization would still leave most decisions far from the people who understand them. HEICO combines ownership with small operating units.

The typical subsidiary is far smaller than the consolidated company; many employ roughly 75 to 100 people. The president knows the products, customers, engineers, and production team. Employees know one another, and poor execution is difficult to hide inside a large bureaucracy.

Victor Mendelson explained how this preserves a small-business mentality:

“So as opposed to being an employee number 5722 at some big company, the team members are one of typically, on average, about 75 or 80 people at a subsidiary and facility, that team member is valued and known. Their opinions are important, they are close to the product, they’re close to the customer. The president of the business who sold us the company and in many instances still owns 20% or even more, is watching everything. They still have that ownership mentality. It’s that small business ownership mentality that’s shared across the enterprise, and they feel it. If a shipment is late, if it doesn’t go out, if there’s an issue of any sort, everybody feels badly because they’re letting someone else down in a small organization and there’s nowhere to hide.” — Victor H. Mendelson, Fernway Insights interview, 2022

This structure places operating decisions close to the relevant information. A subsidiary president generally understands the business’s demand outlook, customer relationships, production bottlenecks, and employee capabilities better than an executive at headquarters could.

HEICO therefore avoids building a large hierarchy of group executives between corporate management and the subsidiaries. Eric Mendelson described the organization as a collection of entrepreneurial business heads rather than a centralized company awaiting instructions:

“You know, that rather than having a highly centralized organization where people are waiting on instructions from the corporate office on what to do, we’ve got 60 decentralized, entrepreneurial, hardworking, aggressive business heads and their staff out in the field figuring out every day what they need to do.” — Eric A. Mendelson, Q1 2022 earnings call

The number of business heads has increased since that comment, but the principle remains. Local management decides how to serve customers, run production, manage inventory, hire employees, and invest in product development.

Headquarters still plays an important role. HEICO allocates capital, approves acquisitions, manages the balance sheet, establishes financial controls, and monitors performance. It also designs incentives, provides access to capital, and encourages cooperation where useful.

The same restraint is visible at HEICO’s headquarters in Hollywood, Florida. Despite overseeing a multibillion-dollar global group, the company operates from an unassuming office and manufacturing building rather than an elaborate corporate campus. The building alone does not prove financial discipline, but it fits a culture of limited overhead, little interest in prestige, and a preference for directing capital toward products, people, and acquisitions.

Headquarters provides resources and accountability rather than detailed operating instructions. The parent does not claim to understand every microwave component, repair procedure, PMA product, parachute system, and customer program better than the managers running those businesses.

This creates an unusual allocation of responsibility: corporate management decides which businesses HEICO should own, while local management decides how each acquired business should operate.

The model therefore depends heavily on selecting the right company. If HEICO acquires a weak business, the wrong management team, or an incompatible culture, decentralization offers fewer mechanisms for correcting the problem afterward. Management repeatedly returns to the principle that the best way to manage an acquisition is to buy the right one.

“We really don’t direct our companies to take actions. We expect them to do what’s right for the business. That doesn’t mean we don’t have discussions with them about it. But ultimately, we expect them to be the same companies they were pre acquisition. And you’ve heard us say that the key is buying right, that if you buy the right business and you buy the right kind of company that does the right things, then you don’t have to direct them post acquisition.” — Victor H. Mendelson, Q2 2020 earnings call

COVID-19 provided the clearest stress test of this structure. Commercial aviation demand collapsed with little warning, but the appropriate response differed across subsidiaries. Some businesses faced an immediate decline of approximately 80%, while defense, space, and other electronics operations remained relatively stable or continued growing.

A centralized response would have required headquarters to determine staffing, working hours, and cost structures for businesses facing very different conditions. HEICO instead allowed subsidiaries to respond locally through measures such as temporary furloughs, reduced hours, and shorter workweeks. Corporate executives and directors also reduced their compensation.

“And so what we’ve noticed is that these folks at these subsidiaries, because we allow them to operate in a decentralized fashion, they do make good decisions and they do tighten their belts when they need to. They’re very aware of and conscientious of working capital management, of listening to their customers, understanding demand as best that they can during this time period. And so we haven’t we don’t have a need or we haven’t felt the we haven’t felt it necessary that we’d be heavy handed in these circumstances. They have done the right things. It just so happens that with them doing what they need to do to manage their businesses, we have also contributed at the corporate level by taking some pay reductions by the executives and the corporate staff and also our Board of Directors.” — Carlos L. Macau, Jr. (CFO), Q2 2020 earnings call

HEICO made layoffs where management believed certain product lines would not recover, but it avoided the large-scale reductions implemented elsewhere in aerospace. Retaining technical and production capabilities allowed the businesses to respond more quickly when demand returned. The company also continued developing products during the downturn rather than protecting short-term profit by cutting investments needed for future growth.

Measures varied by business and included layoffs, temporarily reduced working hours, and pay reductions. The burden was not limited to operating employees: HEICO’s executive management team and Board of Directors also accepted a temporary 20% reduction in compensation.

This highlights another element of the culture: decentralization supports long-term decisions rather than merely lowering corporate overhead. Local managers can invest in inventory, employees, and product development when they believe the future return justifies the spending.

The model also creates trade-offs. Separate subsidiaries may duplicate administrative functions, and performance and culture can vary across businesses. HEICO may capture fewer immediate cost synergies than a centralized acquirer, while investors receive limited information about individual subsidiaries and depend heavily on corporate management to identify problems.

HEICO accepts these costs because it believes centralization would be more damaging. In niche businesses, local knowledge often matters more than the savings from standardizing every process. Central procurement or reporting systems can create efficiencies but may also distract managers, slow decisions, or weaken customer relationships.

Cooperation is encouraged rather than imposed. Subsidiaries can share suppliers, manufacturing capabilities, products, and customers when both sides benefit. Wencor can ask other HEICO businesses to quote manufacturing work, repair stations can use PMA parts produced elsewhere in the group, and distribution operations can introduce products to new customers. Each company nevertheless remains responsible for its own economics.

Even the positioning in this group photograph offers a small illustration of the culture. Victor, Eric, and Laurans Mendelson stand behind other team members rather than placing themselves at the center. A single photograph should not be overinterpreted, but the arrangement is consistent with HEICO’s emphasis on giving operating teams visibility, responsibility, and credit for the company’s success.

The operating system is built around trust, but it is not passive. Managers are measured, incentivized, and held accountable. Autonomy means the right to decide, not freedom from financial consequences.

10.2. The acquisition playbook

Since the Mendelson family took control in 1990, HEICO has completed more than one hundred acquisitions. M&A expanded the PMA catalog, created the Repair and Distribution groups, built ETG, and introduced HEICO to markets beyond its original aircraft-parts business.

Management focuses more on a business’s characteristics than on whether it fits within a narrowly defined sector.

Victor Mendelson explained this flexibility:

“So in the early days, we started making acquisitions. We would have a roadmap we’d lay out, but we couldn’t get the acquisitions in that roadmap, any one of a number of reasons. It could have been price, it could have been the seller wouldn’t sell, etcetera. So we had to look elsewhere and we look at adjacencies, and if the business met certain characteristics, we would acquire it. And I think that’s really been the key for us, has been the characteristics of the business.” — Victor H. Mendelson, Fernway Insights interview, 2022

Across industries and product categories, HEICO’s acquisition criteria remain consistent. Management seeks businesses that can be acquired at a sensible price, operate in defensible niches, and are led by people HEICO is prepared to support for decades:

“When we look to make acquisitions, we’ve got a number of criteria. 1, that they’re fairly priced. Number 2, that they’re in very good businesses with strong barriers to entry. And number 3, superior leadership teams. And the type of people who we want to be in business with and we want to work with for 3 decades.” — Eric A. Mendelson, Q2 2013 earnings call

These three criteria frame the rest of the acquisition process. The price must leave room for an attractive cash return, the business must possess durable competitive advantages, and the management team must be capable of operating with substantial autonomy after the transaction.

The preferred company usually sells a niche product or service that solves an important customer problem. High margins provide an initial indication that the business is doing something difficult or valuable. A company consistently earning an operating margin of roughly 20% is likely selling more than undifferentiated manufacturing capacity.

HEICO has repeatedly said that it generally looks for targets with operating margins of at least 20%:

“But we’ve said publicly we don’t make acquisitions typically unless there’s at least a 20% operating margin” — Victor H. Mendelson, Q1 2016 earnings call

A high-margin business can still be unattractive if it requires excessive capital, depends on a temporary program, or has poor customer relationships. HEICO looks for cash generation, modest capital requirements, defensible products, and a long runway for reinvestment.

HEICO focuses on the cash return generated by the purchase price.

“Also, I should point out that over the years, we bought companies with different growth rates, some on the fairly low side, but very strong and stable, and others that are faster growth. So what we’re looking at is within our typical mix in that regard. Howard, the key the bottom line key to this is number 1, strong cash flow return for what we invest.

I can go out and buy things that have big CapEx and working capital requirements and then go to the bank or go to the investment bankers and raise equity and to pay for it. That anybody can do that and some companies do to raise the top line and show, oh, we’re growing the top line. We don’t do that. We want to be since we’re the largest shareholders, it’s our money at stake and every investor in HEICO is our partner.

That’s our philosophy. That’s the basic philosophy. And if we see a great company and it’s 20% or 25% return on investment, hey, we’re going to buy that company because that’s a wonderful return. And if it doesn’t grow that much, okay, it doesn’t grow that much. But that’s a wonderful return and we take that money and put it towards acquisitions of faster growing ones as Victor said.” — Victor H. Mendelson, Q2 2015 earnings call

This leads to a broader point: growth is valuable only when purchased at an acceptable price and converted into cash. Management is willing to acquire a slower-growing company if the initial cash return is high and durable. The resulting cash can later be reinvested in faster-growing businesses or internal product development.

The desired businesses are generally small or medium-sized, founder-led, and technically specialized. Their advantages may lie in engineering knowledge, certifications, customer approvals, proprietary processes, intellectual property, or qualified positions on long-lived aerospace or defense platforms.

HEICO also looks closely at the people. During due diligence, management observes how owners treat employees and interact with the organization. A founder who understands the factory, knows long-serving employees, and values the company’s reputation is more likely to fit HEICO than one focused mainly on extracting the highest short-term profit.

“One of the things, for example, we look at when we look for acquisitions is when we walk through the facilities, how does the owner interact with his or her people? And are they looking to take care of their people, or are they looking to make money by slicing out a layer each time on their people? We like companies that look to make money by adding products and market share, as opposed to just squeezing the people.” — Victor H. Mendelson, Fernway Insights interview, 2022

HEICO therefore looks for evidence before the transaction that the seller shares its view of employees. Management assesses whether the owner genuinely knows and values the people who built the company rather than treating the workforce merely as a cost base.

“The first thing we do in acquisition, the most important, is really scrutinize, analyze, get to know the person who is selling the company to us and how he manages. If he treats his people well, this is very important. As an example, if he goes through the factory and he sees somebody, and they said, he tells us, ‘Oh, that’s a machine operator, that’s a this and that and that,’ that’s not very impressive. Some of these people go through the factory and they say, They stop at a machine and say, ‘Charlie, here, these are Mendelson’s. How’s Anne?’ Meaning his wife. ‘Family okay? Everything good? Charlie, how long have you been working for 22 years.’ This means an awful lot.” — Laurans A. Mendelson, Q4 2022 earnings call

The two parts of the quote belong together. HEICO prefers businesses whose owners know and value their employees, while offering those employees a structure in which they can participate financially in the company’s future. Culture therefore acts both as an acquisition filter and as part of the seller proposition.

This cultural diligence is economically important because HEICO often wants the seller to continue running the company. Attractive historical financials matter less if the founder leaves immediately and takes essential technical knowledge or customer relationships.

The process is deliberately thorough. HEICO uses internal teams to examine finances, customers, products, quality systems, management, and operating practices. It does not assume that the seller’s adjusted EBITDA or projected synergies will materialize.

Laurans Mendelson described the company’s approach in 2010:

“And we do, as you know, a very, very thorough due diligence with our own staff, our own in house staff, really scrubs the business, scrubs the financial. We go out and we speak to their customers and we really try to cover the waterfront.

We’ve been very successful in our acquisition program by being extremely thorough. Now the corollary to that is that when we dig and dig and dig, sometimes we find things we don’t like and then the deal collapses and we walk away” — Laurans A. Mendelson, Q3 2010 earnings call

Walking away is part of the model. HEICO has no acquisition quota and does not need to complete a specific number of deals to satisfy quarterly expectations. The existing businesses already generate cash and can continue investing organically, making no transaction preferable to buying a weak company at an excessive price.

“And then once we get into the due diligence and start kicking the tires and everything else, we probably drop we look at 100 companies and we may buy 1. We look we do a very thorough due diligence and most companies we drop after the due diligence because people as you very well know, people who promote the companies, they give you information, which is always a hockey stick and then when you go in and kick the tires and you discover there are a lot of pitfalls there.” — Laurans A. Mendelson, Q2 2013 earnings call

This selectivity means HEICO will let a transaction fail late in the process rather than compromise its standards. Management has repeatedly emphasized that neither market expectations nor the desire to support short-term results will cause the company to rush an acquisition:

“We’re spending a lot of time in the due diligence processes and we’re not going to rush a closing of an acquisition in order to meet Wall Street expectation or hope and try to financially engineer our results. We’re going to do due diligence in a very thorough manner the way we always do it and make sure that we’re not buying a pig in the poke.” — Laurans A. Mendelson, Q3 2014 earnings call

HEICO’s acquisition record provides evidence that the approach has worked. Management acknowledges that individual acquisitions have performed differently: some exceeded expectations, while others delivered less than anticipated. What the company says it has avoided is a major failure that forced it to conclude that the original investment thesis was fundamentally wrong:

“So some are better than others. Some are a little less than we expected. But we’ve never had a disaster where we had to say, oh my God, we just made a terrible mistake. So that is our strategy. And I think it’s from an acquisition point of view, it’s worked for us.” — Laurans A. Mendelson, Q3 2020 earnings call

The absence of a major failure does not mean every acquisition was equally successful. It suggests that extensive due diligence, conservative underwriting, and a willingness to walk away have limited the downside when individual businesses developed less favorably than expected.

Historically, HEICO often acquired businesses at mid- to high-single-digit cash-flow or EBIT multiples. Valuations have risen as private equity and strategic buyers became more active in aerospace and defense. Management has accepted higher multiples for exceptional companies but continues to reject transactions that do not produce an adequate return.

Acquisition valuations remain one of the clearest constraints on capital deployment. Private equity and strategic buyers can sometimes justify prices that do not fit HEICO’s return framework, particularly when their thesis depends on leverage, cost reductions, or a later sale at an equally high multiple. HEICO generally expects to own the asset indefinitely, so the acquired business’s cash flows must support the purchase price.

Laurans Mendelson explained both the limitation and the advantage of this model:

“We’re doing a lot of due diligence. I can tell you the big issue that we face is competition from, say, private equity or corporate buyers who will pay 17 times EBITDA. We can’t compete. Our model doesn’t work at 17 times EBITDA. We were with an investment banker who you probably know fairly well or you would know, and he came for a meeting to talk about an acquisition. In the conversation, he said, “You realize that 90% of all acquisitions are not successful.” You know, it’s easy to make acquisitions, it’s easy to buy, but it’s not so easy to make them work out. Our model requires us to buy a company, continue it, and keep it in the portfolio virtually forever. We don’t the old expression, we don’t buy a company, put lipstick on the pig and dump it in three years, so we make a profit on it because we increased the multiple or cut expenses by a few bucks. That’s not our model. We’re competing with people who have a different model than we do. Now, saying all that, we are still able to find companies who are very anxious to join HEICO because of the HEICO culture […] If they want the highest dollar, we tell them at the get-go, “We’re not your buyer.” I would say this is the most difficult part that we’re facing. However, there are many people, as I say, ‘cause look, we’ve made 89 acquisitions, and we give lists of people that sold companies to us. We give you lists to see if we’ve done what we said, how we’ve treated people, how we treated their team members and everything else, and that’s very positive.” — Laurans A. Mendelson, Q1 2022 earnings call

The quote captures the trade-off at the center of HEICO’s strategy. Its return requirements prevent it from winning auctions based solely on price, but its culture and permanent ownership can attract sellers who value more than the highest immediate consideration.

Management has historically described ordinary acquisition multiples in the range of approximately five to seven times EBIT and has said that ten to twelve times EBITDA often priced HEICO out of a transaction. Those ranges are not rigid limits; the appropriate price depends on growth, margins, capital intensity, strategic fit, and the durability of cash flow.

“We have a number of transactions that we are in active due diligence on. They are all priced within our normal pricing, 5-7x EBIT, not EBITDA. […] Unfortunately, because of our strategy, we are priced out of some of the very expensive opportunities where they want 10-12x EBITDA.” — Laurans A. Mendelson, Q3 2010 earnings call

HEICO repeated essentially the same range in 2012. Over time, however, the wider market became more expensive, and the multiples paid by HEICO increased as well. Victor Mendelson acknowledged this development in 2017:

“And multiples have moved up a bit and I think the multiples we pay are slightly higher than they were, let’s say, 10 years ago or 5 years ago. Although I think we pay a very fair price for businesses.” — Victor H. Mendelson, Q4 2017 earnings call

By 2021, management described approximately 8-10x EBIT as a fair initial purchase price. Yet HEICO does not evaluate the multiple only at closing. The company tracks how much of the original investment is subsequently recovered through cash generated by the acquired business:

“So we look at things as a return as you would as a wise investor, which you are, as return on investment. And we like to get our money back within, say 10 years. And our model is that and we pay fair prices, we’ll pay 8-10x EBIT. And what we want to see the cash flow coming back so that if we mentally say we pay whatever we pay for it by the time we’re into the 4th or 5th year of owning a company. We have received enough cash back to make that company costing us in our portfolio, say, 4-5x EBIT. So it becomes a no brainer. And that has been our strategy.

But if we have to pay prices that take us 20 years to do that, all of a sudden we wind up going to the banks and getting heavily indebted, which we don’t again, our strategy is to be relatively low leverage and we can’t do that if it takes us 20 or 25 years to recoup our investment.

So but there are a lot of companies going to 14-16x EBITDA, and you make all kinds of assumptions. I mean, you can justify any acquisition. You can justify a 20x EBITDA price if you assume that the synergies are going to be god knows what. We’re a little more conservative, and we don’t do that. I can’t tell you is that the smartest thing. I don’t know, except that we’ve done 80 some acquisitions and we’ve never had one blow up on us and our history is very clear.” — Eric A. Mendelson, Q3 2021 earnings call

Price discipline is especially important when capital markets encourage aggressive bidding. Paying a high multiple can convert an excellent business into a poor investment if future growth or margins fall short of expectations. HEICO regularly walks away from transactions priced at 14–20 times EBITDA. Such prices leave little room for disappointment and often depend on aggressive assumptions about growth, cost savings, or synergies. HEICO generally underwrites the existing cash-generating capability rather than assuming that restructuring or a later resale will rescue a high initial multiple.

This does not mean HEICO will never pay a double-digit multiple. Wencor carried a significantly higher headline valuation than the company’s traditional smaller transactions. Management acknowledged that the competitive auction pushed the price above the level HEICO initially wanted to pay because Wencor had previously been owned by private equity:

“We don’t feel that we paid a low price. We feel that actually, I feel that I paid a high price and much higher than we had really wanted to pay. The auction pushed us up, we paid what I consider and we consider a market price.” — Eric A. Mendelson, Q2 2023 earnings call

Wencor was an exception supported by its scale, strategic fit, complementary portfolio, and unusually large revenue-synergy opportunity. The transaction broadened the prices HEICO would consider for a unique asset, but management’s language makes clear that it did not establish a new norm for ordinary acquisitions.

HEICO usually funds acquisitions with internally generated cash and conservative borrowing. Equity is treated as expensive because issuing shares transfers part of the company’s future economics to the seller. Stock has been used selectively, particularly for a transaction as large as Wencor, but cash remains the preferred consideration for ordinary acquisitions.

Low leverage gives HEICO flexibility during weaker markets, when sellers become more receptive, private equity financing becomes less available, and strategic buyers may focus on protecting their balance sheets. HEICO can continue reviewing or closing transactions because it has not exhausted its borrowing capacity during the preceding boom.

Not every transaction follows the same post-acquisition structure. Victor Mendelson estimated in 2022 that approximately 20% of historical acquisitions had been consolidations, essentially asset deals. These involve purchasing a product line or troubled operation and placing it inside an existing HEICO company.

Most transactions, however, follow the decentralized model. The acquired company retains its management, employees, facilities, and identity. HEICO provides capital, governance, and access to the wider group without imposing a predetermined restructuring plan.

This distinction matters when assessing the historical record. HEICO can integrate and consolidate businesses when necessary, but cost reduction is rarely the primary thesis. The usual objective is to preserve a good business and allow it to continue compounding.

10.3. Why sellers choose HEICO

The seller proposition is one of HEICO’s most important competitive advantages in M&A, especially among programmatic serial acquirers.

“I would say at least four out of five leadership teams tell us that HEICO is their preferred acquirer.” — Eric A. Mendelson, Q3 2015 earnings call

A private business owner choosing a buyer evaluates more than the headline purchase price. The decision may determine what happens to the company’s employees, name, facilities, customers, and reputation after the transaction.

The founder may have spent decades building the company, working with many of the same employees, and serving customers who depend on its products. Selling to the highest bidder may maximize the immediate payment while placing the company’s future in the hands of an owner with very different priorities.

HEICO offers liquidity without requiring the founder to abandon the business. The seller can monetize most of the equity, remain as president or CEO, and frequently retain an ownership interest of approximately 20%.

Eric Mendelson described the typical structure:

“And you know the acquisitions that Eric’s referring to are companies where the seller wants to have a liquidity event, however, wants to remain active, is very knowledgeable about his industry. So he winds up with a minority interest of roughly 20% And it’s a win win for us. We’re normally not an acquirer that wants to buy a company and then take that and shrink it down and get rid of personnel and fire people and so forth. But that’s normally not our model. In a few cases, we have purchased companies or product lines and put them in, but we prefer to keep the personnel, keep the company, to keep the management and to work cooperatively.” — Eric A. Mendelson, Q3 2015 earnings call

The retained minority stake addresses an incentive problem that can arise after a sale. A founder receiving tens or hundreds of millions of dollars no longer needs the salary. If HEICO acquired 100% and removed the founder’s economic participation, the person most important to the business might have little reason to continue with the same intensity.

Retaining approximately 20% allows the seller to diversify personal wealth while continuing to benefit from the company’s growth. The founder remains an owner but gains access to HEICO’s capital, customer relationships, regulatory knowledge, and acquisition capabilities.

The arrangement also protects HEICO. It reduces the upfront cash requirement and keeps the seller financially exposed to the business’s quality and the accuracy of the projections. If the company performs well, both parties benefit; if expected growth fails to materialize, the seller shares part of the disappointment.

HEICO can offer this structure because it has no exit date. Private equity firms generally acquire a business expecting to sell it again within several years. That model can work, but it introduces recurring changes in ownership, financing, and strategic priorities. Management teams may face restructuring before the first sale and another transition when the next owner arrives.

HEICO instead presents itself as a permanent home:

“We’ve been disciplined to not, as we say, overpay for a business, to not get out of our lanes and to make sure that whatever we buy, we’re ready to own forever. We don’t have an exit strategy and we don’t have an exit strategy for our businesses, unlike a lot of private equity firms do. We are owners to own. We buy to own.” — Victor H. Mendelson, Fernway Insights interview, 2022

Permanent ownership changes the investment horizon. HEICO can fund product development that takes years to generate revenue without worrying that the expenditure will depress EBITDA immediately before an exit. It can retain inventory, employees, and technical capabilities through a downturn when those resources matter to the business’s long-term position.

Permanent ownership also allows the seller to make promises to employees with greater confidence. The company is unlikely to be sold again as part of a predetermined fund cycle, and its name, facilities, and operating approach can continue as long as the business performs.

HEICO does not promise complete freedom. A subsidiary must meet financial standards, maintain quality, comply with regulatory requirements, and generate cash. Capital expenditure and larger strategic decisions are discussed with the group. Autonomy operates within a framework of financial accountability.

The company also acknowledges that it is often not the highest bidder:

“I think that the right kind of company that we like to acquire does view us as the preferred acquirer because of the way we run the companies. When we compete with a private equity firm that buys and sells by the pound every 3 to 5 years, managements really find that very stressful. So when they have a say, as some input, we’re always preferred buyer. When a seller who wants to have a liquidity event wants to protect his employees, continue running very often continue in the position of President, CEO of his company, we are definitely the preferred buyer. And very often and we tell people we cannot be the highest price, But we and we’ll also do a transaction where we’ll buy 80.1%, leave somebody with roughly 20%. So if their projection of growth is correct over the next 3, 5, 7 years, they will benefit significantly by the growth of their own company, while at the same time pulling money out and having a liquidity event,” — Eric A. Mendelson, Q4 2015 earnings call

This creates a form of proprietary deal flow. A seller focused only on maximizing the immediate cash price will probably choose another buyer. A seller who also values employees, autonomy, legacy, and future participation may prefer HEICO even at a slightly lower valuation.

Decades of completed acquisitions provide evidence that the promise is credible. HEICO can introduce a potential seller to founders who previously joined the group. Those references can explain whether management retained autonomy, employees were treated as promised, and the minority interest continued creating value.

Laurans Mendelson highlighted this reputational advantage:

“Many private owners would rather sell to us at a slightly lower price than to sell to, say, one of the other companies or private equity guys, because they know that the culture. They will stay with the company. They will be able to share in the future profits.” — Laurans A. Mendelson, Q1 2022 earnings call

Reputation compounds in acquisitions much as trust compounds in customer relationships. Each successfully preserved company makes the seller proposition more credible to the next founder. That credibility can reduce competitive tension, improve access to businesses not broadly auctioned, and partly offset HEICO’s refusal to pay the highest multiple.

The proposition is also operationally self-reinforcing. The best founders are more likely to choose a buyer that preserves their autonomy. They then continue managing the subsidiaries, making HEICO’s decentralized model more effective. Their subsequent experience provides another reference for future sellers.

The acquisition process is therefore less about purchasing anonymous financial assets than about adding owner-managed businesses to a network of other owner-managed businesses.

Each successful acquisition strengthens HEICO’s reputation as a trusted long-term home for the next entrepreneur or management team.

“I think what’s becoming more and more consistent to us is that HEICO seems to be an acquirer of choice for these folks because of our operating style, because we treat people fairly, both customers and team members, shareholders.

I mean, that’s all part of our DNA. And when they have the opportunity to select with whom they are going to work, whether it is an entrepreneur who’s built up a business or a management team, they or even a private equity firm that feels that HEICO can write a check and close, we continue to be I think favored in that area. And we just got to make sure that we find businesses that match with our DNA and that can be acquired at fair prices where it’s fair for the seller, it’s fair for the seller’s leadership team and employees and also it’s fair for HEICO.”
— Laurans A. Mendelson, Q1 2013 earnings call

10.4. Can the model continue at a larger scale?

HEICO’s operating system has worked across more than one hundred acquisitions, two operating groups, and a wide range of aerospace, defense, space, medical, and industrial products. The central question is whether it can continue working as the company grows.

The acquisition opportunity remains substantial. Aerospace and defense supply chains contain thousands of specialized manufacturers, repair shops, distributors, and electronic-component companies. Many are small, privately owned, and exposed to founder succession. Their products may be attractive even when the businesses lack the scale or capital to remain independent indefinitely.

HEICO also has more resources than during the earlier stages of its acquisition program. Free cash flow, borrowing capacity, reputation, and an internal management network allow it to consider a wider range of targets. Subsidiary presidents can complete smaller acquisitions within their product markets, reducing the burden on the Mendelson family and headquarters.

The decentralized structure is scalable in one important respect: HEICO does not need a central organization capable of operating every acquired business. Each company arrives with management, technical knowledge, and customer relationships. Adding another subsidiary does not require headquarters to learn how to manufacture every product.

The model is not infinitely scalable, however. Capital allocation remains centralized, and every acquisition requires judgment about the people, products, financials, culture, and purchase price. Monitoring the quality of those decisions becomes more difficult as the number of subsidiaries grows.

The capital required to move consolidated results also rises with the company. A $20 million acquisition that once made a meaningful contribution now has limited impact. HEICO can respond by completing more small transactions, pursuing larger acquisitions, or combining both approaches.

More transactions increase demands on due diligence and management attention; larger transactions increase the financial consequence of a mistake. Wencor showed that HEICO can finance a transaction far larger than its traditional bolt-ons while preserving substantial operating autonomy, but it also raised the stakes. A poor outcome from a $20 million deal can be absorbed; a poor outcome from a transaction exceeding $2 billion would affect the entire group.

Valuations create another constraint. Private equity has become increasingly active in aerospace and defense supply markets, raising prices for attractive companies. HEICO’s reputation may help it win selected transactions without the highest bid, but not every seller values legacy or autonomy enough to accept less.

Management has repeatedly said it will wait rather than change the model’s economics. This discipline makes acquisition growth uneven: some years contain many transactions, while others contain few. Investors expecting smooth annual deployment may mistake patience for a lack of opportunity even when refusing to transact creates more long-term value.

Culture also becomes harder to preserve as the group grows. The direct connection between the Mendelsons and each subsidiary naturally weakens, new managers join without experience of the earlier years, and large acquisitions bring employees whose expectations were shaped under different owners.

HEICO must therefore institutionalize a culture that developed around three members of one family. Incentives, decentralization, and retained founder ownership help, while the subsidiary structure keeps local employees close to their immediate leadership. Future generations of corporate and subsidiary managers must nevertheless understand why HEICO operates this way rather than merely copying the visible mechanics.

The greatest risk would be preserving decentralization as a slogan while changing the incentives beneath it. If headquarters begins prioritizing consolidated revenue, short-term margins, or deal volume over cash returns and customer relationships, the operating system would gradually lose coherence.

The same applies to acquisitions. Paying too much because HEICO needs a larger transaction, replacing founders with centralized managers, or cutting investment to produce immediate accretion would make the company resemble the buyers from which it has historically distinguished itself.

Victor Mendelson’s comments on HEICO’s future show that management recognizes this danger:

“One, it isn’t easy. It’s never been easy. And just because we’ve had past success, we know that that’s not necessarily indicative of future success. And we keep that in mind every day here. And for us, we have to treat it as though today is the day we took over the company and we’re looking at a clean slate. And what happened and what we were successful with is not going to repeat itself. And that’s an important mindset for us to have. And we’ve got to be as hungry today. We always were. And I don’t believe for a moment that just because we’ve been fortunate so far, that we’ll automatically be fortunate. We have to make it each day and prove it each day. That’s number one, keep that mindset. Don’t become arrogant. Don’t think we’ve cracked the code.” — Victor H. Mendelson, Fernway Insights interview, 2022

HEICO’s acquisition model is sometimes summarized as buying high-margin niche businesses and leaving them alone. That description captures the visible structure but misses the work beneath it. HEICO must find the right people, pay an acceptable price, design the incentives, maintain financial discipline, and earn enough trust for local managers to use their autonomy responsibly.

The model works because its parts reinforce one another. Family ownership supports a long time horizon; employee and founder ownership spread that perspective through the subsidiaries; decentralization preserves local knowledge and accountability; and the seller proposition attracts businesses that already fit the culture. Those businesses generate cash, which management reallocates to product development and further acquisitions.

HEICO’s products may appear difficult to connect from the outside, but the operating logic is consistent. The company acquires specialized businesses, keeps decisions close to customers and products, measures success through cash generation, and holds assets for the long term.

That operating system may ultimately be more difficult to replicate than any individual product HEICO manufactures.

Part 4 explained how HEICO extended its model beyond aircraft parts through ETG, decentralization, and a disciplined acquisition playbook. The question now is what this compounding system has produced financially—and whether HEICO’s economics, competitive advantages, risks, and valuation still support attractive long-term returns. That is exactly what we will unpack in Part 5.

It will be structured in five Parts:

• Part 1: The Aviation Ecosystem Behind HEICO

• Part 2: Why the Aircraft Aftermarket Creates a Structural Opportunity

• Part 3 (today): Inside HEICO’s Crown Jewel

• Part 4: The Second Engine and the HEICO Operating System

• Part 5: The Economics Behind the Compounding Machine

All parts are now available in one PDF. You can download it below.

Deep Dive Heico Corp

9.73MB ∙ PDF file

Download

Download

Download

👔 Company Name: HEICO Corporation (“HEICO”)

🔎 ISIN: US4228061093 (Common Stock) and US4228062083 (Class A)

🔧 Business model: Aerospace and electronics serial acquirer

🌍 Geographic exposure: global (~62% U.S. and ~38% international sales across approximately 130 countries)

📈 Stock Price: HEI Common Stock: $339 | HEI.A Class A Common Stock: $253

💰 Market Capitalization: ~$40 billion

👨‍💼 Number of CEOs since foundation: 2 (one transition — Laurans Mendelson to Eric and Victor Mendelson)
since 1990

👨‍👩‍👦 Founder-/Owner-operator: Yes — owner-operated by the Mendelson family

📅 CEO tenure: Since 1990

🥇 Insider ownership: ~21.0% of shares

📊 10Y EPS CAGR: ~16%

🔁 Reinvestment profile: High

💸 Capital intensity: Low — capex-light, but inventory-intensive

🏰 Moat: Regulatory approvals, customer trust, installed-base scale, price and availability, culture

🧨 Main risks: Valuation, acquisition execution, aviation cyclicality, OEM countermeasures

🌳 Slow Compounding fit: Yes – high-quality (niche) serial acquirer

Business Model in a Nutshell: HEICO is a decentralized aerospace and electronics serial acquirer. Its Flight Support Group provides lower-cost aircraft parts, repairs, and distribution services, while its Electronic Technologies Group supplies highly engineered components for aerospace, defense, space, medical, and other demanding markets. Growth comes from new product development, market-share gains, and disciplined acquisitions of niche businesses that retain significant operational autonomy.

Subscribe now

7. HEICO Today: One Company, Two Segments, Dozens of Niche Businesses

Describing HEICO simply as a PMA manufacturer captures its origins but only part of the company it has become. HEICO now designs, manufactures, repairs, and distributes a broad range of aerospace, defense, and electronic products through dozens of specialized operations worldwide.

Its products range from FAA-approved replacement parts and component repairs to microwave equipment, power supplies, antennas, cockpit displays, parachute systems, and components used in satellites and missile-defense systems. HEICO generally targets small but important products in technically demanding markets where quality, reliability, certification, specialized knowledge, or established customer relationships make competition difficult.

Management has repeatedly said that it does not view HEICO primarily as an aerospace or electronics company. Laurans Mendelson instead described it as a cash-generating vehicle:

“Basically, our strategy has always been, I’ve said HEICO, I’ve said this many times at presentations, I perceive HEICO not as an aerospace or electronic technologies company. HEICO is a very strong, well managed vehicle for generating cash flow. And as I look at HEICO, I see a snowball of cash. That’s why we are in business.” — Laurans Mendelson, Q4 2017 earnings call

Eric Mendelson returned to the same idea during the COVID-19 crisis in 2020. The disruption placed unusual pressure on commercial aviation but did not change the criteria by which the family evaluated HEICO or allocated capital:

“I have said for many years that HEICO is not an aerospace or electronics company. It is a vehicle that generates strong cash flow and that’s what we do. And we will make decisions based upon our cash flow profitability. […] We are looking for constant cash flow and growth. That’s what HEICO is all about. Forget aerospace, electronic technology, whatever. HEICO is a vehicle to generate cash flow and we do it through those 2 divisions which normally has high margins. And I think if you understand that you’ll understand HEICO better.” — Eric Mendelson, Q2 2020 earnings call

7.1. One company, two operating groups

HEICO reports through two operating segments: Flight Support Group (FSG) and Electronic Technologies Group (ETG). In fiscal 2025, the company generated $4.49 billion of consolidated revenue and slightly more than $1.0 billion of operating income. FSG contributed approximately 70% of both sales and segment operating income, with ETG providing the remaining 30%.

The Flight Support Group is the larger and older platform. It consists principally of HEICO Aerospace Holdings and HEICO Flight Support Corporation and their subsidiaries. FSG generated $3.12 billion of fiscal 2025 revenue and $750 million of operating income, for a 24.1% margin.

Its activities extend far beyond the PMA products most closely associated with HEICO. FSG reports three broad product lines. Aftermarket replacement parts generated approximately $1.92 billion in fiscal 2025, making them the company’s largest individual category. The line includes HEICO’s FAA-approved jet-engine and aircraft-component alternatives as well as replacement parts distributed by the group.

Repair and overhaul parts and services contributed another $749 million, including selected engine and aircraft-component repairs and overhauls, avionics, instruments, composites, and flight surfaces.

Specialty products generated $446 million and include thermal-insulation systems, complex composite assemblies, lightning-strike protection materials, precision-manufactured aerospace components, parachute systems, emergency-descent devices, and missile hardware.

FSG therefore serves several roles in the aviation aftermarket. It develops alternatives to OEM replacement parts, repairs components that might otherwise be replaced, distributes HEICO and third-party products, and manufactures specialized components for commercial aviation, defense, and space. Customers include airlines, cargo carriers, MRO providers, OEMs, business-aviation operators, the U.S. government, and allied foreign militaries.

The Electronic Technologies Group is smaller by revenue but similarly profitable. ETG generated $1.41 billion of fiscal 2025 revenue and $325 million of operating income, for a 23.0% margin. Approximately $1.14 billion came from electronic components used primarily in defense, space, and aerospace equipment, while roughly $271 million came from medical, telecommunications, industrial, and other electronics markets.

ETG’s portfolio includes microwave and radio-frequency products, power-conversion and distribution equipment, high-voltage interconnects, antennas, cockpit displays, memory products, infrared simulation and test equipment, locator beacons, fuel systems, surveillance equipment, and many other specialized components. Chapter 9.1 discusses these products in greater detail. For now, the important point is that ETG follows a different commercial model from PMA while preserving many of the same economics: its products are often technically complex, highly reliable, qualified for specific platforms, and inexpensive relative to the larger systems in which they operate.

The two groups also diversify HEICO’s end markets. Commercial aviation represented approximately 58% of fiscal 2025 consolidated revenue, defense and space another 31%, and medical, telecommunications, electronics, and other industrial markets the remaining 11%.

HEICO remains meaningfully exposed to commercial aviation but is no longer dependent on airline activity alone. Defense and space follow different cycles, while medical and industrial electronics provide smaller sources of diversification. This proved especially valuable during COVID-19, when the collapse in commercial flying sharply affected FSG while much of ETG continued operating close to normal levels.

The customer base is similarly broad. HEICO markets products and services in approximately 130 countries. In fiscal 2025, around 62% of revenue came from U.S. customers and 38% from elsewhere. No individual customer represented 10% of consolidated sales, while the five largest together accounted for approximately 20%.

This diversification matters because many subsidiaries operate in narrow niches. An individual business may depend heavily on one platform, program, or customer, but the consolidated group spreads that exposure across thousands of products, numerous aircraft and defense systems, and a broad range of customers and geographies.

FSG and ETG are distinct operating platforms but not isolated from each other. ETG companies may manufacture electronic or specialty products for Flight Support customers, while FSG’s airline, MRO, and distribution relationships can provide routes to market for ETG products. The Wencor integration has created additional opportunities for HEICO subsidiaries to quote products previously sourced outside the group. HEICO does not, however, force every operation into a centralized cross-selling system; cooperation is pursued where it creates practical value.

7.2. A collection of entrepreneurial businesses

The two-segment reporting structure can suggest two large, centrally managed divisions. Operationally, HEICO looks very different.

Since the Mendelson family took control in 1990, HEICO has completed approximately 112 acquisitions. These transactions added engineering capabilities, product portfolios, manufacturing facilities, repair stations, distribution operations, and customer relationships across aerospace, defense, space, and electronics. Most acquired companies retain their identity, management team, and operating responsibility. They join FSG or ETG for reporting and capital allocation but generally continue operating as decentralized businesses.

The subsidiary, rather than the consolidated group, is therefore the most useful unit for understanding HEICO. A typical company focuses on a narrow set of products and customers. Its president and local team remain close to engineering, manufacturing, inventory, employees, and demand, allowing decisions to be made by people who understand the product rather than by several layers of corporate management.

Victor Mendelson described the structure in 2024:

“We don’t believe in a structure where there are vice presidents and group vice presidents and assistant vice presidents. We don’t want anybody too far from the customer or from the engineering. And, you know, that’s panned out well. We’ve noticed that in a small business, if you look at HEICO, we’ve got about 10,000 people, but it’s not 10,000 people in some one location. You know, it’s about 100, 100-person operations, that kind of thing. And if you’ve got 75 or 100 people in a business, there’s nowhere to hide. If somebody doesn’t show up today, the boss knows.” — Victor Mendelson, Gabelli Funds 30th Annual Aerospace & Defense Symposium, September 2024

By the end of fiscal 2025, HEICO employed approximately 11,100 people, including around 5,300 in FSG and 5,800 in ETG.

The structure has several consequences. Local management remains directly accountable for customer service, quality, delivery, inventory, hiring, costs, and working capital. Managers can respond to market changes without waiting for headquarters, while their results remain highly visible. In a small operation, weak performance cannot easily disappear inside a large corporate organization.

Corporate management focuses on a narrower set of responsibilities: allocating capital, financing acquisitions, managing the balance sheet, establishing incentives, monitoring financial performance, and providing group-level governance. Capabilities, suppliers, and customers are shared where useful, but HEICO generally avoids centralization for its own sake.

The listed parent does not own 100% of every operation. Lufthansa Technik retains a 20% interest in HEICO Aerospace Holdings, preserving the ownership relationship established in 1997. Founders and other partners also retain minority stakes in several FSG and ETG subsidiaries.

These arrangements allow sellers to participate in the future growth of businesses they continue to manage, strengthen alignment, and make HEICO more attractive to entrepreneurs not ready to leave entirely. The accounting consequence is that part of the earnings of consolidated subsidiaries belongs to minority shareholders. In fiscal 2025, $55 million of net income was attributable to noncontrolling interests rather than HEICO’s listed shareholders (further explained in chapter 12.4).

Chapter 10.1 examines the decentralized model in greater depth. The central point here is that the HEICO name sits above a network of entrepreneurial operations. The parent provides capital, discipline, and a permanent home; subsidiaries provide products, technical knowledge, and customer relationships.

7.3. The Mendelson family

The Mendelson family links the HEICO that emerged from the 1990 takeover with the company today. This continuity is unusual because Eric and Victor Mendelson were involved from the beginning rather than joining decades later as second-generation successors. They helped identify the investment, fought for control, and built the two operating groups.

HEICO’s formal leadership structure changed twice in 2025. Laurans Mendelson, Chairman and CEO for more than three decades, became Executive Chairman, while Eric and Victor Mendelson became Co-CEOs and Co-Vice Chairmen. Laurans Mendelson died on September 27, 2025, at age 87. Under HEICO’s long-standing succession plan, Eric and Victor Mendelson immediately became Co-Chairmen while continuing to serve as Co-CEOs.

Eric Mendelson has led FSG since its formal creation in 1993 and was the principal architect of HEICO’s PMA development program. Victor Mendelson has led ETG since its formation in 1996. Both had served as Co-Presidents of HEICO since 2009.

Their responsibilities mirror HEICO’s structure. Eric Mendelson remains President and CEO of FSG, focusing on the aviation aftermarket, product development, customer relationships, and Flight Support acquisitions. Victor Mendelson remains President and CEO of ETG, bringing experience across electronics, defense, space, legal matters, and acquisitions.

Family influence is reinforced by continuing share ownership. HEICO has two publicly traded classes with virtually identical economic rights but different voting power. Each Common share, traded as HEI, carries one vote; each Class A share, traded as HEI.A, carries one-tenth of a vote.

As of January 2026, approximately 55.1 million Common shares and 84.3 million Class A shares were outstanding. The Mendelson Reporting Group beneficially owned approximately 9.23 million Common shares, equal to 16.47% of that higher-voting class, and approximately 974,000 Class A shares. Because the holdings are concentrated in Common shares, the family’s voting influence considerably exceeds its percentage of the combined economic share count.

The structure gives the family substantial influence without an outright majority of the economic interest. It also aligns a meaningful share of the family’s wealth with HEICO’s long-term value. The company’s performance affects the Mendelsons primarily through the same share prices and distributions that affect outside shareholders.

HEICO extends ownership beyond the family. Its U.S. savings and investment plan makes contributions in HEICO shares, giving many employees a direct economic interest. Chapter 10 discusses this broader ownership culture, an important part of HEICO’s effort to reproduce the mentality of a family-controlled small business across a much larger organization.

The current leadership arrangement combines continuity with a completed generational transition. Eric and Victor Mendelson jointly lead the listed company while continuing to oversee the two operating groups they spent decades building.

8. Flight Support Group (FSG): The Crown Jewel

FSG is the business on which modern HEICO was built. It began with one combustion chamber for a Pratt & Whitney engine and has grown into the world’s largest independent provider of FAA-approved aircraft and engine replacement parts, supported by component repair, overhaul, distribution, and specialty manufacturing.

8.1. The structure of the Flight Support Group

Every maintenance event begins with the same problem: an aircraft or component must return to service quickly, safely, and at a reasonable cost. HEICO built FSG to solve that problem in several ways—supplying approved replacement parts, repairing existing components, distributing urgently needed products, and manufacturing specialized aerospace equipment. Together, these capabilities address the customer’s underlying maintenance need rather than a single product or service.

Calling FSG a pure PMA business would therefore be misleading. PMA remains the foundation of its competitive position and its most distinctive capability, but the group increasingly presents itself as a provider of cost-saving aftermarket solutions. Depending on the component and customer situation, HEICO may offer a factory-new PMA part, an approved repair, an OEM product sourced through its distribution network, or a combination of these options.

Operationally, FSG comprises four principal groups:

• the HEICO Parts Group (HPG),

• the HEICO Repair Group (HRG),

• the HEICO Distribution Group (HDG), and

• the Specialty Products Group (SPG).

The groups are closely connected, but each addresses a different part of the aerospace value chain.

8.1.1. HEICO Parts Group (HPG)

HPG is the historical core of Flight Support. It designs and manufactures FAA-approved replacement parts for aircraft and engines and contains the engineering, regulatory, and manufacturing capabilities behind HEICO’s PMA portfolio. Several operating units focus on different aircraft systems, engine platforms, and product categories. The portfolio now spans virtually every ATA chapter—the standardized system used to classify aircraft equipment and functions—and includes engines, components, airframe structures, interiors, and avionics.

This part of FSG most closely resembles the HEICO described in Chapter 6. Customers identify expensive, poorly available, or otherwise unattractive OEM parts; HEICO evaluates the opportunity, develops an alternative, and seeks FAA approval to manufacture and sell it. The resulting product is sold directly to airlines and MRO providers or supplied through HEICO’s repair and distribution operations.

HPG’s reach bears little resemblance to the single combustion chamber with which the Mendelson era began. The group describes itself as the world’s largest independent provider of FAA-PMA-approved engine and aircraft-component parts, with approximately 20,000 approved products and roughly 400–550 new PMAs added each year.

Airlines incur technical and administrative costs when qualifying an alternative supplier. A small PMA company with only a few products may therefore struggle to justify the effort. HPG can offer an airline thousands of potential savings opportunities across engines, airframes, components, structures, interiors, and other systems. Once the customer has qualified HEICO and gained confidence in its quality systems, the same relationship can support many additional parts.

The products are sold factory-new. They are not used or refurbished substitutes but newly manufactured components produced under an FAA-approved quality and production system.

HPG’s role begins well before manufacturing. HEICO screens potential products using industry and customer information, analyzing demand, OEM pricing, availability, technical complexity, the expected life of the underlying platform, and the investment required to develop and stock the part. Only candidates combining technical feasibility with an attractive expected return enter development.

The operating units then perform the engineering needed to establish the replacement design. Depending on the product, this may include dimensional analysis, material characterization, coating development, manufacturing-process design, stress or performance testing, and preparation of the technical data required by the FAA. HEICO’s long approval history, engineering capabilities, and regulatory credibility allow it to process a large number of PMA applications more efficiently than a new entrant.

Manufacturing is another core capability. Design approval is insufficient if the company cannot repeatedly produce the component within approved specifications. HEICO has accumulated specialized knowledge in precision machining, forming, coatings, brazing, and other processes. It relies primarily on trade secrets, proprietary processes, software, and practical manufacturing expertise rather than a large patent portfolio.

Quality control connects design and production. Every batch must conform to the approved design and quality system. In aerospace, a defect can damage far more than one product’s economics; it can weaken confidence in the wider PMA portfolio. HPG’s technical record and consistent quality are therefore central to the group’s commercial value.

Once approved and manufactured, products are sold directly to airlines, cargo carriers, and repair and overhaul companies. They may also reach customers through other Flight Support businesses. HEICO repair stations can use HPG products when returning components to service, while distribution operations stock and deliver them alongside third-party products. HPG creates proprietary products; the wider FSG provides additional channels to the installed fleet.

HPG’s operating record reinforces this credibility. According to HEICO, the group has delivered more than 90 million parts without a service bulletin, Airworthiness Directive, or in-flight shutdown associated with its products. As discussed in Chapter 5.5.4, this history provides an important counterweight to longstanding safety concerns about PMA.

8.1.2. HEICO Repair Group (HRG)

HRG is Flight Support’s component maintenance, repair, and overhaul platform. According to HEICO, it is one of the world’s largest independent providers of component MRO and asset-management services, specializing in flight-critical equipment.

An important part of its offering is proprietary DER-approved repairs. As Chapter 3.10 explained, a Designated Engineering Representative is an FAA-authorized engineer who can approve certain technical data or recommend its approval. DER-approved data allow HEICO to use proprietary repair processes rather than relying exclusively on OEM instructions. In many cases, an airline can repair an expensive component instead of buying a new OEM or PMA replacement.

HRG is a specialized component MRO provider rather than a full-service maintenance organization. It does not perform heavy maintenance on complete airframes, overhaul entire jet engines, or provide airport line and base maintenance. Airlines and MRO providers instead remove accessories, line-replaceable units, and structural components from aircraft or engines and send them to an HRG repair station, where they are inspected, tested, repaired or overhauled, and returned to an airworthy condition.

HRG’s capabilities span avionics, electronics, electromechanical equipment, electrical harnesses and rewinds, fuel systems, hydraulics, power generation, pneumatics, aerostructures, wheels, and brakes.

Products range from valves and actuators to complex avionics and structural assemblies, fuel pumps, generators, fuel controls, pneumatic valves, starters, turbo compressors, constant-speed drives, hydraulic pumps, wheels and brakes, composite flight controls, auxiliary-power-unit accessories, and thrust-reverser actuation systems.

The work involves more than replacing visibly damaged parts. A component entering the shop is inspected and tested to determine the cause and extent of failure. Depending on the unit, the process may include disassembly, cleaning, nondestructive testing, replacement or restoration of internal parts, reassembly, and functional testing before an authorized repair station releases it to service.

The difference between repair and overhaul is primarily one of scope. A repair addresses a defined defect or restores a failed function. An overhaul is more comprehensive: the unit is disassembled, inspected, and restored to an approved technical standard so that it can return to service in a specified condition. In both cases, appropriately certificated facilities and technicians must perform the work using approved data.

HRG may follow OEM maintenance instructions, but it also develops proprietary alternatives approved through DER data or directly by the owner or operator where permitted. Such repairs can provide greater engineering flexibility and restore a component instead of requiring an expensive assembly replacement or a more restrictive OEM procedure.

DER repair development is economically similar to PMA development. In both cases, HEICO invests in engineering and regulatory work to create a lower-cost alternative to the OEM solution. A PMA substitutes a factory-new HEICO part for an OEM part, while a DER-approved repair preserves and restores a component that might otherwise be discarded or replaced.

The repair and parts businesses reinforce each other. HRG repair stations consume replacement parts during overhaul and may use products from HPG and third-party suppliers. Conversely, the shops provide practical information about how components fail, which internal parts are replaced most often, and where OEM procedures create unusually high costs.

A recurring failure observed across many shop visits may reveal an opportunity for a new PMA part or proprietary repair. HRG is therefore not merely a channel for existing products but an important source of technical information and development ideas.

HRG also provides component-exchange and asset-management services. Under an exchange arrangement, an airline receives a serviceable unit immediately and returns its unserviceable component as the exchange core. HEICO repairs the returned unit and places it back into the available pool.

This can be more valuable than waiting for the airline’s own component to move through the shop. The aircraft returns to service sooner, while HEICO manages inventory, the repair cycle, and unit availability. Exchange services position HRG as an alternative to spare-component pools and OEM support programs.

The proposition therefore combines repair price, turnaround time, availability, and technical capability. A low quote offers little value if the component remains in the shop for months and the aircraft cannot fly. HRG’s inventory, exchange pools, and relationships with other Flight Support businesses allow it to address the total cost and operational impact of the event.

Customers include airlines, regional operators, cargo carriers, asset-management companies, independent MRO providers, military operators, and government agencies. HRG covers commercial and military aircraft, including avionics, navigation systems, and instruments used by the U.S. government and allied militaries.

HRG competes with three principal groups:

• OEM-owned repair networks

• Airlines operating their own maintenance shops

• Other independent MRO providers.

Independence is part of HRG’s proposition. An OEM repair organization may be incentivized to maximize proprietary parts and procedures. HRG can compare repair, DER restoration, HEICO PMA, distributed OEM parts, and component exchange and select the most attractive approved outcome for the customer.

In sum, HRG broadens HEICO from a parts supplier into a maintenance partner. HPG creates proprietary factory-new alternatives, while HRG helps determine whether a unit should be repaired, overhauled, exchanged, or fitted with replacement parts. Together with distribution, these capabilities address a larger share of the customer’s maintenance problem rather than one component alone.

8.1.3. HEICO Distribution Group (HDG)

HDG is Flight Support’s global aircraft-parts distribution platform. HEICO entered the business through the 2005 acquisition of Seal Dynamics and expanded it through subsequent acquisitions. Today, HDG distributes FAA-approved components and OEM replacement parts for commercial and military applications through sales offices and stocking locations across the Americas, Europe, the Middle East, Asia, and Australia.

HDG differs fundamentally from HPG. It connects component manufacturers with airlines, MRO providers, aircraft manufacturers, and military organizations. HDG purchases or stocks parts, manages supplier relationships, handles documentation and logistics, and delivers the required component.

Products come from several sources. HDG distributes HEICO-manufactured PMA parts and replacement components supplied by unrelated third-party OEMs and specialist manufacturers. It remains useful even when HEICO offers no proprietary alternative—for example, when a part is too difficult or uneconomical to reverse-engineer, the platform is too new for meaningful PMA adoption, or the manufacturer prefers to reach a fragmented aftermarket through a specialist distributor.

The portfolio includes hydraulic, pneumatic, structural, interconnect, mechanical, and electromechanical components for commercial, regional, and general aviation. HDG also supplies military aircraft parts and support services to the U.S. Department of Defense, defense prime contractors, and allied foreign militaries.

HDG adds value because the aftermarket is highly fragmented. An airline or MRO may require thousands of part numbers from many manufacturers, often in small quantities and at unpredictable intervals. Buying each item directly would require numerous commercial relationships, purchase orders, quality checks, and logistics processes. HDG aggregates products from multiple manufacturers into a broader source of supply.

Inventory is central to the model. Maintenance demand does not follow a predictable production schedule: a component may fail unexpectedly, an aircraft may be grounded, or a shop may discover an additional need only after disassembly. Immediate availability then matters far more than a manufacturer’s theoretical ability to produce the part months later.

HDG holds inventory near major aerospace markets and provides urgent aircraft-on-ground (AOG) support. It also offers customized fulfillment programs, long-term supply agreements, and on-site customer support. Some businesses provide kitting, cable marking, technical assistance, and just-in-time delivery. These services reduce customer purchasing complexity and inventory requirements while preserving access to critical components.

Unlike an ordinary industrial distributor, an aerospace distributor must preserve each part’s documentation and traceability. Before installation, the customer needs evidence of source, condition, and regulatory status. HEICO supplies the relevant airworthiness and conformity documentation, combining physical availability with confidence in a controlled and traceable supply chain.

HDG includes several specialized businesses. Seal Dynamics, the original distribution platform, serves the commercial aerospace aftermarket and provides 24/7 AOG support. Air Cost Control specializes in electrical interconnect products, including connectors, cables, harness protection, electromechanical devices, and related accessories for aerospace, defense, and space.

Blue Aerospace serves the military aftermarket through parts distribution, supply-chain and program management, MRO support, and engineering services for platforms including the F-16, F-15, F/A-18, and C-130. Pioneer Industries represents manufacturers supplying the U.S. military and other government customers and manages procurement, inventory, military packaging, contract administration, and compliance requirements that many smaller manufacturers would struggle to handle independently.

The 2023 Wencor acquisition materially expanded distribution. Its activities cover high-use commercial and military aftermarket products including bearings, tooling, interiors, filters, hardware, lighting, electrical products, safety equipment, communications components, and seals. Wencor also brought a global logistics network, online ordering, and inventory-management programs.

Distribution is strategically important for three reasons:

• First, it gives HEICO a commercial relationship with customers even where no HEICO PMA exists. An airline may initially buy an OEM component through HDG and later adopt a HEICO replacement or HRG repair. Distribution therefore increases customer touchpoints across the group.

• Second, HDG provides information about actual aftermarket demand. Its businesses see which parts customers order repeatedly, where lead times are increasing, and which products are becoming difficult or expensive to source. That information can reveal opportunities for HPG to develop a PMA, HRG to create a proprietary repair, or HDG to secure another distribution agreement.

• Third, distribution supports parts and repair operations. HRG repair stations need replacement components to complete overhauls, including HEICO PMAs, Wencor products, and OEM parts sourced through HDG. Access to several supply channels can reduce turnaround time and help HEICO select the most economical approved solution.

Distribution may also be preferable to PMA development. Attractive rights to an existing product can generate a return without a multi-year engineering and approval process. HEICO can support the customer immediately while avoiding the technical, commercial, and inventory risk of developing a competing product. Management can choose among manufacturing, repair, and distribution based on each opportunity’s economics rather than treating PMA as the only solution.

Distribution nevertheless has a different economic profile from proprietary parts. The distributor shares economics with the manufacturer and has less control over the product and pricing. It must also purchase and hold inventory before receiving customer orders. That inventory may lose value if the aircraft is retired, grounded for an extended period, or supported by a different component.

HDG broadens HEICO’s proposition from selected proprietary alternatives to a much wider share of customer aircraft-parts requirements. HPG develops the alternative, HRG restores the component, and HDG makes the required product—whether made by HEICO, Wencor, or an OEM—available when and where the customer needs it.

8.1.4. HEICO Specialty Products Group (SPG)

SPG is the least intuitive of Flight Support’s four groups and often receives the least investor attention. It brings together specialized manufacturers of highly engineered, mission-critical mechanical solutions, including structural, thermal, and composite products for commercial aviation, defense, space, and selected industrial applications. SPG houses businesses that do not fit neatly into parts development, component repair, or distribution. Compared with the other groups, these companies generally sit further upstream and more often supply OEMs, original equipment suppliers, defense primes, and government customers.

The range is diverse. SPG manufactures personnel and cargo parachutes, heavy-airdrop platforms, and emergency-descent devices for pilots and crews in elevated cockpits. It also produces removable thermal-insulation blankets for engines and other high-temperature applications, conductive foil mesh protecting composite structures from lightning strikes, and complex composite assemblies for aircraft, defense systems, and spacecraft. Other activities include precision machining and missile hardware.

The products may appear unrelated but share similar economics. They are highly engineered, produced in modest volumes, and represent only a small portion of the larger aircraft or defense system’s value. Reliability, qualification, and delivery performance are nevertheless critical, giving customers little reason to switch merely for a small component-cost saving.

SPG therefore differs from the traditional PMA model. HPG enters the aftermarket as a lower-cost approved alternative to an OEM part, while SPG is often the original qualified manufacturer or subcontractor. Its position may begin during the design and production phase of an aircraft, spacecraft, or defense program and continue as long as the platform remains active.

The revenue profile also differs. PMA demand is driven largely by aircraft utilization, maintenance events, and the installed fleet. SPG depends more on OEM production rates, customer programs, defense procurement, and contract timing. Some products later generate replacement demand, but the relationship often begins with an OEM, prime contractor, or government customer.

Despite these differences, SPG fits the broader HEICO model. Its products occupy narrow technical niches, account for a small share of total system cost, and require capabilities that cannot be replicated quickly. Many are manufactured in modest volumes but must meet demanding specifications, supporting attractive economics without mass-market production.

The position is durable but not risk-free. An SPG business may depend on a limited number of customers or programs. Production delays, program cancellations, defense-budget changes, or lower aircraft deliveries can affect demand, while poor quality or delivery performance can cost future work. Consolidation across numerous products, customers, and platforms reduces some of this concentration.

SPG also strengthens Flight Support’s manufacturing base. Its machining, composite, thermal, and fabrication capabilities can support products developed elsewhere in HEICO. After the Wencor acquisition, management specifically identified SPG as an internal resource that Wencor could approach for new product quotations.

The four-group structure differs from external reporting. FSG is one operating segment, and revenue is divided into only three product lines: aftermarket replacement parts; repair and overhaul parts and services; and specialty products. The organizational groups and reported categories overlap but do not correspond exactly. Distribution, for example, is not separately disclosed and is largely included in aftermarket replacement parts (further explained in Chapter 8.8).

The interaction among the groups matters more than the labels. HPG develops proprietary alternatives; HRG brings HEICO into the maintenance event and consumes PMA and distributed products; HDG provides inventory, customer access, and market intelligence; and SPG adds manufacturing capability and exposure to additional aerospace and defense applications. Wencor spans several activities and materially increases their scale.

“With regard to PMA versus repair or distribution, again, I think what the airlines are looking for is reducing their total cost of ownership, producing their total costs. And whether we sell a product as a direct PMA or we embody it in a repair or we are able to structure something with the distribution deal, I think that they’re all very complementary and things are getting very fuzzy between our PMA and our repair, because there are all sorts of products, which perhaps in the past we would have sold as PMA and now we’re selling as repairs, because sometimes you’re able to salvage part of a unit and have the cost of the repair be lower than the cost of making a brand new part.” — Eric A. Mendelson, Q4 2015 earnings call

Recurring aftermarket demand should not be confused with long-term order visibility. The installed fleet, recurring maintenance events, and growing number of approved parts provide a durable demand base, but customers place orders relatively close to delivery. Visibility also differs among FSG activities:

“In our parts business, both PMA and distribution, we receive most of the orders in the month of shipment. So the visibility there is probably 30 to 60 days out. Within repair, it’s probably another 30 days on top of that. And in specialty products, it’s probably, say, another 60 days on top of that.” — Eric A. Mendelson, Q1 2020 earnings call

This creates an important distinction between structural demand visibility and near-term revenue visibility. HEICO can assess long-term drivers through utilization, maintenance activity, fleet age, and customer adoption, but has less visibility into exact quarterly timing. PMA and distribution are particularly short-cycle, with most orders arriving near shipment. Repair adds approximately one month of visibility, while specialty products generally add another two. Changes in demand can therefore appear in HEICO’s results quickly, as COVID-19 demonstrated.

8.2. From customer problem to approved product

HEICO does not develop products by searching randomly through an aircraft for technically replicable parts. The process begins with customer demand and then passes through financial, technical, and regulatory filters.

Airlines, repair stations, and MRO providers already know where the pain lies. They see which OEM products are purchased frequently, which prices have risen most aggressively, which components suffer from poor availability, and where a credible alternative could create meaningful savings. HEICO’s long-standing customer relationships provide this information before engineering resources are committed.

The Lufthansa partnership established the original model: Lufthansa Technik identified high-volume, high-value products, supplied technical knowledge, and provided demand after approval. Today, the network is much broader. HEICO serves every major airline, operates repair and distribution businesses, and receives product requests from across the aftermarket.

The first question is whether customers genuinely want the product. A technically attractive part has little value if airlines resist approving it, the installed base is too small, or expected volume cannot justify the engineering and inventory investment. HEICO also considers similarity to products it has already developed, sourcing and manufacturing speed, and the capital required before meaningful revenue begins.

Eric Mendelson described the decision process in 2025:

“We look at how similar it is to something that we’ve done before, how much the customer wants it, what the payback looks like, what the investment is, how quickly we can get it from the vendor. I mean, all of that stuff is put together, and basically that goes into an IRR analysis.” — Eric Mendelson, Q3 2025 earnings call

This discipline matters because regulatory approval alone does not make a product economically successful. HEICO must pay engineers, acquire and analyze OEM samples, create drawings, select materials, qualify processes, perform tests, prepare the submission, and build inventory. The product must then pass each airline’s qualification process before meaningful purchasing volume develops.

HEICO has historically focused on parts offering meaningful cost or availability benefits without imposing disproportionate customer risk. Less safety-sensitive articles are generally easier for airlines to approve than the most critical engine components, although the portfolio has become more technically demanding over time. Management has repeatedly said that HEICO now develops products whose complexity and criticality it does not disclose for competitive reasons.

“We continue to develop 300 to 500 new PMAs per year, similar number of DER repairs. […]. In addition, we’ve got a number of, you know, I would say, extremely complex, critical products which we offer, which we don’t publicly speak about for competitive reasons. Sometimes our competitors know about them, other times they don’t.” — Eric A. Mendelson, Q3 2022 earnings call

Once selected, the product must reproduce the required performance on a design and manufacturing basis acceptable to the FAA. As discussed earlier, equivalency does not mean merely looking similar; the product must preserve airworthiness and function correctly within the broader system.

HEICO may also improve a product while preserving its required form, fit, and function. An OEM design may have entered service decades before newer materials, coatings, and manufacturing methods became available, while operating experience may reveal recurring weaknesses. HEICO can incorporate those lessons provided the result remains fully compatible and satisfies FAA requirements.

Approval is followed by another capital commitment: HEICO must manufacture and stock enough parts to support customers reliably. A lower price loses much of its value if the part is unavailable when needed, so the company builds inventory before the full demand curve is visible.

Management describes development and commercialization as gradual. Depending on complexity, a product may take roughly a year from identification until sufficient inventory is available. Customer acceptance then builds over time, with the product typically reaching full commercial potential after three to four years. Revenue therefore ramps rather than appearing immediately upon FAA approval.

This creates a portfolio effect. Each product may be small and ramp slowly, but HEICO introduces several hundred PMAs and a similar number of DER-approved repairs in a typical year. Annual cohorts overlap: new approvals enter airline qualification, earlier cohorts gain adoption, and mature products continue serving aircraft that may remain in operation for decades.

Catalog breadth has also changed the offer. A small supplier with one or two PMAs asks an airline to undertake qualification for limited savings. HEICO spreads that effort across a much broader portfolio. Once an airline trusts its engineering, quality, and support, it can evaluate additional products without treating HEICO as a new supplier each time.

Wencor materially increased that scale. Before the acquisition, HEICO offered roughly 12,000 PMAs and Wencor about 7,000, creating a combined portfolio approaching 20,000 approved replacement parts. By early 2025, management also referred to nearly 10,000 DER-approved repairs.

The portfolio now extends far beyond HEICO’s historical engine focus. It expanded from one JT8D combustion-chamber product into additional engine parts and then fuel, hydraulic, pneumatic, electromechanical, wheel and brake, airframe, interior, and avionics products.

“You know, HEICO started out life as a JT8D engine parts manufacturer, and then we got into other engines and components, and as time has gone on, into structures and avionics.” — Eric A. Mendelson, Q3 2025 earnings call

FSG remained entirely dependent on engine products until the early 2000s, when HEICO deliberately began diversifying. By early 2026, approximately three-quarters of PMA sales came from non-engine products:

“When you look at […] the products that we’re doing, our sales in the PMA business are roughly 3/4 non-engine, which would be components, airframe, interior, and about 25% engine.” — Eric A. Mendelson, Q1 2026 earnings call

This diversification matters. Engine products can offer attractive savings, but OEM control through service agreements, licensed repair networks, and warranty pressure is strongest in the engine aftermarket. Non-engine categories expose HEICO to more customer pain points and often face fewer contractual barriers, while reducing dependence on individual engine programs.

HEICO has built a repeatable process for identifying customer problems, screening the economics, completing engineering and regulatory work, establishing supply, carrying inventory, and driving adoption. The process that continually produces new PMA parts is the strategic asset.

8.3. The customer value proposition

HEICO’s value proposition rests on three elements: cost, availability, and credibility. Cost attracts attention, availability may create the immediate reason to switch, and confidence determines whether an airline is willing to install the product.

8.3.1. Price

Price is the first element. OEMs often control the aftermarket for products designed into an aircraft or engine. Once certified as part of the platform, the operator may have no alternative approved source and must continue buying from the same supplier. HEICO enters as an approved second source without bearing the cost of developing the entire aircraft, engine, or system, allowing it to offer a substantial discount while still earning attractive margins.

HEICO commonly introduces parts at approximately 30–40% below the corresponding OEM price. The initial discount often widens because OEMs have historically raised prices much faster than HEICO. Over time, the gap can exceed 50% and, for mature products, may reach 70–80%.

HEICO and the OEM frequently pursue very different pricing strategies after the alternative enters the market. OEMs tend to exploit sole-source positions through substantial increases, while HEICO has generally raised prices only modestly. The price advantage can therefore compound for many years.

HEICO’s descriptions of this behavior have remained remarkably consistent. In early 2012, Eric Mendelson said airlines expected OEM pricing on newer platforms to become even more aggressive:

“I was just over in Singapore last week, and many people were commenting that on the newer platforms, they sense that the OEM prices are going to be even more egregious than they’ve seen in the past.” — Eric A. Mendelson, Q1 2012 earnings call

Later that year, management described repeated increases as a fundamental feature of the OEM aftermarket model and a source of customer frustration:

“They [=> the OEMs] have a distressed relationship with their customers because of their ability to maximize profit through pricing. And that’s the way unfortunately they have to do it. We on the other hand build up a lot of customer goodwill and we view it as an investment by keeping our prices reasonable” — HEICO management, speaker unclear, Q2 2012 earnings call

In 2013, Eric Mendelson quantified typical annual increases at approximately 5–7%. He linked the behavior to what Laurans Mendelson called the “expanding universe”: even as PMA suppliers gain share, the OEM aftermarket continues growing through price alone.

“But the reason it’s sort of staying at that level is, of course, the OEM, my dad always has spoken about the theory in the expanding universe. The OEM prices continue to go up by just say 5%, 6%, 7% per year and that frankly dwarfs the PMA percentage of the total market.” — Eric A. Mendelson, Q4 2013 earnings call

By 2017, the pattern was unchanged. Eric Mendelson cited examples of OEMs raising prices by 10–11% annually for several consecutive years. HEICO could theoretically have followed but deliberately chose not to:

“I mean I’ve heard examples. There are some OEMs out there that have raised prices 10%, 11% per year for the last number of years. And we’ve been clearly, we could have done the same and we didn’t. […] And HEICO has developed this reputation of not taking advantage of the customers when we can take advantage of the customers.” — Eric A. Mendelson, Q2 2017 earnings call

Independent reports on two major engine families appeared to support the broader observation. According to Eric Mendelson, CFM56 and CF6 parts prices had increased by roughly 8% annually over ten years:

“There have been many newspaper or many media reports on the increases coming on particularly the cost of engine parts. There’s been articles and independent reports that have come out, particularly on the CFM56 and the CF6 showing price increases over a 10 year period, roughly in the 8% per year area. And airlines see that, they’re not happy about it. And I think that there’s continued opportunity throughout the industry.”— Eric A. Mendelson, Q2 2017 earnings call

The pandemic did not materially change the behavior. In early 2021, management observed that some OEMs had increased prices particularly sharply to recover margins lost during the collapse in aviation activity:

“The Pricing umbrella does widen over time, and we can get to a point where if somebody has been buying a part from us for 15 to 20 years, our price could end up being 70%, 80% below the OEM price. […] The OEMs, I would say, this year in general, their price increase, I mean, they’ve been across the board. Some have decided to raise price substantially in order to make up all of the lost margin that they’ve Surrender due to the pandemic.” — Eric A. Mendelson, Q1 2021 earnings call

HEICO continued to view its share gains within a much larger and increasingly valuable OEM aftermarket. Even when customers adopt HEICO products, the OEM generally retains most of the market and benefits from continued increases on the remaining volume:

“And also, I want to point out that even though we will take market share, in no means should this be interpreted that OEM businesses will not do well because we take a minority of the market share. We leave a majority for the OEM. The OEMs have been pretty aggressive with price increases, and we’re just trying to take our little piece.” — Eric A. Mendelson, Q1 2021 earnings call

Victor Mendelson summarized the economics even more directly in 2024. His 6–13% range should not be read as a measured annual average for every product, but it illustrates the pricing power available to a sole approved source:

“So what do you do if you’re the only approved source? Of course, rational people raise prices, and they raise prices 6%-13% a year, regardless of economic conditions” — Victor H. Mendelson, Gabelli Funds 30th Annual Aerospace & Defense Symposium, September 2024

Eric Mendelson cited one major OEM that raised prices twice in a year—first by 10% and then by another 18%—while HEICO remained far more conservative:

“So honestly, I think that our pricing has been a lot more conservative and gentle than it could be. Our competitors are substantially raising price. I just received an email last night from a I don’t want to call out the OEM, but it’s an OEM that everybody knows. And they increased price twice last year, once 10% and another time 18%.”— Eric A. Mendelson, Q1 2024 earnings call

These statements span more than a decade, several aviation cycles, and the industry’s largest disruption. Percentages differ by product, platform, OEM, and period, but management’s description has remained consistent: OEM replacement-part prices have generally risen much faster than HEICO’s.

How the price advantage compounds:

The following chart illustrates how a conventional initial PMA discount can widen into the 70% range. It starts with an OEM price index of 100 and a HEICO price of 70, a 30% discount. The OEM price then increases by 7% annually, while HEICO raises its price by 1%.

Under these illustrative assumptions, the OEM price rises from 100 to approximately 276 over 15 annual increases, while HEICO’s price reaches only about 81. The relative discount widens from 30% to roughly 71%. Even with 2% annual HEICO increases, it would reach approximately 66% after 15 years and more than 70% after 20 years.

The chart is illustrative rather than a reconstruction of one part’s history. It nevertheless shows why management’s claim that mature HEICO products may sell for 70–80% less than OEM equivalents is mathematically plausible. A modest annual pricing difference becomes enormous when compounded across a 15- to 20-year product life.

Eric Mendelson described this development in 2021:

“The Pricing umbrella does widen over time, and we can get to a point where if somebody has been buying a part from us for 15 to 20 years, our price could end up being 70%, 80% below the OEM price.” — Eric A. Mendelson, Q1 2021 earnings call

By 2024, HEICO’s prices as a percentage of the corresponding OEM price had reached their lowest level in company history:

“I can tell you that our prices that we sell as a percentage of OEM, I would say, are unfortunately at an all-time low. So, the OEMs have raised prices faster than we have raised prices.” — Eric A. Mendelson, Q2 2024 earnings call

The word “unfortunately” is revealing. A widening discount benefits customers and makes HEICO more attractive, but also shows how much pricing power the company chooses not to exercise. HEICO could retain more of the available savings while remaining far below the OEM price.

The restraint is deliberate. Management believes that maximizing every product’s price would weaken customer relationships, reduce incentives to approve additional HEICO parts, and potentially provoke a more aggressive OEM response. HEICO instead earns attractive margins while leaving a meaningful and visible share of the benefit with the airline.

Laurans Mendelson summarized the philosophy more directly:

“We don’t try to screw our customer.” — Laurans A. Mendelson, Forbes interview, 2020

The wording is blunt but captures HEICO’s long-term approach. Management could retain more savings through higher prices but believes fair treatment creates greater value through stronger relationships, higher volumes, and additional development opportunities.

HEICO was following the same approach in 2025. Eric Mendelson characterized increases as ranging from the low single digits to the upper end of that range and primarily intended to offset cost inflation:

“We could, frankly, I think our prices could be a lot higher, but we don’t do that. And our prices have been, as you know, sort of the increases have been sort of low single digits, maybe the high end of low single digits, but really sufficient in order to cover our cost increases.

We do have certain contracted customers where, as a result of fixed prices for a longer period of time, there could be more substantial price increases. But if you look at it on an annualized basis, it’s still that, I would say, low single digits up to the high end of the low single digits [=> of price increases]. So we have not, no, we’ve not pushed the pricing. We want to make sure that we’re very fair.” — Eric A. Mendelson, Q1 2025 earnings call

The commercial value extends beyond goodwill. Airlines can reward HEICO with more volume on existing products and ask it to develop further alternatives. Eric Mendelson described an unusually direct example after attending an MRO conference in Dallas:

“We believe that we’ve been able to successfully pass along our cost increases, along with maintaining our profit margin, while at the same time, keeping our customers happy. […] actually have to just add a little anecdote.

I was at the MRO conference in Dallas a couple of weeks ago, and actually we had a major airline that everybody would be very, very familiar with. I can’t mention the name. They brought all of their senior leadership to frankly thank HEICO. In all of my years, I’ve never had a meeting quite like this, where they brought their senior leadership to thank HEICO, one, for coming up with our new product solutions and helping them with all sorts of stuff that others wouldn’t. Number two, not taking advantage of them and not doing what other people are doing. They called out a number of other manufacturers, and they said that HEICO really differentiated itself and was going to be rewarded with not only increased business on products that we currently offer, but increased business on new stuff that they wanted us to develop for them. I think as a result of treating our customers right, this is gonna work.” — Eric A. Mendelson, Q2 2022 earnings call

The anecdote shows how pricing reinforces the development pipeline. Fair treatment strengthens relationships, increases volume from the existing catalog, and encourages customers to bring HEICO more parts to develop.

This supports a different growth model from that of many sole-source aerospace suppliers. By treating customers fairly, HEICO has historically been rewarded with unit growth. Much of FSG’s organic growth has therefore come from volume rather than price.

“Our organic growth comes primarily from volume, not from price. We tend to be very price friendly to our customers.” — Eric A. Mendelson, Q2 2016 earnings call

HEICO generally raises prices only to reflect underlying input-cost inflation.

HEICO benefits when an existing customer approves another product, installs it across more of its fleet, or adds product families to a long-term agreement. The company can outgrow the underlying aftermarket without relying on double-digit annual price increases.

Long-term agreements are an important part of the relationship. They give airlines price visibility and supply protection while providing HEICO the volume commitments needed to procure materials, build inventory, and organize production. In 2024, management estimated that well over half of the PMA business might be under contract:

“Our customers, with regard to PMA, they like the idea of having a long-term agreement, and we like that idea too, because we can go out and procure the product for them and protect them. You know, clearly, if they want to be protected on price, we’re happy to do that, but in turn, they’ve got to commit to us. So, you know, definitely on the PMA side, the percentage of contracts would be, you know, I’m guessing well over 50%.” — Eric A. Mendelson, Q2 2024 earnings call

These agreements commonly run for three to five years and may contain flat pricing or inflation-linked adjustments. They can temporarily limit HEICO’s ability to reprice during periods of rapidly rising costs, as in 2022 and 2023, but strengthen the relationship and shift value creation toward higher volumes and broader adoption.

Price protection generally applies only to products already covered. If the customer later adds another HEICO part, it is priced at the current level rather than the historical price granted to the existing portfolio. Airlines therefore have an incentive to qualify and contract products early:

“So if a customer is buying a product and it’s under contract, then obviously, they would have price protection for the terms of the contract, the duration of the contract, if that’s what it’s provided for. And of course, there are different things which matter to different customers, so we’re very accommodating there. However, if that customer wants to start buying a part that they haven’t purchased, then they would get a price based on the newest price as opposed to what the old price was. So there’s definitely a big incentive to get started and get locked in with us as early as possible.” — Eric A. Mendelson, Q1 2024 earnings call

Early commitment can lock in supply and a more favorable starting price, while HEICO gains longer-term volume and better procurement and inventory visibility.

The airline’s financial benefit becomes especially visible across several contracts and pricing cycles. HEICO may protect the customer through modest increases while the OEM raises list prices much faster, widening the gap even as HEICO continues earning attractive margins:

“When our customers commit to us long term, and we give them, you know, pricing protections, we can get into an area where our parts can be as much as 70% below the OEM after many years. We still drive a very nice margin, and the airlines save a lot of money.” — Eric A. Mendelson, Q1 2023 earnings call

The proposition is broader than a cheaper introductory price. HEICO offers an alternative pricing trajectory: the initial 30–40% discount creates immediate savings, while the difference in annual increases can multiply those savings over the remaining life of the aircraft or engine platform.

HEICO’s large advantage might suggest maximizing volume. Management has historically been more restrained, seeking an attractive minority share for each part while leaving the OEM most of the market.

HEICO described this approach in 2013:

“We only go for up to one third market share on each of the parts we provide. So we intentionally leave them [=> the OEMs] with two thirds. So, if you look at the economics of that, they can get two thirds at an aggressive price. And if they want to try to squeeze us on the one third that we’re going to take and compete on price, then we’re just going to have to go after some of the two thirds some of the other pieces that they’ve got in order to capture our target market share.” — Eric A. Mendelson, Q1 2013 earnings call

The logic is straightforward. If the OEM retains roughly two-thirds of volume, it can earn a high contribution on most of the market at its existing price. A reduction might recover share but would apply to every unit sold. The OEM must weigh contribution from recaptured volume against the margin sacrificed across its remaining installed base.

The following table illustrates the trade-off in a simplified 100-unit market. The OEM charges $100 per part with $50 of variable cost, earning $50 of contribution per unit. HEICO enters at $70, a 30% discount, and earns a 30% contribution margin. If the OEM responds, the model assumes a 15% reduction to $85 and recovery of the entire market.

At a 20% HEICO share, the OEM sells 80 units at $50 of contribution, or $4,000. Reducing the price to $85 and regaining all 100 units generates only $3,500, so the OEM is better off accepting the lost volume and preserving price.

At a 30% HEICO share, the alternatives produce the same result and the OEM is indifferent. Above 30%, the balance changes. At a 40% share, the OEM earns $3,000 at the original price versus $3,500 if it lowers the price and recaptures the market. The incentive to respond increases with HEICO’s share.

The intersection near 30% visualizes the strategic equilibrium. Below that level, maintaining the high price is more profitable; above it, a reduction becomes increasingly attractive under the model assumptions.

The threshold is not universal. It depends on variable cost, the required price reduction, and the volume recovered. If the OEM had to match HEICO’s $70 price fully, it would sacrifice far more contribution per unit and the break-even share would move to 60%, as the sensitivity analysis below shows.

The model nevertheless captures the logic behind HEICO’s stated one-third target. The company seeks enough volume to earn attractive returns but generally stops before its presence becomes painful enough to make the OEM abandon its high-price strategy.

Management described the same balance eight years later:

“And also, I want to point out that even though we will take market share, in no means should this be interpreted that OEM businesses will not do well because we take a minority of the market share. We leave a majority for the OEM. The OEMs have been pretty aggressive with price increases, and we’re just trying to take our little piece.” — Eric A. Mendelson, Q1 2021 earnings call

HEICO’s restraint extends beyond market share. It also largely avoids the engine OEMs’ most valuable parts. Rather than targeting life-limited parts—highly engineered, safety-critical components replaced after prescribed cycles—HEICO focuses primarily on expendables and selected repairables:

“Our expertise is in a certain area, and I would anticipate we continue to focus in that area. In general, we do expendables, parts which are replaced typically at every shop visit or at most shop visits. And then we also do certain repairables as well. So I think we’re going to continue to focus in those areas. We don’t do [life-]limited parts. And that really is the bread and butter for the original equipment manufacturers.” — Eric A. Mendelson, Q1 2019 earnings call

Life-limited parts are crown jewels of the engine aftermarket: highly engineered, safety-critical, replaced at mandatory intervals, and typically carrying some of the OEM’s highest margins. Avoiding them reduces the threat HEICO poses to core OEM economics.

This creates rational coexistence. HEICO earns attractive margins and gives airlines substantial savings on the minority share it captures. The OEM retains most volume and continues charging high prices across that larger base. Both can therefore earn attractive economics in the same product market.

The strategy also creates an implicit deterrent. If the OEM aggressively defends HEICO’s targeted one-third share, HEICO can pursue more of the remaining two-thirds. Leaving most of the market untouched is cooperative only while the OEM accepts the arrangement.

HEICO’s restraint therefore operates in two directions: it leaves substantial savings with airlines and substantial market share with the OEM. This supports goodwill, reduces destructive price competition, and allows HEICO to repeat the model across thousands of parts rather than maximize one product’s share.

The approach resembles Nick Sleep’s concept of “scale economies shared”, best known through Costco. Costco passes a meaningful share of its purchasing power and operating scale to members through lower prices, strengthening loyalty and volume. HEICO follows a similar principle. As engineering expertise, catalog breadth, and customer relationships expand, it could raise prices more aggressively; instead, it preserves a large discount. Customers save, HEICO earns attractive margins and gains volume, and the resulting trust supports further approvals. Shared savings therefore reinforce the scale advantages that made them possible.

These dynamics benefit HEICO in several ways. The widening discount makes mature products more compelling, supports additional approvals, and strengthens the company’s reputation as a long-term cost-saving partner. HEICO preserves attractive margins because its manufacturing costs do not rise nearly as fast as OEM list prices. Customers save more, HEICO earns a strong return, and the OEM retains most of an aftermarket that continues expanding through price increases.

8.3.2. Availability

Availability is the second element. Aircraft-on-ground costs can quickly exceed the price difference between components. During supply-chain disruptions, a product available today may be worth more than a cheaper one arriving months later. By ensuring immediate part availability, they are actively de-risking their customers’ supply chains.

HEICO’s PMAs provide a second source, while its inventory and distribution infrastructure make that source usable. Recent shortages have strengthened this proposition. Airlines must keep older aircraft operating while facing long lead times for parts and maintenance capacity. Even OEMs (!) have occasionally purchased HEICO or Wencor products when their own parts were unavailable and repaired units could not otherwise be shipped.

“I have to say, I don’t wanna mention which ones, but even OEMs have now moved to buying both HEICO and Wencor PMA products because if they don’t have the parts on the shelf, and they’ve got to ship even their own repaired units.” — Eric A. Mendelson, Q2 2023 earnings call

Availability can begin a relationship that later becomes permanent. A customer may first approve a HEICO part because the OEM cannot deliver. Once the alternative performs successfully, the airline has less reason to return to the higher-priced source.

8.3.3. Credibility

“You know, we’re not the small PMA company that we used to be many, many years ago. I think that credibility is very important.” — Laurans A. Mendelson, Q3 2020 earnings call

Credibility is the third requirement. An employee approving an alternative has less personal downside from staying with the OEM, even when it charges more. The savings belong to the airline; the perceived career risk sits with the decision-maker.

“It’s very hard to convince people to buy an alternative on an airplane.” — Victor H. Mendelson, Gabelli Funds 30th Annual Aerospace & Defense Symposium, September 2024

HEICO has spent decades reducing that perceived risk. Its FAA approval record, technical capabilities, quality systems, Lufthansa relationship, and successful service history all contribute. Catalog breadth also matters: every successful product provides more evidence that HEICO can support the next.

This creates an asymmetric sales process. Winning the first product can be slow, but subsequent approvals become easier. HEICO already sells to virtually every major airline, so the main organic opportunity is no longer adding customer names but increasing the number of products each customer buys.

“So, it’s not so much getting new customers for us as it is selling customers more of our product line.” — Eric A. Mendelson, Q3 2020 earnings call

The relationship can deepen for years. An airline may begin with low-risk, non-engine products, gain confidence through operating experience, and then expand into additional systems, repairs, and distribution arrangements. Savings open the door; consistent quality and delivery determine how far it opens.

International adoption follows a similar path. Airlines receiving many new aircraft may receive more OEM attention and have less immediate need for alternatives. As fleets mature, maintenance costs rise, OEM support becomes less generous, and PMA’s financial value becomes clearer. HEICO has observed this pattern across North America, South America, Europe, and Asia.

External validation helped overcome early skepticism, but partnerships and regulatory approvals could only open the door. Lasting credibility had to be earned through product performance. In aerospace, reputation builds slowly over many years and can be damaged by one serious quality failure.

Victor Mendelson described quality as an existential requirement rather than another operating objective:

“Another is an absolute commitment to quality. And in our industry, by the way, you’re probably going to be out of business if you don’t have complete quality because this is either a high-reliability, harsh-environment business in everything that we make.” — Victor H. Mendelson, Fernway Insights interview, 2022

This principle has tangible economic consequences. Higher testing standards, additional inspections, stronger quality systems, and conservative manufacturing controls all cost money. HEICO accepts those costs because protecting its reputation is more valuable than maximizing the margin on one part.

“Quality is absolutely number one, and we will overspend to get that quality. That’s very, very important to us.” — Laurans A. Mendelson, Q2 2012 earnings call

Spending beyond the minimum standard is central to HEICO’s credibility with airlines, MRO providers, regulators, and other customers. A lower-priced alternative creates value only if customers trust its reliability. Quality is therefore more than a defensive requirement; it is the foundation for winning approvals, expanding into more complex products, and earning additional customer responsibility over time.

8.4. Cyclicality: short-term volume pressure, long-term share gains

HEICO is exposed to the commercial aviation cycle, but downturns affect it more subtly than through a simple demand decline. Lower flight activity initially reduces wear, parts consumption, and repair volume. In a severe disruption, as COVID-19 demonstrated, this near-term volume effect can outweigh the benefit of greater customer cost consciousness. HEICO is therefore neither recession-proof nor conventionally countercyclical.

Over time, however, financial pressure can strengthen its competitive position. When airline economics deteriorate, management teams scrutinize every source of savings. PMA parts, alternative repairs, and independent distribution solutions receive more attention than during periods of strong profitability, when qualifying a new supplier feels less urgent.

Management has consistently described this mechanism:

“Yes, what we say is that typically when the economy turns down, airlines get more focused on their cost savings, whether it’s parts, repair, distribution—basically all of our offerings—and we get, if you will, spec’d in on additional products as the economy is getting weaker. […] I think HEICO’s credibility at the airlines is at a level that we’ve never seen before. I mean, I’ve been with the company now almost 22 years, and I’ve never seen this level of acceptance at the airlines and desire to continue to develop more new parts. I think we’ll continue to see new parts to new customers and take market share that way.” — Eric A. Mendelson, Q2 2011 earnings call

The reference to being “spec’d in” is important. Before using a new PMA part or alternative repair, an airline generally completes its own technical, engineering, procurement, and quality approvals. That requires time and internal resources. During favorable periods, potential savings may not justify the effort; a downturn moves the same opportunity higher on the priority list.

The mechanism is not limited to demand-driven recessions. Rising fuel prices can create similar pressure by compressing airline profitability and increasing the need to reduce other costs:

“Yeah, there’s no question that whenever fuel prices go up, the airlines get more serious about cutting their costs, and they become much less complacent and much more aggressive. I think that is a good medium- and long-term driver for our business.” — Eric A. Mendelson, Q1 2012 earnings call

The immediate benefit may be modest because qualifying more products does not instantly offset lower industry volume. The more important effect is that each approval expands HEICO’s position within the customer’s maintenance system. Once the airline has completed the work, used the product successfully, and gained confidence in its performance, the approval does not ordinarily disappear when traffic and profitability recover.

After completing the approval process and gaining confidence in a PMA part, a customer has little reason to return to the more expensive OEM alternative. The relationship is highly sticky, helping HEICO emerge from downturns with deeper customer penetration and a stronger competitive position.

“I think normally we always say that we gain market share in financial downturns. That’s when airlines realize they’ve got to focus on cost.” — Eric A. Mendelson, Q3 2014 earnings call

The same dynamic applies when uncertainty rather than an outright recession prompts airlines to reassess costs. Concerns about passenger demand, fuel prices, financing costs, supply-chain reliability, or general industry conditions can all increase willingness to consider alternatives to established OEM solutions:

“I think one of the other things that’s important to note is that whenever there’s angst or concern, anxiety, whatever, with regard to commercial aviation, airlines realize that they’ve got to get more serious and cut costs. That always helps us in the long term. There ends up being more interest in our products. We get approved in more spaces, and that, in turn, leads to greater future revenue and earnings.” — Eric A. Mendelson, Q2 2026 earnings call

This creates an attractive through-cycle pattern. In the short term, HEICO remains exposed to flight activity and maintenance volume. Over the longer term, financial pressure can accelerate customer approvals, broaden the applications in which HEICO products are accepted, and increase its share of airline maintenance spending. When traffic recovers, HEICO participates in higher industry volume from a stronger commercial position.

2.5. Wencor

HEICO’s August 2023 acquisition of Wencor differed from its typical transaction. Most targets are small specialists adding a product line, manufacturing capability, or customer relationship. Wencor was already a substantial aftermarket platform and the second-largest independent PMA provider.

HEICO paid $1.9 billion in cash and $150 million in Class A shares, for total consideration of approximately $2.05 billion. It was the largest transaction in company history by purchase price, acquired revenue, and acquired income.

The strategic appeal lay in complementarity rather than simple share consolidation. HEICO began in engine products and later built a broad non-engine offering; Wencor was particularly strong in non-engine PMAs, value-added distribution, and component repair. The catalogs contained surprisingly little overlap.

“You know, HEICO started out over in the PMA area focused on engine parts. Wencor has focused on non-engine parts. HEICO also does non-engine parts, but there are actually very little similarity in the product that we do. As a matter of fact, the HEICO component repair stations purchase all of the Wencor PMAs because HEICO doesn’t offer those PMAs. We’re very excited about the complementary nature there. With regard to component repair, Wencor overhauls a lot of components and is in a lot of market niches where HEICO is not in. We think that that’s gonna broaden us. Likewise, in distribution, we focus in different areas. Wencor is, for example, has a very large position over in the bearings area, whereas HEICO basically isn’t involved in the bearings business” — Eric A. Mendelson, Q2 2023 earnings call

HEICO’s repair stations were already buying Wencor products, providing direct evidence that the portfolios were complementary.

Wencor also brought a developed e-commerce platform, distribution relationships, and customer positions that differed from HEICO’s. Each company could introduce products where the other had stronger relationships, while a combined catalog approaching 20,000 PMAs made HEICO relevant across more of an airline’s maintenance spending.

The acquisition expanded development capacity as well. HEICO and Wencor had experience with different product types, and engineering or regulatory knowledge from one category could shorten the path in another. HEICO manufacturers can quote work previously outsourced by Wencor, while Wencor’s distribution infrastructure can carry additional HEICO products.

Cultural fit was another part of the thesis. Although Wencor had been private-equity-owned, its organizational structure and customer focus resembled HEICO’s decentralized model.

“They’ve got a DNA so similar to HEICO. They’re very focused on the customer, very focused on efficiency, getting it done, jumping through hoops for the customers, so there couldn’t be a better marriage” — Eric A. Mendelson, Q3 2023 earnings call

HEICO did not respond to the transaction’s size by fully absorbing Wencor into a centralized organization. It preserved the business as an operationally separate unit with its existing management structure.

“Wencor continues as an individual autonomous business. No plan to change that.” — Eric A. Mendelson, Q1 2024 earnings call

Autonomy does not mean disconnection. The objective is cooperation without destroying local responsibility: Wencor remains autonomous in day-to-day operations while the businesses work together where the economics are clear.

By the third quarter of 2024, management provided a detailed list of collaborative initiatives:

“Some examples of how we’re now working together include: one, utilization of all HEICO and Wencor PMAs and DERs at all of our repair stations. Two, commercial and defense aftermarket sales cooperation. Three, Wencor e-commerce platform lists all HEICO non-competitive PMAs. Four, Wencor is utilizing HEICO’s manufacturing base, in particular, our Specialty Products and Electronic Technologies Group, to quote new products. Five, engineering and regulatory cooperation. Six, sharing best-in-class vendors. And seven, driving various back-office synergies, such as payroll and export compliance, that will help offset the cost of additional regulatory compliance, such as Sarbanes-Oxley and HEICO’s FAA ODA program.” — Eric A. Mendelson, Q3 2024 earnings call

The most important opportunities are likely on the revenue side. Cost savings can offset some expense of operating Wencor within a public company, but they were not the reason to pay more than $2 billion. The larger prize is selling more products through the combined customer, repair, and distribution network.

Each repair station can use the full range of HEICO and Wencor PMAs and DER-approved repairs. The e-commerce platform can expose customers to unfamiliar products, sales teams can introduce the combined catalog through their strongest relationships, and shared engineering can increase the number and speed of development opportunities.

HEICO’s balance sheet may also allow Wencor to pursue opportunities that were difficult under private-equity ownership. Management argued that lower leverage would provide more freedom to invest in sales, product development, and inventory—especially important in a constrained market where having the product on the shelf can determine who wins the order.

The initial customer response was strong:

“Yeah, we both HEICO and Wencor performed very well in terms of new PMA generation. We’re continuing to invest, continuing to find new opportunities. So I mean, without doubt, this is going to be a record year in terms of PMA generation and the number of parts that we can come out with. I can tell you that I’ve met with a number of customers since Wencor has closed, and they are really excited and enthusiastic, unlike I’ve ever seen, concerning our product, our product line. They want us to do more. You know, again, there’s going to be plenty of business for the OEMs.

You know, there’s more than enough business to go around, but they clearly have seen, after going through a supply chain constraint like we’ve seen over the last couple of years, not only does HEICO bring cost savings, but we also bring availability” — Eric A. Mendelson, Q4 2023 earnings call

Wencor has changed HEICO’s position with customers. The combined company is no longer merely a specialist offering selected alternatives; it can address a much larger share of parts, repair, and distribution requirements.

“I think in speaking with our customers, we are viewed as a much more complete supplier.” — Eric A. Mendelson, Q3 2024 earnings call

The transaction still carries risk. HEICO paid a price management described as high, and Wencor was far larger than any previous acquisition. Value creation depends on preserving its entrepreneurial culture while realizing cooperation across product development, repair, distribution, and customer relationships. Excessive centralization could weaken the model; insufficient cooperation could leave much of the strategic value unrealized.

Management’s comments so far indicate that integration has progressed well. The larger catalog, complementary capabilities, and customer demand were visible almost immediately, but the full effect should develop over years because product approvals, airline qualifications, and cross-selling require time.

8.6. Market size and HEICO’s position

Market-size estimates vary widely because sources often measure different parts of the aerospace value chain. The global MRO market, replacement-parts market, and PMA market are sometimes treated as interchangeable, although each is a narrower subset of the preceding one.

For context, Fortune Business Insights valued the global commercial-aircraft original-equipment market at approximately $118 billion in 2025 and projected roughly $240 billion by 2034, implying annual growth of about 8%.

A rough cross-check suggests that the estimate is plausible. Airbus generated about $60 billion of commercial-aircraft revenue in 2025, excluding Helicopters and Defence and Space, while Boeing reported approximately $41 billion from Commercial Airplanes. After adjusting for the undisclosed aftermarket portion of those revenues and adding smaller OEMs, the industry falls into a similar range. This is only a high-level check, not a precise market calculation.

Roughly 50–60% of this spending supports fleet growth, while the remaining 40–50% replaces retired aircraft.

Replacement deliveries have an obvious negative aftermarket effect. Once an old aircraft is permanently retired, it stops generating maintenance, repair, and replacement-parts demand. HEICO products tied exclusively to that platform will eventually decline as the fleet reaches the end of its life.

Retirements are only one side of the equation. Most of the installed fleet remains in service and ages by another year. As aircraft age, warranties expire, components accumulate flight hours and cycles, and inspections, repairs, and replacement needs generally increase. HEICO summarized the balance as follows:

“So, when we look at the number of aircraft that are being delivered, roughly half of them are for new growth, half of them are for replacement. So the ones that are for replacement, obviously, that takes away opportunity for us. But on the other hand, we’ve got roughly 95% of the fleet is aging by 1 year every year and the parts become even more expensive.” — Eric A. Mendelson, Q3 2014 earnings call

The installed fleet is constantly changing: older aircraft leave at the back end, new aircraft enter at the front, and the much larger group in between continues aging. New aircraft initially create little HEICO opportunity but gradually enter the addressable aftermarket as platforms mature and airlines seek alternatives to original suppliers:

“But the way we look at it is, it’s a fairly complex equation in that you’ve got the base fleet aging obviously 1 year per year and then the older aircraft dropping out at the back end and of course the new aircraft coming in at the front end. The airlines have been flying the older aircraft beyond what everybody originally anticipated. […] And if the airlines continue to fly these older aircraft, they’re going to have to put some dollars into it.” — HEICO management, speaker unclear, Q3 2015 earnings call

The analysis below provides a useful cross-check. Between 2020 and 2025, approximately 7,241 aircraft were delivered and 3,702 retired. The resulting 3,539 net additions exactly reconcile the increase in the global fleet from 30,547 aircraft at the beginning of 2020 to roughly 34,086 at the end of 2025. Retirements absorbed approximately 51% of deliveries over the period, although 2020 skews the result. Measured against the beginning fleet, only about 1.4–2.3% of aircraft retired in any individual year. Between 97.7% and 98.6% therefore remained and aged another year. New deliveries expand and partially renew the fleet but do not prevent the much larger installed base from continuing to age.

This also explains why demand for an individual HEICO product eventually declines without undermining portfolio growth. HEICO typically enters a platform several years after introduction—often around ten years—builds sales as the installed fleet matures, and continues supplying it as aircraft retire gradually. At the same time, HEICO introduces products for other platforms and benefits from aging across the broader fleet:

“I mean, one of the phenomenon in the sort of the history of our business is we get on a platform a number of years into the program and then we ride it until the sunset. So, there’s always aircraft that are coming out of the fleet. So, we do see on certain products reduction in demand. But of course, you’ve got the majority of aircraft that are just continuing to age and stay in the fleet, so we see an increase there. So yes, we are seeing an increase combined with our new part sales.” — Eric A. Mendelson, Q3 2016 earnings call

The aftermarket therefore loses demand from retired aircraft but gains from fleet growth, maturation of newer platforms, and rising maintenance needs across the fleet that remains in service.

Beyond investing in new aircraft, airlines spend annually to maintain and repair the installed fleet. Global commercial MRO demand reached approximately $136 billion in 2025, up 8% from $126 billion in 2024. Oliver Wyman expects annual spending to approach $193 billion by the end of the decade as the fleet grows, aircraft remain in service longer, and operators contend with supply constraints and durability problems on newer platforms.

On this basis, I estimate that airlines spent roughly $189 billion maintaining the existing fleet through replacement capital expenditures and MRO expenses, versus about $65 billion expanding it. The comparison provides a clearer sense of where revenue and economic value are generated and helps explain why the aftermarket profit pool can exceed that of original equipment.

The full MRO market is not HEICO’s addressable market. It includes labor, line maintenance, heavy airframe checks, complete engine shop visits, life-limited parts, modifications, logistics, and many other products and services FSG does not provide.

Engine and component MRO represented approximately 68% of global MRO spending in 2024, according to IATA and Oliver Wyman, but even this figure is far too broad. HEICO does not overhaul complete engines, manufacture most life-limited parts, or participate in every component category. FSG addresses selected replacement parts, component repairs, distribution, and specialized manufacturing within the wider ecosystem.

The market can therefore be viewed as a series of progressively narrower layers:

1. Global commercial MRO spending

2. Maintenance material, components, and replacement parts

3. Categories addressed by HEICO through parts, repair, and distribution

4. Approved alternative material

5. Independently developed PMA parts

PMA is only the final and narrowest layer. FSG’s practical addressable market is broader because it also earns revenue from proprietary repairs, distributed OEM and third-party parts, component exchange, and specialty products.

No exact industry figure exists for annual PMA market value. Commercial research estimates currently differ by more than fourfold: one places the global commercial-aircraft PMA market at approximately $2.6 billion in 2025 and $2.8 billion in 2026, while another estimates $11.8 billion in 2025. The studies are evidently measuring different scopes.

Some estimates appear to focus on factory-new, independently developed commercial-airline PMA parts. Others may include licensed PMAs, general and business aviation, military applications, PMA content embedded in larger repairs or components, and other forms of alternative material.

A PMA issued under a licensing agreement may use the authorization and design data of the original type-certificate holder. Economically, this differs fundamentally from HEICO independently developing a lower-cost competitor, yet both appear in FAA PMA records.

Raw approval counts therefore do not measure the independent alternative-parts market, and approvals differ greatly in commercial value. One may cover a low-priced part used on a small or aging fleet; another may relate to an expensive, frequently replaced component installed across thousands of aircraft.

A rough comparison with TransDigm illustrates the difference. TransDigm’s portfolio is estimated at more than 300,000 parts—roughly 15 times HEICO’s approximately 20,000—yet its commercial aftermarket parts business generates only somewhat more than $2.8 billion of aftermarket revenue, versus an estimated roughly $2 billion for HEICO including HDG. Although necessarily approximate, the comparison suggests that HEICO generates substantially more revenue per portfolio item on average.

This also helps explain why the companies compete less directly than their aftermarket exposure suggests. Much of TransDigm’s portfolio consists of low-volume or low-revenue parts for which PMA development and certification would offer limited returns. Airlines likewise have little reason to qualify a second source when potential savings are small. HEICO concentrates development on products where installed volume, replacement frequency, and OEM pricing create an attractive opportunity.

For these reasons, I would not anchor the investment case to a precise PMA market estimate. The evidence supports a multi-billion-dollar market growing faster than the commercial fleet, but published figures are too inconsistent to justify one definitive total addressable market.

HEICO’s market position:

HEICO calls HPG the world’s largest independent supplier of FAA-approved engine and aircraft-component replacement parts. Its portfolio contains more than 20,000 FAA-approved products, and the group develops more than 500 additional highly engineered parts annually.

Dividing an estimated $2.0 billion of aftermarket revenue by any published PMA market estimate would be misleading. The $2.6 billion estimate implies a share approaching three-quarters—a figure often cited by investors—while the $11.8 billion estimate implies roughly one-sixth.

Management’s comments provide a more useful view of market structure. Victor Mendelson has described PMA as only a very small part of the broader replacement-parts market:

“PMA parts constitute somewhere around 1%-2%, we believe, of the market, so it’s tiny.” — Victor H. Mendelson, Gabelli Funds 30th Annual Aerospace & Defense Symposium, September 2024

Because the denominator was not formally defined, the 1–2% figure should be treated as a broad management estimate rather than a measured statistic. The message matters more than the precise percentage: OEM parts continue to dominate the commercial aerospace aftermarket.

Three market-share concepts must therefore be kept separate:

• First, PMA’s share of the entire replacement-parts market remains in the low single digits according to HEICO management, leaving the overwhelming majority with OEMs.

• Second, HEICO is clearly the leading independent PMA supplier, but no reliable public dataset allows its share of that market to be calculated.

• Third, HEICO’s share of an individual part market after introducing an approved alternative is a separate concept. Management has historically targeted an attractive minority rather than complete OEM displacement.

HEICO’s approximately 20,000 approved part numbers might appear to cover roughly 3–4% of the parts installed on a modern aircraft, but this is only a rough indication and not a reliable measure of penetration. HEICO’s approvals span many aircraft, engine, and component platforms, whereas aircraft part-count estimates include every physical item, many of which have no PMA relevance. One HEICO part number may be installed several times on an aircraft or approved for multiple platforms, while only a fraction of the portfolio applies to any one aircraft type. The percentage therefore illustrates the enormous remaining product universe rather than HEICO’s share of the economically addressable aftermarket.

8.7. The remaining growth runway

HEICO already sells to virtually every major airline and has built the dominant independent PMA platform, which can make FSG appear mature. Its remaining runway differs from that of a young company still seeking its first customers.

Growth should come primarily from selling more to existing customers, adding products to the catalog, entering adjacent technical categories, and making the combined HEICO-Wencor platform more useful across customer maintenance activities.

The first opportunity is product breadth. A modern aircraft contains an enormous number of components, while HEICO’s catalog remains selective. Even after decades of development and acquisitions, the company addresses only a fraction of the aftermarket. It can continue expanding into structures, avionics, interiors, and other component categories where customer demand and expected returns justify the investment.

“But again, we just continue to broaden the capabilities. Ten years ago, nobody would have ever thought that HEICO would control the Aircraft Information Management System of the 737NG or the 777. And we couple that with our 20,000 PMAs and whatever it is, nearly 10,000 DERs, and it’s a pretty broad offering, which just continues to grow step by step every quarter.” — Eric A. Mendelson, Q1 2025 earnings call

The second opportunity is penetration. An airline may already be a HEICO customer while buying only a small share of the products available for its fleet. Adding one approved part across a large installed base can create meaningful recurring revenue without winning a new customer.

The sales organization is therefore critical. Product development creates the opportunity, but airline approvals and purchasing decisions convert it into revenue. Sales teams must understand each customer’s fleet, maintenance program, contracts, and technical concerns. A broad catalog gives them many reasons to continue the conversation.

The third opportunity is fleet age. New aircraft typically generate little PMA revenue during their first years because OEM support is strongest, maintenance needs are lower, and contractual restrictions are more common. The addressable opportunity expands as platforms mature and operators focus more closely on maintenance economics.

The aircraft shortage extends the lives of older platforms. Delayed deliveries force airlines to retain aircraft that might otherwise retire, higher utilization accelerates wear, and supply constraints increase the value of a second source. These dynamics support both parts and repair demand.

The fourth opportunity is international adoption. HEICO already operates globally, but acceptance still varies by airline, region, ownership model, and product category. Historically lower penetration outside established markets leaves additional room for growth:

“Historically, we had less penetration in the international markets. So we saw that there was a bigger opportunity for us there and we’re continuing to mine that opportunity” — Eric A. Mendelson, Q3 2010 earnings call

Adoption is closely linked to fleet maturity. Airlines receiving many new aircraft generally receive greater OEM attention, face lower maintenance requirements, and initially need fewer alternatives. As deliveries slow relative to the installed fleet and maintenance costs rise, PMA’s economic value becomes clearer.

Eric Mendelson described how this pattern repeatedly turned initial resistance into substantial customer relationships across all major regions:

“What we found with PMA acceptance is directly correlated to the sort of the age of the airline, the age in sophistication. When airlines are taking a lot of deliveries of new equipment, they get a lot of attention from the OEMs and they don’t really see the need or the value proposition in the beginning. And then of course as those deliveries as a percentage of the fleet go down, they sort of get less attention and they realize that these machines are extraordinarily expensive to maintain. And that’s where we get in there and we’re able to show our value. So, I history over the last 30 years that’s absolutely been the case. I mean, without mentioning names, but I can tell you that airlines in all regions of the world, whether it’s North America, South America, Europe, Asia, where in the beginning they were refusing and not interested in using PMA parts. And then as time went on, we go in and show why this makes sense and they become very good customers.” — Eric A. Mendelson, Q2 2019 earnings call

International expansion is therefore less about entering entirely new regions than gradually deepening penetration as individual airlines become more receptive. Once an operator understands the approval process, recognizes the savings, and gains positive operating experience, a cautious initial relationship can become a meaningful recurring source of demand.

Emerging markets offer additional long-term potential:

“The majority of our business comes out of the Americas and Europe, and we expect that to continue for, you know, quite some time. We are picking up a nice chunk of business in the emerging markets as well. There’s a lot of interest in our products, and I anticipate further growth there.” — Eric A. Mendelson, Q4 2018 earnings call

The fifth opportunity is availability. Supply-chain problems have pushed customers to qualify alternatives they might otherwise have postponed. An airline unable to obtain an OEM part may undertake the internal work required to approve HEICO; successful use can turn an emergency purchase into a recurring relationship.

Wencor adds another layer to each opportunity by increasing the products, repair capabilities, distribution lines, customer relationships, and engineering categories available to the combined group. HEICO can grow before developing anything new simply by placing existing Wencor products with HEICO customers and vice versa.

Execution still constrains the runway. HEICO cannot develop every product at once; engineering and regulatory capacity is finite, airlines approve alternatives gradually, and inventory must be built before demand is certain. The company must continue selecting opportunities that earn acceptable returns rather than pursuing catalog size for its own sake.

OEM behavior is another constraint. HEICO has benefited from rational competition and its small share of the overall aftermarket. An OEM can selectively reduce prices, use contractual leverage, or make a particular product less attractive to copy. HEICO must continue choosing its battles carefully.

Taken together, these drivers should allow the relevant commercial aftermarket to grow at a mid-single-digit rate. Fleet expansion increases the installed base, while higher utilization, aging, and rising maintenance requirements increase spending per aircraft. PMA should grow somewhat faster as airlines seek lower-cost, more available alternatives, supporting approximately 6–8% annual growth in HEICO’s addressable aftermarket opportunity. Continued product introductions, broader adoption, and market-share gains may allow HEICO to grow organically around 8–10% over a full cycle, broadly consistent with history. This is a directional framework rather than a precise forecast because the drivers overlap and annual performance will fluctuate.

2.8. Growth and economics

FSG’s long-term development shows how far HEICO has moved beyond its original engine-parts business. Quarterly revenue was below $10 million in the mid-1990s; three decades later, it is approaching $1 billion.

The path was not linear. FSG experienced weaker periods after 9/11, during the Global Financial Crisis, and in the collapse of commercial aviation during COVID-19. Each downturn was followed by renewed growth, with the revenue base eventually moving well beyond its previous peak.

The COVID-19 impact is especially visible. Flight activity collapsed, causing revenue to fall sharply over the following three quarters, with the trough extending into early fiscal 2021. As utilization recovered, so did demand for replacement parts and component repairs. By fiscal 2022, quarterly revenue had exceeded its pre-pandemic level.

The next major step change came in the fourth quarter of fiscal 2023, when HEICO began consolidating Wencor. Quarterly FSG revenue rose from approximately $405 million to around $600 million. This was primarily an acquisition-driven expansion rather than a sudden acceleration in legacy operations. Wencor added a large PMA catalog, repair capabilities, and a substantial distribution platform, permanently raising FSG’s scale.

Revenue mix:

Since fiscal 2018, HEICO has disclosed quarterly FSG revenue in three product categories, making changes in segment composition more visible.

The reported categories do not correspond exactly to FSG’s four organizational groups, but the following simplified mapping is useful:

• Aftermarket replacement parts broadly include PMA products developed by HPG and comparable Wencor activities, together with OEM and third-party replacement parts sold through HDG and Wencor distribution.

• Repair and overhaul parts and services broadly correspond to HRG and Wencor’s component-MRO activities, including replacement parts consumed during repairs and overhauls.

• Specialty products largely reflect SPG.

The mapping is only approximate. Distribution is not disclosed separately, Wencor spans several activities, and products developed by one group may be sold or consumed through another. HEICO reports by product and service category rather than internal organizational unit.

Aftermarket replacement parts have consistently been the largest and fastest-growing category, recently contributing around 61% of FSG revenue. Repair and overhaul account for approximately 24%, with specialty products representing the remaining mid-teens percentage. Replacement parts remain FSG’s financial center.

COVID-19 affected all three categories, although not equally. Lower utilization most directly reduced replacement-parts and component-repair demand. Specialty products were somewhat less dependent on airline activity because they also serve original-equipment, defense, and space customers. Recovery spread across the portfolio as aircraft returned to service and supply constraints increased the value of alternatives and independent repair capacity.

Organic growth and acquisitions:

The following chart separates revenue growth into its components.

The organic-growth series confirms strong underlying expansion, recently supported by record demand. Drivers include higher utilization, fleet aging, new PMA and DER-approved repairs, broader customer adoption, greater use within existing fleets, increased repair activity, and the gradual ramp of earlier product cohorts. Distribution can also grow organically through new product lines, deeper relationships, and more inventory to support demand.

Organic growth was strong before the Global Financial Crisis, turned negative during the aviation downturn, and then recovered. COVID-19 produced a far more extreme cycle: quarterly organic growth fell by approximately 45% as flight activity collapsed before rebounding above 30% during the recovery.

These swings distort a simple average. Based on the quarterly series, arithmetic average organic growth from fiscal 2006 through the second quarter of fiscal 2026 was approximately 8%. The median was higher at roughly 11%, because a small number of exceptionally weak COVID-19 quarters pulled down the mean.

Excluding the acute decline and unusually strong reopening comparison—from approximately the second quarter of fiscal 2020 through the second quarter of fiscal 2022—the average was close to 10%, with a median of roughly 11–12%. A reasonable cycle-normalized interpretation is therefore that FSG has historically generated organic growth of approximately 10%, or low double digits, over time.

M&A contributions have always been lumpy. Some periods show almost no acquired growth, while individual transactions create large temporary increases. This is consistent with HEICO’s discipline: management does not transact on a fixed schedule and walks away when price, business quality, or the leadership team fails to meet its requirements.

Clusters of higher acquired growth reflect distinct waves. Transactions completed from 2006 to 2008 made a meaningful contribution, followed by further additions during the 2010s. The contribution increased again from fiscal 2022 and reached a different scale with Wencor in fiscal 2024.

A large acquisition contributes to reported year-over-year growth for four quarters and then disappears mechanically from the bridge, even though its revenue remains permanently within the segment.

Margin development:

Growth has been accompanied by attractive profitability. The exceptionally high late-1990s margins are not a useful baseline for today’s FSG because the business was still small and concentrated in a limited number of engine PMAs. Until 2001, HEICO’s PMA activities were entirely engine-focused; it then deliberately broadened the portfolio.

The subsequent normalization should not be attributed primarily to the move from engine to non-engine PMAs, whose profitability management describes as broadly comparable. The more important shift was FSG’s expansion beyond proprietary replacement parts into component repair, specialty manufacturing, and, more meaningfully after the 2005 Seal Dynamics acquisition, distribution.

Distribution has a different economic profile from proprietary PMA manufacturing. It can add substantial revenue because the distributor records the full value of products sold, but margins are generally lower because the manufacturer retains part of the economics.

The decline from the unusually high margins of the late 1990s therefore reflects a broader change in business mix rather than deterioration in HEICO’s core PMA economics.

For much of 2002–2020, FSG’s quarterly EBITDA margin remained in the high teens to low twenties, roughly 17–23%. This is attractive for a business that manufactures physical products, operates repair facilities, carries substantial inventory, and includes lower-margin distribution. The margin reflects the value FSG creates: PMA parts can be sold at substantial discounts to OEM products while still generating attractive profitability.

Business mix nevertheless matters. Proprietary PMA parts generally carry stronger economics than third-party distribution, while repair and specialty-product margins depend on quarterly work and product mix. Changes in relative contribution can therefore move segment margins even when each operation performs well.

The recent 29.4% record should not automatically be treated as a permanent baseline. Quarterly margins fluctuate with product mix, customer demand, acquisition integration, and the relative contribution of PMA, repair, distribution, and specialty products. The current aviation environment is also unusually favorable, with high utilization, limited aircraft availability, and persistent supply-chain constraints.

Part 3 explained how HEICO turned the aircraft aftermarket into the crown jewel of its business. The question now is how the company extended that model beyond replacement parts—and how ETG, decentralization, and a disciplined acquisition playbook became the second engine of the compounding machine. That is exactly what we will unpack in Part 4.

Note that Part 3 of the HEICO Deep Dive will be published on Sunday, August 9.

Kinsale’s second quarter once again shows why top-line growth alone provides an incomplete picture of the business, as investment income is becoming an increasingly important driver of overall profitability.

At first glance, Kinsale’s second-quarter results did not look particularly exciting. Gross written premiums declined by 5%, mainly because Commercial Property premiums fell by almost one-third. As the chart shows, growth in gross written premiums has decelerated sharply since 2023, with GWP now declining for the second consecutive quarter.

Yet this is only one part of the picture.

Net earned premiums increased by 8.9%, underwriting income grew by 10.5%, net investment income was up almost 20%, and diluted operating earnings per share increased by 15.9%. The combined ratio remained excellent at 75.5%.

In other words, Kinsale wrote less new business but still earned considerably more money.

This is the result of business written in previous periods continuing to flow through earned premiums, Kinsale retaining a larger share of the risks it underwrites, and management refusing to follow competitors into business that no longer meets its return requirements.

The quarter also included an important change in capital allocation. Kinsale repurchased $100 million of its own shares, and Michael Kehoe described the stock as not merely good value, but “a very good value.”

That is probably the most interesting sentence from the entire earnings call.

As usual, Part 1 of this update focuses on Kinsale’s quarterly results and the most important developments in the business. Part 2 takes a step back from the quarter and looks at a question that came up while reviewing the company’s longer-term financials: how does Kinsale manage to generate such consistently high returns on equity?

Part 1: 2026 Q2

• Diluted EPS: $7.72 (+34.0% YoY)

• Gross Written Premiums (GWP): $527.6 million (−5.0% YoY)

• Net Written Premiums (NWP): $452.5 million (−1.4% YoY)

• Combined Ratio: 75.5% (loss ratio 53.8%, expense ratio 21.7%)

• Underwriting Income: $105.4 million (+10.4% YoY)

• Net Investment Income: $55.7 million (+19.9% YoY)

• Return on Equity (RoE): 35.2%

• Book Value per Share: $89.34 (+20.8% YoY)

Kinsale reported record quarterly net income of $175.9 million, up from $134.1 million in the prior-year period.

As we will discuss in this update, the increase was driven by both underwriting income and, to an even greater extent, investment income.

Growth

The main drag in the quarter once again came from Commercial Property, one of Kinsale’s largest divisions. Gross written premiums in the division declined by 32.7%, as intense competition continued to drive material rate decreases. Excluding Commercial Property, Kinsale’s gross written premiums grew by 3.7%, compared with 6.0% in Q1. The slowdown is no longer confined to Commercial Property. Premium growth across the remainder of the portfolio has now decelerated from 14.3% in Q2 2025 to 6.0% in Q1 2026 and just 3.7% in Q2.

If the broader shift toward a softer market persists, it may only be a matter of time before GWP growth excluding Commercial Property turns negative as well.

Only a few years ago, this division was benefiting from severe capacity shortages, substantial price increases and unusually attractive terms. Kinsale leaned into that opportunity and grew rapidly. However, the situation has since reversed, as insurance is a cyclical industry.

Management described the current Commercial Property market as a clear “buyer’s market.” More capacity has entered the market, rates are falling, and coverage is expanding. Much of the additional competition appears to be coming from London-based capacity.

Premium growth can always be increased by accepting lower prices, offering broader terms or writing larger limits. None of this is particularly difficult. The difficult part is maintaining discipline when competitors are willing to accept returns that do not meet your own requirements.

Management was unequivocal on this point. Kinsale will not sacrifice profitability for the sake of top-line growth.

“Staying disciplined on price and terms means that there will be business that we choose not to write, and we are comfortable with that. The long-term health of the portfolio matters more than any individual account. That mindset is embedded in how we evaluate every risk that comes through the door. When the market softens and competitors begin to stretch on terms and conditions to hold onto accounts, we’re going to stay disciplined to our underwriting standards. If we lose accounts due to competition, whether it’s pricing or terms that no longer meet our profitability threshold, we view that as the model working as intended. What we will not do is sacrifice profitability for the sake of top-line growth.” (Michael Kehoe, 2026 Q2)

The Commercial Property decline should also be viewed in the context of the unusually strong comparable period. Approximately 60% of the division’s 2025 premiums were written during the first half of the year. As a result, the year-over-year comparison should become somewhat easier during the remainder of 2026, as management has emphasized during the earnings call.

That does not necessarily mean that the division will return to GWP growth soon. The timing of a market improvement is impossible to predict, and the current level of competition may persist for some time.

The three following charts show Gross and Net written premiums as well as Net earned premiums. As a reminder, they reflect different stages of the insurance business. Gross written premiums represent all premiums written before reinsurance, while Net written premiums show the portion retained by Kinsale after premiums ceded to reinsurers. Net earned premiums, in turn, recognize these retained premiums over the period in which the insurance coverage is provided. This timing difference explains why net earned premiums can continue to grow even when current written premium growth has already slowed or turned negative.

Underwriting Income

Despite writing less GWP, Kinsale increased underwriting income by 10.5% to $105.4 million. The combined ratio improved slightly from 75.8% to 75.5% YoY.

The loss ratio declined from 55.1% to 53.8%. This included 4.5 percentage points of favorable prior-year reserve development, compared with 3.9 points in the previous year. Catastrophe losses amounted to 1.3 percentage points, modestly above the 0.9 points recorded in Q2 2025.

The expense ratio increased from 20.7% to 21.7%. On its own, that might look like a deterioration in Kinsale’s cost advantage, but the underlying reason is largely economic rather than operational.

As Kinsale retains a larger share of the premiums and risks it writes, Kinsale cedes less business, and as a result, Kinsale receives lower ceding commissions. Since these commissions reduce reported underwriting expenses, lower commissions mechanically increase the expense ratio.

Kinsale gives up part of the commission income, but in return retains more underwriting profit and more insurance float.

Investment Income

Net investment income increased by 19.9% to $55.7 million. Cash and invested assets reached approximately $5.5 billion.

The strong increase was driven to a significant extent by gains on Kinsale’s equity portfolio. These gains are economically relevant and flow directly through net income, but they can fluctuate considerably from quarter to quarter and should therefore not be treated as recurring earnings.

The remaining investment result has developed much more steadily, supported by the continued growth of the investment portfolio and the higher yields earned on fixed-income securities. I will take a closer look at the composition of Kinsale’s invested assets—and how the portfolio contributes to the company’s RoE—in the second part of this update.

Kinsale shares represent a (very good) value

Kinsale repurchased 321,055 shares at an average price of $311.47, spending $100 million. The Board subsequently increased the repurchase authorization by another $250 million, leaving total remaining capacity of $337.5 million.

Michael Kehoe’s assessment was unusually direct:

“Kinsale shares represent a good value at today’s price. A very good value.”

Management teams regularly claim that their shares are undervalued. The statement carries more weight when it is accompanied by a meaningful deployment of capital.

The timing also makes sense.

During the hard market, Kinsale had an obvious use for nearly every additional dollar of equity. Premium growth of 30%, 40% or even 50% required more capital to support the growing insurance operation.

That has changed, as current market conditions do not allow Kinsale to deploy capital into Commercial Property at the same attractive returns. At the same time, the company continues to generate substantial underwriting profits and investment income.

Repurchasing shares is therefore a logical alternative, assuming the stock trades below a reasonable estimate of intrinsic value. It also shows that management is willing to adapt its capital allocation to the available opportunity set.

When insurance pricing is attractive, Kinsale reinvests heavily in premium growth. When pricing becomes inadequate, it allows business to leave. When excess capital accumulates and the shares appear undervalued, it buys back stock.

There is no need to force capital into one particular use.

That flexibility is valuable, particularly for a company whose organic growth opportunity can vary considerably over the course of an insurance cycle.

Part 2: How Kinsale Generates Its Return on Equity

The economics of an insurance company differ fundamentally from those of most other businesses. Premiums are collected upfront, while claims are paid months or even years later. When an insurer writes a policy, it therefore recognizes a reserve for future claim payments and related expenses. Until those claims are settled, the corresponding funds remain available to the insurer and can be invested. This capital is commonly referred to as insurance float.

The profitability of the insurance operation itself is captured by the combined ratio. It compares claims and underwriting expenses with earned premiums:

A combined ratio below 100% means that the insurer earned an underwriting profit. A ratio above 100% means that claims and expenses exceeded earned premiums, resulting in an underwriting loss.

Viewed from another angle, the combined ratio indicates the economic cost of the float. When the ratio is below 100%, the insurer is effectively being paid to hold and invest the float because the underwriting business is profitable on its own. When the ratio is above 100%, the underwriting loss represents the cost the insurer incurs to obtain that float.

This distinction is particularly important for Kinsale. The company does not merely receive capital that can be invested for several years; it has historically generated substantial underwriting profits while doing so. Kinsale therefore benefits from two separate return engines. First, it earns a profit from writing insurance. Second, it invests both shareholders’ equity and the float created by the time lag between collecting premiums and paying claims.

For an insurer such as Kinsale, the total RoE can therefore be distilled into two broad components (excluding other interest & overhead expenses):

• The Underwriting RoE measures the return generated by the insurance business itself.

• The Investment RoE captures the return earned on the investment portfolio, including the portion funded by float.

The chart below breaks Kinsale’s 2025 RoE into its main components. The underwriting business contributed 17.9 percentage points, the investment portfolio added another 11.8 percentage points, while financing and other expenses reduced the return by approximately 0.6 percentage points. Together, these components reconcile to a total RoE of 29.2%, broadly in line with the reported 29.3%.

The Underwriting contribution starts with Kinsale’s combined ratio of 75.9%. This corresponds to a pre-tax underwriting margin of 24.1%, or approximately 19.1% after tax (using the actual 2025 tax rate). Since this margin is earned on premiums rather than directly on shareholders’ equity, it must be related to the equity base.

Earned premiums and fees amounted to approximately 93.9% of average equity in 2025. This ratio can be thought of as the underwriting equivalent of a capital-turnover measure: it shows how much premium volume Kinsale generated for each dollar of shareholders’ equity supporting the business.

The after-tax underwriting margin of 19.1% is earned on premiums, whereas RoE measures profit relative to equity. To translate the margin into an RoE contribution, the two therefore have to be linked. In 2025, every $1 of average equity supported approximately $0.94 of earned premiums and fees. Applying the 19.1% after-tax underwriting margin to this premium volume results in an underwriting RoE of 17.9%:

The Investment contribution follows the same basic logic. Based on the mix and returns of Kinsale’s cash, fixed-maturity securities, equity securities and real estate investments, the portfolio generated a weighted gross return of approximately 5.6%. After investment expenses and taxes, the return was approximately 4.4 % (using the 2025 tax rate again).

What turns this seemingly modest return into an 11.8% contribution to RoE is the size of the investment portfolio relative to shareholders’ equity. Kinsale held invested assets equal to approximately 268.9% of average equity, meaning that it had almost $2.70 of invested assets for every $1 of shareholders’ capital:

This is where the economics of insurance float become visible. The investment portfolio is not funded solely by shareholders’ equity, but also by premiums collected before the related claims are ultimately paid. Kinsale therefore earns an underwriting profit while simultaneously investing a pool of assets considerably larger than its equity base. This combination of highly profitable underwriting and returns earned on float is what allows the company to generate such a high overall RoE.

After accounting for financing and other expenses, Kinsale’s RoE was reduced by approximately 60 basis points in 2025 (called“Other RoE” in the chart below).

How Kinsale’s RoE Has Developed Over Time

The underwriting business has consistently been the main driver of Kinsale’s RoE. Underwriting RoE peaked at 23.7% in 2023 before declining to 20.4% in 2024 and 17.9% in 2025.

This decline was not primarily caused by weaker underwriting margins. Kinsale’s combined ratio remained broadly stable in the mid-70s. Instead, shareholders’ equity grew faster than earned premiums.

Earned premiums amounted to 120.0% of average equity in 2023, compared with 107.7% in 2024 and only 93.9% in 2025. As explained, this ratio can be viewed as a capital-turnover measure for the underwriting business: it shows how much premium Kinsale generates for every dollar of equity.

Kinsale therefore continued to earn an excellent margin, but on a smaller premium base relative to its growing equity. This explains most of the decline in underwriting RoE since 2023.

The investment contribution is likewise determined by two factors: the return generated by the portfolio and the amount of invested assets relative to equity.

The after-tax investment return increased significantly in recent years, from 1.0% in 2022 to 3.8% in 2023 and 4.5% in 2024, before declining slightly to 4.4% in 2025. The unusually low return in 2018 and 2022 mainly reflected negative fair-value movements in Kinsale’s equity securities.

At the same time, Kinsale consistently held invested assets equal to more than twice its equity base. The ratio peaked at 288.2% in 2023 and declined to 268.9% by 2025. Supported by insurance float, Kinsale could therefore earn its investment return on an asset base approximately 2.7 times larger than shareholders’ equity.

Together, these developments explain why total RoE declined from 34.4% in 2023 to 29.2% in 2025. The main reason was not deteriorating underwriting quality, but lower capital utilization: both earned premiums and invested assets declined relative to the growing equity base.

Conclusion

The decomposition makes Kinsale’s return drivers much easier to understand. Despite the growing contribution from investments, Kinsale remains primarily an insurance business rather than a financial holding company with an insurance operation attached (such as Berkshire or Fairfax).

There is nevertheless further potential on the investment side. A gradually higher allocation to equity securities could increase the portfolio’s long-term return, although this would also introduce greater volatility into reported earnings. The investment portfolio may therefore become a more important earnings driver over time, but underwriting remains the foundation of the business.

Management currently runs the business to a 20% RoE or greater, with most product lines reportedly earning returns above that threshold. Looking at the RoE from the bottom up shows why this target appears relatively comfortable.

As long as Kinsale maintains an after-tax investment return above 4% on invested assets exceeding 250% of equity, the investment portfolio alone contributes roughly 10 percentage points to RoE:

Before financing and other expenses, Kinsale would therefore need only another 10 percentage points from underwriting to reach its 20% RoE target. At a combined ratio of 75%, the after-tax underwriting margin is approximately 20%. This means that earned premiums equal to only around 50% of equity would be sufficient to generate a 10% underwriting RoE. Allowing for the roughly 60-basis-point drag from financing and other expenses raises the required ratio only modestly, to approximately 50–55%.

That would still be well below Kinsale’s historical post-IPO low of approximately 78%.

The exercise provides at least a rough indication of how much room management has when balancing underwriting margins, premium growth, investment returns and capital allocation. Kinsale does not need every component to remain at recent peak levels to sustain a 20% RoE.

• The good bucket consists of subsidiaries that already generate attractive margins and compound steadily.

• The bad bucket contains the companies that have weighed on group profitability and require operational improvement.

• The M&A machine allows Teqnion to redeploy capital into profitable niche businesses at attractive prices.

Q1 2026 was encouraging because all three buckets moved in the right direction.

Q2 suggests that Q1 may not have been a one-off. One quarter does not make a trend, and, strictly speaking, neither do two. However, two consecutive quarters pointing in the same direction can be an early indication that a trend is beginning to form. The next few quarters will show whether the underlying investment thesis was correct.

This is particularly relevant because Teqnion’s valuation remains depressed, as discussed later in this article. That creates an attractive setup: if subsequent quarters confirm the trend and sentiment begins to improve, the company could benefit not only from continued earnings growth but also from a narrowing of its valuation discount to more proven serial acquirers.

At group level, net sales increased by 9% to SEK 517.9m, surpassing SEK 500m in quarterly revenue for the first time.

Reported EBITA increased by 36% to SEK 72.9m…

…while the EBITA margin rose from 11.3% to 14.1%. This was the highest Q2 EBITA and one of the strongest quarterly margins Teqnion has reported since its listing.

The reported development is already strong, but it still understates the improvement in underlying profitability.

Both periods contained positive non-cash effects from the revaluation of contingent considerations. However, Q2 2025 benefited from a considerably larger positive revaluation than Q2 2026. Excluding these accounting effects, adjusted EBITA increased by 79% (!), providing a much clearer picture of the underlying operational development.

Teqnion’s own bridge reaches a similar conclusion. After removing currency effects and earn-out revaluations, underlying profit before tax increased from approximately SEK 26m to SEK 54m, or by 106%.

In other words, the improvement was not created by accounting noise. The underlying businesses earned substantially more money.

Less bad revenue, substantially more profit

Organic sales declined by 2.8%, which initially looks disappointing. But once again, the headline does not tell the full story.

In local currencies, the decline was only 1.0%. Excluding revenue that Teqnion deliberately discontinued because it was insufficiently profitable, organic sales were effectively flat at +0.3%.

More importantly, organic EBITA increased by 52% (after +13% in Q1).

This is the same development we saw in Q1: Teqnion is walking away from revenue that does not create sufficient value while improving the profitability of the remaining business.

Revenue growth is only valuable when it produces an adequate return. A company should not be rewarded for selling more products if those sales consume capital, management attention, and working capital without generating sufficient profit.

Teqnion describes itself as being in the business of generating profitable sales. The Q2 numbers increasingly reflect that philosophy.

Cash flow is beginning to follow earnings

Another important improvement was cash conversion.

Free cash flow excluding acquisitions increased from SEK 4.5m to SEK 35.0m in Q2. For the first half of the year, it more than doubled from SEK 23.0m to SEK 54.8m.

This is particularly welcome because earnings growth ultimately has to translate into cash. Serial acquirers cannot fund acquisitions indefinitely through increasing debt. The model becomes truly powerful when the existing portfolio generates enough cash to finance an increasing portion of future acquisitions.

There is still room for improvement. Working capital absorbed SEK 22.9m during the quarter and SEK 53.2m during the first half (though I’m not converned here). Gross cash flow—defined as operating cash flow before changes in working capital—nearly tripled from SEK 39m in H1 2025 to SEK 114m in H1 2026.

TEQ Nord: the recovery continues

The segment includes the subsidiaries in Sweden (25) and Finland (1).

Net sales were broadly flat at SEK 365.0m, increasing by only 0.6%.

EBITA, however, increased by 55% from SEK 26.6m to SEK 41.2m.

The margin improved from 7.3% to 11.3%, marking clear progress compared with 2024 and 2025. However, it remains below the level achieved in 2023 and well below the margins typically generated by larger Swedish serial acquirers such as Indutrade, Lagercrantz, Lifco, and Addtech. From a group perspective, TEQ Nord therefore remains the main drag on profitability, although I expect margins to improve gradually over time.

The underlying businesses are different, and many of the Swedish subsidiaries originate from an earlier phase in Teqnion’s development when acquisition quality and operational processes were less consistent.

TEQ Väst: growth remains strong

The segment includes the subsidiaries in the UK (16).

TEQ Väst continues to represent the structurally higher-quality part of the group.

Revenue increased by 37% to SEK 152.9m, driven primarily by acquisitions.

EBITA increased by 15% to SEK 38.4m.

The EBITA margin declined from 29.9% to 25.1%, but the comparison period benefited from unusually favorable business and accounting items. A margin above 25% remains exceptional for a group of small industrial and service companies.

The Portfolio Mix Is Gradually Shifting

The sales and EBITA development illustrates how Teqnion’s portfolio is gradually changing.

TEQ Nord generated almost all group revenue before Teqnion began acquiring internationally. Since 2022, the majority of acquisitions have been completed in the UK and Ireland. As a result, TEQ Väst has grown from almost nothing to annualized sales of more than SEK 600m.

TEQ Väst still accounts for less than one-third of group sales, but already contributes nearly half of segment EBITA before central costs.

As Väst becomes a larger part of Teqnion, the group margin should structurally increase, even without assuming further margin expansion within Väst itself.

The first Finnish acquisition, Norband, has now also been allocated to TEQ Nord. This means that future growth in the higher-quality acquisition bucket will not necessarily be limited to Väst. However, I still expect the majority of Teqnion’s acquisition capital to be deployed in the UK.

The acquisition cohorts are getting better

One of the most interesting disclosures in the Q2 report was Teqnion’s new acquisition-cohort analysis.

Based on the underlying first-half subsidiary results, companies acquired between 2006 and 2021 generated an EBT margin of approximately 11%. The 2022–2024 cohort generated around 18%, while the businesses acquired in 2025 and 2026 generated approximately 25%.

The figures are not perfectly comparable. The most recent acquisitions were not consolidated for the full period, there may be seasonality, and the calculation excludes central costs, financing costs, amortization, and IFRS adjustments.

Still, the direction is difficult to ignore.

The legacy portfolio provides a stable but relatively average foundation. The acquisitions completed between 2022 and 2024 are better. The most recent acquisitions appear better again.

This is precisely what management has been trying to achieve: acquire businesses that raise the average quality of the group rather than merely increase its size.

As Johan Steene summarized during the earnings call:

“The intention is that you’re going to see better and better margins and better and better earnings, and better and better sales.”
(Johan Steene, CEO, 2026 Q2 earnings call)

The cohort data provides the first tangible evidence that this process may already be underway.

The combination of a recovering legacy portfolio and increasingly profitable new acquisitions is powerful. Teqnion does not need to transform every old subsidiary into a 25%-margin business. It needs to improve the weaker companies while continuously allocating incremental capital toward companies that are better than the existing group average.

That is how the overall portfolio quality gradually compounds upward—something the stock market either has yet to fully understand or simply does not yet trust Teqnion to deliver.

M&A: attractive businesses at attractive prices

Teqnion completed four acquisitions during the first half: Cambs Compressor Engineering, the Powerair bolt-on, T.E.S.T., and Norband. The businesses have combined average historical sales of approximately SEK 100-110m.

Total consideration amounted to SEK 130.5m. The acquired companies held SEK 23.7m of cash, resulting in a cash-free purchase price of approximately SEK 106.8m. Of the total consideration, SEK 85.0m was paid in cash at closing, while SEK 33.2m consisted of contingent consideration and SEK 12.3m of deferred payments.

Had the acquired companies been part of Teqnion from January 1, they would have contributed SEK 46.8m of sales and SEK 12.5m of EBITA during the first half.

Annualizing these figures results in approximately SEK 25.0m of EBITA, implying a combined EBITA margin of almost 27%. This simple annualization may be affected by seasonality, but it provides a reasonable indication of the acquired earnings base.

Based on these figures:

• The total consideration corresponds to approximately 5.2x EBITA.

• The cash-free purchase price corresponds to approximately 4.3x EBITA.

• The immediate net cash outflow of SEK 61.3m corresponds to approximately 2.5x EBITA.

Balance sheet and valuation

Net debt, including lease liabilities, increased to SEK 544.4m as Teqnion continued to acquire companies. Nevertheless, net debt to EBITDA remained moderate at 1.7x, compared with the company’s target of below 2.5x.

The balance sheet therefore still provides capacity for further acquisitions, although the growing amount of deferred and contingent consideration should not be ignored. These liabilities represent future cash payments, even though they are not included in traditional bank net debt.

The stock

Teqnion’s market capitalization is approximately SEK 2.78bn. Adding bank debt and deferred consideration and deducting cash results in an enterprise value of around SEK 3.16bn.

Q2 EBITDA was approximately SEK 91.2m. Simply annualizing the quarter produces a run-rate EBITDA of around SEK 365m and an EV/EBITDA multiple of approximately 8.7x.

Conclusion

Q1 confirmed the thesis. Q2 strengthened it.

The legacy Swedish portfolio is recovering. TEQ Väst continues to grow at structurally higher margins. Organic profit is increasing despite deliberately abandoning unprofitable revenue. Cash flow has improved. The latest acquisition cohorts appear significantly more profitable than the older portfolio, and the disclosed purchase price math remains highly attractive, pointing to high ROIIC.

There will inevitably be weaker quarters. Teqnion is still a relatively small group, individual subsidiaries can have a meaningful impact on consolidated results, and operational improvement is rarely linear. But it is becoming increasingly difficult to argue that the recent progress is merely temporary in my opinion.

It will be structured in five Parts:

• Part 1: The Aviation Ecosystem Behind HEICO

• Part 2 (today): Why the Aircraft Aftermarket Creates a Structural Opportunity

• Part 3: Inside HEICO’s Crown Jewel

• Part 4: The Second Engine and the HEICO Operating System

• Part 5: The Economics Behind the Compounding Machine

All parts are now available in one PDF. You can download it below.

Deep Dive Heico Corp

9.73MB ∙ PDF file

Download

Download

Download

👔 Company Name: HEICO Corporation (“HEICO”)

🔎 ISIN: US4228061093 (Common Stock) and US4228062083 (Class A)

🔧 Business model: Aerospace and electronics serial acquirer

🌍 Geographic exposure: global (~62% U.S. and ~38% international sales across approximately 130 countries)

📈 Stock Price: HEI Common Stock: $339 | HEI.A Class A Common Stock: $253

💰 Market Capitalization: ~$40 billion

👨‍💼 Number of CEOs since foundation: 2 (one transition — Laurans Mendelson to Eric and Victor Mendelson)
since 1990

👨‍👩‍👦 Founder-/Owner-operator: Yes — owner-operated by the Mendelson family

📅 CEO tenure: Since 1990

🥇 Insider ownership: ~21.0% of shares

📊 10Y EPS CAGR: ~16%

🔁 Reinvestment profile: High

💸 Capital intensity: Low — capex-light, but inventory-intensive

🏰 Moat: Regulatory approvals, customer trust, installed-base scale, price and availability, culture

🧨 Main risks: Valuation, acquisition execution, aviation cyclicality, OEM countermeasures

🌳 Slow Compounding fit: Yes – high-quality (niche) serial acquirer

Business Model in a Nutshell: HEICO is a decentralized aerospace and electronics serial acquirer. Its Flight Support Group provides lower-cost aircraft parts, repairs, and distribution services, while its Electronic Technologies Group supplies highly engineered components for aerospace, defense, space, medical, and other demanding markets. Growth comes from new product development, market-share gains, and disciplined acquisitions of niche businesses that retain significant operational autonomy.

Subscribe now

4. The Aircraft Aftermarket: Aircraft Maintenance, Repair, and Overhaul

4.1. Why MRO demand is recurring

An aircraft sale is the beginning of a long aftermarket life. Every flight hour, takeoff, landing, pressurization cycle, brake event, engine run, cabin cycle, and environmental exposure creates incremental maintenance demand. MRO services keep the aircraft airworthy, reliable, and safe to operate.

Aircraft maintenance is driven by several clocks at once, as the following table shows. Some tasks become due after a defined number of flight hours; others depend on flight cycles, calendar time, landings, engine cycles, APU hours, or specific operating conditions. A short-haul aircraft may accumulate many cycles through several daily takeoffs and landings, while a long-haul aircraft accumulates more flight hours but fewer cycles. Maintenance profiles therefore vary materially by aircraft type and operating pattern.

As discussed in Chapter 3.4, the CAMO tracks far more than aircraft age. It monitors checks due after specified flight hours, components approaching cycle limits, Airworthiness Directives with fixed compliance dates, and engine life-limited parts nearing retirement. The maintenance organization performs the required work within its approved scope and releases the aircraft or component to service.

MRO is both predictable and unpredictable. Many tasks are scheduled years in advance, while defects, inspection findings, corrosion, cracks, and component failures create nonroutine work.

Maintenance, repair, and overhaul. The boundaries can blur in practice, but the basic distinctions are straightforward.

Maintenance is the broad activity of keeping an aircraft, engine, or component in an airworthy condition. It includes inspections, functional checks, lubrication, servicing, adjustments, cleaning, monitoring, and scheduled replacement tasks. The objective is to limit wear and prevent the asset from becoming unsafe or unreliable.

Repair is narrower: it restores a damaged, worn, or defective item to a serviceable condition. The work may be simple, such as replacing a seal, or highly engineered, such as restoring a worn engine part under approved repair data.

Overhaul is more comprehensive. A component or engine is removed, disassembled, cleaned, inspected, repaired as necessary, reassembled, tested, and released to service. It is the deeper shop-visit form of repair.

Repair and overhaul therefore restore an aircraft or component to an approved serviceable condition, rather than necessarily to a literally new state.

Historically, aircraft maintenance programs were far less data-driven than they are today. Reliable operating data were limited, so programs relied heavily on the judgment of mechanics and engineers and often followed a “more is better” philosophy.

That began to change as regulators and the industry adopted condition-based and reliability-centered maintenance methods. Planning moved away from purely experience-based routines toward more analytical programs.

Modern maintenance asks not only how often a part may fail but also what happens if it does. A benign failure does not require the same treatment as a safety-critical one. Economics matter as well: airlines seek to avoid unnecessary shop visits, downtime, and premature parts replacement without compromising airworthiness. The maintenance program balances sufficient intervention to preserve safety and reliability against unnecessary removal from service.

Modern programs generally distinguish among three maintenance concepts:

Scheduled and preventive maintenance is planned in advance and includes tasks due after defined hours, cycles, days, months, or years. The airline performs these tasks before a failure occurs.

Predictive maintenance uses operating data, trend monitoring, sensors, reliability information, and condition indicators to determine when work should be performed. The objective is to prevent failures without removing parts prematurely.

Unscheduled maintenance arises when something fails or an inspection reveals an unexpected finding. A pilot may report a defect, a warning message may appear, a leak or crack may be found, a component may fail a test, or a part may be outside approved limits.

4.2. How MRO became an industry

For most of aviation history, maintenance was not a separate aftermarket industry. Airlines performed much of the work internally: they owned the aircraft, employed the mechanics, controlled the manuals, operated the shops, and treated maintenance as a necessary operating function. Manufacturers primarily supplied products and technical documentation rather than seeking to capture the entire aftermarket through long-term service contracts, proprietary repair networks, or bundled support solutions.

This model worked when large flag carriers had enough scale to support internal maintenance divisions. Heavy maintenance, however, was expensive, technical, and scale-dependent, encouraging airlines to share capacity. One example was ATLAS, the 1970s Boeing 747 maintenance cooperation among Air France, Alitalia, Lufthansa, Iberia, and Sabena Technics. Specialized widebody capability was valuable, but no individual airline always had sufficient scale to utilize it efficiently.

Over time, the internal maintenance departments of large legacy carriers became businesses in their own right. Lufthansa Technik, Air France Industries KLM Engineering & Maintenance, Delta TechOps, Turkish Technic, and others grew out of airline maintenance organizations and began serving third-party customers. Internal cost centers became external businesses that spread fixed costs, improved hangar and labor utilization, and generated revenue. Independent MRO providers added another layer of competition, often specializing in base maintenance, components, engines, landing gear, or inventory support.

Today’s MRO market reflects that evolution. Airlines retain selected capabilities, particularly line maintenance and strategically important work; airline-affiliated MROs sell services to third parties; independent providers compete on cost, specialization, flexibility, and turnaround time; and OEMs seek a larger aftermarket share through parts, repairs, licenses, long-term service agreements, and control of technical data. HEICO enters a layered ecosystem in which airlines, MRO providers, OEMs, lessors, and alternative suppliers compete over cost, availability, control, and certification.

Historically, MRO was often regarded as a necessary cost center. Airlines needed maintenance to keep aircraft safe and compliant, but generally treated it as an operating expense rather than a strategic source of value. The traditional approach was closer to “break it, fix it” than to today’s reliability-centered maintenance model.

That view has changed. In an asset-intensive airline business, maintenance directly affects safety, reliability, aircraft availability, punctuality, and cost. A grounded aircraft generates no revenue, while a delayed aircraft can disrupt the entire network. Airline capacity is also perishable: once a flight departs, an empty seat cannot be stored and sold the following day. Passenger transportation must be delivered when scheduled.

This makes maintenance particularly important in aviation. A missing part can turn a minor technical issue into a grounded aircraft. Technical problems may not account for most delays, but the disruptions they cause can be lengthy and expensive.

Punctuality is therefore an important driver of airline profitability. Recent industry estimates put the broader cost of disruption at up to 8% of airline revenue—a substantial burden in a structurally low-margin industry. Delays can cascade through the network, affecting crews, gates, passenger connections, airport slots, and subsequent aircraft rotations. Effective maintenance supports profitability by reducing technical disruptions and keeping aircraft available for service.

4.3. How maintenance works: checks, locations, and parts

A check is a bundle of tasks grouped into a planned maintenance event. Rather than performing every inspection, lubrication, functional check, component removal, and structural task separately when due, airlines combine work into line checks, A-checks, C-checks, heavy checks or D-checks, and customized maintenance packages.

Terminology and intervals vary by aircraft type, operator, maintenance program, utilization, and regulatory framework. The traditional A, B, C, and D labels remain useful for orientation, but modern programs are more modular. Tasks once included in a heavier C-check may be redistributed into smaller overnight, weekly, or A-check packages.

Airlines seek to perform as much maintenance as possible during natural downtime—particularly overnight or during lower-demand periods—while preserving aircraft availability during peak flying hours.

The intervals shown are indicative rather than universal; the approved maintenance program governs each aircraft.

Line maintenance. Line maintenance comprises recurring, relatively minor tasks designed to preserve airworthiness without materially disrupting the flight schedule. It is commonly performed between flights or overnight and may include walk-arounds, troubleshooting, servicing, minor repairs, tire changes, cabin fixes, fluid servicing, MEL-related follow-up, and defect clearance. Typical categories include transit checks, daily, 48-hour, and weekly checks, and A-checks.

Base maintenance. Base maintenance—also-called airframe or heavy maintenance—is hangar-based work performed while the aircraft is removed from its normal schedule. It includes major inspections, corrosion checks, structural repairs, modifications, cabin work, and heavier C-check- or D-check-style events. On newer aircraft, modular work packages have reduced the size and frequency of traditional base-maintenance visits.

Base maintenance is more labor-intensive than engine or component MRO. The aircraft is large, complex, and customized, and many tasks require access, inspection, disassembly, reassembly, testing, and coordination across large teams. Materials matter, but labor hours, hangar capacity, planning quality, and turnaround time often matter more.

This makes base maintenance economically different from selling high-value replacement parts. It is operationally demanding and essential, but generally more price-competitive and more exposed to regional labor-cost differences. Key performance indicators include turnaround time (TAT), on-time performance (OTP), quality, and the avoidance of unexpected findings. A low-priced heavy check that returns the aircraft late may prove expensive overall.

Parts vocabulary: rotables, repairables, expendables, and life-limited parts. Some parts are repeatedly removed, repaired, and returned to service; others are consumed and replaced; and some carry hard certified life limits.

These terms are practical commercial categories rather than a perfectly uniform legal taxonomy across every manual, contract, or airline system.

A rotable can circulate through the system repeatedly. It is removed, repaired or overhauled, certified as serviceable, and reinstalled on the same or another aircraft. Depending on the item, avionics boxes, pumps, actuators, landing gear components, wheels, brakes, and APUs can follow this model. Airlines and MRO providers maintain rotable pools so that a serviceable unit can be installed immediately while the removed unit is repaired.

A repairable is similar but generally has a more limited economic or technical life. It can be repaired and returned to service, but not indefinitely. Eventually, wear, repair cost, or approved limits may make further repair uneconomic or impossible, at which point the item is scrapped and replaced.

Expendables and consumables are lower-value items that are generally used once or replaced rather than repaired. Expendables include filters, seals, gaskets, fasteners, and certain cabin or interior parts. Consumables include materials used during maintenance, such as lubricants, adhesives, sealants, chemicals, and cleaning products.

A life-limited part (LLP) has a hard certified limit expressed in flight cycles, flight hours, or calendar time. Once the limit is reached, the part must be removed even if it appears serviceable. LLPs are common in critical areas such as engines and landing gear, where fatigue and accumulated stress matter, and they create predictable replacement demand.

The removal-and-replacement loop. The practical MRO flow becomes clearer by following a single component.

Suppose a pilot reports a system fault or line maintenance identifies a defect during an overnight check. The airline first determines whether the aircraft may still be dispatched. If the item is not immediately safety-critical and the Minimum Equipment List permits continued operation, the defect may be deferred for a limited period under controlled conditions. Otherwise, the aircraft remains grounded until the issue is fixed.

If the component must be removed, the airline or MRO may install a serviceable replacement from inventory, an exchange pool, or a supplier. The unserviceable unit then goes to a component shop, where it is inspected, tested, repaired or overhauled if possible, tested again, documented, and released to service with the appropriate certificate. It can then return to inventory or be installed on another aircraft.

That flow contains several economic choices: buy a new OEM part, use used serviceable material (USM), install an eligible PMA part, repair the existing component, use an exchange pool to reduce downtime, wait for the OEM, or send the item to an independent shop.

The mechanic does not make this decision alone. The maintenance organization performs and releases the work, while the airline’s CAMO, engineering, reliability, planning, and procurement functions define the policy framework. Lessors may also restrict acceptable materials and repairs. Any installed item must be eligible, documented, acceptable to the operator, and compatible with the approved maintenance data and aircraft configuration.

Four common situations drive the decision:

1. First, a defect is identified. The airline determines whether the aircraft may continue operating under the MEL, whether the part must be removed immediately, what replacement is available, and whether that replacement is eligible and properly documented.

2. Second, a life limit is reached. Once an LLP reaches its approved limit, replacement is mandatory.

3. Third, an Airworthiness Directive or other mandatory instruction requires action. The operator may have planning flexibility within the compliance window, but the requirement itself is not optional.

4. Fourth, an economic choice exists. A worn or damaged item may be replaced with a new OEM part or USM, repaired under approved data, exchanged through a pool, or replaced with an eligible and accepted PMA part. This is where alternative parts and repair solutions create value.

Once a part is removed, the airline or MRO generally has several paths:

1. A new OEM replacement part is often the simplest option. Acceptance is high, documentation is straightforward, and internal policy approval is usually easiest. It is also often the most expensive route, may carry long lead times, and reinforces dependence on the OEM.

2. Used serviceable material (USM) can be attractive when available. These previously installed parts have been inspected and, where necessary, repaired or overhauled before being released to service with the required documentation. USM can be cheaper and faster than new material, but it must have proper traceability, sufficient remaining life, and acceptable documentation.

3. An approved repair avoids replacement by restoring the existing item under approved repair data. It can materially reduce cost, but only when technically feasible, approved, and economically worthwhile. The shop also needs the appropriate capabilities, tooling, test procedures, and return-to-service authority. Turnaround time remains critical: a low-cost repair offers little value if the aircraft or component waits too long.

4. Exchange pools address speed. The airline receives a serviceable unit immediately and returns the unserviceable part to the pool for repair, keeping the aircraft moving. The trade-off is a combination of access fees, eligibility rules, availability constraints, and return conditions.

5. PMA parts are approved alternatives to OEM articles. For suitable applications, they may offer lower prices, better availability, or both. Adoption still requires certification, technical confidence, and customer acceptance; some airlines and lessors are more receptive than others, and not every part is equally suitable.

When an OEM part is expensive, unavailable, or burdened by long lead times, a certified PMA alternative gives airlines and MRO providers another way to keep the aircraft flying without accepting the OEM’s full economic terms.

4.4. The four MRO markets

The MRO market is commonly divided into four service categories:

• Line maintenance (discussed in Chapter 4.3)

• Base maintenance / airframe MRO (discussed in Chapter 4.3)

• Engine MRO

• Component MRO

The four categories are not perfectly separate physical events. Line and base maintenance describe where and how aircraft-level work is performed, whereas engine and component MRO describe what is maintained or repaired. A component may be removed during line or base maintenance and later repaired in a specialized shop. The discussion below therefore focuses on engine and component MRO.

Fragmentation differs sharply across the MRO market. Engine MRO—particularly full overhauls—is generally the most concentrated and OEM-controlled segment, although control changes over a program’s lifecycle. Airframe and component MRO are more fragmented and leave greater room for airline-affiliated providers, independents, and specialist repair shops.

Engine overhaul. Engine MRO includes off-wing work performed on a removed engine, while engine-related tasks completed on-wing are generally classified as line maintenance.

An aircraft engine does not have a single mileage threshold after which it is “finished.” It can remain in service for decades and pass through several shop visits. A Lufthansa CFM56-5C, for example, exceeded 100,000 flight hours and had been fully overhauled four times—equivalent to roughly 22 years at an assumed 12 flight hours per day. Depending on engine size and work scope, a single overhaul can cost several million dollars, while a heavy visit including life-limited parts can approach $10 million.

The process begins with workscoping. The shop reviews flight hours, cycles, previous repairs, performance trends, borescope findings, and the remaining life of LLPs. The customer and MRO then determine the required depth of the visit. A light performance restoration differs materially from a heavy visit involving major module work and LLP replacement. The engine is disassembled into modules and, where necessary, individual parts, which are cleaned and inspected for cracks, wear, corrosion, heat damage, and fatigue. Repairable parts return to service; others are replaced. The engine is then reassembled and tested in a test cell before release with the required documentation.

Engine overhaul is among the most controlled and material-intensive parts of the aftermarket. OEMs perform some work directly and also rely on joint ventures and licensed shops, but the economics often remain tied to OEM-controlled parts and approved repairs. Materials are estimated to represent roughly 60% of the direct cost of a typical narrowbody overhaul, with repairs adding another 20–30%. When significant LLP replacement is required, a shop visit may cost twice as much or more, and materials can rise to 65–80% of total overhaul cost.

Market participation, however, changes materially over an engine program’s lifecycle.

OEM control is generally strongest early in an engine program. The installed base is young, technical knowledge is concentrated with the manufacturer, repair schemes are immature, spare-parts supply is tightly controlled, and independent alternatives are limited. This supports recovery of development costs. The OEM designed the engine, owns much of the repair data, controls many critical parts, and often determines which shops may participate through licenses, joint ventures, or long-term service agreements. For airlines, the result can be expensive and highly dependent maintenance.

That control tends to weaken as the fleet matures. More engines enter the aftermarket, shop-visit experience accumulates, USM becomes available, and independent MRO providers build capability. The addressable opportunity for PMA parts and alternative repairs expands accordingly.

A young engine program may offer superior fuel efficiency while leaving airlines highly dependent on the OEM in the aftermarket. HEICO therefore tends to focus on PMA parts used later in an engine’s lifecycle, when the installed base and customer demand for alternatives are more mature.

Component MRO. Component MRO covers the non-engine systems that keep an aircraft functioning, including avionics, APUs, wheels, tires, brakes, landing gear, hydraulics, electrical power, fuel systems, flight controls, cabin systems, environmental systems, and many smaller categories. It includes repair, replacement, and testing and is less concentrated than engine MRO because the market spans numerous component families, OEMs, aircraft configurations, and specialist shops.

OEMs retain strong positions in complex categories because they designed the equipment and often control repair instructions, test equipment, technical publications, and spare parts. Their participation is especially strong in avionics, landing gear, APUs, thrust reversers, and other high-value systems. Independent repair and alternative supply are generally more competitive in simpler or more fragmented categories.

This is the opportunity investors should understand. HEICO does not need to dominate the entire MRO market. It can compound by solving numerous narrow problems across the installed base: an expensive OEM replacement, a long-lead-time component, a recurring consumable, or a specialized article for which an approved alternative offers better economics.

Airframe and line maintenance. These activities are essential to aviation but are not the primary lens through which to assess HEICO’s moat.

Airframe MRO keeps the physical aircraft structure airworthy through scheduled inspections, corrosion prevention, structural repairs, modifications, and heavy checks. The business is operationally intensive, requiring hangars, labor planning, tooling, quality systems, engineering support, and disciplined turnaround execution. Competition is often regional and cost-driven because labor represents a large share of the value added.

Line maintenance sits closest to daily operations: the mechanic at the gate, the overnight troubleshooting team, the outstation contractor, the MEL decision, the tire change, the cabin issue, and the rapid component swap that protects the schedule. Airlines often retain a large share of hub line maintenance because dispatch reliability is too closely tied to the customer promise to outsource indiscriminately.

4.5. Market structure: who controls what

The MRO market is a network of overlapping competitors and partners. Unlike aircraft manufacturing, which is highly concentrated around a few airframers and engine OEMs, the MRO market is more dispersed. It is not one market controlled by one type of player, but a mix of airline-affiliated MROs, independent specialists, OEM-owned service businesses, repair shops, distributors, lessors, and alternative parts suppliers.

The chart below is useful in that sense, even though it should not be read as a current market-share table. It is a 2016 estimate, and MRO revenues are not reported consistently across OEMs, airline-affiliated MROs, and independent providers. But directionally, it shows the point well: the MRO market is much more fragmented than aircraft manufacturing, with engine OEMs, airframers, system suppliers, airline-affiliated MROs, and independent providers all competing in the same broad aftermarket.

First, OEMs participate directly. Engine OEMs, airframers, and system suppliers seek a larger aftermarket share because repairs and spare parts can be more profitable than the original-equipment sale. The model is straightforward: sell the asset, then capture recurring service and parts revenue over its life.

Second, airline-affiliated MRO providers participate. Lufthansa Technik, Delta TechOps, AFI KLM Engineering & Maintenance, Turkish Technic, and others originated from their airline parents’ maintenance needs but now serve third parties. Their advantages include operator knowledge, fleet experience, scale, and a practical understanding of downtime, reliability, and parts availability.

Third, independent MRO providers participate. They may specialize in engine overhaul, component repair, airframe maintenance, line support, or narrow technical niches. Their advantages often include flexibility, independence from OEM spare-parts incentives, and the ability to use approved alternatives when customers permit them.

Fourth, specialist component, piece-part, and accessory shops provide the hidden plumbing of the aftermarket. A large MRO may hold the airline contract while subcontracting selected repairs, and a component may pass through several organizations before returning to service.

Why independent alternatives exist despite OEM control. At first glance, the OEM appears positioned to own the aftermarket: it designed the system, wrote the manuals, knows the original part, and may control tooling, test equipment, service bulletins, repair schemes, and spare-parts pricing. Yet aviation regulation also creates formal paths for approved competition.

This is also where OEM pricing power comes from. If there is no approved competitive alternative, the OEM is effectively the only supplier. The customer does not have a normal procurement choice between competing products. The airline, MRO provider, or component shop either buys the OEM replacement part at the quoted price, delays the maintenance event, or keeps the aircraft on the ground. And an aircraft on the ground produces no revenue. The bargaining position is therefore obvious.

The rules do not reserve support of the aircraft indefinitely for the OEM. They require the aircraft to remain airworthy and the parts, repairs, maintenance data, organizations, and releases to be approved or acceptable. This distinction creates room for PMA parts, DER-approved repairs, EASA-approved repair data, USM, independent component repair, and airline-approved alternative-sourcing policies.

This does not mean PMA adoption is automatic. Lessors may prefer OEM parts and repairs to preserve residual value and transferability; airlines may restrict PMA use on selected systems; engineers may need time to build confidence in a supplier; procurement requires a credible business case; and every part must be eligible, documented, compatible with the aircraft configuration, and reflected correctly in the maintenance records. Chapter 5 examines these barriers in detail.

Once those hurdles are cleared, the value proposition is powerful. An approved, traceable, supported, eligible, and accepted PMA article can reduce replacement cost. An approved repair can return an existing item to service instead of forcing a new OEM purchase, lowering material cost and improving availability. Both options operate within—not outside—the regulatory system.

The current aviation cycle discussed in Chapter 1 makes MRO alternatives more valuable. Delayed deliveries keep older aircraft in service; engine issues and parts shortages ground assets; turnaround times lengthen; and airlines carry more spares to protect operations. The aftermarket is absorbing stress that fleet renewal would normally relieve.

Availability can therefore matter as much as price. A cheaper part that arrives too late does not solve the airline’s problem. An approved alternative available during an OEM shortage may create value even before the price discount is considered. In a tight supply chain, HEICO’s proposition broadens from “the OEM is expensive” to “the OEM may also be slow or unable to supply the required part on time.”

The following chart summarizes the aircraft and MRO value chain. Airframers, system and lower-tier suppliers, MRO providers, airlines, and alternative sources are linked through product flows, service flows, and contractual relationships.

5. PMA Parts: The Opportunity and Its Limits

Before turning to the practical debate around PMA, it is useful to connect the themes discussed so far.

PMA sits at the intersection of several themes: aircraft parts are heavily regulated, much of the aerospace profit pool lies in the aftermarket, and airlines face constant pressure to control maintenance costs. A replacement part cannot be installed merely because it looks identical, fits the same slot, or costs less than the OEM version. The relevant question is whether it is approved for the specific aircraft, engine, system, or component on which it will be used.

Parts Manufacturer Approval (PMA) is one route that makes such alternatives possible. It allows a company other than the original OEM to manufacture and sell approved replacement or modification articles for type-certificated products. PMA is not merely permission to manufacture a part; it combines design approval with approval of the production system. The article must be technically acceptable for its intended use, and the manufacturer must be able to produce it consistently under an approved quality system.

Aircraft remain in service for decades, OEM replacement parts can carry high margins, and airlines have a strong incentive to reduce maintenance costs. Maintenance is one of the few major expense categories they can influence directly, while many other costs remain largely outside their control.

Adoption nevertheless involves friction because aviation is conservative, documentation-heavy, safety-critical, and relationship-driven. Even when a PMA part is approved, airlines must be comfortable with the supplier, engineering work, quality system, documentation, installation eligibility, warranty implications, and, in some cases, the lessor’s view of aircraft transferability.

Without the PMA industry, many replacement-part categories would effectively remain under OEM control. Where the OEM is the only practical source, it can exercise substantial aftermarket pricing power and has historically pushed through repeated spare-parts price increases. These high-margin sales represent a major OEM profit pool, as discussed in Chapter 2.5.1. PMA suppliers compete for part of that pool, while OEMs naturally try to defend it.

This chapter examines how PMA acceptance has developed, why airlines use PMA, why OEMs resist it, why some operators remain cautious, and why the resulting tension has created an attractive niche for HEICO.

5.1. From obscure approval route to strategic sourcing tool

PMA is not new. The concept has existed for decades and originally supported replacement parts for older aircraft, including World War II-era models. For many years, however, it remained a niche approval route rather than a mainstream airline sourcing strategy. Depending on the source, PMA existed for roughly 50 years before beginning to “take off” commercially in the 1990s.

That timing matters. During the 1990s and 2000s, airlines became more cost-focused, maintenance organizations grew more professional, and OEMs increasingly treated the installed base as the principal profit pool. Airlines gradually recognized that replacement parts were not always an unavoidable cost accepted on the OEM’s terms; in selected applications, they could source an approved alternative.

PMA acceptance had to be earned over many years. Aviation is conservative for good reason: no airline engineer wants to be responsible for installing the wrong part—the industry equivalent of “no one ever got fired for buying IBM.” A poor decision can create enormous technical, operational, reputational, and career risk. Maintenance organizations therefore need more than the absence of an obvious problem; they need evidence that the entire approval, quality, and documentation chain is sound.

PMA adoption has therefore been gradual. Formal FAA approval is only the first step; airline adoption requires a second layer of internal acceptance. Engineering must understand the part, quality assurance must trust the supplier, procurement must establish the business case, records and maintenance documentation must remain clean, and lessors may need to accept the installation. The part must also be eligible for the specific aircraft, engine, or component configuration, and the paperwork must be correct.

Acceptance has nevertheless broadened. Early resistance often reflected unfamiliarity and OEM arguments about safety, warranty, and support. Over time, industry education, operating history, airline references, and the FAA’s own position helped establish PMA as a legitimate sourcing tool.

A recent IATA survey illustrates that normalization. In November 2025, IATA presented responses from 46 airlines about PMA use in their fleets. Thirty-four airlines, or 74%, already used PMA parts. PMA is also no longer a purely U.S.-centric discussion: among users, Europe represented the largest share, followed by the Americas, Africa and the Middle East, Asia-Pacific, and China and North Asia. The FAA approval framework may remain the center of gravity for PMA, but the commercial use case has spread well beyond its home market.

The survey also shows why adoption remains uneven. If almost three-quarters of respondents already use PMA, the more revealing question is why some airlines still avoid it or use it only selectively.

The answer is revealing. The principal obstacles are not technical reliability concerns. Leasing agreements were cited by 82% of respondents, followed by OEM contracts at 50% and warranty concerns at 32%; PMA reliability was cited by only 12%.

Remaining resistance is often less about whether a part can perform than about who controls the aircraft, what the lease permits, how OEM contracts are structured, how warranties are interpreted, and how comfortable the airline is with alternatives. The regulator may approve the part, but the commercial ecosystem must also accept it.

The supply-chain environment discussed in Chapter 1 may accelerate acceptance. Airlines are not operating in a normal aftermarket: deliveries are delayed, older aircraft remain in service longer, and engine reliability problems and parts shortages are extending turnaround times.

In a normal environment, PMA is primarily a price argument. Today, it is also an availability argument. When an OEM part is expensive but available, the PMA alternative must justify itself mainly through savings. When the OEM part is expensive, slow, or unavailable, the value proposition becomes considerably stronger.

5.2. Why small savings matter in a low-margin industry

The strongest commercial case for PMA begins with airline economics. Airlines are essential to the global economy, but they have historically struggled to earn attractive returns. The industry combines high fixed costs, volatile demand, low customer switching costs, powerful suppliers and distribution channels, and a product often perceived as a commodity. Over long periods, this has produced weak returns on invested capital. According to IATA and McKinsey, airline ROIC remained below WACC from at least 1996, although the gap narrowed materially during the post-pandemic recovery.

Weak profitability is not simply the result of poor management; much of it is structural. Airlines sell perishable, just-in-time capacity: once a flight departs, an empty seat can never be sold. The marginal cost of one additional passenger on an existing flight is low, encouraging aggressive pricing. Customers can compare fares easily, switching costs are low, and online platforms have made pricing highly transparent. Meanwhile, many of the largest cost categories are difficult to negotiate. Fuel prices are set globally, while airport charges, landing fees, taxes, security costs, and air traffic control fees are often outside an airline’s direct control. Aircraft and engine OEMs are concentrated, airports may act as local monopolies, and labor can hold substantial bargaining power, particularly in network operations.

The long-term history of RASK and CASK illustrates the point. Real revenue per available seat kilometer (RASK) has declined dramatically, but cost per available seat kilometer (CASK) has had to fall almost in parallel. Technological improvements, deregulation, widebody aircraft, and higher load factors reduced the cost of flying, yet much of the benefit passed to passengers through lower fares. The industry became vastly more efficient without becoming equally more profitable. Intense competition creates persistent price pressure, and passenger growth often cannot fully offset yield deterioration. Airline revenue has therefore tracked unit costs closely, while temporary pricing premiums have usually been competed away quickly.

That is the core problem for airlines Efficiency gains often do not remain with airlines for long; competition transfers them to customers. When one carrier lowers its cost base, another can lower fares. Greater transparency allows customers to capture more of the surplus, while weaker demand quickly exposes the fixed-cost structure. Airlines therefore seek cost savings that are real, repeatable, and not immediately competed away.

Airlines operate in a structurally difficult industry, with pressure from almost every direction:

• High bargaining power of suppliers: The airline supply chain is dominated by concentrated supplier groups. Aircraft and engine manufacturing are oligopolistic, airports often operate as local monopolies, air navigation service providers are difficult to replace, and labor unions can be powerful. Fuel is another major expense largely outside the airline’s control, while the manufacturing and service supply chain has become increasingly concentrated.

• High bargaining power of distribution channels and customers: Global distribution and computer reservation systems are concentrated among a small number of providers, giving them meaningful market power. Customers increasingly view air travel as a commodity: switching costs are low, price transparency is high, and comparison websites make it easy to select the lowest fare.

• Medium threat of substitutes: Air travel is difficult to replace on many routes, particularly long-haul services, but alternatives have improved. Video conferencing can substitute for some business travel, while high-speed rail can compete on shorter routes where city-center-to-city-center travel times are attractive.

• High threat of new entrants: Barriers can be lower than they appear. Aircraft can be leased, distribution channels are accessible, customer switching costs are low, and incumbency advantages may be limited on individual routes. A new entrant need not replicate a global network to pressure fares in selected markets.

• High rivalry among existing airlines: A seat is perishable: once the aircraft departs, unsold capacity is lost. High fixed costs and low marginal costs per additional passenger encourage aggressive pricing, while limited differentiation makes yields difficult to protect.

The result is intense rivalry, particularly on routes where several carriers compete for the same passengers.

Airlines consequently have few easy cost levers. Many large expenses are effectively non-negotiable: fuel is priced in global markets, while taxes, landing fees, airport charges, security costs, and air traffic control fees are largely imposed rather than negotiated. The remaining controllable categories therefore become especially important.

Maintenance is one of those categories. Airlines cannot choose whether to maintain an aircraft, but they can influence how the work is performed, which suppliers they use, how aggressively they develop repairs, how they manage inventory, and whether they approve alternatives such as PMA parts.

In that environment, every dollar saved matters. At a 5% operating margin, one dollar of cost reduction has the same operating-profit effect as roughly twenty dollars of additional revenue. Unlike new revenue, savings do not require selling more seats, adding capacity, or accepting greater operational complexity.

The illustrative London-to-New York flight demonstrates this operating leverage. It generates roughly $174,000 of revenue against about $153,000 of cost, leaving approximately $21,000 of profit and a 12.2% operating margin. Maintenance is one of the categories in which an airline can still make active choices. Fuel, airport costs, air traffic control, taxes, and many ownership expenses are market-driven or contractually fixed.

This is where PMA becomes economically relevant for airlines. The answer is not to underinvest in maintenance, which keeps the aircraft flying and generating revenue, but to reduce the cost of approved material without compromising airworthiness. PMA fits that logic. If an approved PMA part performs the required function at a materially lower price, the savings can be highly valuable in an industry with thin margins and permanent cost pressure.

Airlines carry a large share of the industry’s invested capital but have historically captured weak returns on that capital. Other parts of the ecosystem often occupy structurally stronger positions through greater concentration, pricing power, or more defensible niches. Airlines are squeezed between powerful suppliers and price-sensitive customers.

This is why the OEM aftermarket model is so painful for airlines. OEMs may accept attractive—or even weak—upfront economics to win the installed base, then earn the profit through spare parts, repairs, manuals, licenses, and technical control. For the OEM, the aftermarket is a high-quality recurring profit pool; for the airline, it is a recurring cost pool. PMA exists within that tension.

A PMA supplier need not replace the OEM across the entire aircraft. It only needs to identify parts for which OEM pricing is high, the installed base is large enough, technical risk is manageable, and the approval path is feasible. In those applications, PMA offers airlines lower material costs, greater supplier diversity, and sometimes better availability.

In a structurally low-margin industry, a 30% saving on one replacement part may appear small in isolation. Across a large fleet, repeated maintenance events, and thousands of part numbers, however, the effect can become meaningful. Because airline margins are thin, even modest material savings can have an outsized impact on operating profit.

Industry sources have estimated that DER-approved repairs and PMA programs focused on engine gas-path components can save several hundred thousand dollars per shop visit and, in some cases, more than 50% relative to OEM catalog pricing.

5.3. Availability can be as important as price

The PMA debate is often framed as “OEM part versus cheaper PMA part.” In aviation, however, the most expensive part is sometimes the one that is unavailable. A missing component can ground an aircraft, delay a flight, disrupt the network, force the airline to lease replacement capacity, or require last-minute sourcing at unattractive prices. In an asset-heavy, just-in-time industry, availability directly affects profit.

The current cycle is therefore particularly favorable for alternative sourcing. Delayed deliveries keep older aircraft in service, increasing maintenance and parts demand just as the supply chain remains constrained. Turnaround times lengthen, more inventory becomes trapped in the repair loop, and airlines must carry additional spares or accept poorer operational performance.

PMA is therefore also a supply-chain resilience tool. If a PMA supplier has inventory when the OEM does not, the airline may value availability even before considering the discount. This is especially relevant for mature platforms with large installed fleets, long remaining service lives, and OEM production priorities increasingly focused on new programs, constrained capacity, or higher-margin channels.

5.4. Patents and the boundaries of the PMA opportunity

One obvious question is whether OEMs can use patents to close the market to independent replacement parts. The concern is understandable: OEMs incur substantial upfront costs to develop, test, and certify an aircraft or engine, while a PMA supplier enters later, after the original part has established its commercial relevance. Patents provide one way to protect the technical advances created through that initial investment.

Patents matter, but they do not invalidate the PMA model. They influence which parts HEICO can address, when it can enter, and whether it must develop a technically distinct design.

The first distinction is between regulatory approval and intellectual-property rights. The FAA determines whether a replacement article complies with the applicable airworthiness requirements and can be produced under an approved quality system. It does not determine whether the applicant is free to manufacture and sell the article under patent law. The FAA assesses airworthiness, not whether manufacture or sale infringes third-party intellectual-property rights. If HEICO can develop a technically distinct part—for example, through a different manufacturing process, material, or design feature—it may be able to design around relevant patent claims while still satisfying the FAA’s requirements.

For the products HEICO typically targets, utility patents are more relevant than design patents. A design patent protects ornamental appearance rather than technical function. That can matter for visible products such as cabin interiors but is generally less relevant to seals, filters, combustion components, blades, and other functional parts. A utility patent, by contrast, can protect how a component works or is constructed, the materials or coatings it uses, or the way it is manufactured.

Functionality does not make a part unpatentable. A new cooling structure in a turbine blade, a novel heat-resistant coating, a particular alloy, or an improved manufacturing process may all qualify for protection. What an OEM cannot do is obtain a new patent merely on a component that has already existed in substantially the same form for decades. Among other requirements, a utility-patent claim must be new and non-obvious. Obtaining a new patent on a turbine blade or hydraulic seal that has existed for decades in essentially the same form and performed the same function is therefore difficult.

HEICO may be free to develop an alternative turbine blade while remaining unable to use a patented cooling geometry, coating, or production method. It can wait for the patent to expire, obtain a license, abandon the opportunity, or design around the claims with a different technical solution. Independent development alone does not prevent infringement: a product can infringe a valid patent even if it was created without access to the patent holder’s confidential information.

The long lives of commercial aircraft and engines nevertheless favor PMA suppliers. Patents generally last up to 20 years from the relevant filing date, while aircraft and engine platforms can remain in service for several decades. Patents filed during a platform’s original development therefore do not necessarily cover its entire economic life. This timing matters because HEICO usually becomes interested only after a platform has built a meaningful installed base and entered its heavier maintenance phase. New aircraft are initially protected by warranties, require relatively little maintenance, and may not yet generate enough replacement demand to justify PMA development. The opportunity improves as the fleet matures, warranties expire, maintenance events increase, and airlines seek lower aftermarket costs. By then, some original-development patents may have expired or be approaching expiration.

A mature platform is not necessarily free of IP protection. OEMs can patent later improvements involving new materials, coatings, geometries, production processes, and component designs, creating layers of protection with different expiration dates. Nevertheless, the pool of technology no longer covered by the original patents tends to expand as the platform matures.

Reverse engineering also requires a legal distinction. HEICO may lawfully purchase an OEM part, disassemble and measure it, analyze its composition and performance, and use the findings to develop its own design and substantiation data. U.S. trade-secret law generally recognizes reverse engineering of a lawfully obtained product and independent development as legitimate means of acquiring information. HEICO may not, however, use stolen drawings, improperly obtained manufacturing instructions, confidential software, or technical information disclosed in breach of a nondisclosure agreement.

Finally, PMA serves an important economic and supply-chain function. Airlines have historically operated on thin margins and often earned returns below their cost of capital, as discussed in Chapter 5.2, making maintenance costs and parts availability especially important. Restricting the aftermarket to OEM-supported parts would reduce price competition, increase dependence on a small number of suppliers, and risk materially raising the cost of maintaining the global fleet. From a public-interest perspective, a fully closed aftermarket would be difficult to justify.

The legal risk is not merely theoretical. In 1989, United Technologies Corporation, then the parent of Pratt & Whitney, sued HEICO and Jet Avion over certain engine parts and coatings, alleging patent infringement, misappropriation of trade secrets, and unfair competition. The litigation continued for more than a decade before the parties settled in 2000. HEICO received a permanent license to manufacture and sell the relevant parts and paid UTC an agreed amount for that license.

HEICO states that FSG holds no material patents covering the proprietary techniques, software, and manufacturing expertise developed for engine and aircraft-component replacement parts. It instead relies primarily on trade-secret protection, continuous process improvement, technical expertise, and safeguards against misappropriation or obsolescence. HEICO also identifies the development of patents or methodologies that prevent it from manufacturing certain replacement parts as a business risk.

Product selection is therefore critical. HEICO does not need to replace every aircraft component; it can direct engineering resources toward parts with manageable intellectual-property positions, designs that can be independently analyzed and substantiated, sufficiently large installed bases, recurring replacement demand, and meaningful customer savings. A heavily protected or technically inaccessible part can be passed over for another opportunity.

Patents can narrow or delay HEICO’s addressable market, particularly on the newest and most complex platforms, but they do not eliminate the broader opportunity. Aircraft often remain in service far longer than the patents filed during their development, and the number of potentially addressable components is enormous. HEICO need not gain access to every part; it needs a steady flow of commercially attractive opportunities that can be independently developed without infringing enforceable rights. The breadth of its PMA portfolio further reduces the risk to FSG as a whole.

5.5. Why PMA penetration remains limited

The bullish PMA case is clear: lower costs, more competition, better availability, and less dependence on OEM-controlled aftermarket economics. Yet adoption is not automatic, because airlines consider far more than the lowest purchase price.

5.5.1. Lessors worry about transferability and residual value

Leasing is one of the most practical constraints on PMA adoption and was the largest obstacle in IATA’s recent survey. When airlines were asked what prevented their companies from using PMA, 82% cited leasing agreements.

Leasing has become the dominant ownership model in commercial aviation. According to IATA and Cirium, leased aircraft represented roughly 58% of the global commercial fleet at the end of 2023, up from about 10% in the 1970s.

The airline may want the PMA savings, and the part may be fully approved, but the aircraft is often owned by another party. That changes the decision.

Lessors generally worry about two issues. The first is transferability. Every lessor fears an aircraft returning from lease that cannot be placed quickly with another operator. The lessor continues carrying the asset while receiving no lease revenue. PMA may raise concerns because airlines, regulators, and jurisdictions differ in their acceptance, particularly for complex or sensitive applications. If a future lessee refuses an aircraft with certain PMA parts installed, the lessor may face additional cost, delay, or reconfiguration before transition.

The second concern is residual value. Lessors view an aircraft both as an operating asset and as collateral with future value. Replacing expensive OEM parts with lower-cost PMA alternatives may improve the airline’s immediate economics, but the lessor may worry that the aircraft or engine will be worth less at lease end. The same question arises during part-out: will a used OEM turbine blade, valve, or component command a higher surplus-market price than a PMA equivalent?

HEICO’s comments over the years suggest that lessor positions are far from uniform. Some have restricted PMA because of marketability and residual-value concerns, while others increasingly view sourcing flexibility as part of their own customer proposition.

In 2010, HEICO identified GECAS, then General Electric’s aircraft-leasing business, as the most vocal PMA opponent. Management argued that the position reflected GE’s broader interests as an engine manufacturer rather than evidence that HEICO parts materially impaired aircraft marketability:

“When leasing companies look at PMA parts, they look at it in multiple areas. And I would say that the leasing company that has been the most vocal about not wanting to use PMA, surprise, surprise, it’s been General Electric, GECAS. However, I can tell you that GECAS has got many competitors out there and those competitors do permit the use of our parts when requested by their customers. And we have had success in getting these competitors to realize that there is a strategic advantage that they can offer their customers. Specifically, GECAS has come out with the argument that if a PMA part is used, that may restrict the marketability of the aircraft after they take it back. And we say that that is just sheer nonsense. When you look at 19 of the world’s 20 largest airlines are our customers and accept our parts, this is not a valid argument. It’s really just an argument for, frankly, General Electric to try to gouge their customers and sell more overpriced engine parts.” — Eric A. Mendelson, Q3 2010 earnings call

The quote highlights a potential conflict of interest. An OEM-affiliated lessor may have an additional incentive to preserve demand for the manufacturer’s own replacement parts. Independent lessors can view the issue differently, particularly when customers value the freedom to reduce maintenance costs.

HEICO has therefore spent considerable time educating both operators and owners. By 2013, management was reporting progress in persuading lessors that approved alternatives did not necessarily damage the underlying asset:

“We have seen we have had success with certain lessors permitting their lessees to use our parts. And we think that we’ve got to continue to educate and make sure that the operators understand the benefit and understand the lessors understand that this is not detrimental to the value of their aircraft or engines. So yes, I would say we made continued progress on that front.” — Eric A. Mendelson, Q1 2013 earnings call

Some lessors have moved beyond merely accepting PMA and recognized that greater sourcing flexibility can make their aircraft more attractive to potential lessees:

“There are some very progressive lessors out there that want to give their customers competitive advantage to be able to use alternative material and we see that as a very positive trend.” — Eric A. Mendelson, Q3 2014 earnings call

Management reiterated the point several years later:

“A lot of other leasing companies have viewed it as a competitive advantage to permit the use of alternative material. And we’ve got many examples where the world’s biggest lessors do permit the use of HEICO parts.” — Eric A. Mendelson, Q1 2019 earnings call

For airlines, the leasing barrier is therefore largely contractual. An airline need not decide at lease inception that it will use PMA; the important point is to preserve the right to evaluate and use alternatives later if the economics become attractive:

“We have had success with lessors approving the use of our parts. I think it’s also more of an education process for the airlines, so they know upfront that they should not enter into contracts that prohibit the use of alternative material. They don’t need to decide upfront when they sign a lease that they’re going to use it. But I think just to have the flexibility to be able to use it is what’s so important.” — Eric A. Mendelson, Q1 2014 earnings call

The ability to obtain this flexibility depends partly on the airline’s negotiating leverage. Large carriers with substantial fleets can generally influence lease terms more than smaller operators. HEICO has also highlighted IATA’s role in defending airlines’ freedom to consider alternatives without recommending any particular PMA part:

“There are a number of who permit the use of PMA parts on their aircraft. And a number of airlines worldwide will not sign leasing contracts without having the opportunity to do that. And of course, the airlines that have larger fleets are the ones who are typically able to get that, if you will, restriction lifted. The smaller airlines, it’s been an issue of education and frankly, a market power of the lessors. But I think there are a number of things going on in the international airline community, in particular, IATA has been very vocal in this area, not telling airlines that they should or should not use PMA material, but instead wanting to maintain the option for them. And it’s not a good thing when they have a particular manufacturer who can dictate prices. So we’ve been successful working with a number of lessors. As a matter of fact, if any customers are on this call and want to know the names of lessors, our salespeople would be more than happy to give them the names of those people who are cooperative in this area.” — Eric A. Mendelson, Q1 2016 earnings call

PMA restrictions carry a measurable economic cost. An airline accepting an OEM-only clause gives up one of the few tools available to reduce maintenance material expense. In HEICO’s view, a lessor insisting on such a restriction should compensate the airline through a lower lease rate:

“And it is important that the airlines negotiate with their lessors to get relief to be able to use alternative parts so they’re not put at a competitive disadvantage. Certainly, if a leasing company does not want to permit the use of alternative parts, then they need to have a materially lower lease rate to offset the damage that they’re causing to their lessees. And most lessors don’t want to do that.” — Eric A. Mendelson, Q1 2019 earnings call

The issue therefore becomes a total-cost calculation. The airline must compare the lease rate with the additional maintenance spending caused by surrendering sourcing flexibility. A contract that appears attractive before maintenance costs may become far less competitive if it requires higher-priced OEM material throughout the lease.

Some large carriers have reportedly made this position explicit. A 2016 Aviation Maintenance Magazine article named Delta Air Lines and Copa Airlines as operators that had said they would not sign leases containing “no PMA” clauses. HEICO has likewise observed that more airlines insist on retaining the option to use alternative material.

The residual-value argument can also be reversed. Lessors worry that PMA parts will make an aircraft or engine less attractive to the next operator, yet an asset may also lose value if its maintenance economics become excessively dependent on a single supplier:

“I would say the probably the change with regard to the engine market is that lessors and owners of assets including airlines realize that there’s not going to be much residual value if there isn’t competition in the aftermarket.” — Eric A. Mendelson, Q1 2014 earnings call

Victor Mendelson illustrated the weakness of attributing an entire asset’s value to the brand on each replacement component with a deliberately simple automotive analogy:

“So it’s like if somebody’s got a fancy car and they use some other air filter than the, I don’t know, Rolls-Royce air filter, then somehow your car is no longer worth $500,000 or something like that. People are seeing through that logic and or lack of logic, and increasingly, that’s not an issue for us.” — Victor H. Mendelson, Gabelli Funds 30th Annual Aerospace & Defense Symposium, September 2024

The analogy is intentionally simple, but the underlying point is clear. Aircraft value and transferability depend primarily on technical condition, maintenance status, operating economics, and remaining useful life—not on whether every approved replacement component carries the original manufacturer’s name.

Lease restrictions remain a genuine obstacle, particularly for smaller airlines with limited bargaining power. The market has nevertheless become more flexible: major lessors permit HEICO parts, some present that flexibility as a competitive advantage, and more airlines preserve the option during lease negotiations. As PMA usage and operating experience expand, the claim that approved alternatives automatically impair marketability or residual value becomes harder to sustain.

5.5.2. OEM contracts can limit PMA adoption without banning it

Another major hurdle is the structure of OEM agreements. In IATA’s 2025 survey, 50% of respondents cited OEM contracts as an obstacle—the second-largest barrier after leasing. PMA adoption is therefore often constrained less by regulation than by the commercial architecture surrounding the aircraft, engine, or component.

OEM contracts can influence PMA use in several ways. Engine maintenance agreements, flight-hour or “power-by-the-hour” contracts, component support agreements, long-term service agreements, material supply arrangements, warranty terms (see Chapter 5.5.3), and technical support contracts may contain restrictions or incentives that make PMA difficult, unattractive, or costly. The restriction need not be an outright ban; the airline may lose price concessions, warranty comfort, technical support, repair access, or maintenance flexibility if it selects non-OEM material.

This is especially relevant in engine MRO. Engine OEMs often maintain contractual relationships with airlines that extend far beyond the engine sale and may include maintenance, spare parts, service bulletins, engineering support, fleet-hour agreements, and shop-visit planning. Once inside that ecosystem, an airline’s theoretical right to use PMA becomes less valuable if the contract steers it back toward OEM material.

For airlines, PMA therefore becomes a negotiation issue. The question is not only whether a part is approved and economically attractive but also whether OEM agreements allow the airline to capture the savings. A contract preserving the right to use approved alternatives can be valuable; one that quietly limits flexibility may protect the OEM’s aftermarket economics for years.

5.5.3. OEMs threaten to withhold warranty support if PMA parts are used

Warranty is another common deterrent. Airlines may hesitate to use PMA if they fear that the OEM will no longer honor its warranty. No operator wants to risk contractual protection on an aircraft, engine, or major component merely to save money on an alternative part.

Warranty practices also became part of a wider dispute over competition in the engine aftermarket. After airlines raised concerns about OEM practices, IATA filed a formal complaint with the European Commission in 2016. The dispute with CFM was settled through an agreement signed in 2018, under which CFM published Conduct Policies covering warranties, servicing, technical support, repairs, licensing, and contracting. Most importantly, CFM committed to assessing warranty claims on a nondiscriminatory basis rather than rejecting them merely because an engine contained non-OEM parts or repairs. CFM also agreed that the presence of such alternatives would not, by itself, justify refusing to service an engine. The agreement applied directly to CFM and did not constitute a formal finding of wrongdoing, but it limited the use of warranty and service access to discourage non-OEM competition.

In practice, the warranty argument is often less threatening than it sounds. The most valuable protection is usually the new-product warranty, during which the OEM typically replaces failed components at no cost. Airlines then have little reason to purchase PMA parts. No operator will replace a free OEM part with a paid alternative merely to make a point. The real cost issue appears later, when the warranty expires and the airline must absorb the full maintenance cost.

The warranty discussion therefore becomes a financial comparison rather than a fear-based decision. The airline must weigh the warranty’s actual value against the maintenance savings available from PMA. In some cases, OEM protection may be worth preserving; in others, avoiding PMA may cost far more than the protection is worth.

A second point is often overlooked: PMA parts also carry warranties. A credible supplier stands behind its product, and the airline should compare PMA and OEM warranties part by part.

5.5.4. OEMs claim that PMA parts pose safety risk

Safety is a central argument against PMA, but PMA is not a shortcut around airworthiness. Approval is evidence-heavy and technically demanding and requires the applicant to substantiate both the part and the production system. When the FAA approves a critical PMA article, it may scrutinize that article more directly than the original OEM part was reviewed on a standalone basis, because the OEM part was often approved within a broader aircraft, engine, or system certification.

The tension is easy to understand. Airlines cannot control fuel prices, airport charges, taxes, or air traffic control fees, while maintenance remains one of the few large cost categories with room for active decisions. PMA is therefore economically attractive. OEMs can turn that economic argument into an emotional one by asking the billion-dollar question: is an airline really willing to risk lives, litigation, and its reputation merely to buy “cheaper” parts? Framed that way, PMA sounds less like disciplined cost control and more like unnecessary risk.

If an aircraft crashes, the public usually hears the aircraft model, airline, and perhaps engine manufacturer—not the nuanced account of which replacement part may have contributed. From the OEM’s perspective, any non-OEM part therefore creates potential reputational exposure, because the aircraft or engine brand may be damaged even if the problem originated elsewhere in the maintenance chain.

The FAA’s role, however, is not to protect an OEM’s aftermarket position. It must determine whether the article complies with the applicable airworthiness requirements and whether the manufacturer can produce it reliably. If an alternative supplier follows the required process and demonstrates acceptability, the regulator has no safety basis to block competition.

The available evidence also does not support the claim that PMA parts are inherently less safe. EASA’s former head of product safety, Yves Morier, was quoted as saying that there was no statistical evidence supporting safety concerns about PMA.

In a more recent analysis, the Modification and Replacement Parts Association (MARPA) reviewed Airworthiness Directives for transport-aircraft engines from 1992 onward, a period chosen because PMA approvals had begun growing rapidly and engines contain many critical and important parts. The review identified 287 turbine-engine ADs: 286 arose from OEM problems. Three ADs involved PMA parts, two of which had replicated the OEM design problem and were therefore included among the OEM-related ADs. MARPA also identified one non-engine PMA case linked to a fatal helicopter accident, again involving a part that replicated an OEM design problem.

The evidence strongly supports PMA, although OEM material represents a much larger share of the installed base and the comparison must therefore be interpreted carefully. The available record suggests that PMA parts have performed at least in line with OEM parts and, in some cases, arguably better. Airlines do not have to sacrifice safety to use PMA; the historical performance record has been very strong.

PMA acceptance often improves once airlines understand the process behind the part. Greater transparency makes PMA look less like a “cheap alternative” and more like an approved sourcing tool. British Airways provides a useful example: industry accounts describe BA as initially skeptical, but its view changed after HEICO explained the approval process and economic benefits.

British Airways had historically been cautious about PMA parts, but its position changed after HEICO explained the regulatory process and economic benefits. The airline subsequently began expanding its use of PMA alternatives.

As a result, British Airways entered a long-term strategic alliance with HEICO Aerospace in May 2007 for parts development and management, becoming the seventh major airline to partner with HEICO. At the Royal Aeronautical Society’s “Great PMA Debate,” Ameet Bhalla, then BA’s Technical Manager for Airframe Systems, summarized the shift: “Through this deal with HEICO, we will actively seek PMA opportunities going forward. We will no longer be the cash machine for OEMs.”

HEICO’s operating record provides another reference point. According to the company, HEICO Parts Group has delivered more than 90 million parts without a service bulletin, Airworthiness Directive, or in-flight shutdown associated with its products. This does not prove that every PMA supplier offers the same engineering and quality control, but it provides strong evidence that properly designed, approved, and manufactured PMA parts can operate safely across a very large installed base, as the following quote illustrates: [1]

“And simply HEICO warrants its products and has also insurance backup to that and the OEMs warrant their products. And if there is an incident, then there is an airline sponsored failure investigation and HEICO has participated in those failure investigations repeatedly. I mean, we’ve been involved in many, many, many of them. And fortunately, never has a HEICO product been found to have caused any of those failures. We’ve shipped, I don’t know, 65 million parts in the last roughly 20 years or so and not a single in flight shutdown or service both and has resulted as a result of HEICO parts. So we warrant our products, the OEMs warrant their products and that’s how that works.” — Eric A. Mendelson, Q3 2017 earnings call

5.5.5. OEMs claim that PMA parts are inferior to OEM parts

OEMs have historically promoted a simple message: the original part is the safest part. One industry anecdote captures the argument. Before the FAA’s 2008 response to anti-PMA rhetoric, an unnamed engine OEM reportedly ran an advertisement showing a tired Elvis Presley impersonator beneath the headline, “Let’s face it, lookalikes never perform quite like the original.” The campaign is difficult to verify today, but the message was clear: PMA parts were portrayed as second-rate lookalikes and OEM parts as the only reliable choice.

The FAA responded through a Special Airworthiness Information Bulletin (SAIB). Unlike an Airworthiness Directive, an SAIB is a nonmandatory communication used to alert, educate, or recommend action when the FAA considers information important but does not believe mandatory corrective action is warranted. SAIBs usually address technical concerns, service experience, inspection recommendations, or maintenance issues.

It is unusual for the FAA to enter what appeared to be a commercial marketing dispute. The agency reminded the market that airworthiness approval is determined by compliance, not branding. Once a PMA or STC part is approved for installation on a certificated product, it is a valid replacement under the FAA system. An OEM may prefer and promote its own part, but marketing claims cannot overrule an FAA approval.

The bulletin’s message was clear: once the FAA approves a PMA part, the industry should recognize that approval. An engine manufacturer may prefer its own part, but it cannot declare an FAA-approved alternative invalid.

The OEM argument is emotionally effective but technically incomplete. A PMA supplier cannot merely copy a part’s shape and sell it into aviation. It must substantiate the design, demonstrate compliance with the applicable airworthiness requirements, obtain production approval, and support continued operational safety. Complex or critical PMA articles may face more focused part-level scrutiny than the OEM article did on a standalone basis because the original was typically approved within a broader aircraft, engine, or system certification.

The argument also assumes that the original design is always best. Operating history shows otherwise. New engine programs often mature for years after entry into service as field experience reveals failure modes not fully visible during certification. If OEM parts were perfect from day one, the industry would not need so many service bulletins, redesigns, replacement campaigns, and Airworthiness Directives. PMA suppliers can use accumulated operating experience, newer materials, improved manufacturing methods, and targeted testing to produce a part that performs at least as well as the original and sometimes better.

5.5.6. OEMs claim that PMA designers do not understand system effects

A more subtle version of the quality argument concerns “system effects.” An engine is an extremely complex system, and a small change in one part may create unintended consequences elsewhere. The OEM designed the product and understands its interfaces, the argument goes, whereas an independent PMA supplier designing one replacement part supposedly does not.

The concern is reasonable: engines are highly engineered and tightly integrated, and unintended effects cannot be dismissed. The argument nevertheless overstates how modern aerospace production works. OEMs often act as system integrators rather than vertically integrated manufacturers of every part. Engine development and production involve multiple companies, suppliers, facilities, and countries, and many articles are manufactured externally even within OEM-controlled programs.

PMA suppliers are therefore not as foreign to the system as the argument suggests. They generally do not receive the OEM drawing and must develop their own through reverse engineering. That is more difficult, but it also forces close study of the article. In some cases, reverse engineering and modern manufacturing can produce tighter tolerances or greater durability than the original design.

The relevant question is not whether the PMA supplier designed the entire engine but whether it has demonstrated that the specific replacement article performs its required function safely in the intended environment without unacceptable effects on the next higher assembly. The PMA process therefore addresses failure modes, criticality, testing, installation eligibility, production controls, and continued operational safety. System effects are real, but they are also precisely what the approval process is designed to evaluate.

5.5.7. Outsourced maintenance can block access to PMA parts

Outsourced maintenance is another practical obstacle. Airlines may favor PMA savings in principle, but the maintenance provider often controls the actual sourcing decision. An airline performing work in-house has more direct control over which parts are evaluated, approved, stocked, and installed; outsourcing weakens that control.

This is especially important in engine MRO. If the maintenance provider is also the engine OEM, PMA savings become much harder to capture because the OEM has little incentive to install an alternative that competes with its own profit pool. Only very large customers may have enough leverage to insist on PMA; otherwise, the default is usually OEM material.

Control over maintenance channels is one of the most effective ways to defend the aftermarket without banning PMA outright. If the OEM owns the shop, controls the manuals, sets repair standards, supplies material, and manages the work scope, it can strongly influence what is installed. The PMA article may be approved and the airline willing to use it, yet the maintenance arrangement can still block access to the engine.

PMA adoption is therefore partly a contracting issue. Airlines must decide in advance how much sourcing freedom to retain when outsourcing maintenance. A contract granting the provider full control over material selection may eliminate PMA savings; customer-directed material, approved vendor lists, PMA review rights, or shared-savings mechanisms improve the airline’s ability to capture them.

Outsourced maintenance can therefore slow adoption even when the regulatory and technical case is sound. Approval alone does not create savings; the part also needs access to the maintenance event. In engine MRO, where OEMs have increased their aftermarket control, that access may be the real bottleneck.

6. From One Aircraft Part to HEICO

Understanding HEICO first required understanding the market around it: the unusually long lives of aircraft, the economics of the aerospace aftermarket, the PMA regulatory framework, and the considerable barriers independent suppliers must overcome. Against this backdrop, HEICO’s history shows how regulatory complexity, customer cost pressure, and persistent resistance to alternative parts were transformed into an exceptional business.

Today, HEICO is a diversified aerospace, defense, and electronics group with thousands of products, global operations, and two major operating segments. None of this was apparent when the Mendelson family took control in 1990. The investment case then rested on one aircraft part, a small balance sheet, and a simple question: if HEICO could make one valuable product, why could it not make more?

6.1. The Mendelsons take control

HEICO’s origins bore little resemblance to the company it would become. When the Mendelson family took control in 1990, HEICO had already existed for more than three decades, passed through several owners and strategic directions, and discovered the aerospace product that would form the foundation of the modern group.

HEICO was founded in 1957 as Heinicke Instruments Company. Its original business had little to do with aviation: Heinicke manufactured products for medical laboratories. Only three years later, the company completed its initial public offering in 1960, beginning a public-market history that already spanned three decades when the Mendelsons took control. The decisive move into aerospace came in 1974, when Heinicke acquired Jet Avion, a manufacturer of jet-engine replacement parts.

In the early 1980s, acquisition-driven industrial conglomerate Tyco Laboratories accumulated a 46% interest in Heinicke and took control. Tyco intended to use Heinicke as a platform for expanding in medical supplies rather than building a focused aerospace business. It installed Chester Warner as CEO, who reorganized the company and revitalized its product offering. Heinicke later repurchased Tyco’s shares and regained its independence.

By 1986, Heinicke generated $46 million in sales and $7.6 million in earnings, with Jet Avion already accounting for roughly two-thirds of revenue. Aerospace had moved from an acquired side activity to the company’s economic center.

That year, the company changed its name from Heinicke Instruments Company to HEICO Corporation. The new name prompted litigation in 1989 from an unrelated manufacturing holding company, Heico Inc., which argued that it created “unnecessary confusion in the trade and financial communities.” HEICO successfully defended its right to keep the name.

HEICO also became more visible in the capital markets. In early 1987, it completed a stock offering on the American Stock Exchange. Earnings reached $7.6 million in the fiscal year ended October 1987, but conditions in the jet-engine parts market subsequently weakened.

The combination attracted outside investors. HEICO owned a valuable aerospace franchise, but control was unsettled and strategic direction remained unclear. In 1988, H Acquisition Corporation, an investor group led by George Fox, offered $75 million, or $30 per share, for the company.

By then, the Mendelson family was building its own position. As the takeover battle developed, the group led by Laurans “Larry” Mendelson increased its stake from 9.9% to 13.6%.

The family’s interest began at Columbia University, where Laurans Mendelson’s sons, Eric and Victor Mendelson, studied business and economics. Fascinated by the leveraged-buyout boom of the 1980s, the brothers searched for a publicly traded industrial company their family could acquire and develop. Victor Mendelson discovered HEICO through a stockbroker and studied its annual reports and financial statements in Columbia’s library.

Laurans Mendelson brought a complementary background. He had worked as an accountant before becoming a successful Florida real estate investor, allowing the family to combine Victor and Eric Mendelson’s search for an industrial investment with Laurans Mendelson’s financial experience and capital.

They found a profitable company rather than a classic distressed turnaround. The aerospace operation had performed strongly in the middle of the decade, the balance sheet carried no debt, and the company held cash. Yet HEICO was strategically unfocused, exposed to management and ownership disputes, and failing to exploit the opportunity implied by its aerospace product.

The absence of meaningful insider ownership was particularly striking.

“The board owned nothing—it didn’t own stock. They weren’t motivated.” — Laurans Mendelson, Forbes interview, 2020

The core aerospace franchise centered on a combustion chamber used in a Pratt & Whitney jet engine. HEICO had obtained the rights and technical data needed to manufacture the component from the original producer. The part served one of the most widely operated jet engines of the period, making it economically important despite the narrow product line.

For the Mendelsons, this concentration represented both risk and opportunity. HEICO had shown that an independent manufacturer could occupy a valuable position in the jet-engine aftermarket but had barely attempted to repeat the model across additional components.

Victor Mendelson later explained what attracted the family:

“One, it had a unique product in a niche segment of a market and they really essentially only had one of these products. And it was a very important jet engine part, in the most prolific jet engine in service at the time. And we thought, well, gee, if they have this one part, why can’t they make more?” — Victor Mendelson, Fernway Insights interview, 2022

The idea appears simple in retrospect, but the family still had to gain control. In 1989, the Mendelson group offered $42 million, or $21 per share, for the remaining shares and prepared a proxy fight to secure board representation.

The contest was difficult. Victor Mendelson was completing his senior year at Columbia when the family launched and initially lost the proxy fight. The Mendelsons then sued the company. Victor Mendelson entered law school while the dispute continued, and the litigation reached trial before the parties settled.

By December 1989, the Mendelson group controlled four board seats. The transition from shareholder activism to operating control was completed in 1990, when the family became HEICO’s largest shareholder and assumed management of the business.

Forbes later captured how unrealistic the plan appeared to many observers:

“Everyone told us it was impossible.” — Victor Mendelson, Forbes interview, 2020

“It couldn’t be done.” — Eric Mendelson, Forbes interview, 2020

“That we were going to fail.” — Victor Mendelson, Forbes interview, 2020

By then, the Mendelsons had invested approximately $3 million in HEICO stock, financed equally with cash and debt. The thesis rested on more than the combustion chamber. HEICO had no financial debt, giving the family room to invest without immediately answering to lenders, and it held a useful cash position. It also owned its historical laboratory-products division, which the Mendelsons believed could be sold to release capital and sharpen the strategic focus.

The laboratory division was sold to Varlen Corporation for $17 million around the time control changed hands.

Victor Mendelson later summarized the other factors behind the investment:

“Second, they had no debt, and that was very important because it would allow us to do what we needed to do without this overhang of debt. And third, they had a decent cash position, which was helpful. And fourth, they had a line of business making laboratory products and lab equipment that we felt should and could be sold, which we did immediately after taking over the company.” — Victor Mendelson, Fernway Insights interview, 2022

Location also mattered. HEICO was based in Hollywood, Florida, less than an hour from the family’s home. That proximity allowed Laurans, Eric, and Victor Mendelson to immerse themselves in a small manufacturing company despite their limited aerospace operating experience, rather than managing the investment from a distance.

The situation they inherited was more difficult than it had appeared. The family’s investment initially fell by approximately 30% and remained underwater for several years. More importantly, HEICO faced a legal threat directed at the product on which its aerospace franchise depended.

United Technologies Corporation, then the parent of Pratt & Whitney, sued HEICO in 1989, alleging that Jet Avion had infringed patents covering heat- and corrosion-resistant coatings used in combustion chambers for Pratt & Whitney gas-turbine engines. These highly profitable coated products represented roughly one-tenth of HEICO’s sales.

According to Victor Mendelson, United Technologies sought both an injunction preventing HEICO from manufacturing the part and $100 million in damages—approximately four times HEICO’s market capitalization. After a long battle for control, the family now faced a much larger aerospace company seeking to stop HEICO from producing what Victor Mendelson described as its only significant part.

“So we had just been through a very difficult battle to get control or start running the company, and we’d actually had a proxy fight my senior year in college, which we lost, and we had to sue the company. And so my first year in law school, we had a trial and company settled, and we took over managing the business. The mindset at that point was one, a war footing, if you will.” — Victor Mendelson, Fernway Insights interview, 2022

Survival was the immediate priority. HEICO had to defend the existing product, stabilize the company, and create additional revenue sources. Dependence on one component left the business exposed to litigation, changes in the underlying engine fleet, and the decisions of a single OEM.

The existing part also showed why the opportunity was worth pursuing. It served a valuable niche, generated high margins, and competed in a market protected by demanding technical and regulatory requirements. HEICO’s weakness was closely related to its potential: the company had already found one attractive aerospace product but had not built an organization capable of finding and developing the next.

The early Mendelson years were not a straight line toward today’s HEICO. Weak aviation markets in the early 1990s pushed the company to seek growth outside its core. HEICO formed MediTek Health Corporation to enter medical imaging, temporarily returning to a market closer to its laboratory roots. The short-lived venture was sold to U.S. Diagnostic Labs in 1996 for $23 million.

The episode shows that the strategy was not yet fully formed. The Mendelsons knew the financial and operating characteristics they wanted—high margins, strong cash flow, valuable niche products, and a conservative balance sheet—but did not arrive in 1990 with a fixed blueprint for a global aerospace and electronics group.

Their first strategic commitment was broader: create shareholder value, invest in products and people, preserve financial flexibility, and follow attractive opportunities as they emerged.

“We couldn’t become wedded to any single strategy or dogma other than producing excellent products, investing in the products and people, and emphasizing cash flow.” — Victor Mendelson, Fernway Insights interview, 2022

In sum, the family took over a small, contested public company with a valuable aerospace niche, a strong balance sheet, one dominant product, and several unresolved problems. Their first achievement was gaining control and preserving the opportunity. The harder challenge was proving that HEICO could develop another approved part and turn a single-product franchise into a repeatable model.

6.2. Proving that the model could scale

The combustion chamber had not yet demonstrated a repeatable product-development model because HEICO already possessed the rights and data needed to manufacture it. Building the modern company required a different capability: identifying an attractive OEM part, developing an alternative design, proving equivalency, establishing controlled production, and obtaining FAA approval.

As Chapter 3 explained, the regulatory route is demanding. Reverse engineering alone was insufficient. HEICO had to understand the part’s dimensions, materials, coatings, manufacturing processes, interfaces, and operating environment, then demonstrate that the alternative could perform safely and consistently. The manufacturing system also had to satisfy the FAA.

HEICO approached the process with a level of detail that would become central to its culture. Eric Mendelson spent so much time navigating the approval process in Washington that Forbes described him as practically living in the halls of FAA headquarters.

The burden was especially heavy for a small company. HEICO could not spread engineering and regulatory costs across a broad catalog and lacked decades of approval experience, established airline relationships, and a large installed base of its own products. The next approval had to be built almost from scratch.

Quality had to be treated as existential. A failed product would have cost far more than the revenue attached to that part; it could have ended HEICO’s effort to become a credible independent aerospace supplier.

“We carry out metallurgical inspection on all batches of parts that we produce.” — Eric Mendelson, Forbes interview, 2020

“The reason we do this is because we can’t afford to fail.” — Eric Mendelson, Forbes interview, 2020

The first year under the Mendelsons provided early evidence that the opportunity extended beyond one combustion chamber. According to HEICO, the company obtained FAA approval for five parts that year. One of its first independently developed products was a tube used in a jet engine. HEICO had begun to demonstrate a repeatable ability to move products through engineering, testing, regulatory approval, and controlled production while building internal expertise in materials, manufacturing, and quality assurance.

Each approval also made the next one slightly easier. Engineers gained experience with materials and production processes; the regulatory team learned how to prepare evidence and work with the FAA; manufacturing accumulated knowledge across batches and product categories; successful airline use strengthened HEICO’s reputation; and customers became more willing to discuss other expensive or difficult-to-source components.

Development remained slow. Victor Mendelson later acknowledged that the family might have viewed the original opportunity differently had it understood how many years the next approval would require. Yet the same work that delayed HEICO also protected the market by discouraging competitors without the patience, capital, or technical commitment to complete the process.

HEICO initially expanded around the engine it already understood. It developed additional parts for that engine, then for other engines from the same manufacturer, and eventually for engines from other OEMs. Airlines that had successfully used one HEICO product began asking the company to solve more problems.

“When we came to the company 28 years ago, we were 100% engine. And it was basically a particular part, pretty much one part for one type of engine. And then our customers asked us to develop more parts for that engine and they asked us to develop more parts for other engines manufactured by that original equipment manufacturer and then they asked us for more parts for other original equipment manufacturers’ engines. And then I would say about 20 years ago, they started asking for component parts because of course the fuel, hydraulic, pneumatic, electromechanical, avionics, wheels and brakes, all this other stuff is also a tremendous market.” — Eric Mendelson, Q3 2017 earnings call

This progression established a pattern HEICO still follows. The company rarely needs to invent demand: customers already operate the aircraft, buy the OEM product, experience its price and availability, and understand the value of a credible alternative. HEICO must select the right opportunities and execute the engineering, regulatory, and commercial work needed to address them.

Customer relationships therefore became integral to product development. Every successful product created the possibility of another request. HEICO did not need to predict the entire aftermarket from headquarters; airlines and MRO providers could point directly to the components causing the greatest cost or supply-chain pain.

This also explains why expansion did not remain limited to traditional engine PMA parts. Customers cared about the total cost of keeping aircraft flying. Their problems could involve an expensive replacement part, a repairable component, an unavailable item, avionics, or a non-engine component. Following those problems gradually pulled HEICO into a much broader part of the aftermarket.

6.3. Lufthansa and the transformation into a global supplier

Developing approved products was only half the challenge; HEICO also had to persuade conservative airline engineering and procurement departments to install them. As Chapter 5 explained, FAA approval establishes legal installation eligibility but does not force an airline to approve the supplier, change its internal maintenance policy, or accept the perceived career risk of moving away from the OEM.

Credibility is therefore a major bottleneck for a young PMA supplier. HEICO could explain the regulatory process, present test results, and offer a meaningful discount, yet a large airline still had to trust that the company would deliver consistent quality, support its products, and remain in business for the long term.

The Lufthansa relationship changed that equation.

In the mid-1990s, Eric Mendelson met Wolfgang Mayrhuber at an industry trade show. Mayrhuber was then Chairman and CEO of Lufthansa Technik, Lufthansa’s MRO arm, and later became CEO of Lufthansa Airlines. Eric Mendelson described HEICO’s lower-priced replacement parts as an alternative to OEM products. Mayrhuber became interested, and in 1997 Lufthansa Technik invested approximately $26 million in HEICO Aerospace for a 20% interest in the aircraft-parts business.

The investment mattered far beyond the capital. Lufthansa Technik was one of the world’s leading maintenance organizations and closely associated with German engineering quality. Its willingness to invest in HEICO and use HEICO PMA parts provided powerful validation. Other airlines could see that a highly respected technical organization had reviewed and accepted the products and was willing to install them in its own operations. Lufthansa also brought the perspective of a sophisticated airline-affiliated MRO, giving HEICO practical maintenance experience and a clearer view of frequently purchased parts, unusually high OEM prices, and operator availability problems.

This improved product selection. HEICO could focus engineering resources on identifiable customer needs rather than developing products and hoping airlines would buy them. Lufthansa helped identify high-volume, high-value candidates, while HEICO supplied approved alternatives that lowered Lufthansa’s maintenance costs.

The partnership also gave new products an anchor customer. Once HEICO completed engineering and approval, it had a sophisticated airline partner with a direct economic interest in using the product, shortening the distance between regulatory approval and commercial revenue.

Most importantly, Lufthansa provided external validation. HEICO could make many claims about its own engineering and quality, but a major airline and MRO investing its own capital carried far more weight. For other customers, Lufthansa’s involvement signaled that HEICO had passed extensive technical and commercial scrutiny.

The relationship reinforced several parts of the model at once. Better customer information improved product selection; better selection increased returns on development spending; anchor demand improved the economics of each approval; successful use strengthened HEICO’s quality record; and association with Lufthansa made it easier to approach additional airlines, generating more product ideas.

The late 1990s marked HEICO’s expansion beyond its original product base. It acquired businesses in jet-engine parts, component and composite repair, and aircraft ground-support equipment, then added broader repair and overhaul capabilities, distribution, avionics, and other aircraft components.

A second electronic-technologies platform would later extend the same niche-product philosophy into defense, space, medical, and industrial applications.

After years on the American Stock Exchange, HEICO transferred to the New York Stock Exchange in January 1999. It was no longer merely a small Florida supplier built around a narrow PMA portfolio but an acquisitive public company with broader ambitions, a stronger shareholder base, and access to growth capital. Revenue had grown by more than 50% annually over the previous five years, and management was already discussing a path toward $1 billion of annual sales.

HEICO’s second operating platform began with the 1996 acquisition of Trilectron Industries, a manufacturer of ground-support equipment such as ground-power and air-conditioning units. Initially organized as the Ground Support Group and later renamed the Electronics and Ground Support Group, it expanded into specialized electronics through acquisitions such as Radiant Power in 1999, whose products included onboard backup power supplies and batteries, and Leader Tech, a manufacturer of circuit-board shielding. These businesses established a second growth platform focused on niche electronic and electrical products for demanding aerospace and industrial applications. Over time, it became today’s Electronic Technologies Group (ETG).

The Mendelsons were not merely building a PMA company. They were learning to apply the same pattern across adjacent markets: small but critical products, technical expertise, specialized customers, long product lives, attractive margins, and acquisition opportunities in fragmented niches.

The Lufthansa partnership also began compounding commercially. Once airlines saw that a respected maintenance organization would invest in HEICO and use its products, the conversation changed. HEICO could approach customers not merely as a cheaper OEM alternative but as a validated supplier backed by a major airline-affiliated MRO.

HEICO subsequently replicated elements of the Lufthansa model with other major airlines. In March 2001, it formed a joint venture with American Airlines to develop, design, and sell FAA-approved jet-engine and aircraft-component replacement parts. American partly owned the venture and agreed to provide technical services and worldwide marketing support.

Further relationships followed with United Airlines in May 2002, Delta Air Lines in February 2003, Air Canada in March 2003, and Japan Airlines in March 2004. These partnerships provided technical knowledge and operating experience, helped identify attractive development opportunities, and created committed customers for newly approved parts. Partner airlines agreed to purchase products developed through the relationships, as well as much of HEICO’s existing FAA-approved portfolio, exclusively from HEICO.

Across North America, Europe, and Asia, major airlines were increasingly willing to work directly with HEICO to develop and manage alternatives to OEM parts. When British Airways entered its agreement in May 2007, it became the seventh major airline to establish such a strategic relationship.

British Airways became the most visible later example. Industry accounts describe BA as initially skeptical of PMA, but its view changed after HEICO explained the approval process and economics. In May 2007, British Airways entered a long-term strategic alliance with HEICO Aerospace for parts development and management, becoming the seventh major airline to partner with HEICO.

HEICO entered another important aftermarket activity through the 2005 acquisition of Seal Dynamics, a distributor of aircraft parts and related products. Distribution gave Flight Support another route to customers, greater visibility into what airlines and MRO providers were buying, and a broader ability to solve availability problems. Distribution made HEICO more useful even when the best solution was not a newly developed HEICO PMA part.

This step helps explain the reinforcing network effects within Flight Support:

• PMA gave airlines a lower-cost, approved alternative to OEM parts.

• Repair and overhaul created technical touchpoints and practical insight into failed components.

• Distribution of proprietary PMA parts and third-party OEM products added inventory, availability, and customer access.

• Airline partnerships supplied product ideas, validation, and demand. Each capability strengthened the others.

The company that began the Mendelson era with one Pratt & Whitney combustion chamber had become a broad aerospace aftermarket platform. It now combined a growing library of approved replacement parts, repair capabilities, distribution, international airline partnerships, a developing electronics business, and a public-market profile that provided capital and visibility.

Today, every major airline is a Flight Support Group customer, and the PMA portfolio extends far beyond engines into a broad range of aircraft components. Including acquired products, HEICO has developed approximately 20,000 FAA-approved PMA parts and currently adds roughly 400–550 each year. In fiscal 2025, the company generated $4.49 billion of revenue and $690 million of net income attributable to HEICO. Since the Mendelsons took control in 1990, revenue has compounded from $26.2 million at approximately 16% annually, while net income has grown from $2.0 million at roughly 18%. What began with one combustion chamber has become the world’s largest independent provider of FAA-approved jet-engine and aircraft-component replacement parts, complemented by repair, distribution, and a second platform in specialized electronic technologies.

Part 2 explained why the aircraft aftermarket creates such an attractive structural opportunity. The question now is how HEICO built the world’s largest independent platform around that opportunity—and turned lower-cost alternatives, customer trust, and continuous product development into a compounding engine. That is exactly what we will unpack in Part 3.

[1] A service bulletin recommends technical action, an airworthiness directive makes corrective action mandatory, and an in-flight shutdown refers to an engine being shut down during flight because of a technical issue. Making it a particularly important reliability indicator for engine parts.

My Swedish serial acquirers are having quite a quarter.

Seven of my Swedish serial acquirers have now reported results covering April through June 2026. EBITA growth across the seven companies was as follows:

Not a single-digit result among them.

Röko stands out, as it delivered the highest EBITA growth (100 bp ahead of Teqnion), but also because it was one of the weaker performers in my serial-acquirer portfolio only a few quarters ago. Acquisition activity had slowed, organic growth was modest, and just a few weeks after the IPO, the market had started to question whether Röko’s acquisition engine could return to its earlier pace.

It has.

Despite the strong operating performance, the market reaction has been muted. Röko’s share price is almost unchanged, although it is still up around 30% since I published my Deep Dive in April. Meanwhile, the shares of my other Swedish serial acquirers have generally traded lower despite their solid results. In my view, this disconnect makes it a particularly good time to take a closer look at serial acquirers (again). Over the long term, share prices tend to follow earnings, and the best serial acquirers have delivered remarkably consistent earnings growth for decades.

Subscribe now

Faster than I expected

At the end of May, I published an update titled Röko Is Waking Up Again.

My central argument was that the acquisition model itself had never stopped working. The problem in 2025 was simply that too few transactions had moved from the pipeline to completion.

That began to change in early 2026. Röko completed three acquisitions during Q1, followed by Fri-Jado in May—the company’s largest acquisition to date. The following chart shows the annual revenue of every company acquired by Röko, measured at the respective acquisition date.

As a result, I expected acquired growth to accelerate as these companies became more fully reflected in the reported numbers. More specifically, I expected acquired growth to move above 20% by Q3.

Röko’s net sales increased by 31% in Q2, from SEK 1,562 million to SEK 2,045 million. Organic growth contributed 3%, while currencies had no meaningful impact. This implies that acquisitions contributed roughly 28 percentage points to quarterly revenue growth. Röko therefore exceeded my expectation by a wide margin.

Reported growth of serial acquirers can be inherently lumpy. As acquisitions are completed, their contribution gradually enters the comparable figures. A slower period can therefore be followed by an abrupt acceleration, even when the underlying acquisition process has been building for several quarters unnoticed.

The charts below illustrate this dynamic using Röko’s 2026 acquisitions as an example. They estimate the revenue contribution from Lambda, ABP, NH, and Fri-Jado based solely on transaction timing and deal size, while excluding seasonality effects. Put differently, the acquired annual revenue is spread evenly across the remaining calendar days after each acquisition date. The left-hand chart illustrates the monthly pattern, while the right-hand chart applies the same logic on an aggregated quarterly basis.

This perfectly illustrates why reported M&A growth can be so uneven: acquisitions of different sizes close at different points in time, and their revenue contributions are therefore consolidated in very different amounts across subsequent months and quarters. It is also one reason why I prefer programmatic serial acquirers completing, on average, five or more acquisitions per year over companies making only one or two (think of Judges Scientific). A higher acquisition frequency typically results in a steadier and more predictable inorganic growth contribution, whereas infrequent acquisitions can make reported growth considerably more volatile and dependent on the timing and size of individual transactions.

Small changes in acquisition timing, deal size, consolidation dates, and seasonality can materially shift reported growth between quarters without changing the underlying economics.

More than an acquisition-driven revenue jump

The strongest number in the report was EBITA growth. Adjusted EBITA increased by 37%, from SEK 312 million to SEK 427 million, meaning that earnings grew faster than sales. The adjusted EBITA margin increased from 20% to 21%.

However, CEO Johan Bladh noted on the earnings call that organic EBITA growth outpaced organic revenue growth, while the group margin was diluted by newly acquired businesses operating at lower margins.

Overall, EBITA growth reaccelerated during the quarter after several years of gradually moderating growth rates, partly reflecting the increasingly demanding comparison base as Röko has grown significantly since 2022.

Organic revenue growth moderated from 6% in Q1 to 3% in Q2, but remained positive despite mixed demand across the portfolio. Management highlighted continued weakness among certain companies selling larger systems and machinery, as well as businesses exposed to construction, the US, and the Middle East. At the same time, subsidiaries that had acted decisively on pricing generally performed well.

This fits the broader picture from recent quarters. Röko is not (yet?) benefiting from a broad and powerful cyclical recovery across all companies. The development remains mixed. The improvement instead appears to come from a combination of pricing, operational work within the subsidiaries, and a much stronger contribution from acquisitions.

More growth, but also more debt

The renewed acquisition pace has naturally increased leverage.

Interest-bearing net debt rose to SEK 1,817 million, equivalent to 1.1x LTM adjusted EBITDA. Including put/call liabilities for minority interests and deferred considerations, Röko’s broader financial net debt reached 2.6x LTM adjusted EBITDA, compared with 2.3x one year earlier. This remains below management’s long-term ceiling of 3.0x, but the balance sheet now provides less unused capacity than it did before the recent acquisition wave. At the same time, the phasing of the acquisitions will create a natural deleveraging effect, as the leverage ratio is based on LTM EBITDA and therefore only partly reflects the earnings contribution from recently acquired businesses. As these contributions become fully included in the denominator, leverage should decline mechanically, assuming no further major acquisitions or increase in debt.

Return on Capital and Capital Allocation

Encouragingly, return on capital employed increased from 14.1% to 14.5% despite the significant amount of capital deployed during the past year.

The recent acquisition momentum is also clearly visible in Röko’s capital allocation. Q2 2026 was one of the most acquisition-heavy quarters in the company’s history, with capital deployed into M&A substantially exceeding the adjusted gross cash flow generated during the period. This is not unusual for a serial acquirer, as acquisition activity is inherently lumpy and has now picked up after a quieter period between 2023 and 2025. (However, note that the M&A spend shown in the graph below also includes payments made to settle put/call option liabilities. These payments relate to the acquisition of additional minority stakes in companies that are already fully consolidated and therefore do not increase reported EBITA. Instead, they increase the share of EBITA attributable to Röko’s shareholders.)

Conclusion

The central concern surrounding Röko was (and still is) execution: the pipeline appeared healthy, but too few acquisitions were actually completed.

As the acquisition activity has now picked up again, the question is shifting back to the one that ultimately matters for every serial acquirer: not whether management can deploy capital, but whether it can continue doing so at attractive prices and generate strong incremental returns.

The newest acquisitions have only contributed for a short period, and their long-term performance cannot yet be judged. But the early evidence is encouraging. Revenue is accelerating, EBITA is growing faster than sales, margins are improving within the existing portfolio, cash flow is following earnings, and ROCE has moved upward rather than downward.

Three months ago, I wrote that Röko was waking up again.

Q2 confirms that Röko’s acquisition engine is running again and is now translating into accelerating revenue, EBITA, and cash flow growth.

It will be structured in five Parts:

• Part 1 (today): The Aviation Ecosystem Behind HEICO

• Part 2: Why the Aircraft Aftermarket Creates a Structural Opportunity

• Part 3: Inside HEICO’s Crown Jewel

• Part 4: The Second Engine and the HEICO Operating System

• Part 5: The Economics Behind the Compounding Machine

All parts are now available in one PDF. You can download it below.

Deep Dive Heico Corp

9.73MB ∙ PDF file

Download

Download

Download

👔 Company Name: HEICO Corporation (“HEICO”)

🔎 ISIN: US4228061093 (Common Stock) and US4228062083 (Class A)

🔧 Business model: Aerospace and electronics serial acquirer

🌍 Geographic exposure: global (~62% U.S. and ~38% international sales across approximately 130 countries)

📈 Stock Price: HEI Common Stock: $339 | HEI.A Class A Common Stock: $253

💰 Market Capitalization: ~$40 billion

👨‍💼 Number of CEOs since foundation: 2 (one transition — Laurans Mendelson to Eric and Victor Mendelson)
since 1990

👨‍👩‍👦 Founder-/Owner-operator: Yes — owner-operated by the Mendelson family

📅 CEO tenure: Since 1990

🥇 Insider ownership: ~21.0% of shares

📊 10Y EPS CAGR: ~16%

🔁 Reinvestment profile: High

💸 Capital intensity: Low — capex-light, but inventory-intensive

🏰 Moat: Regulatory approvals, customer trust, installed-base scale, price and availability, culture

🧨 Main risks: Valuation, acquisition execution, aviation cyclicality, OEM countermeasures

🌳 Slow Compounding fit: Yes – high-quality (niche) serial acquirer

Business Model in a Nutshell: HEICO is a decentralized aerospace and electronics serial acquirer. Its Flight Support Group provides lower-cost aircraft parts, repairs, and distribution services, while its Electronic Technologies Group supplies highly engineered components for aerospace, defense, space, medical, and other demanding markets. Growth comes from new product development, market-share gains, and disciplined acquisitions of niche businesses that retain significant operational autonomy.

Subscribe now

1. The State of Commercial Aviation

Commercial aviation connects people, businesses, and supply chains across continents. In 2024, airlines carried roughly 4.8 billion passengers, equivalent to about 4.1 billion origin-destination journeys because connecting passengers are counted on each flight leg. The industry operated more than 37 million flights. It also transported around 68 million metric tons of freight. This equates to more than 100 commercial takeoffs and landings per minute. On exceptionally busy days, flight-tracking services have recorded more than 24,000 simultaneous flights.

Airbus estimates that air transport supports roughly 86.5 million jobs and $4.1 trillion of economic activity worldwide, equivalent to about 3.9% of global GDP. According to Airbus, 89% of revenue passenger kilometers (RPKs[1]) have no convenient alternative. Much of this travel cannot be replaced by rail, road, or sea without materially increasing travel time or reducing convenience.

1.1. A growing industry constrained by aircraft supply

Demand has recovered after COVID, but aircraft shortages, engine constraints, and broader supply-chain bottlenecks limit the capacity airlines can deploy. In a normal cycle, airlines can respond to strong demand by ordering new aircraft, retiring older models, improving fuel efficiency, and optimizing their fleets. Today, supply constraints interrupt that renewal cycle.

The International Air Transport Association (IATA), the global airline trade association, describes the aircraft shortage that began building in 2019 as the industry’s most pressing challenge. It is limiting traffic growth, forcing airlines to keep older, less efficient aircraft in service, raising costs, and slowing emissions reductions. Although production has recovered somewhat, IATA does not expect the shortage to normalize before 2031–2034 because the industry is missing the equivalent of several years of aircraft deliveries.

As of June 2025, IATA counted 35,550 commercial aircraft worldwide, of which 30,300 were active and 5,250 were in storage. Aircraft manufacturing is highly concentrated: Boeing and Airbus account for about 80% of the active fleet, while the five largest manufacturers account for nearly 92% of all aircraft in service.

Such concentration limits the industry’s ability to work around shortages. Commercial aircraft are certified platforms with long production cycles, specialized suppliers, extensive regulatory oversight, and decades-long aftermarket lives. If Boeing, Airbus, engine OEMs, or major Tier 1 suppliers cannot ramp production, the entire industry is affected.

Narrowbody jets are single-aisle aircraft used mainly on short- and medium-haul routes, with the Airbus A320 and Boeing 737 families as the leading examples. They account for roughly 61% of the active commercial fleet and 56% of global available seat kilometers (ASK[2]), reflecting their versatility, lower unit costs on shorter routes, and high utilization.

By contrast, widebody jets are twin-aisle aircraft used mainly on long-haul routes, including the Boeing 777 and 787 and the Airbus A330, A350, and A380. Although they represent only about 19% of the active fleet, they account for nearly 40% of global ASK because they carry more passengers over longer distances.

Regional jets and turboprops make up the remaining roughly 20% of the fleet but only about 3% of ASK.

On average, widebody flights carry about 60% more seats and cover more than three times the distance of narrowbody flights.

According to IATA, aircraft in storage—those not in regular operational service—represented 15% of the global fleet in June 2025, above the 2010–2018 average of 11.8% despite the industry-wide fleet shortage. A further 2% of the fleet was grounded by engine-related issues. Returning a parked aircraft to service may require maintenance, engine work, inspections, cabin modifications, regulatory approval, and a viable economic case.

Aircraft in storage declined sharply from the COVID-19 peak but remained well above pre-pandemic levels. The total was broadly stable at 19–24 thousand aircraft between 2010 and 2019, rose to roughly 97 thousand in 2020, and then fell to 78 thousand in 2021, 57 thousand in 2022, 48 thousand in 2023, and 47 thousand in 2024. The 2024 level was still almost twice the 2019 level. In other words, even after passenger demand recovered, the amount of aircraft sitting in storage remained structurally elevated.

(The absolute numbers should not be interpreted as unique aircraft parked at a single point in time. A 47k figure would clearly exceed the size of the global commercial fleet. The chart appears to use an annualized or cumulative storage measure rather than a simple point-in-time aircraft count. If the 47k figure for 2024 is divided by twelve months, it implies an average monthly storage level of roughly 3,900 aircraft. That is a much more realistic order of magnitude and broadly consistent with industry data showing several thousand aircraft in storage, not tens of thousands of unique aircraft parked at one point in time.)

1.2. The aircraft shortage is not a short-term disruption

The shortage is not merely a temporary post-COVID-19 disruption. It began building in 2019 and reflects structural constraints across the aerospace supply chain. The pandemic then disrupted complex just-in-time production networks.

Many suppliers downsized or exited the market, while labor shortages, cost inflation, and limited supplies of engines, avionics, and specialty metals slowed the recovery in production capacity. Quality-control problems and tighter regulatory oversight have also constrained output at major airframers.

One measure compares actual deliveries with the pre-pandemic trend. Based on delivery growth from 2010 to 2018, roughly 16,004 aircraft would have been expected to enter service between 2019 and 2026. Including the forecasts for 2025 and 2026, cumulative deliveries are expected to reach only around 10,720, implying a shortfall of about 5,284 aircraft.

The backlog points to a similar shortfall. Historically, the global backlog equaled about 40% of the active fleet; by mid-2025, the ratio had reached a record 58%. Using the historical relationship between backlog and fleet size, IATA estimates the resulting shortage at 5,352 aircraft.

This imbalance will take years to unwind. IATA does not expect the shortage to normalize before 2031–2034, even if deliveries improve, because the industry must absorb the accumulated delivery shortfall, deferred retirements, and record backlog.

1.3. Order books are full, but deliveries take longer

The aircraft shortage is not caused by a lack of airline demand for new aircraft. Quite the opposite: Airlines have placed record orders, but manufacturers cannot convert them into deliveries quickly enough. The bottleneck is production capacity, supply-chain reliability, certification, and delivery execution.

The commercial aircraft backlog rose from roughly 4,900 aircraft in 2000 to 8,300 in 2010 and continued climbing through the 2010s. It exceeded 17,000 aircraft in 2024 before easing to around 15,800 in 2025.

Measured in years of production, the backlog is even more stretched. It reached 12.7 years in 2024, well above both the historical average and previous downturn peaks.

A large order book signals strong demand, but it also constrains airlines when delivery slots stretch over many years. An airline may want to renew its fleet, reduce fuel burn, add capacity, or replace aging aircraft, yet still wait years for delivery. The constraint is manufacturing capacity, not airlines’ willingness to invest.

The average order-to-delivery lead time reached 6.8 years in 2024, up from 4.5 years in 2018. Longer waits delay fleet renewal, constrain capacity growth, and postpone fuel-efficiency gains, forcing airlines to keep older aircraft in service.

1.4. Delayed deliveries keep older aircraft in service

In a normal market, airlines retire older, less efficient aircraft as new models arrive. Newer aircraft offer better fuel efficiency, lower emissions, higher reliability, a better passenger experience, and lower unit costs. Supply constraints have disrupted this replacement cycle.

Missed delivery targets and longer lead times have forced airlines to retain older aircraft. The average fleet age has risen from roughly 13 years before COVID-19 to around 15 years, the highest level in the series shown below.

For HEICO, an older fleet means more component repairs, replacement parts, inspections, overhauls, and supply-chain workarounds.

The same dynamic is visible in retirement rates. IATA estimates that the lower retirement rate between 2019 and 2025 kept 2,397 aircraft from leaving the fleet. Many remained in service; others were retained in storage for possible reactivation.

Storage figures therefore overstate the capacity that airlines can readily reactivate. Many parked aircraft are old, awaiting maintenance, constrained by engine issues, or unlikely to return to service. Airlines are therefore short of usable capacity: flyable aircraft are being used intensively, while many grounded aircraft require maintenance, parts, engines, inspections, or a viable economic case before they can return to service.

1.5. Higher utilization masks the shortage

The shortage appears less severe because airlines are extracting more capacity from the existing fleet. Fleet utilization reached record levels in 2024 as airlines maximized the hours flown by available aircraft.

Airbus estimates that passenger aircraft with more than 100 seats were around 50% more productive in 2024 than in 2004. Over that period, the fleet grew from 12,800 to 22,380 aircraft, average daily utilization rose from 8.2 to 10.2 block hours, seats per flight increased from 162 to 185, and the load factor climbed from 73% to 83%.

Higher utilization spreads fixed costs across more revenue and helps airlines serve demand with fewer aircraft, but it also accelerates wear. More flight hours and cycles bring inspections forward and increase demand for repairs and spare parts.

1.6. The fleet shortage slows efficiency gains and raises costs

The aircraft shortage affects fuel efficiency and emissions as well as capacity. Airbus states that the latest-generation aircraft can reduce fuel burn and CO₂ emissions by up to 25% compared with previous-generation models.

Delayed fleet renewal has stalled the industry’s long-term efficiency gains. According to IATA, fuel consumption per available tonne-kilometer (ATK[3]) was flat year over year in 2024 after improving almost continuously since the early 1990s.

Fuel is one of airlines’ largest expenses, and newer aircraft reduce fuel burn per seat. Delivery delays therefore create a double burden: airlines cannot add capacity as quickly as planned and must keep operating older aircraft that burn more fuel, require more maintenance, and may be less reliable.

1.7. Long-term demand remains strong

Airbus expects passenger traffic to grow at a CAGR of roughly 3.6% and the global in-service fleet to reach 49,210 aircraft by the end of 2044. Meeting that demand would require 43,420 new passenger and freighter aircraft between 2025 and 2044.

The passenger-aircraft forecast comprises roughly 34,250 single-aisle aircraft and 8,200 widebodies.

Near-term supply constraints do not change the long-term expansion of the installed fleet. As the fleet grows, so does demand for parts, repairs, inspections, and inventory support, creating more opportunities for approved alternative suppliers.

HEICO therefore benefits from both time horizons. In the near term, airlines are flying existing aircraft more intensively, delaying retirements, and facing longer OEM lead times. Over the long term, a larger installed fleet expands the addressable aftermarket. Together, these trends increase the value of certified, trusted, readily available, and lower-cost alternatives.

Growth will be uneven across regions. Mature aviation markets will continue to expand, but emerging markets are expected to grow faster as incomes rise and air travel remains far less common than in Europe and North America.

Boeing expects passenger traffic within emerging markets to grow by about 5% annually between 2024 and 2044, compared with roughly 3% within advanced economies. Traffic between emerging markets is expected to grow even faster, at about 6% per year, versus around 2% between advanced economies.

Airbus’s route-level forecast points in the same direction. Domestic traffic in India is expected to grow by 8.9% annually through 2044, while domestic traffic within Emerging Asia and traffic between Emerging Asia and China are forecast to grow by 7.6% and 8.5%, respectively. By comparison, domestic U.S. traffic is expected to grow by 1.6% and traffic within Western Europe by 1.7%.

The gap reflects the much lower starting point in emerging markets. In 2024, China recorded about 0.6 air trips per capita and India just 0.1, compared with 1.9 in Europe and 2.2 in the U.S. By 2044, Airbus expects these figures to rise to 1.8 in China and 0.5 in India, while Europe and the U.S. approach three trips per capita.

Even then, travel intensity in China and India would remain below today’s levels in developed markets. Given their vast populations, even modest convergence would generate substantial additional passenger traffic, support further fleet growth, and expand the aerospace aftermarket.

For HEICO, this is primarily a long-term installed-base tailwind. Its commercial aerospace business remains concentrated in the Americas and Europe, while new aircraft entering emerging-market fleets are initially more likely to remain tied to OEM warranties, service agreements, and leasing restrictions. As these fleets expand, mature, and pass through more maintenance cycles, however, they should create a much larger installed base requiring parts, repairs, and lower-cost aftermarket alternatives.

2. The Aerospace Value Chain: A System of Systems

2.1. The commercial aviation value chain

Commercial aviation is not a simple value chain in which one manufacturer builds and sells a finished product. It is a multi-layered ecosystem of airframers, engine manufacturers, system and component suppliers, lessors, airlines, airports, regulators, maintenance, repair, and overhaul (MRO) providers, distributors, travel platforms, freight operators, labor providers, fuel suppliers, and financial intermediaries.

Airlines sit at the center of this ecosystem because they provide the transport service to passengers and cargo customers. Their ability to operate, however, depends on external parties that finance aircraft, provide airport infrastructure and fuel, supply labor and services, manufacture aircraft and parts, and distribute tickets. Regulators set the safety, security, air traffic control, and operating requirements within which the entire system functions.

This structure helps explain why airlines have historically struggled to earn attractive returns despite long-term traffic growth. They bear much of the operating and commercial risk, while several critical inputs are controlled by counterparties with strong bargaining power. Aircraft and engine manufacturing are highly concentrated; airports often have local monopoly characteristics; fuel prices are largely outside airlines’ control; labor is operationally critical and often unionized; and distribution intermediaries influence customer access and pricing transparency.

For HEICO, the relevant part of the map is the upstream aerospace supply chain, where the company sits among parts suppliers. Aircraft manufacturers—so-called airframers or OEMs—such as Boeing and Airbus design, certify, assemble, and sell aircraft, but rely on a deep network of engine manufacturers, avionics providers, aerostructure companies, component specialists, and aftermarket parts suppliers.

2.2. A commercial aircraft is highly complex

A commercial aircraft consists of hundreds of thousands to several million components, subcomponents, and individual parts. A Boeing 737 contains roughly 400,000 parts, compared with about 4 million for an Airbus A380 and 6 million for a Boeing 747-8. These figures illustrate the extraordinary complexity of modern commercial aircraft.

Technically, an aircraft is a system of systems. Its main building blocks include the airframe—such as the fuselage, wings, and stabilizers—secondary structures such as fairings, doors, and nacelles, engines, the auxiliary power unit, landing gear, avionics, and hundreds of other systems and components. The aircraft is then fitted with seats, galleys, inflight entertainment systems, carpets, and other cabin equipment before being painted, inspected, tested, and delivered.

The graph above provides a useful way to think about this complexity. A commercial aircraft is organized around several major system families that are integrated into the final aircraft by the airframer.

At the top, the airframer is responsible for aircraft design, final assembly, and sales. Below it are three broad Tier 1 categories: onboard avionics systems; propulsion systems; and airframe structures, subassemblies, and subsystems. These, in turn, divide into more specialized Tier 2 layers. Avionics depend on electronic and electrical components, systems, and subsystems. Propulsion includes engines, engine components and submodules, starting systems, and electrical power sources. Airframe-related systems include fuselage structures, cabin interiors, environmental controls, fuel systems, landing gear, and hydraulics.

The hierarchy shows that the airframer acts as the system architect and final integrator of a broad supplier ecosystem. Many suppliers deliver complete systems or subsystems that become embedded in the aircraft’s design, certification, operating performance, and maintenance requirements.

This structure also makes aerospace supply chains difficult to scale quickly. A missing or delayed subcomponent can prevent a larger system from being completed, ultimately delaying aircraft assembly and delivery. In aviation, a single weak link in the certified supply chain can hold up an entire aircraft.

This complexity has two important economic consequences:

· First, suppliers with strong positions in critical systems can become highly valuable. Once a system is selected for an aircraft program, it may remain tied to that platform for decades. The original-equipment sale is only the beginning: the installed system later generates demand for spare parts, repairs, documentation, testing, service bulletins, upgrades, and technical support.

· Second, aircraft complexity creates a long tail of aftermarket demand. Every system contains components that wear, fail, or require inspection, replacement, or repair throughout the aircraft’s operating life. This is where HEICO operates.

2.3. From vertical integration to a tiered aerospace supply chain

Aircraft manufacturers were historically far more vertically integrated. In the 1960s and 1970s, airframers such as Boeing and Douglas produced more aerostructures, systems, and interiors in-house, while suppliers focused mainly on individual parts and subassemblies with limited design responsibility.

That model gradually changed as trade liberalization, the end of the Cold War, globalization, digital design tools, and mounting cost pressure encouraged airframers to outsource more design and production. In the 1990s, Bombardier and Embraer advanced the risk-sharing partnership model, transferring more development work and financial risk to Tier 1 suppliers. The model later spread across the industry and reshaped the aerospace supply chain.

Today, the commercial aerospace value chain has a tiered structure. Suppliers at different levels produce parts, components, subassemblies, and complete systems; airframers integrate them into finished aircraft; regulators certify the aircraft; and airlines and lessors place them into service. Throughout their operating lives, airlines and maintenance, repair, and overhaul (MRO) providers keep aircraft airworthy and preserve their value.

The supply chain begins with raw materials and castings. Tier 3 suppliers process these inputs into detailed parts and basic components. Tier 2 suppliers combine them into larger components and subassemblies, while Tier 1 suppliers deliver major systems, aerostructures, and assemblies for integration by the airframer.

Airframers such as Airbus, Boeing, and Embraer perform final assembly and integrate the systems into the aircraft. Finished aircraft are delivered to airlines, cargo operators, or lessors. The aftermarket then supports them throughout their operating lives through airline, independent, OEM-affiliated, and joint-venture MRO providers, as well as distributors and trading platforms.

This interdependent structure helps explain why the aircraft shortage discussed in Chapter 1 is so difficult to resolve. A commercial aircraft is not produced by a single factory that can simply increase output; it depends on a certified network of specialized suppliers with long production cycles, strict quality requirements, and limited redundancy. Shortages of forgings, castings, engines, landing gear, seats, avionics, wiring, interiors, or skilled labor can delay an entire aircraft.

This complexity also helps explain why commercial aircraft manufacturing is so concentrated. Building an aircraft requires vast engineering capability, certification expertise, capital, supplier coordination, and decades of customer support. These demands create formidable technological and financial barriers to entry. The widebody market is effectively a duopoly between Airbus and Boeing, whose rivalry has at times led to aggressive pricing for major orders.

Below the main Airbus-Boeing market, regional aircraft have historically been supplied by a smaller oligopoly including Bombardier (Canada), Embraer (Brazil) and Avions de Transport Régional (ATR), a French-Italian Joint Venture. This segment is economically different from the mainline narrowbody market.

2.4. Where the value in an aircraft sits

The value of a newly built commercial aircraft is concentrated in a few major systems. Oliver Wyman estimates that engines account for roughly 25% of the average aircraft value, while wings and fuselage each account for around 15%.

For example, a single Rolls-Royce Trent 900 engine for the Airbus A380 is estimated to cost around $25 million. With four engines per aircraft, this implies total engine costs of roughly $100 million per A380, compared with the aircraft’s overall list price of approximately $450 million (i.e. slightly below 25%).

2.5. The aerospace supplier landscape

Aircraft manufacturers rely on a broad supplier base that produces everything from complete engines and major systems to subassemblies and individual parts. For this discussion, the supplier landscape can be divided into three groups:

• Engine manufacturers (engine OEMs)

• Tier 1 Original Equipment Suppliers (OES)

• Lower-tier suppliers of parts, components, and subassemblies to higher-tier suppliers

Each group differs in its economics, bargaining power, and exposure to the aftermarket.

2.5.1. Engine OEMs

Engine manufacturers occupy a unique position in the aerospace value chain. Engines combine technological complexity, advanced materials, and a direct influence on aircraft performance, fuel burn, reliability, and operating economics.

The commercial aircraft engine market is highly concentrated. GE Aerospace, Rolls-Royce, and Pratt & Whitney are the principal manufacturers capable of developing complete large commercial turbofan engines. Joint ventures such as CFM International and Engine Alliance complement them in specific market segments.

New engine programs require enormous upfront investment. Older industry estimates often put development costs at around $1 billion, while recent programs can require several billion dollars. Rolls-Royce’s next-generation UltraFan program, for example, has been described as a roughly $4 billion project. Combined with long development cycles and payback periods of 15–20 years, these economics explain why engine manufacturers often use joint ventures and risk-sharing partnerships to spread cost and technological risk.

• CFM International is a 50/50 joint venture between GE Aerospace and Safran Aircraft Engines.

• Engine Alliance is a joint venture between GE Aerospace and Pratt & Whitney that developed the GP7000 engine for the Airbus A380.

Engine choice varies considerably by platform. The A320neo family offers CFM’s LEAP-1A and Pratt & Whitney’s PW1100G-JM, while the Boeing 787 offers GE Aerospace’s GEnx-1B and Rolls-Royce’s Trent 1000. By contrast, platforms such as the A220, 737 MAX, A330neo, A350, and 777X have only one engine option. Many aircraft platforms are therefore effectively sole-source from an engine perspective.

Engine selection is not merely a technical procurement decision. Once an engine is certified and installed on an aircraft platform, it becomes embedded in the platform’s operating economics and maintenance ecosystem for decades. This creates high visibility for future spare-parts and service demand.

The chart above highlights the different competitive structures of the narrowbody and widebody markets. In narrowbodies, CFM International accounted for 56% of 2024 new-build turbofan engine value, followed by Pratt & Whitney at 41% and GE Aerospace at 3%. The direct GE Aerospace share understates its economic exposure because the company also owns 50% of CFM International alongside Safran Aircraft Engines. In widebodies, Rolls-Royce accounted for 64% of new-build engine value, followed by GE Aerospace at 32% and Pratt & Whitney at 5%.

The initial engine sale can be heavily discounted, particularly when an OEM is seeking a platform position or a major airline customer. Development costs and initial losses are then recovered through aftermarket revenue from spare parts, shop visits, repairs, life-limited parts, long-term service agreements, and technical support.

Oliver Wyman estimates that engine OEM gross margins on original-equipment production typically range from negative 5% to positive 10%, compared with 20% to 35% in MRO. The aftermarket is therefore the principal engine-industry profit pool.

The pattern extends beyond engines. As the following illustration shows, original-equipment production has a finite program window, while aftermarket revenue can continue for decades.

Rolls-Royce’s Civil Aerospace segment provides a useful illustration. The company does not disclose gross profit separately for original equipment and aftermarket services, but the revenue mix already shows their relative economic weight. In 2025, aftermarket services generated £7.1 billion, or 69% of Civil Aerospace revenue, compared with £3.2 billion from original equipment.

An illustrative allocation of reported segment gross profit reinforces the point. Assuming that total Civil Aerospace gross profit remains unchanged, a negative 5% original-equipment margin would require aftermarket services to contribute more than 100% of segment gross profit. Even at original-equipment margins of 5% and 10%, aftermarket services would contribute approximately 94% and 88% of gross profit, respectively. Across every scenario, the aftermarket remains the core profit pool.

This is where the opportunity for PMA suppliers such as HEICO begins. PMA parts do not compete with the original engine sale; they compete for selected parts of the aftermarket profit pool. HEICO has historically entered the market at prices roughly 30–40% below the OEM alternative, allowing airlines and MROs to capture meaningful savings while HEICO still earns attractive returns. Because HEICO has generally raised prices more slowly than OEMs, the discount can widen further over the life of a product. Airlines benefit from lower maintenance costs and better availability, while HEICO gains access to a large, recurring profit pool supported by the long life of the installed fleet.

PMA parts cannot replace every OEM part. Technical feasibility, certification, customer acceptance, warranties, lessor restrictions, and safety considerations all matter. Nevertheless, high OEM aftermarket margins give airlines a strong incentive to evaluate alternatives that are approved and operationally acceptable, while leaving trusted PMA suppliers room to offer savings profitably. Chapter 5 examines the airline value proposition and the remaining barriers to adoption in detail.

Engine OEMs therefore have a strong incentive to defend their installed-base economics.

2.5.2. OES and lower-tier suppliers

The second major group consists of original equipment suppliers (OES), which provide major aircraft systems or modules, including avionics, flight controls, APUs, landing gear, cabin interiors, aerostructures, nacelles, hydraulic systems, and electrical systems. Examples include Honeywell, Collins, Safran, Liebherr, Spirit AeroSystems, GKN, and other system-level suppliers. Many are Tier 1 suppliers because they deliver complete systems or major assemblies directly to the airframer.

Their role extends far beyond manufacturing individual parts. A Tier 1 supplier may be responsible for design, engineering, certification support, manufacturing, integration, documentation, testing, and subsequent aftermarket support. Once a system is selected for an aircraft program, the supplier can remain tied to that platform for decades (see Chapter 2.6). Its economics may therefore include both original-equipment sales and a long aftermarket tail of spare parts, repairs, manuals, testing equipment, and service support.

Lower-tier suppliers generally do not deliver complete aircraft systems directly to Airbus or Boeing. Instead, they provide the inputs that Tier 1 and Tier 2 suppliers use to build those systems.

Landing gear provides a simplified example. At the bottom of the chain, raw-material and forging suppliers provide aerospace-grade metals and forged structural inputs. Tier 3 suppliers turn these inputs into detailed parts such as machined components, bearings, seals, pins, and fittings. Tier 2 suppliers combine the parts into larger mechanical or hydraulic subassemblies. At the Tier 1 level, suppliers such as Safran, Collins, Liebherr, and Héroux-Devtek deliver complete landing gear systems or major landing gear assemblies to the airframer, which then integrates them into the aircraft.

The supplier base also explains the high switching costs in aerospace. Suppliers cannot be replaced overnight. A new supplier must be qualified, audited, tooled, documented, approved, and integrated into the relevant quality system. In many cases, a component is tied to a specific aircraft program, certification basis, production configuration, or proprietary technical design. Aerospace supply chains are therefore far less flexible than ordinary industrial supply chains.

2.6. Aircraft program lifecycle

A commercial aircraft is a multi-decade industrial platform whose program lifecycle begins long before the first delivery. During the early definition phase, the manufacturer develops the initial concept, defines the target market, evaluates customer requirements, sets broad performance goals, and determines whether airline demand justifies the enormous investment. This phase can take at least five years, during which the aircraft remains largely conceptual and its mission profile, size, range, payload, fuel efficiency, technology choices, and customer value proposition are defined.

The first major milestone is the go-ahead decision, at which point the manufacturer formally commits to the program.

The aircraft then enters a development phase that typically lasts four to five years. During this period, the design is engineered in detail, prototypes are built, suppliers are coordinated, and testing begins as the program moves toward certification. The first flight is a crucial milestone, while certification is the final gate before the aircraft can enter commercial service.

Once the aircraft enters service, production begins in earnest and can continue for decades. A typical aircraft production program can last 20 to 30 years or even longer. The Boeing 747 is a striking example: production of the legendary “Jumbo Jet” ran for roughly 56 years, from 1967 until early 2023, when the program ended.

The Airbus A380 illustrates the other side of lifecycle risk. Airbus developed the ultra-large aircraft as airline demand increasingly shifted toward smaller, more flexible long-haul twinjets such as the Boeing 787 and Airbus A350. Airbus launched the program in 2000, began manufacturing the first components in 2002, and delivered the first aircraft in 2007. Yet the decision to discontinue the program came in 2019, only 12 years after the first delivery, and the final aircraft was delivered in 2021. The resulting 14-year delivery run was far shorter than that of the A380’s iconic predecessor and closest conceptual counterpart, the Boeing 747.

During production, manufacturers continue to introduce enhancements, launch variants such as stretched versions, and expand successful platforms into broader product families. The A320 illustrates this platform logic: the original aircraft was followed by the A319 and A321 and later evolved into the neo variants.

This platform logic is central to aircraft economics. The initial development cost of a new aircraft is enormous, and manufacturers need long production runs to amortize that investment. Recovering these costs often takes more than a decade, creating substantial financial, technological, and market risk. If customer demand falls short, technology choices prove problematic, or production costs exceed plan, the economics of the entire program can remain impaired for years.

The lifecycle does not end when production stops; the aftermarket continues for as long as the fleet remains in service. Even after the final aircraft leaves the production line, manufacturers and suppliers remain tied to the installed fleet. Manufacturers must continue supporting their aircraft as long as the fleet remains operational.

Because aircraft typically remain in service for 20–30 years, this long operating life is the key point. The initial aircraft sale is a one-time event, but each delivery enters the installed base and creates two to three decades of recurring aftermarket demand. Across the full production and operating cycle, an aircraft platform can therefore generate parts and maintenance demand for 35 to more than 40 years. This longevity makes the aftermarket structurally attractive. The production chain creates the installed base; the aftermarket keeps it productive.

To put these cycles into perspective, the Boeing 737 was already a well-established platform in 1996—11 years before Apple introduced the first iPhone. The family has since evolved through the 737 MAX and remains a major part of the global fleet.

The lifecycle also explains why supplier selection during the original aircraft program matters so much. If a supplier’s system is selected for a major platform, it can generate revenue not only during production but also through decades of aftermarket activity. The original-equipment relationship can create future demand for spare parts, repair instructions, test equipment, technical documentation, and service support. This is why aerospace suppliers compete aggressively to be designed into aircraft programs and why aftermarket access becomes an important strategic battleground.

At the same time, long lifecycles create opportunities for alternative suppliers. Early in a platform’s life, OEMs typically hold the strongest position: the aircraft is new, warranties remain active, airline technical teams are still gaining experience, and lessors often prefer OEM-supported configurations to protect residual values. As the platform matures, however, the installed base grows, operators accumulate operating data, warranties expire, and airlines become more receptive to cost-saving alternatives that are legally and technically acceptable. PMA parts, DER repairs, used serviceable material, and independent repair solutions can therefore become increasingly relevant; each is discussed in detail later.

This lifecycle perspective is essential to understanding HEICO. Unlike an engine OEM or Tier 1 system supplier, HEICO does not need to win content at the beginning of an aircraft program. HEICO’s opportunity grows with the installed base: the more aircraft are delivered, operated, aged, repaired, and kept in service, the larger the addressable aftermarket becomes. Because aircraft can remain in operation for decades, a single program can create a long runway of recurring parts and repair opportunities.

3. Regulation, Airworthiness, and the Right to Keep Flying

Aviation is not a typical industrial market. In most industries, a replacement part is acceptable if it fits, performs as required, and is competitively priced. In commercial aviation, that is not enough. A part must also be approved, traceable, documented, eligible for installation, installed and maintained under approved procedures, and accepted within the aircraft’s airworthiness framework.

Airworthiness is the legal and technical condition that allows an aircraft to fly. It links design, production, maintenance, documentation, repairs, inspections, parts traceability, operator responsibility, and regulatory oversight. Without it, even an expensive aircraft is merely a grounded asset.

For HEICO, this is the central regulatory point. The company operates within a system in which every part, repair, and maintenance action must fit into a defined approval chain. This raises barriers to entry but also increases the value of approved alternatives. Once a supplier has the necessary approvals, engineering capabilities, quality systems, customer trust, and installed-base knowledge, regulation becomes part of its moat.

3.1. Initial and continuing Airworthiness

Aviation regulation can be understood through two related concepts: initial airworthiness and continuing airworthiness.

Initial airworthiness concerns whether an aircraft, engine, propeller, part, or system has been designed and manufactured in accordance with the applicable certification requirements. It encompasses type certificates, design and production approvals, approved design data, manufacturing controls, conformity, and certification testing. Before an aircraft enters service, its design and production system must be approved, and the completed aircraft must conform to the approved type design.

Continuing airworthiness begins when the aircraft enters service and covers the ongoing process of keeping it airworthy throughout its operating life. It includes maintenance programs, inspections, repairs, component replacements, airworthiness directives, reliability monitoring, records, service experience, and release-to-service documentation. Initial certification does not make an aircraft automatically airworthy for its entire lifecycle. The operator must ensure that it remains in an approved and airworthy condition every day it flies.

One important continuing-airworthiness mechanism is the Airworthiness Directive (AD). An AD is a legally binding safety instruction issued by an aviation authority to address an unsafe condition in an aircraft, engine, propeller, system, component, or appliance. It may require operators to inspect, repair, modify, or replace the affected item, restrict its use, or complete another specified action within a defined timeframe. Unlike a manufacturer-issued service bulletin, an AD is mandatory. Until the required action has been completed, the affected aircraft may no longer be considered airworthy.

By contrast, a Service Bulletin (SB) is issued by an aircraft, engine, or component manufacturer rather than the regulator. It informs operators about recommended inspections, modifications, repairs, software updates, or operating improvements. Unlike an AD, an SB is generally not legally binding on its own. It may nevertheless become mandatory if an aviation authority incorporates it by reference into an AD, if it becomes part of the approved maintenance program, or if compliance is required under leasing, warranty, or service-agreement terms. Service Bulletins also allow OEMs to feed technical experience from the installed fleet back into maintenance and operating procedures.

The Minimum Equipment List (MEL) illustrates the difference between certification and day-to-day airworthiness. Even a properly certified aircraft may develop defects in service. The question is not only how the defect will be repaired but also whether the aircraft may continue operating temporarily until it is corrected.

The starting point is the Master Minimum Equipment List (MMEL), which is developed for a specific aircraft type and approved by the aviation authority. It defines which equipment items may remain temporarily inoperative and under what conditions. Based on the MMEL, each operator develops its own MEL for the relevant aircraft type, equipment configuration, and operating conditions. The operator’s MEL must be approved by the competent authority and may not be less restrictive than the MMEL.

If an item may remain inoperative, the MEL specifies the conditions and timeframe for continued operation. The defect must still be recorded, monitored, and corrected within the permitted period.

For example, an aircraft may be dispatched with a noncritical galley oven, a reading light, or certain passenger-service equipment inoperative, provided the defect is recorded and corrected within the permitted timeframe. A safety-critical system, by contrast, may be subject to much stricter conditions or provide no dispatch relief at all.

3.2. Who regulates what?

Aviation regulation is international but not governed by a single global authority. At the highest level, ICAO (International Civil Aviation Organization) provides the international framework and standards for civil aviation. National and regional authorities implement and enforce the applicable safety rules within their jurisdictions. In the U.S., the principal authority is the FAA (Federal Aviation Administration); in Europe, EASA (European Union Aviation Safety Agency) works alongside national aviation authorities.

Aircraft are global assets. A Boeing aircraft may be designed in the U.S., contain engines or systems from several countries, be delivered to a European lessor, operated by an Asian airline, maintained by an MRO in Singapore, and later sold into another jurisdiction. The regulatory framework must allow this global system to function while preserving safety and traceability.

The regulatory frameworks governing aviation organizations in the U.S. and Europe are broadly similar. Harmonization and the mutual recognition of certificates and approvals have steadily advanced in recent years, particularly through bilateral aviation safety agreements (BASAs).

“In general, the FAA approval is accepted around the world and it’s due to the bilaterals.” — Eric A. Mendelson, Q2 2019 earnings call

The global nature of aviation raises a practical question: which authority is responsible when an aircraft is designed in one country, registered in another, operated by an airline in a third, and maintained elsewhere? The answer begins with the distinction between the State of Design and the State of Registry.

The State of Design is the jurisdiction whose authority is responsible for the original aircraft or product design. For Boeing aircraft, that authority is typically the FAA; for Airbus aircraft, EASA. It plays a central role in type certification, design changes, service bulletins, airworthiness directives, and the continued safety of the type design.

The State of Registry is the jurisdiction in which the individual aircraft is registered. Its authority oversees whether that aircraft remains airworthy, properly maintained, correctly documented, and operated under the applicable rules.

The operator connects these jurisdictions. It may fly an aircraft designed and certified under one framework, registered under another, and maintained by organizations located in a third. This makes bilateral agreements, recognized release certificates, approved maintenance organizations, and harmonized standards essential.

3.3. Design, production, and maintenance require separate approvals

Aviation regulation separates three rights that are often bundled together in conventional industrial markets: the right to design a part, the right to manufacture it, and the right to install, maintain, or repair it on a certified aircraft.

This distinction is crucial. A company may be highly capable of manufacturing a component without holding the regulatory approval to design it. Another company may own the approved design data, but that does not authorize every factory to produce the part. Similarly, a maintenance organization may be qualified to install or repair the component, but it must use approved or acceptable data and release the work with the required documentation.

In practical terms, the approval chain must answer three questions:

• Who approved the design?

• Who is authorized to produce the part?

• Who is authorized to install or repair the part and release it to service?

The terminology differs across regulatory systems. EASA describes these functions through organizational approvals such as Design Organisation Approval and Production Organisation Approval. The FAA uses a different structure, including Type Certificates, Supplemental Type Certificates, Parts Manufacturer Approvals (PMA), Technical Standard Order Authorizations, and production approvals. The underlying principle is the same: a physical part is useful only when its design, production, installation, maintenance, and release documentation all fit within the approved airworthiness system. Chapters 3.8 and 3.9 examine these approval paths in more detail.

Aerospace therefore cannot be treated like a conventional spare-parts market. In many industrial sectors, a replacement part can compete if it fits, performs as required, and costs less. In aviation, it must also be legally eligible for installation, tied to approved data, produced under an approved quality system, traceable, properly marked, accompanied by acceptable release documentation, and maintained in accordance with the applicable instructions.

The regulatory chain therefore extends beyond the physical part to the complete data and documentation chain behind it.

3.4. How continuing airworthiness is maintained

Once an aircraft enters service, the regulatory focus shifts from initial certification to continuing airworthiness.

Continuing airworthiness requires the operator to ensure that the aircraft remains in a condition for safe operation throughout its service life. This includes scheduled maintenance, defect rectification, component control, reliability monitoring, compliance with Airworthiness Directives, tracking of life-limited parts, maintenance records, and implementation of an approved maintenance program.

In practice, this responsibility must be managed through an approved organization rather than by individual mechanics. In the European system, this function is performed by a Continuing Airworthiness Management Organisation (CAMO). The CAMO plans, manages, monitors, and documents the aircraft’s continuing airworthiness.

The airline operates the aircraft, the CAMO manages its continuing airworthiness, and the maintenance organization performs the physical maintenance work. The competent authority, such as EASA or a national aviation authority, sets the rules, approves the relevant organizations, and audits their compliance.

For many commercial airlines, the CAMO function is embedded in the technical organization. It serves as the airline’s airworthiness control center. Its role is to ensure that every aircraft in the fleet remains legally and technically fit to fly. The CAMO tracks upcoming inspections, components approaching their life limits, compliance with Airworthiness Directives, updates to the maintenance program, defect rectification, and the proper recording of all maintenance actions.

The CAMO does not wait for something to break; it continuously manages the aircraft’s technical status. Every flight hour, landing, component change, inspection, defect, and maintenance release becomes part of its technical history. The aircraft remains airworthy only if that history is controlled, documented, and kept aligned with the approved maintenance requirements.

Airlines can outsource maintenance work, but they cannot outsource regulatory responsibility. A maintenance organization may perform the physical work, but the operator must still ensure that the aircraft’s continuing airworthiness is properly managed. The operator’s airworthiness-management system must ensure that the correct work is planned, performed, documented, and released properly. Outsourcing MRO does not outsource responsibility: the operator remains responsible for ensuring that the aircraft is maintained correctly and remains airworthy. When specific activities are outsourced, they fall under the subcontracting of continuing airworthiness management tasks (SCAMT).

Consider an airline operating an Airbus A320. The CAMO identifies a scheduled inspection due in 200 flight hours and receives a new Airworthiness Directive affecting a specific component installed on part of the fleet. It must determine which aircraft are affected, plan the required work, coordinate with the maintenance organization, ensure that the correct approved data and parts are used, review the completed documentation, and update the aircraft records. The mechanics perform the task, while the CAMO ensures that the aircraft remains in a controlled and airworthy condition.

The FAA system has no direct equivalent to the EASA CAMO. For U.S. air carriers, continuing-airworthiness management is embedded in the certificate holder’s maintenance organization, maintenance program, manuals, records, and Continuing Analysis and Surveillance System (CASS). The terminology differs, but the principle is similar: the airline remains responsible for the airworthiness of its aircraft and must operate a controlled system to plan, monitor, document, and continuously evaluate maintenance performance, including work performed by contracted maintenance providers.

In Europe, organizations performing aircraft or component maintenance for commercial air transport generally require approval under EASA Part-145. A Part-145 organization must demonstrate that it has the facilities, tools, qualified personnel, training systems, planning processes, quality assurance, and organizational controls required to perform maintenance within its approved scope. The regulator therefore considers not only whether the maintenance is performed but also who performs it, where it is performed, which tools are used, which qualified personnel carry it out, and which documented procedures govern the work.

Maintenance work must also be performed in accordance with approved maintenance data. Mechanics and MRO providers do not independently decide how an aircraft, engine, or component should be maintained; they follow approved manuals and instructions such as the Aircraft Maintenance Manual, Component Maintenance Manual, Engine Manual, Structural Repair Manual, and other Instructions for Continued Airworthiness (ICA). These documents are typically provided by the aircraft, engine, or component manufacturer and form the technical basis for the maintenance task.

The closest U.S. equivalent to an EASA Part-145 maintenance organization is an FAA-certificated repair station under 14 CFR Part 145. Although the terminology differs, the principle is similar: the organization must be approved for a defined scope of maintenance, repair, overhaul, inspection, or alteration work; have the required tools, data, facilities, and qualified personnel; and approve work for return to service only within its certificate and ratings.

3.5. The aircraft maintenance program

Continuing airworthiness turns maintenance from a simple repair activity into a regulated lifecycle process. An aircraft must be designed and produced correctly before entering service and remain under continuous control throughout its operating life. The next step is the aircraft maintenance program—the document and planning system that translates this continuing-airworthiness obligation into concrete maintenance tasks.

This is the role of the Aircraft Maintenance Program (AMP). The AMP is the operator-specific document that lists the maintenance tasks to be performed throughout the aircraft’s service life. It defines what must be inspected, tested, lubricated, repaired, replaced, or monitored and at what intervals. In practical terms, the AMP translates the obligation to keep the aircraft airworthy into a defined set of tasks, intervals, checks, responsibilities, and records.

Defects must be rectified when they occur, but much of aviation maintenance is preventive and planned. The aircraft structure must be inspected for fatigue, corrosion, cracks, and accidental damage; systems must be functionally checked; engines and APUs must be monitored and maintained; and components with life limits must be tracked. Other parts must be removed, inspected, repaired, or replaced after defined flight hours, flight cycles, calendar periods, or operating conditions. Tasks are grouped into maintenance events so the airline can plan downtime, labor, materials, tooling, and aircraft availability.

The AMP is therefore the planning and control framework that defines the aircraft’s maintenance schedule throughout its lifecycle. It serves as the aircraft’s maintenance calendar and task list, while the detailed procedures are contained in documents such as the Aircraft Maintenance Manual and Component Maintenance Manual.

From MSG-3 to MRB Report:

For large commercial aircraft, the initial maintenance-planning foundation is developed during the aircraft development and certification process rather than independently by each airline. The key methodology is MSG-3, historically derived from the Maintenance Steering Group process and formally titled Operator/Manufacturer Scheduled Maintenance Development.

MSG-3 is a structured, preventive, and task-oriented methodology based on the consequences of failure. Rather than asking only, “Can this part fail?”, it asks, “What happens if it fails?” A failure affecting flight safety is treated differently from one affecting only passenger comfort. The standardized decision-tree logic then derives concrete maintenance tasks such as lubrication, functional checks, inspections, and replacements.

Applying MSG-3 to a new aircraft program involves representatives from the airframer, engine manufacturer, major suppliers, airlines, and, in some cases, major maintenance organizations. Aircraft-specific working groups develop proposals that are reviewed through an industry and regulatory process. The result is the Maintenance Review Board Report (MRBR).

The MRBR is the first major maintenance-planning foundation for a new aircraft type. It defines the minimum initial scheduled maintenance and inspection tasks and intervals derived through MSG-3. It is especially important early in a program, when operators have limited service experience with the new type. However, the MRBR is not static: accumulated service experience can lead to updates and revisions.

The MPD: turning the MRB Report into a practical planning document:

The MRBR is essential, but it is generally not detailed enough to serve as an airline’s sole day-to-day maintenance-planning tool. It establishes the baseline scheduled requirements, while operators need a more detailed document for practical planning and execution.

This is the role of the Maintenance Planning Document (MPD). Boeing commonly uses the term Maintenance Planning Data, while Airbus uses Maintenance Planning Document. Both serve the same broad purpose: the MPD translates and expands the MRBR into a more usable planning document for operators.

The MPD is the central manufacturer document used to develop an airline’s maintenance program and provides more detail than the MRBR. It may include the structure and sequence of maintenance tasks, references to maintenance manuals, required tools and equipment, information on access panels and doors, and requirements for components not fully covered by the MRBR. It may also contain additional manufacturer requirements or recommendations.

The operator’s Aircraft Maintenance Program:

The final step is the airline’s own Aircraft Maintenance Program (AMP), which draws on the MRBR, the MPD, applicable Instructions for Continued Airworthiness, mandatory requirements, and operating experience. It must be tailored to the operator’s aircraft configuration, operating environment, utilization pattern, maintenance concept, and fleet experience.

Two airlines may operate the same aircraft type in very different ways. One may fly short, high-cycle routes with many takeoffs and landings each day, while another uses the same type on longer sectors with fewer cycles. One may operate in humid, salty, or dusty environments, while another operates mainly in temperate conditions. These differences affect maintenance planning.

The AMP must therefore be operator-specific. It defines the full maintenance scope for the aircraft the airline actually operates, rather than for an abstract aircraft type.

At a minimum, the AMP defines maintenance tasks and intervals for the aircraft structure, systems, engines, components, and parts, as well as the scope and frequency of checks. A “check” is a bundle of maintenance tasks grouped into a planned maintenance event. Rather than performing every task separately when it becomes due, airlines package tasks into line checks, A-checks, C-checks, heavy checks, or other customized maintenance events. The names and intervals vary by aircraft type, operator, and maintenance program, but the underlying principle remains the same: maintenance tasks are planned, grouped, scheduled, and controlled.

Under the EASA framework, operators must establish, apply, and keep current an approved maintenance program for each aircraft. In practice, one program may cover a fleet of the same type, reducing administrative work and making operating and maintenance experience easier to compare across the fleet.

The following chart summarizes the development of an AMP and the responsibilities at each stage:

3.6. Maintenance organizations and release to service

While the CAMO manages continuing airworthiness, an approved maintenance organization performs the physical maintenance, repair, inspection, overhaul, and component replacement. In Europe, this is typically an organization approved under EASA Part-145; in the U.S., the closest equivalent is an FAA-certificated repair station under 14 CFR Part 145.

An approved maintenance organization is far more than an ordinary repair shop: it may perform only the work covered by its approval. It must have the required facilities, tools, equipment, qualified personnel, procedures, planning systems, quality controls, and access to current maintenance data. Because the approval is scope-specific, authorization for certain aircraft types, engines, components, instruments, accessories, or repair categories does not extend to every maintenance task or aircraft.

Aviation authorities also regulate who performs maintenance, where it is performed, which tools are used, which qualified personnel carry it out, and which approved procedures govern the work. In aviation, a repair is not valid merely because a mechanic has rectified the defect; it must be performed and released within an approved maintenance system.

Maintenance organizations cannot independently decide how an aircraft, engine, or component should be maintained. They must use approved or acceptable maintenance data, including:

• Aircraft Maintenance Manual (AMM): The primary manual for aircraft-level maintenance. It covers inspections, system tests, troubleshooting, lubrication, component removal and installation, and required post-maintenance checks. For example, when a mechanic removes and reinstalls a pump, valve, or avionics unit on an Airbus A320, the AMM specifies the required steps, safety precautions, access panels, and post-installation tests.

• Component Maintenance Manual (CMM): The manual governing an individual component after its removal from the aircraft. It specifies how the component is inspected, disassembled, cleaned, repaired, reassembled, tested, and released to service. For example, a hydraulic pump, actuator, valve, generator, brake unit, or avionics box may be sent to a component shop, where the work is performed in accordance with the relevant CMM.

• Engine Manual: These cover engine inspections, troubleshooting, module work, limits, repairs, tests, life-limited parts, and shop-visit procedures. Depending on the task, engine work may draw on several related documents, including engine maintenance manuals, shop manuals, illustrated parts catalogs, and service bulletins.

• Structural Repair Manual (SRM): The manual for assessing and repairing structural airframe damage. It defines allowable damage limits and approved repair methods for the fuselage, wings, doors, panels, frames, stringers, fairings, and stabilizers. For example, if a technician finds a dent, crack, or corrosion in the fuselage, the SRM helps determine whether the damage is allowable, requires monitoring, or needs an approved structural repair.

After maintenance, the aircraft or component is not automatically ready to return to operation. It requires a formal release to service. This confirms that the work was performed in accordance with the applicable rules, maintenance data, and documented procedures. Under EASA rules, aircraft maintenance is certified through a Certificate of Release to Service (CRS); the FAA uses an approval for return to service. Both confirm that the relevant work has been properly completed and that the aircraft may resume operation.

For components, release certificates serve the same function. They may be used to approve engines, propellers, appliances, and component parts for return to service. Depending on the context, these documents confirm either that a component was manufactured in conformity with the applicable design data or that maintenance such as repair, overhaul, or inspection was performed under the relevant approval. Without the required release documentation, a technically functional component may still be unusable for an airline.

Consider a component removed from an aircraft during maintenance. The CAMO or airline technical organization tracks the requirement, the Part-145 maintenance organization removes the part, and, if necessary, an approved component shop repairs it. The shop follows the relevant maintenance data, documents the work, and releases the component with the appropriate certificate. Only then may it be reinstalled, provided it is eligible for the aircraft and its configuration.

This is where the CAMO, MRO, and release processes connect. The CAMO ensures that the correct work is planned, controlled, and recorded; the maintenance organization performs it within its approved scope; the maintenance data define how it must be done; and the release documentation confirms its proper completion. Only when these elements align can the aircraft or component return to service in a controlled and airworthy condition.

Traceability is therefore essential in MRO: the records must show what work was performed, by whom, under which approval and maintenance data, and with which release documentation.

3.7. FAA manufacturing approvals: the routes to approved aircraft parts

Before examining PMA in greater detail, it helps to understand the broader FAA framework for production approvals. The central point is simple: aviation products and articles must be manufactured under a recognized approval path.

The FAA framework distinguishes several ways in which aviation products can be produced under approval. Hinsch summarizes four important FAA manufacturing approval routes:

• Production Certificate,

• Approved Production Inspection System,

• Parts Manufacturer Approval, and

• Technical Standard Order Authorization.

3.7.1. Production Certificate (PC)

A PC authorizes a manufacturer to produce duplicate products under an FAA-approved type design, such as a Type Certificate or Supplemental Type Certificate. Boeing, for example, does not need to recertify the design each time a new 737 leaves the production line. Once the type design has been approved and Boeing holds the corresponding Production Certificate, it may repeatedly manufacture aircraft conforming to that design under an FAA-approved quality system.

Put simply:

Production Certificate = FAA approval for serial production under an approved design.

This approval is primarily relevant to manufacturers of complete aircraft, aircraft engines, or propellers.

3.7.2. Approved Production Inspection System (APIS)

An APIS is a more limited form of production approval. Under this framework, the manufacturer has to operate an FAA-approved production inspection system demonstrating that each product conformed to the approved type design and was in a condition for safe operation. Following the 2009 revision of Part 21, however, the FAA required existing APIS holders to transition to Production Certificates. APIS should therefore be understood as a historical predecessor rather than a current, more limited alternative to a PC.

Put simply:

APIS = an approved production and inspection system, usually narrower than a full Production Certificate.

APIS is far less relevant to HEICO than PMA, but it illustrates an important principle: approval of a design does not by itself authorize uncontrolled production. The manufacturer must also operate an approved system that ensures each product or article consistently conforms to the approved design.

For individual articles such as components and replacement parts, the two current approval routes most relevant to the following discussion are PMA and TSOA.

3.7.3. Parts Manufacturer Approval (PMA)

A PMA is the principal FAA approval route for replacement and modification articles produced outside the original Type Certificate holder’s production system.

It allows a manufacturer, including a company other than the original OEM, to produce and sell approved articles for installation on type-certificated products. For HEICO, PMA is the regulatory foundation that makes certified non-OEM replacement parts possible.

A PMA is not merely permission to manufacture a part. It combines two regulatory approvals. First, the article’s design must comply with the applicable airworthiness requirements. Second, the manufacturer must operate an FAA-approved quality system capable of producing the article consistently in conformity with that approved design.

Put simply:

PMA = FAA approval for alternative replacement or modification parts, combining design approval and production approval.

This is the route through which qualified suppliers can offer certified alternatives to selected OEM spare parts. A PMA article is therefore not an unregulated “copy.” It is manufactured under an FAA-approved quality system and has defined eligibility for installation on specified aircraft, engines, or propellers. The applicant must either establish that the design is identical in all respects to an article covered by an approved type design or demonstrate through tests and computations that it complies with the applicable airworthiness requirements.

In practical terms, PMA articles can therefore serve as FAA-approved alternatives to parts originally supplied by the aircraft, engine, or component OEM.

Importantly, PMA is formally an FAA approval. Europe does not operate a simple parallel “EASA PMA” system. However, FAA-PMA parts can be accepted for use on EASA-certified or EASA-validated products under the EU-U.S. Bilateral Aviation Safety Agreement (BASA) and the applicable Technical Implementation Procedures (TIP). Non-critical PMA articles approved through identicality or tests and computations can generally be accepted without a separate EASA validation. Independently developed PMA articles installed on critical components, by contrast, generally require EASA validation through an equivalent Supplemental Type Certificate. In every case, the applicable approval basis, release documentation, marking, and installation eligibility must be satisfied.

The same logic extends beyond Europe. The FAA maintains a network of Bilateral Aviation Safety Agreements and older Bilateral Airworthiness Agreements with civil aviation authorities around the world. These agreements facilitate the reciprocal certification and acceptance of approved products, articles, and technical data across jurisdictions. They reduce duplicative certification work while preserving the conditions and safeguards established by the participating authorities.

Acceptance nevertheless remains specific to each bilateral arrangement; an FAA PMA article is not automatically eligible for installation in every country. Where the relevant agreement covers PMA, the article may be accepted once the applicable design, documentation, export, and installation conditions have been met. Critical articles may require additional validation. PMA therefore remains a U.S. approval, but the FAA’s bilateral framework has materially expanded its practical reach across the global aviation market.

In short, PMA rests on a mature U.S. design and production approval framework whose international relevance has expanded through bilateral aviation safety agreements between the FAA and other airworthiness authorities, as illustrated below.

3.7.4. Technical Standard Order Authorization (TSOA)

A TSOA is a combined FAA design and production approval for an article that has been shown to meet a specified minimum performance standard.

A Technical Standard Order, or TSO, defines the minimum performance standard for a specified category of civil aviation article. Examples include avionics, instruments, seats, safety and oxygen equipment, navigation units, communication equipment, and other standardized articles.

Crucially, a TSOA approves the design and production of the article itself; it does not automatically approve its installation on every aircraft. Installation on a specific aircraft must still be covered by the aircraft’s approved type design, an STC, or another applicable installation approval.

Put simply:

TSOA = FAA approval to manufacture a standardized aviation article that meets a defined minimum performance standard.

But:

Approval of the article under a TSO does not automatically constitute installation approval for a specific aircraft.

1.8. Approved alternatives: why “generic” does not mean unregulated

When investors hear the word “generic,” they may think of generic drugs: a cheaper alternative to a branded product. In aviation, the idea is somewhat similar, but the regulatory reality is very different. A non-OEM aircraft part is not useful simply because it looks the same, fits into the same place, or costs less. It must be approved.

Simply put, PMA is the regulatory route that allows a qualified alternative supplier to compete with the OEM in selected replacement and modification articles.

But a PMA is not merely permission to manufacture a copy. It combines two inseparable elements: design approval and production approval.

• The PMA Design Approval answers the first question: does the proposed article comply with the applicable airworthiness requirements for its intended application? The applicant must define the article’s design and substantiate compliance either by demonstrating that it is identical in all respects to an article covered by an approved type design or through applicable tests and computations. The FAA regulator must accept that this part can safely perform its intended function in the specific aircraft, engine, or system context.

• The PMA Production Approval answers the second question: can the manufacturer reproduce the approved design consistently under an FAA-approved quality system? An acceptable design alone is not enough. The manufacturer must control materials, suppliers, production processes, inspections, testing, documentation and other quality procedures to ensure that every completed article conforms to the approved design and is in a condition for safe operation.

A simple example makes the distinction clearer. Suppose HEICO develops an alternative replacement article for a specific OEM component. First, HEICO must demonstrate that the article’s design complies with the applicable airworthiness requirements for that particular application. That is the design side. HEICO must then demonstrate that it can manufacture the article repeatedly and reliably under an FAA-approved quality system. That is the production side. A compliant design without controlled production is not enough, and controlled production without an approved design is equally insufficient.

This is why PMA parts should not be confused with unregulated copycat parts. A PMA article is an FAA-approved article produced under an approved quality system and with defined installation eligibility. Its approval is not universal: the article is eligible only for the aircraft, engine or propeller models and applications identified in the approval, while acceptance outside the U.S. remains subject to the applicable bilateral and national requirements.

That regulated approval path creates the opening for companies such as HEICO. OEM parts can be expensive, lead times can be long, and the installed fleet generates recurring demand for replacements and repairs. PMA allows qualified suppliers to compete for selected parts of that aftermarket without bypassing the aviation safety framework. Regulation does not eliminate competition; it defines who may compete, for which applications and under what conditions.

3.9. PMA approval pathways and the role of equivalency

The simplest approval route is identicality with a license agreement. In this case, the PMA applicant has access to the OEM’s design data through a license or other agreement and can therefore demonstrate that the PMA part is identical to the already approved OEM part. From a regulatory perspective, this is the most straightforward case because the approval is based on original design data. Commercially, however, this route is less accessible to independent PMA suppliers because OEMs usually have little incentive to license their most valuable replacement-part data to competitors.

PMA design approval can be obtained through different methods, depending on how the applicant demonstrates that the proposed part is acceptable for its intended application. The central question remains the same: can the part safely perform its required function on the specific aircraft, engine, propeller, appliance, or component on which it will be installed?

In practice, this is often described in terms of “form, fit, and function.” The PMA part must fit its intended application, interface properly with the surrounding assembly, and perform the required function without compromising airworthiness.

The FAA requires detailed evidence that a PMA design complies with the applicable airworthiness requirements and performs safely and reliably in its intended application. The hurdle is meaningful but well established: more than a thousand PMA manufacturers have reportedly cleared it, many of them repeatedly.

The most straightforward approval route is identicality with a license agreement. Here, the PMA applicant has access to the OEM’s design data through a license or another agreement and can demonstrate that the proposed part is identical to the approved original. From a regulatory perspective, this is the clearest case because it relies on original design data. Commercially, however, the route is less accessible to independent PMA suppliers because OEMs generally have little incentive to license valuable replacement-part data to competitors.

A second route is identicality without a license agreement. The applicant again argues that the proposed part is identical to the approved original but lacks a licensing agreement with the design approval holder. It must demonstrate that the design is the same in every relevant respect, including dimensions, tolerances, materials, processes, and specifications. In practice, this is difficult without access to original design drawings and production specifications. Reverse engineering, dimensional measurement, material analysis, testing, and technical substantiation can help develop and evaluate an alternative design, but reverse engineering alone will not normally establish identicality. If true identicality cannot be demonstrated, the applicant must use the test-and-computation route instead.

A third route is based on a Supplemental Type Certificate (STC). An STC approves a change to an existing type-certificated product. If a modification to an aircraft, engine, or system is approved through an STC, the articles required for that modification can also be produced under PMA. The STC approves the design change, while the PMA provides production approval for the associated articles.

The fourth route, and often the most important for independent PMA suppliers, is approval based on Test Reports and Computations (T&C). The PMA supplier typically reverse-engineers the OEM part and then uses analysis and testing to demonstrate that the proposed part is equivalent for its intended application and complies with the applicable airworthiness requirements. Depending on the part and its safety significance, the evidence may include load testing, vibration testing, fatigue analysis, temperature testing, material comparisons, functional testing, or other forms of substantiation.

Once the proposed part, approval basis, and applicable airworthiness standards have been defined, the detailed substantiation work begins.

The process begins with a safety and criticality assessment. The applicant must determine how a part failure could affect the continued airworthiness or performance of the aircraft, engine, component, and next higher assembly. This is generally assessed through a failure modes and effects analysis that identifies potential failure modes and their consequences. Some industry materials summarize the resulting categories as critical—potentially affecting aircraft airworthiness—important—potentially affecting aircraft or engine performance—or neither critical nor important. Most PMA parts fall into the final category.

The applicant must also review whether the original part is subject to Airworthiness Directives or unresolved service difficulties. The FAA will not approve a replacement that reproduces a known unsafe condition. PMA approval therefore goes beyond showing that the proposed part resembles the original; the applicant must demonstrate that it is safe and suitable in its intended operating context.

For critical, life-limited, influencing, or technically complex articles, the FAA may require a Part Specific Certification Plan (PartSCP). The plan aligns the applicant and the FAA on the certification basis and testing approach before significant time and money are committed. It sets out the test purpose, the physical and functional description of the test article, the number of units, test conditions, duration, success and failure criteria, instrumentation, data collection, safety controls, and applicable procedures. The FAA may require additional testing if the plan does not sufficiently address the relevant risks.

Once the test plan has been agreed, the applicant must execute it and generate evidence that the part performs its intended function. This often begins with representative samples of OEM parts. The PMA supplier analyzes them to establish a benchmark that the proposed part must meet or exceed. Dimensional analysis helps define tolerances, while chemical and metallurgical testing identifies the materials and processes used in the original part. Functional testing then determines whether the PMA design can withstand the relevant operating environment. In some cases, the PMA supplier may even improve on the OEM part by using newer materials, better processes, or lessons learned from airline experience with the original part.

Equivalency does not necessarily require every detail of a PMA part to match the OEM part exactly. The central question is whether the PMA part performs the required function and preserves the airworthiness of the aircraft, engine, or system in its intended application. A seal, bracket, valve, or cabin component may require less substantiation than a critical engine or hydraulic component. The greater the complexity or safety significance of the part, the more demanding the approval process becomes.

Design approval is only one side of the process; the applicant must also demonstrate that it can manufacture the part consistently. This requires an approved quality system that ensures each completed article conforms to the approved design and is safe for installation. Materials must meet the design specifications; quality-affecting processes must be controlled; finished articles must be inspected for conformity; current drawings must be available to manufacturing and inspection personnel; major design changes must be controlled and approved; rejected materials must be segregated; and inspection records must be maintained. After design approval, the FAA’s certificate-management organization assesses the production facility and quality system before issuing the PMA production approval and continues its oversight thereafter.

The obligations continue after approval. Where required, the PMA holder must provide inspection and repair instructions as part of the Instructions for Continued Airworthiness. It must also maintain a Continued Operational Safety (COS) plan covering problem prevention, service monitoring, and corrective response. In practice, this includes retaining detailed manufacturing records throughout the life of the part, monitoring service experience, isolating potentially affected part populations, identifying possible failure modes, and defining corrective actions when field issues arise.

PMA therefore creates both an opportunity and a barrier to entry. OEM spare parts can be expensive, lead times can be long, and airlines have a strong incentive to evaluate lower-cost alternatives. Yet the approval path is demanding. A credible PMA supplier needs engineering capabilities, testing discipline, regulatory experience, quality systems, documentation, manufacturing controls, and post-approval monitoring. The part may cost less than the OEM equivalent, but the process behind it is anything but simple.

As of December 21, 2023, the FAA database contained approximately 1.5 million PMA articles. The largest share, 62%, had been approved through identicality with agreement, meaning the applicant had access to licensed or otherwise agreed design data. Another 23%, or about 350,000 articles, had been approved through test reports and computations—the route most closely associated with independently engineered or reverse-engineered PMA parts. STC-related PMAs accounted for approximately 10%, while identicality without agreement represented only 5%.

Approvals issued during 2023 followed a similar pattern. Of 18,958 PMA articles approved during the year, 65% were based on identicality with agreement, 20% on test reports and computations, and 15% on STC-related approvals. Identicality without agreement was effectively negligible.

3.10. DER-approved repairs: an alternative to replacement

PMA parts offer one way to reduce aftermarket costs: an airline or MRO can use an approved alternative instead of buying an OEM replacement part.

Most routine maintenance and overhaul work follows existing technical instructions, such as the OEM’s Component Maintenance Manual or other approved maintenance data. In these cases, the MRO applies an established procedure. An FAA-authorized Designated Engineering Representative (DER) becomes relevant when the existing manuals provide no suitable solution, the damage falls outside the published repair limits, or the repair station develops a more economical proprietary repair method. Within the scope of the DER’s authorization, the DER reviews the technical data and may approve it or recommend its approval before the repair station performs the work.

DER-approved repairs address the same aftermarket pain point from a different angle: instead of replacing a damaged or worn component with a new part, the existing component is restored using approved repair data and returned to service.

A DER is an FAA-authorized engineering expert who, within a defined discipline and scope, can approve technical data or recommend its approval to the FAA. DERs may specialize in structures, engines, powerplant installation, mechanical or electrical systems, materials, or other technical fields.

An MRO cannot repair an aircraft part merely because the work appears technically feasible. The repair must have an approved technical basis. If the Aircraft Maintenance Manual, Component Maintenance Manual, Engine Manual, or Structural Repair Manual contains an approved procedure, the MRO can perform the repair using that manual. If the damage falls outside the published limits or no suitable procedure exists, however, a new engineering repair may be required. This is where DER-approved repair data becomes valuable.

Consider an airline that removes an expensive engine or component part because it is worn or damaged. The OEM may recommend replacement, but the new part may be expensive, unavailable, or subject to long lead times. An independent repair provider can instead ask whether the existing part can be safely repaired. If the standard manual provides no suitable procedure, an engineering repair solution can be developed. A DER then reviews the technical data and, within the scope of the applicable authorization, may approve it or recommend its approval. Once the data has been approved, a qualified repair station can perform the repair accordingly and approve the part for return to service.

The conventional path is:

damaged part → buy new OEM/PMA replacement part

A DER-approved repair creates an alternative:

damaged part → approved repair → return to service

For airlines, an approved repair can reduce costs, shorten turnaround times, and improve availability. This is especially valuable when OEM spare parts are expensive, lead times are long, and aircraft utilization is high. The relevant question is not only what the replacement part costs but also how quickly the aircraft, engine, or component can be returned to a serviceable condition.

HEICO is not only a PMA parts company; it also participates in repair solutions. In some cases, a PMA replacement part may offer the best answer for the customer; in others, repairing the existing component under approved repair data may be preferable. The underlying customer need is the same: lower costs, better availability, and less operational friction without compromising airworthiness.

A DER is an individual engineering designee under the U.S. FAA system, not the repair shop that performs the work. A DER may be employed by a company or work as an independent consultant and, within the applicable authorization, may approve technical repair data or recommend its approval to the FAA. The repair station then performs the physical repair using the approved data.

Europe has no direct one-to-one equivalent to the FAA DER system. The EASA framework is more organization-based. Repair and modification data may be approved by EASA, by the relevant Type Certificate or Supplemental Type Certificate holder, or by a Design Organisation approved under Part-21 acting within its privileges. The closest European equivalent is therefore an approved Design Organisation authorized to develop and approve certain repair or modification data.

Part 1 explained why commercial aviation creates such unusual economic conditions. The question now is how recurring maintenance demand, strict regulation, and OEM pricing power turn those conditions into a structural aftermarket opportunity. That is exactly what we will unpack in Part 2.

[1] RPK measures passenger traffic: the number of revenue passengers multiplied by the distance flown. For example, 100 passengers traveling 1,000 kilometers generate 100,000 RPK. RPK is therefore a better measure of demand than passenger numbers alone, because it also captures flight distance.

[2] ASK measures available passenger capacity: the number of seats offered multiplied by the distance flown. A 200-seat aircraft flying 1,000 kilometers generates 200,000 ASK.

[3] ATK measures available passenger and cargo capacity by weight, multiplied by the distance flown. Unlike ASK, it captures total carrying capacity rather than passenger seats alone.

Note that Part I of my upcoming HEICO Deep Dive will be published on Sunday, July 19.

Not many people want to hear what I’m about to say about KPG.

This may not make me popular.

At first glance, Kelly Partners looks like a classic “quality compounder”: a steady, recurring-revenue professional services business that grows through acquisitions in a large, fragmented market, posts attractive margins, and is led by a (seemingly) highly incentivized founder.

But once you look beneath the surface, a few things start to bother me. The issue isn’t the business itself. It’s the math and how the deal structures can make consolidated financials look far better than the economics that are actually attributable to shareholders.

The business model

Kelly Partners Group (KPG) was founded in 2006 by Brett Kelly. KPG is a programmatic acquirer of tax and accounting firms. The early focus was Australia (major metro areas), but more recently, the group has expanded into the UK and the U.S. (All figures in A$ unless noted.)

The market itself is structurally attractive. Tax and accounting services are high-retention and relationship-driven, especially for SMEs and private clients. Switching accounting firm is possible, but the switching costs are real: years of accumulated know-how would get lost. In practice, most business owners don’t wake up thinking, “Today I’m shopping for a new accountant.” If the work is solid and deadlines are met, inertia is powerful.

And believe me: sometimes the accountant knows more than the client’s own spouse. I’m speaking from experience—I spent several years in audit and at a small accounting firm. Once you sit close enough to the numbers, you realize how much sensitive information flows through the accountant-client relationship. In extreme cases, that can even include “undisclosed” children and related financial obligations the spouse is not aware of—and is not meant to be aware of.

The accounting market is also deeply fragmented with many small local accounting firms, and the total addressable market is large. KPG argues that across its three operating markets there are roughly 87,000 smaller firms (excluding the Big 4 and mid-tiers) that could face succession by 2029. That would be about ~54% of roughly ~162,000 existing accounting firms. In other words: plenty of targets, and plenty of willing sellers.

According to KPG, the market is roughly $12.5 billion in size. With about $130 million in revenue, KPG still has less than 1% market share, which suggests a long runway for growth.

In Australia, KPG is now the 11th-largest accounting firm, with an estimated ~3% market share (excluding the Big 4: Deloitte, EY, PwC, and KPMG).

The bird’s-eye view

From 30,000 feet, the following chart is impressive: a ~25% revenue CAGR over 17 years…

…paired with a nice-looking EBITDA trajectory (even though the EBITDA margin has been meaningfully lower over the last three years).

Add a founder who knows how to sell the story to the market. The investor deck hits all the right keywords:

How many IR decks include a “100-bagger checklist”?

If you stop here, the story sounds close to ideal: recurring revenue + fragmentation + programmatic M&A.

Now comes the uncomfortable part (that I care more about than many others and that keeps me from adding KPG to my portfolio despite the hefty drawdown).

The 51/49 structure

KPG’s twist is its 51/49 structure: it typically acquires only ~51% of the operating firms, while local equity partners keep ~49%. Management presents this as an alternative to traditional “everyone-equal” partnerships—meant to keep operators invested and accountable while still enabling centralized strategy and scale benefits.

But if the pitch is a huge market with a looming succession wave, why do sellers keep nearly half the equity so consistently? I understand minority rollovers—plenty of serial acquirers do that—but they usually buy 75–90% and leave 10–25% with the seller. At KPG, buying ~51% isn’t occasional. It’s the operating model.

KPG calls this the Partner-Owner-Driver® model and describes it as driving long-term strategic alignment and creating a foundation for long-term success and growth for the clients, people, and partners of Kelly Partners.

The listed parent (KPGH) owns 100% of the local holding companies (labeled “Subsidiary Company” in the diagram below). Those entities then acquire a narrow majority stake in the operating businesses that are usually structured as partnerships.

The consolidation optics

When KPG buys ~51% of a firm, it usually controls it—so it consolidates 100% of that firm’s revenue, costs, profit, assets and liabilities into the group financials. That’s normal accounting according to IFRS. But it creates a very abnormal investor trap:

Consolidated numbers can look excellent even when very little incremental shareholder value is created by the structure.

A quick detour into consolidation accounting: a group financial statement treats the parent and its subsidiaries as one economic unit. Once the parent controls a subsidiary (typically via >50% ownership), the subsidiary is fully consolidated. Revenue, costs, and profit show up at 100% in the income statement. The same applies on the balance sheet: assets and liabilities are consolidated at 100%.

The portion of profit and equity attributable to minority shareholders is reported as non-controlling interests (NCI) below net income in the income statement and within equity on the balance sheet.

A simple example illustrates this. Assume the Parent has no operating business of its own and only incurs $5.0 million of interest expense, while the Subsidiary generates all operating profit. Whether the Parent owns 100% or just 51% of the Subsidiary, the consolidated income statement looks identical from revenue down to net income (EAT), because control requires the Subsidiary to be fully consolidated. In both cases, the Group therefore reports $100.0 million of revenue, $40.0 million of EBITDA, and $16.0 million of EAT.

The difference appears only below EAT, where the Subsidiary’s profit is allocated between non-controlling interests and the Parent’s shareholders. In the 51% ownership scenario, $10.3 million of EAT is attributable to minority shareholders, leaving only $5.7 million attributable to the Parent’s shareholders after the Parent’s interest expense. The same economic distinction applies further up the income statement: although the Group reports $40.0 million of consolidated EBITDA, only $20.4 million, or 51%, is economically attributable to the Parent’s shareholders.

Most investors ignore NCI, and for most companies that’s fine because the amounts are immaterial. With KPG, it’s a mistake. If you focus on the fully consolidated numbers and mentally dismiss the minorities, you can end up valuing economics that don’t belong to shareholders of the parent company.

You can see it in the balance sheet: equity attributable to KPGH shareholders is only A$28.4 million, while equity attributable to NCI is A$38.1 million.

The same story shows up at the very bottom of the income statement (a line many investors never reach—they stop at EBITDA). Out of A$16.5 million of profit, only A$3.4 million (!) is attributable to the parent; A$13.0 million goes to NCI.

Read that again: the group reported A$16.4 million of statutory profit, but only A$3.4m was attributable to the parent entity under statutory accounting in FY25.

An EBITDA of ~A$40 million carries a very different “story value” in an investor deck than A$3.4 million of net income attributable to shareholders.

The chart below shows how the group’s profit has been split over time.

Summing the period FY2015/16 to FY2024/25, KPG reported total group profit of A$99 million. Of that:

• Attributable to shareholders: A$31 million (31%)

• Attributable to minorities: A$68 million (69%)

That’s substantial.

So why isn’t the split 51/49?

Because the listed parent incurs costs that the partners do not share—such as holding-company expenses, acquisition-related amortization, other purchase-accounting effects, and more. This is the same mechanism illustrated in our hypothetical example: although the minority owners hold only 49% of the subsidiary, 64% of reported Group (!) net income is attributable to NCI, while just 36% accrues to the Parent’s shareholders. The reason is that costs incurred at the Parent level are borne entirely by its shareholders and do not reduce the earnings attributable to NCI. As a result, the NCI share of consolidated net income can be materially higher than the underlying minority ownership percentage, particularly when the Parent’s standalone cost base is significant.

KPG provides the following reconciliation:

Again: this isn’t fraud. It’s just the deliberate outcome when you buy just 51% in a partnership-style structure. The only mistake is pretending the consolidated numbers describe shareholder economics.

The cash test: where the story gets real

The most important question to ask (and the one almost nobody asks):

How much cash is left for the parent shareholders after the partners get paid?

Unlike profit, cash flow cannot simply be attributed to shareholders and NCI based on their respective ownership percentages. Cash generated by a subsidiary initially remains within that legal entity and is not allocated to either shareholder group until it is distributed. The cash flow statement therefore follows the consolidated-entity perspective and reports the Group’s total cash movements, while only actual transactions with NCI and shareholders—such as dividends or changes in ownership interests—are separately identifiable. Consequently, consolidated operating cash flow may materially overstate the cash that is economically available to the Parent’s shareholders.

If the parent company owns 100% of a subsidiary, the parent can move cash upstream via dividends or cash pooling without any real friction. Those intra-group movements disappear in consolidated financial statements.

Once meaningful minority owners exist, that changes. Cash pooling can still happen, but it creates real intercompany balances that have to be repaid; the cash is not simply “free.” Dividends can be paid, but then minorities participate too.

For FY2024/25, KPG reports operating cash flow of A$31.3 million. Against EBITDA of A$39.3 million, that looks like normal 80% cash conversion.

But then you hit the line that matters:

In financing cash flow, KPG reports “Distributions paid to non-controlling interests.” In FY2024/25, that was A$19.1 million (!)—more than half of operating cash flow.

These are partnership distributions, comparable to dividend payments from the subsidiary to its owners (e.g. the parent company and minority shareholders). The parent company also receives its own share internally, but you don’t see that as an external outflow, as intra-group transactions are eliminated in consolidated numbers. The cash paid to minority owners leaves the group, which is why it shows up in financing cash flow. Either way, it’s obviously not cash that belongs to public shareholders—and ignoring it is costly.

Owners’ Earnings

KPG highlights a metric it calls “Owners’ Earnings.” It starts with operating cash flow and subtracts lease repayments and maintenance capex:

• Step one: subtract “repayment of lease liabilities” of A$6.4m. Under IFRS 16 (AASB 16 in Australia), office leases create a right-of-use asset and a lease liability. The right-of-use asset is depreciated (lifting EBITDA and depreciation), while cash lease payments are split between interest expense and principal repayment. That principal repayment is the A$6.4m reported in financing cashflow. Before IFRS 16, rent was simply an operating expense. Without this adjustment, operating cash flow can look optically higher for lease-heavy businesses. If you don’t correct for it, operating cashflow is overstated (I have written about this topic here).

• Step two: subtract maintenance capex. IFRS doesn’t define this line item, so it inevitably involves management judgment (not necessarily good or bad—just something to keep in mind).

On that basis, KPG’s “Owners’ Earnings” chart implies roughly ~24% annual growth:

But the ~A$24 million reported for FY25 are not, as the label “Owners’ Earnings” might suggest, cash that belongs to KPGH shareholders. A cleaner shareholder-level view subtracts the distributions to NCI. The chart then looks like this:

There’s still a positive trend—but the owners’ earnings attributable to shareholders are materially lower than what KPG discloses for the group. Far less impressive than growth in reported EBITDA and in Owners’ Earnings.

KPG says it aims to communicate transparently. Still, it’s hard to shake the feeling that this topic is kept in the background. In June 2025, I emailed Brett Kelly asking why distributions to NCI are ignored in the “Owners’ Earnings” narrative and equity story. After a couple of follow-ups, I still haven’t received a response.

To be fair, KPG does calculate Owners’ Earnings for the parent company somewhere in its investor presentations (hidden). It’s close to my estimate, but not identical. The problem is that the bridge isn’t explained anywhere, and the parent-level number isn’t put at the center of communication, although this metric reflects the true economics attributable to shareholders much better. The communication remains on the group-level optics, which is misleading.

The chart below shows how KPG has allocated capital over time, including distributions to NCI, which are too material to ignore.

From FY2023/24 to FY2024/25,

• EBITDA increased by $5.8 million, from $33.5 million to $39.3 million,

• while adjusted operating cash flow—defined as operating cash flow less IFRS 16 lease repayments—rose by $4.8 million, from $20.1 million to $24.9 million.

• However, distributions paid to NCI increased even more sharply, by $9.7 million, from $9.4 million to $19.1 million.

As a result, the owner earnings attributable to KPG’s shareholders declined from $10.7 million to just $5.8 million despite the improvement in reported EBITDA and cash generation.

Leverage

As a result of the inflated revenue and EBITDA lines, the headline net debt / EBITDA is understated. KPG reports gearing (Net Debt / Underlying EBITDA) of 1.42x for FY2024/25. It looks conservative, but does it reflect the underlying economics appropriately?

Remember: KPG’s fully consolidated EBITDA includes subsidiaries it owns only ~51% of. But most of the debt sits at the parent level. Putting parent net debt against fully consolidated EBITDA—of which shareholders effectively own only a bit more than half—can paint a dangerously rosy picture.

I’d make a few adjustments:

• Net debt: KPG excludes roughly A$7 million of contingent consideration. I would typically include it when calculating net debt.

• EBITDA: I would haircut EBITDA by 50% as a blunt proxy for the portion economically attributable to minorities.

• Leases: KPG’s leverage framing also downplays IFRS 16. Economically, offices aren’t free. You should count leases once—either include lease liabilities in net debt or adjust EBITDA to reflect rent, as long as leasing is not immaterial. I include lease liabilities in net debt.

On my net debt number alone, leverage moves to ~2.5x. If you then use only the portion of EBITDA that is actually attributable to the parent (and therefore to debt repayment), leverage rises to ~5.0x, vs. ~1.4x disclosed by KPG.

Excluding lease liabilities, net debt still comes in at ~A$65 million. Comparing that number with the ~A$5-10 million Owners’ Earnings attributable to the parent, it doesn’t look that conservative anymore. It would take 5-10 years of cashflow available to shareholders to pay down net debt.

Conclusion

Stepping back, here’s how I think the model really works: KPG typically buys just 51%. That gives it control—and with it, full consolidation—so the reported revenue and EBITDA lines look great, and the upfront cash outlay per deal stays relatively low (vs acquiring 100% right away). The trade-off is that a meaningful share of the economics never belongs to the parent in the first place. It shows up later as a structural cash outflow in the financing section—“distributions to NCI”—right where most investors don’t bother to look. These distributions to NCI will never show up in FCF, although it’s a significant “expense” for shareholders of the parent company KPGH.

This structure makes the company appear economically larger than it really is—and that can support a higher valuation if you just look at EV/EBITDA-multiples. The obvious question is: how many analysts and investors actually value the minority interests properly and include them in enterprise value or cut EBITDA in half to reflect only the portion that is attributable to shareholders of the parent company?

It also supports a low-looking leverage ratio that can be used to fund more acquisitions. The group keeps adding consolidated EBITDA—without generating much free cash flow for public shareholders—because distributions to NCI sit in financing cash flow and quietly drain the pool. Those payments are a structural outflow. They are not discretionary capital allocation.

With a market cap of roughly A$175m and net debt of about A$97m (including earn-outs and lease liabilities), enterprise value is around A$272m. Using my adjusted owners’ earnings attributable to shareholders of A$4.8m, and adding back A$6.5m of interest expense (which reduces operating cash flow), I get roughly A$11.3m of “adjusted owners’ earnings before interest.” That’s an owners’ earnings yield of about 4.2% on EV—even after a ~60% drawdown in the share price.

For me, KPGH is not investable, and the recent developments surrounding Brett Kelly have only reinforced my critical assessment—although I do not intend to discuss them further here.

New to Slow Compounding?

This Company Snapshot is the short version of the most extensive research project I have published so far.

The full HEICO Deep Dive was published in collaboration with Compounding Quality, one of the best-known investment newsletters on Substack with more than 550.000 readers.

The project is based on months of work, including going through more than 1,200 pages of earnings call transcripts, decades of annual and quarterly financials, aviation aftermarket reports, regulatory documents, PMA industry sources, and even a doctoral thesis on the aircraft parts value chain.

Slow Compounding is built for long-term fundamental investors who want deep, source-driven research on high-quality compounders and serial acquirers.

Subscribe now

A small plastic bag containing 1,000 metal bushings can cost an airline $50,000.

That price has little to do with the value of the metal. It reflects the extraordinary market power of OEMs, which can use their control over approved replacement parts to charge exorbitant prices and push through substantial price increases over time.

HEICO has built one of the world’s most successful compounding machines around this simple imbalance.

Since the Mendelson family took control in 1990, revenue has grown from $26 million to approximately $4.5 billion, while net income has increased from $2 million to almost $700 million. Along the way, HEICO has developed thousands of aircraft parts, completed more than 100 acquisitions, and expanded into a decentralized portfolio of highly specialized aerospace and electronics businesses.

Yet the company’s success is not simply the result of selling cheaper parts or acquiring more businesses.

It is the result of a system in which regulatory barriers, customer trust, recurring aftermarket demand, entrepreneurial autonomy, and disciplined capital allocation reinforce one another.

In our Quality Growth framework, HEICO checks almost every box:

🛩️ Recurring demand from aircraft that require maintenance for decades

🧱 High barriers created by regulation, operating history, and customer trust

💰 A strong value proposition based on lower prices and better availability

🔬 A repeatable organic growth engine driven by new product development

🤝 A decentralized acquisition model with a reputation as a permanent home

👨‍👩‍👦 Meaningful family ownership and a genuinely long-term culture

📈 A multi-decade runway supported by fleet growth and rising aftermarket demand

This Company Snapshot provides the guided tour: what HEICO does, why its business model is so powerful, how its two operating groups differ, and where the opportunities and risks lie.

Please do not click "Download"—it links to the Teqnion Deep Dive. A bug in the Substack editor is currently preventing me from deleting it.

Download

👔 Company Name: HEICO Corporation (“HEICO”)

🔎 ISIN: US4228061093 (Common Stock) and US4228062083 (Class A)

🔧 Business model: Aerospace and electronics serial acquirer

🌍 Geographic exposure: global (~62% U.S. and ~38% international sales across approximately 130 countries)

📈 Stock Price: HEI Common Stock: $339 | HEI.A Class A Common Stock: $253

💰 Market Capitalization: ~$40 billion

👨‍💼 Number of CEOs since foundation: 2 (one transition — Laurans Mendelson to Eric and Victor Mendelson)
since 1990

👨‍👩‍👦 Founder-/Owner-operator: Yes — owner-operated by the Mendelson family

📅 CEO tenure: Since 1990

🥇 Insider ownership: ~21.0% of shares

📊 10Y EPS CAGR: ~16%

🔁 Reinvestment profile: High

💸 Capital intensity: Low — capex-light, but inventory-intensive

🏰 Moat: Regulatory approvals, customer trust, installed-base scale, price and availability, culture

🧨 Main risks: Valuation, acquisition execution, aviation cyclicality, OEM countermeasures

🌳 Slow Compounding fit: Yes – high-quality (niche) serial acquirer

Business Model in a Nutshell: HEICO is a decentralized aerospace and electronics serial acquirer. Its Flight Support Group provides lower-cost aircraft parts, repairs, and distribution services, while its Electronic Technologies Group supplies highly engineered components for aero-space, defense, space, medical, and other de-manding markets. Growth comes from new product development, market-share gains, and disciplined acquisitions of niche businesses that retain signifi-cant operational autonomy.

Subscribe now

If you are new to the world of serial acquirers, please check out my fundamental piece before you continue with Heico:

A World-Class Compounding Flywheel Riding a Multi-Decade Tailwind

A $50,000 Bag of Bushings

Imagine I handed you a small plastic bag containing 1,000 metal bushings. They are unremarkable to look at—small, round pieces of metal that most people would probably describe as washers or spacers. Unless you happened to know exactly what you were looking at, you might expect to find something similar in a hardware store.

How much do you think the bag costs?

Perhaps $100? Maybe $500? Even $2,000 would sound expensive for a collection of such simple-looking components.

The original equipment manufacturer (OEM) charges $50,000.

The bushings are installed in a CFM56 aircraft engine, one of the most widely used commercial jet engines in the world. Yet the fact that they ultimately end up inside an engine does not make the price any less striking. The bag contains 1,000 small pieces, implying an average price of $50 per bushing. A set of approximately 400 small Teflon washers can also cost $50,000. So can 80 drain plugs. In the latter case, the customer is paying more than $600 for each plug.

At first glance, these prices seem almost impossible to justify. The raw materials are clearly not worth tens of thousands of dollars, and the physical manufacturing process alone cannot explain the difference. Yet the airline is not really paying for the metal, the Teflon, or the plug itself. It is paying for something much more valuable: the right to install that component on an aircraft and continue operating the aircraft safely and legally.

That distinction is the key to understanding HEICO.

A commercial aircraft can be worth well over $100 million, but it generates revenue only while it is flying. If one small component is worn, damaged, or unavailable, the entire aircraft may remain on the ground. Passengers may have to be rebooked, connections can be missed, crews and airport slots may be lost, and the disruption can spread across the airline’s network. The economic damage caused by an aircraft sitting idle for another day can therefore be many times larger than the price of the part needed to return it to service.

The obvious response would be to buy the component somewhere else. After all, there are thousands of industrial manufacturers capable of producing small metal parts. An airline could presumably take the original bushing or washer to one of them, ask for an identical copy, and avoid paying the OEM’s extraordinary price.

In aviation, however, that is not an option.

A part cannot be installed on a commercial aircraft merely because it looks identical, fits into the same space, or is made from the same material. Its design must be approved, it must be manufactured within an accepted quality system, and its origin and production history must be documented and traceable. The manufacturer must also be capable of showing that the part performs its intended function under the demanding conditions in which an aircraft operates.

A machine shop may be perfectly capable of manufacturing an identical-looking component. That does not make the component an approved aircraft part.

When the original aircraft, engine, or component manufacturer is the only approved source, the airline therefore has very little bargaining power. It can purchase the part at the price requested by the OEM, wait for the OEM to deliver it, or keep the aircraft on the ground. This combination of regulatory barriers, limited alternative supply, and the urgent need to return expensive assets to service explains why the price of a small replacement part can bear so little relationship to its raw-material value.

HEICO was built around offering airlines another choice.

The easiest way to understand what the company does is to think about the difference between branded and generic medicine.

When a patient visits a pharmacy, there may be two versions of the same treatment. The first is the branded drug sold by the pharmaceutical company that originally discovered and developed it. That company financed the research, carried the risk that the development program might fail, completed the necessary clinical work, obtained regulatory approval, and established the product in the market. The branded drug therefore reflects not only the cost of manufacturing the tablet itself, but also the original development burden and the value attached to the brand.

Over time, other manufacturers may be permitted to offer an approved generic alternative. The name on the packaging is different, but the generic product must satisfy strict regulatory requirements and provide the same intended therapeutic effect. Because the generic manufacturer did not finance the original discovery process and does not carry the same brand premium, it can normally offer the medicine at a substantially lower price.

The analogy is not perfect in every technical or legal respect, but it captures the economic idea remarkably well.

The OEM aircraft part is the branded drug. A PMA part is the regulated generic alternative.

PMA stands for Parts Manufacturer Approval, an authorization granted by the U.S. Federal Aviation Administration. It allows an independent company to develop and manufacture a new replacement part that can be installed in place of the corresponding OEM component. A PMA part is not second-hand, refurbished, counterfeit, or an unofficial copy. It is a factory-new aviation product manufactured under an FAA-approved design and production system and required to comply with the applicable airworthiness standards.

In other words, HEICO does not simply produce a cheaper piece of metal that happens to fit into the same opening. It performs the engineering work, obtains the regulatory approval, establishes a controlled manufacturing process, and provides the documentation and traceability that allow an airline to install the part with confidence.

That is what turns an apparently ordinary component into a legitimate alternative to the OEM product.

HEICO has become the world’s largest independent provider of such approved alternatives. Historically, the company has introduced new PMA parts at prices approximately 30–40% below those charged by the OEM.

In some cases, the difference becomes considerably larger over time. OEMs have frequently used their strong aftermarket positions to raise replacement-part prices substantially, whereas HEICO has generally followed a much more restrained pricing approach. As the two prices develop along different paths, an initial discount of 30–40% can eventually widen to 50%, 60%, or even approximately 70%.

These savings matter particularly in an industry that has historically struggled to earn attractive returns on capital. Airlines operate with thin margins and have limited control over many of their largest expenses. Fuel prices are largely determined by global markets, labor is operationally essential, aircraft ownership and leasing costs are contractually fixed, and airport and air-traffic-control charges cannot simply be negotiated away. Maintenance, repair, and overhaul (MRO) is therefore one of the relatively few major cost categories in which an airline can actively reduce spending without flying fewer routes, removing seats, or weakening the passenger experience. A dollar saved on maintenance can flow directly into operating profit without the airline having to sell another ticket.

For airlines, those savings are not limited to one unusual purchase. Aircraft maintenance creates frequent and recurring demand. Components wear out, fail, become damaged, reach mandatory inspection limits, or have to be replaced after a specified number of flight hours or takeoffs and landings. A commercial aircraft may remain in service for 20–30 years, while the underlying aircraft or engine platform can continue generating demand for replacement parts and repairs for 35–40 years or longer.

A single approved part may therefore be purchased repeatedly across hundreds or thousands of aircraft over several decades. Once HEICO has completed the engineering and regulatory work, the same product can continue generating revenue whenever another component needs to be replaced.

This is what makes the model so powerful. HEICO is not merely helping an airline save money on one bag of bushings. It is gaining access to a long stream of recurring demand within an installed fleet that continues to fly, wear, and require maintenance year after year.

The $50,000 bag therefore represents much more than an example of excessive aerospace pricing. It illustrates the economic gap on which HEICO was built: a captive OEM aftermarket on one side, and airlines desperate for safe, approved, available, and more affordable alternatives on the other.

HEICO sits between them.

Sharing the Savings

The remarkable feature of HEICO’s model is not only that the company can sell an approved alternative for less than the OEM. It is how much of that difference management has historically chosen to leave with the customer.

Suppose an OEM part costs $100 and HEICO can develop and manufacture an approved alternative at a much lower cost. HEICO could charge $90 or $95. The airline would still save money, and HEICO would retain most of the economic benefit created by the alternative. Given the customer’s limited options and the importance of keeping the aircraft in service, such a strategy might remain profitable for a considerable period.

HEICO has deliberately avoided that approach. Instead, it may offer the part for $60 or $70, creating a saving large enough to matter to the airline and to justify the technical and administrative work required to approve another supplier. This is not an indication that HEICO lacks pricing power. It is a deliberate decision to reinvest part of that pricing power in the customer relationship.

The airline lowers its maintenance costs, while HEICO can still earn an attractive margin because it does not carry the development cost of the entire aircraft, engine, or larger system. Lower prices encourage greater adoption, support higher volumes, and make customers more willing to evaluate additional HEICO products. Those volumes, in turn, allow HEICO to invest further in engineering, product development, inventory, manufacturing, quality control, and distribution. The stronger the platform becomes, the more products it can develop and the more value it can offer to customers.

The approach resembles Nick Sleep’s concept of scale economies shared, most famously associated with Costco. Costco does not retain every benefit created by its purchasing power and operating scale. It returns a meaningful share to its members through lower prices, thereby strengthening customer loyalty and increasing volume. The additional volume improves Costco’s bargaining power and cost position, allowing it to offer even more value and reinforcing the cycle.

HEICO follows a similar principle in a very different industry. As the company’s catalog, engineering base, purchasing power, manufacturing knowledge, customer relationships, and distribution capabilities have expanded, it could have used those advantages primarily to increase prices. Instead, it has preserved a substantial discount to the OEM. Customers save money, HEICO earns attractive returns, and the resulting trust and volume support further product approvals. The savings shared with customers reinforce the scale advantages that made those savings possible.

HEICO also exercises restraint in the amount of market share it pursues. Management has historically been satisfied with an attractive minority position—often around one-third of the market for an individual product—rather than trying to eliminate the original supplier. The OEM can continue supplying most of the volume at a substantially higher price, while HEICO serves the portion of the market willing and able to adopt an alternative.

This creates the possibility of rational coexistence. The airline receives meaningful savings, HEICO earns attractive economics, and the OEM retains most of a profitable aftermarket. An OEM considering an aggressive response must weigh the cost of reducing prices across its much larger installed base against the benefit of winning back the minority share held by HEICO. As long as HEICO does not threaten the entire market, the economics of a price war may be unattractive for the incumbent.

HEICO has reinforced that balance by generally avoiding the most valuable life-limited engine parts, which represent some of the crown jewels of the OEM aftermarket. Its restraint therefore operates in both directions: the company leaves substantial savings with customers and substantial volume with the original supplier. Rather than maximizing the economics of a handful of products, it has created a model that can be repeated across thousands of parts.

The resulting flywheel is straightforward. More approved products create more opportunities for customers to save. Greater savings encourage adoption and deepen the commercial relationship. Higher adoption produces volume, product ideas, operating data, and additional resources for engineering and inventory. Those capabilities allow HEICO to develop more products, which create further savings and strengthen the relationship again.

That is a much more durable proposition than simply selling a cheaper component.

Why Price Alone Is Not Enough

A discount of 30–40% sounds compelling, but aviation customers do not choose parts on price alone. The employee responsible for approving an alternative may generate substantial savings for the airline, yet that individual also bears the perceived professional risk if the product later creates a problem. Choosing the OEM is institutionally easy: it is the incumbent supplier, its part was installed originally, and few people are criticized for remaining with the established source. Choosing an alternative requires someone to make an active decision and accept responsibility for it.

This is why Victor Mendelson, one of HEICO’s current Co-CEOs and the long-time leader of its Electronic Technologies Group, has described it as extremely difficult to convince people to use an alternative part on an airplane. The financial benefit belongs to the airline, while the perceived downside may sit with the engineer, maintenance executive, or procurement professional who approved the switch. A lower price can begin the conversation, but credibility determines whether the sale actually happens.

HEICO has spent more than three decades reducing that perceived risk. It has built specialized engineering and regulatory capabilities, established quality systems across a broad manufacturing network, accumulated extensive operational experience, and developed long-standing relationships with airlines and maintenance organizations. The HEICO Parts Group has shipped more than 90 million parts without a Service Bulletin, Airworthiness Directive, or in-flight shutdown attributed to one of its products.

A new competitor may be able to hire engineers, purchase machinery, and obtain approval for an individual product. It cannot purchase a comparable operating history. Every year of successful performance adds to a record that can only be built over time, and every approved product creates further evidence that HEICO’s processes work beyond a single component.

The partnership with Lufthansa Technik played a decisive role in establishing that credibility. When Lufthansa Technik acquired a minority interest in HEICO’s aircraft-parts operations in 1997, one of the world’s most respected maintenance organizations placed its technical reputation and capital behind the company. Lufthansa could help identify parts that were expensive, difficult to source, or commercially attractive, while also providing operating knowledge and anchor demand once HEICO had completed the development and approval process.

The first HEICO part an airline approves may require considerable analysis, internal discussion, and technical documentation. Once that part has operated successfully, the company is no longer an unknown supplier. The customer has already reviewed HEICO’s quality systems, documentation, engineering capabilities, and support organization. Each subsequent approval can build on the credibility established by the products that came before it.

Catalog breadth magnifies this advantage. An airline may be reluctant to invest time in qualifying a small PMA manufacturer that offers only one or two products and therefore creates limited potential savings. HEICO can offer thousands of opportunities across engines, airframes, hydraulic and pneumatic systems, interiors, avionics, wheels and brakes, electromechanical equipment, and other categories. The technical and administrative effort required to establish the supplier relationship can be spread across a much larger pool of potential savings.

HEICO already serves virtually every major airline. Its remaining organic opportunity is therefore not primarily about adding customer names. It is about expanding the number of products each existing customer is willing to purchase. Every successful part increases confidence in the next one, while every newly approved product expands the portion of the customer’s maintenance spending in which HEICO can participate.

Availability adds another layer to the proposition. A lower-priced part is useful only if it can be delivered when required. When an aircraft is grounded, the economic cost of waiting can quickly exceed the price difference between competing components. HEICO therefore carries meaningful inventory and has built distribution capabilities that allow approved alternatives to be supplied at short notice. In periods of severe supply-chain disruption, immediate availability can become more important than the discount itself. A customer may first approve a HEICO part because the OEM cannot deliver, then continue buying it after the alternative has performed successfully and the higher OEM price becomes difficult to justify.

The moat is therefore not a single patent, approval, factory, or customer contract. It is the accumulated system of regulatory knowledge, engineering capability, quality control, operating history, product breadth, inventory, distribution, customer relationships, and institutional trust. Each element supports the others, and the system becomes progressively harder to reproduce as it grows.

From One Aircraft Part to Approximately 20,000

The HEICO recognized by investors today began taking shape when the Mendelson family assumed control in 1990. At the time, the company generated $26.2 million in revenue and $2.0 million in net income. Its aerospace operation was centered on essentially one core PMA product: a replacement combustion chamber used in a Pratt & Whitney aircraft engine.

That product demonstrated that an independent manufacturer could overcome the technical, regulatory, and commercial barriers required to compete with an established aerospace supplier. It did not yet prove that the opportunity could become a scalable business. HEICO still needed to expand its approval capabilities, gain the trust of conservative airline customers, establish repeatable manufacturing processes, hold inventory, and show that it could support products reliably over long periods.

The Mendelsons proceeded gradually. HEICO added further engine components, expanded into additional aircraft systems, developed repair capabilities, and used acquisitions to obtain technical expertise, customer relationships, manufacturing processes, and entry into adjacent product categories. Over time, the portfolio moved beyond its original engine focus into fuel, hydraulic, pneumatic, electromechanical, wheel and brake, airframe, interior, structural, and avionics products.

The acquisition of Wencor in 2023 materially increased the scale of the platform. Before the transaction, HEICO offered approximately 12,000 PMA parts and Wencor roughly 7,000, creating a combined portfolio approaching 20,000 approved products. HEICO now adds approximately 400–550 new PMAs each year and also offers thousands of DER-approved repairs, which allow damaged components to be restored rather than replaced with expensive new OEM products.

The number of products is important, but the process that continually creates them is the more valuable asset. Customers identify components suffering from high prices, poor availability, or an absence of competitive supply. HEICO evaluates the size of the market, the remaining life of the aircraft or engine platform, the technical complexity of the product, the likely customer demand, the incumbent price, and the development and inventory investment required. Promising candidates move through engineering, regulatory approval, manufacturing setup, quality validation, and commercial introduction.

Not every new product becomes important immediately. Airlines may require time to complete their own technical reviews, and adoption can build gradually as the part establishes an operating history. Product cohorts can therefore ramp for several years, while mature products continue generating recurring revenue from the installed fleet. HEICO’s organic growth reflects the layering of many such cohorts: older products continue selling, newer products gain adoption, and hundreds of additional approvals enter the portfolio each year.

This also explains why the opportunity can remain large despite the company’s long history. New aircraft and engine platforms enter service, existing platforms mature and move beyond initial warranties, OEM prices rise, supply problems emerge, technologies change, and customers identify additional components or repairs for which they want another source. The addressable opportunity continually renews itself.

What began with one combustion chamber has consequently become the world’s largest independent portfolio of FAA-approved jet-engine and aircraft-component replacement parts. Yet describing HEICO simply as a PMA company now understates the breadth of the business.

Two Operating Groups, One Economic Logic

HEICO operates through two principal segments. The Flight Support Group, or FSG, is the larger platform and the historical core of the company. It designs and manufactures PMA parts, repairs and overhauls selected aircraft components, distributes proprietary and third-party products, and manufactures specialized aerospace equipment. Depending on the customer’s situation, HEICO may provide a new replacement part, restore the existing component through an approved repair, source a needed OEM product through its distribution network, or combine several of these capabilities.

This broader offering matters because the customer’s underlying problem is not necessarily a desire to buy a PMA part. The customer needs an aircraft or component returned to service safely, quickly, and at a reasonable cost. By supplying parts, repairs, inventory, distribution, and technical support, HEICO can address that problem through several routes rather than forcing every situation into a single product category.

FSG generated approximately 70% of HEICO’s fiscal 2025 revenue and operating income. Its scale, catalog breadth, regulatory capabilities, and direct customer relationships make it the crown jewel of the company and the clearest expression of the HEICO model.

The Electronic Technologies Group, or ETG, receives less attention but provides a second growth engine. Its companies manufacture highly engineered components and subsystems used in aircraft, defense equipment, missiles, satellites, medical devices, telecommunications infrastructure, and other technically demanding applications. The portfolio includes products such as power supplies, antennas, microwave components, shielding, sensors, connectors, and other specialized devices that are often small relative to the value of the larger system in which they operate.

ETG reaches attractive economics through a somewhat different mechanism. FSG frequently challenges a highly priced incumbent by creating an approved alternative. ETG businesses often become the incumbent by having their component designed into a customer’s product or platform. Once the product has been selected, tested, qualified, documented, and incorporated into the larger system, replacing it may require redesign, additional testing, new documentation, customer approval, and regulatory or technical requalification. The possible cost saving from changing suppliers is often insignificant compared with the expense, delay, and risk involved in replacing a product that already performs reliably.

The two groups therefore appear diverse at the product level but share a common economic logic. HEICO focuses on small yet important products used in much larger systems, where the cost of failure is high and the component’s selling price is modest relative to the value of the aircraft, engine, missile, satellite, medical device, or other platform. Customers care about reliability, availability, documentation, qualification, and technical support far more than the cost of the underlying raw material.

This is why Laurans Mendelson did not primarily describe HEICO as an aerospace or electronics company. He regarded it as a vehicle for generating and reinvesting cash. The industries and products provide the setting, but the underlying objective is consistent: acquire or develop businesses with strong margins, durable demand, defensible customer positions, and opportunities to reinvest capital at attractive returns.

The Acquisition Flywheel

Organic product development forms one side of HEICO’s compounding model. Acquisitions form the other.

The company generally seeks specialized businesses with strong customer relationships, capable management teams, attractive margins, defensible niche positions, and opportunities for continued growth. Many targets are founder- or family-owned companies that have developed valuable products and technical expertise but remain too small to attract widespread attention.

After an acquisition, HEICO typically preserves the identity, management, employees, and operating autonomy of the business. Decisions about customers, products, engineering, manufacturing, and personnel remain largely with the people closest to the operation. Headquarters focuses on capital allocation, financial discipline, incentives, acquisitions, and the balance sheet rather than attempting to run dozens of specialized companies through a centralized corporate bureaucracy.

Sellers may retain a minority interest and continue managing the business. This allows an entrepreneur to achieve personal liquidity and diversify wealth without necessarily abandoning the company, employees, and customer relationships built over many years. The seller can continue participating in future value creation while gaining access to HEICO’s capital, acquisition expertise, public listing, and broader network.

HEICO also presents itself as a permanent owner. It does not generally acquire businesses with the intention of improving reported metrics for a few years and selling them to the next financial buyer. For founders who care about the future of their employees, the independence of the business, and the preservation of its identity, that distinction can matter as much as the highest immediate purchase price.

The seller proposition has become more credible with time. A founder considering HEICO can speak with entrepreneurs who sold their businesses many years earlier and ask whether management honored its promises. Each successful acquisition therefore becomes a reference for the next one. The larger and longer the track record becomes, the harder it is for a new buyer to reproduce.

This can generate proprietary or less competitive deal flow and allow HEICO to acquire businesses that might not choose a conventional strategic buyer or private equity firm. It does not eliminate competition, and HEICO will not win every attractive transaction, particularly when another buyer is prepared to pay a price that management considers excessive. However, it expands the factors on which the company can compete beyond valuation alone.

The parallels with the customer proposition are striking. HEICO does not attempt to capture every available dollar from airlines, and it does not attempt to extract every degree of control from acquired entrepreneurs. In both cases, management willingly leaves meaningful economics or autonomy with the other party because the resulting relationship may endure for decades.

HEICO’s long-standing refusal to maximize each individual transaction strengthens confidence in both components of its growth engine. Customers continue bringing the company expensive or difficult-to-source products they would like HEICO to develop. Entrepreneurs continue considering HEICO as a permanent home for the businesses they created. The acquisition pipeline and the organic product pipeline are therefore both supported by a reputation accumulated over many years.

This is particularly valuable because there is frequent, recurring demand for HEICO’s products. Aircraft continue flying, components continue wearing, maintenance events continue occurring, and customers repeatedly return for replacement parts, repairs, distribution, and technical support. Preserving the relationship is more valuable than maximizing the margin on one order. In a business built around repeated transactions over long product lives, retention is not merely a commercial metric. It is central to the economics.

Longevity is the cornerstone of compounding.

An Internal Flywheel Riding a Multi-Decade Tailwind

HEICO’s internal compounding system operates within one of the world’s most durable secular growth markets. Commercial air travel has expanded over many decades as populations, incomes, tourism, trade, and international connectivity have increased. The path has never been smooth. Recessions, terrorist attacks, wars, fuel-price shocks, and the COVID-19 pandemic have all caused severe temporary disruptions. Yet passenger demand has repeatedly recovered and resumed its long-term growth.

The current environment offers additional support to the aftermarket. Aircraft manufacturers and their suppliers have struggled to deliver enough new aircraft, forcing airlines to keep older models in service for longer than originally planned. Older aircraft generally require more maintenance, while the high utilization of the available fleet accelerates the accumulation of flight hours and cycles that trigger inspections, repairs, and replacement demand. Long OEM lead times also increase the value of an approved second source capable of delivering a part immediately.

These near-term conditions are favorable, but the longer-term installed-base development is more important. The global commercial fleet is expected to expand substantially over the coming decades as air travel grows, particularly in emerging markets where trips per capita remain far below developed-market levels. Each aircraft entering service creates a potential stream of parts, repairs, inspections, and inventory demand extending far beyond the original delivery.

New aircraft initially remain more closely tied to OEM warranties, service agreements, and approved maintenance networks. As those aircraft age, warranties expire, maintenance events become more frequent, and operators become more motivated to reduce costs. The addressable market for independent aftermarket suppliers therefore grows not only as more aircraft enter service but also as each generation of aircraft matures.

HEICO benefits from both time horizons. In the near term, delayed deliveries, aging fleets, high utilization, and parts shortages support demand for repairs and readily available alternatives. Over the long term, a larger installed fleet creates a broader base of aircraft and systems requiring maintenance for decades.

The financial record reflects the combination of these industry tailwinds with HEICO’s internal execution. Between fiscal 1990 and fiscal 2025, revenue increased from $26.2 million to approximately $4.49 billion, representing annual growth of roughly 16%. Net income attributable to HEICO rose from $2.0 million to approximately $690 million, equivalent to about 18% annually.

Growth has come from a combination of new products, increased adoption of existing products, market-share gains, acquisitions, and entry into adjacent niches. Importantly, HEICO has generally achieved this without relying on aggressive price increases or substantial equity issuance. Acquisitions have predominantly been financed with internally generated cash and debt, resulting in relatively limited dilution for long-term shareholders.

The business is also modestly capital-intensive in the conventional sense. Physical capital expenditure represented approximately 1.6% of fiscal 2025 revenue. HEICO does, however, commit meaningful capital to inventory because immediate availability is a central part of the customer proposition. It also expenses research and development through the income statement, meaning current earnings already bear the cost of product-development efforts that may generate revenue for many years.

The Mendelson family’s significant ownership reinforces the long-term orientation. Its financial outcome is primarily linked to the value of HEICO’s shares rather than the maximization of executive compensation or short-term transaction volume. Subsidiary managers and employees also participate through retained minority interests, performance incentives, and ownership of HEICO shares.

The result is a rare combination of organic product development, recurring aftermarket demand, programmatic acquisitions, attractive margins, modest physical capital requirements, aligned ownership, and a secular growth runway extending over multiple decades. Few businesses possess even several of these characteristics. HEICO has assembled them within one compounding system.

Understanding HEICO Requires Understanding the Industry

This Deep Dive is intentionally structured differently from a conventional company report. When I began researching HEICO, I did not yet have a deep understanding of the aerospace industry, and I quickly realized that the company could not be properly analyzed in isolation. Understanding why HEICO’s products are valuable—and why its competitive position is so difficult to replicate—first requires an understanding of the broader aviation industry, the aerospace value chain, aircraft maintenance, and the regulatory system governing every part installed on an aircraft.

I therefore expanded the research well beyond HEICO itself. The result is not only a company Deep Dive, but also a broader reference guide to the aerospace industry that can be revisited when analyzing other companies operating across aircraft manufacturing, aerospace supply, maintenance, repair, distribution, and the aftermarket.

HEICO itself is therefore not examined in detail until Part III. The first two parts establish the industrial, economic, and regulatory system in which the company operates.

• Part I (published on July 19) begins with the broader aviation industry. It examines long-term passenger growth, the current aircraft shortage, production backlogs, delayed retirements, fleet utilization, and the expected expansion of the global installed fleet. It then moves through the aerospace value chain, explaining how a modern aircraft is assembled from highly specialized systems and components and why aircraft and engine manufacturers rely on a deep network of suppliers. Finally, it establishes the regulatory framework governing design, production, maintenance, and continuing airworthiness.

• Part II turns to the aircraft aftermarket. It explains why maintenance demand exists, how maintenance, repair, and overhaul developed into a global industry, how aircraft checks and component repairs work, and where control and bargaining power sit across the value chain. It then examines PMA parts and DER-approved repairs in detail, including the regulatory approval routes, the airline economics supporting adoption, the price and availability proposition, and the practical barriers that still limit penetration.

• Only after that foundation has been established does Part III turn directly to HEICO. It covers the company’s development under the Mendelson family, the creation of the modern Flight Support Group, the customer proposition, the acquisition of Wencor, HEICO’s current market position, and the remaining organic runway.

• Part IV examines the Electronic Technologies Group and the HEICO Operating System, including ownership, incentives, decentralization, acquisition criteria, and the reasons entrepreneurs may choose HEICO over competing buyers.

• Part V brings the analysis together through HEICO’s acquisition history, financial development, capital intensity, competitive advantages, risks, and valuation.

Parts I and II are therefore not an extended detour before reaching the company. They are necessary to understand why the company exists. Without a working knowledge of aircraft lifecycles, certification, continuing airworthiness, maintenance economics, OEM aftermarket power, airline incentives, and the PMA approval process, it is difficult to appreciate why a small bag of apparently ordinary components can cost $50,000—or why offering the airline an approved alternative for substantially less can become the foundation of an extraordinary business.

Most company reports begin with HEICO’s revenue, margins, acquisitions, and valuation multiples. Those figures describe what the company has achieved, but they do not fully explain why it has been possible.

To my knowledge, no other publicly available HEICO Deep Dive develops the underlying aerospace ecosystem in comparable depth.

That context ultimately reveals what makes HEICO unusual. It is not simply an aerospace supplier, a PMA manufacturer, an electronics group, or a serial acquirer. It is a carefully constructed system that converts customer cost pressure, regulatory complexity, recurring maintenance demand, technical credibility, entrepreneurial autonomy, and disciplined capital allocation into a flywheel capable of compounding over decades.

Stay tuned for Part 1 of the upcoming deep-dive!

When Chris Mayer read my Teqnion Deep Dive, he wrote that it was “the best thing I’ve yet read about Teqnion.”

That set a high bar.

With HEICO, I tried to raise it.

This Company Snapshot is the short version of the most extensive research project I have published so far. The goal was not just to summarize a great company, but to write one of the clearest and most comprehensive explanations of HEICO’s business model, aviation aftermarket ecosystem, acquisition culture, and long-term compounding engine.

Or, stated with a bit more humor: I tried to write the most understandable HEICO analysis in human history.

You can judge whether I succeeded.

The full HEICO Deep Dive was published in collaboration with Compounding Quality, one of the best-known investment newsletters on Substack, reaching hundreds of thousands of quality-focused investors around the world.

Starting on July 19, I will also publish the full Deep Dive here on Slow Compounding in five parts.

Subscribe now

Behind the scenes

What started as a company analysis quickly turned into a much broader research project on the aviation aftermarket, PMA parts, MRO economics, aircraft parts regulation, customer trust, acquisition-driven compounding, and HEICO’s unusual role inside that ecosystem.

To understand HEICO properly, I had to go well beyond the latest annual report and a few recent financial metrics.

The research process included:

• more than 1,200 pages of HEICO earnings call transcripts

• decades of annual reports and quarterly financials

• aviation aftermarket and MRO industry reports

• FAA, EASA, and PMA-related regulatory

• PMA and DER repair sources

• a doctoral thesis on the aircraft parts value chain

• HEICO’s acquisition history

• and much more

The company sits at the intersection of several forces that are hard to understand in isolation: airline cost pressure, OEM pricing power, aviation regulation, safety-critical replacement parts, long product approval cycles, customer trust, decentralized acquisitions, and family-controlled capital allocation.

That is what makes HEICO so interesting. HEICO is not just a regular aerospace parts company. It is a compounding machine.

Why this matters

As most investment write-ups summarize what a company does, I am more interested in how a company became what it is, why its economics exist, how durable those economics might be, and whether management can reinvest capital intelligently over long periods of time.

That requires going backward before going forward.

In HEICO’s case, a few key questions were:

• Why do airlines accept alternative aircraft parts?

• Why are OEM parts so expensive?

• Why is customer trust so hard to build in aviation?

• Why has HEICO been able to compound for more than three decades?

• Why has the company avoided many of the common failure modes of serial acquirers?

Those are the questions the full Deep Dive tries to answer.

And they are also the kind of questions Slow Compounding is built around.

What Slow Compounding is

Slow Compounding is an investment research publication for long-term fundamental investors.

I focus on high-quality compounders and serial acquirers — businesses that can reinvest capital at attractive rates, protect their economics over time, and create meaningful per-share value over many years.

❌ The goal is not to chase short-term stock moves, quarterly noise, macro predictions, or hot ideas.

✅ The goal is to build a growing research library that helps investors understand great businesses deeply.

That usually means going through old annual reports, earnings call transcripts, acquisitions, segment histories, incentive structures, capital allocation decisions, per-share value creation, and the industry context around a company.

The result is slower, but hopefully more useful. That is why this publication is called Slow Compounding

What you will find here

If you are new here, the easiest way to navigate Slow Compounding is by research type.

• Company Snapshots are concise introductions to high-quality companies. They are meant to explain the business, the moat, the capital allocation model, valuation, and key risks in a readable format.

• Deep Dives are much more extensive. They are long-form research projects that try to reconstruct a company from the ground up: history, industry structure, financials, capital allocation, culture, incentives, valuation, and long-term risks.

• The Fundamentals are educational pieces on business models, industries, accounting, insurance, valuation, and other topics that help investors understand companies better.

• The Valuation Bible is my framework for thinking about long-term shareholder returns, reinvestment, per-share compounding, multiples, and valuation.

• CEO Interviews are conversations with managers of high-quality companies, ideally focused on timeless business questions rather than short-term earnings commentary.

A few good places to start

If you are interested in serial acquirers, you may also enjoy my work on Teqnion and Röko. Both are decentralized acquisition-driven compounders, but they are very different from HEICO in terms of size, history, governance, and business mix.

Over time, I plan to expand this coverage to other fascinating serial acquirers as well — especially companies with decentralized operating models, disciplined capital allocation, strong acquisition cultures, and long runways for reinvestment.

If you are interested in insurance and specialty underwriting, the Kinsale Deep Dive is a good starting points.

If you are more interested in consumer internet and Southeast Asia, you may want to read my work on Sea Limited and Shopee.

And if you want to understand how I think about long-term shareholder returns, reinvestment, and valuation, the best place to start is the Valuation Bible.

Why subscribe?

Slow Compounding is currently free.

By subscribing, you will receive future company snapshots, deep dives, Excel models, valuation work, and long-form research on quality compounders and serial acquirers.

❌ No trading ideas.

❌ No macro noise.

❌ No daily market commentary.

Just patient, source-driven fundamental research on businesses that can compound value over long periods of time.

If that is the kind of research you value, you can subscribe below.

Subscribe now

Thank you for reading.

And welcome to Slow Compounding.

One of the hardest things in investing is recognizing productive reinvestment before it becomes visible in the reported financials. In real time, it rarely looks clean. Revenue may still be growing, but margins compress. Operating income may stall or decline. Analysts lower near-term estimates. Investors begin to question whether management is being disciplined or simply spending too much. The market often struggles to distinguish between a company that is spending defensively to protect a weakening position and a company that is deliberately sacrificing near-term profits to strengthen its long-term competitive position.

This distinction is especially difficult in e-commerce. A platform can spend on shipping, fulfillment, vouchers, technology, seller tools, and customer benefits for years before the payoff becomes obvious. Some of that spending may create durable value by increasing frequency, loyalty, density, and monetization. Some of it may simply subsidize transactions that would disappear as soon as incentives are reduced. The P&L alone rarely tells you which is which at the beginning.

So let us begin with a thought experiment.

The thought experiment

Imagine a young e-commerce company that started from a very small base and then grew at extraordinary rates. Just three years after its founding, the company went public. At the time, it was still tiny, generating only $148 million in net sales. Within a decade of its founding — and seven years after going public — net sales had grown to almost $7 billion. The business was still mostly first-party: it sold products directly to consumers, carried inventory, invested heavily in fulfillment capacity, and absorbed the operating complexity of building a large online retailer from scratch.

Gross profit increased from almost nothing to roughly $1.6 billion over the first eight reporting periods, while the gross profit margin moved from the high-teens into the low-to-mid twenties.

However, almost all of this expanding gross profit was being consumed below the gross profit line. Fulfillment, technology, marketing, and administrative expenses remained heavy because the company was still building the infrastructure required to support a much larger business. This is why the company could show clear gross profit progression while still reporting substantial operating losses. EBIT remained negative for several years, and the operating margin only turned positive once the revenue base had grown large enough to absorb the investments made in earlier periods.

By year 6 after its IPO, the company turned EBIT positive. By year 8 after its IPO, the company generated approximately $440 million of EBIT on $6.9 billion of net sales, equivalent to a 6.4% operating margin. For a business that many investors had previously dismissed as structurally unprofitable, this looked like an important proof point.

There was, however, one important cost item that already hinted at how management thought about the business: shipping.

The company was willing to absorb a negative gross profit contribution from shipping in order to make the customer proposition more attractive. Shipping revenue increased over time, but outbound shipping costs grew even faster. Beginning in the early 2000s, shipping became a clear gross profit headwind, with the gap between what customers paid for shipping and what the company incurred in outbound shipping costs widening materially.

This is an important detail because it shows that the company was not treating shipping as a pass-through cost to be fully recovered from customers. Management was already using shipping economics strategically. The company was effectively accepting lower reported gross profit in exchange for a better customer experience, higher conversion, and greater purchase frequency: Use logistics and shipping convenience as a way to deepen the customer relationship, even if that meant depressing near-term profitability.

At that point, a short-term investor might have expected management to let EBIT-margins expand. The company had spent years proving the model. The obvious next step seemed to be harvesting operating leverage.

Instead, management launched a membership program.

The customer proposition was extremely attractive: pay a fixed annual fee and receive a materially better shipping experience. From the customer’s perspective, this made the platform more useful. From the company’s perspective, it created a new cost burden. Shipping became even cheaper and easier for the customer precisely because the company absorbed more of the cost itself.

The following year, management added another major logistics initiative, this time designed to allow third-party sellers to place inventory inside the company’s fulfillment network. The two initiatives reinforced each other strategically, but they also made the reported financials more difficult to interpret.

The P&L immediately reflected the reinvestment.

Operating margins declined from 6.4% to 3.6% within two years. Operating income declined in absolute dollars from roughly $440 million to approximately $389 million, even though revenue continued to grow from $6.9 billion to $10.7 billion.

This is exactly the kind of situation the market often dislikes. Revenue was still growing, but margins were contracting as management reinvested to accelerate the flywheel and strengthen the moat. The company had only recently demonstrated profitability, and management was already choosing to give some of it back. Investors had to decide whether this was disciplined long-term investment or another example of an e-commerce company sacrificing profitability for growth.

The stock reflected that uncertainty. During this investment period, the share price fell sharply, with a maximum drawdown of roughly 45% from peak to trough. To a skeptical investor, the conclusion was easy: the company had reached a local margin peak, competition and shipping costs were pressuring the model, and management was once again prioritizing growth over profits.

Yet the market’s interpretation changed quickly once the financial evidence began to improve. As operating margins recovered and revenue growth accelerated, the share price rebounded from roughly $2 to almost $5 at the peak in the following year. What had looked like margin-destructive spending began to be reinterpreted as the upfront cost of building a stronger customer relationship, a denser logistics network, and a more powerful marketplace flywheel.

Would you have bought the stock?

The membership program was Amazon Prime, launched in early 2005. The seller logistics initiative was Fulfillment by Amazon (FBA), launched in 2006. In hindsight, both look obvious. At the time, they did not. They looked like expensive reinvestments in a business that had only recently convinced the market it could earn money at all.

Two decades later, the scale of what emerged from that supposedly expensive reinvestment cycle is difficult to reconcile with how uncertain the setup looked at the time. In 2025, Amazon generated $716.9 billion in net sales, of which $128.7 billion came from AWS. The remaining $588.2 billion came from Amazon’s non-AWS businesses — a broad mix of first-party retail, third-party marketplace services, advertising, subscriptions, physical stores, and other consumer-facing activities. Consolidated operating income reached $80.0 billion, equivalent to an 11.2% operating margin. On a gross merchandise value basis, Marketplace Pulse estimates that Amazon and its sellers processed roughly $830 billion of GMV in 2025.

Prime has become one of the central pillars of this ecosystem. Amazon does not disclose Prime membership regularly, but the last official figure was already more than 200 million members globally several years ago. In the U.S. alone, CIRP estimates that 201 million customers used a Prime membership, while eMarketer had previously projected roughly 90 million U.S. Prime households by 2025 (~7 out of 10 households). From the end of 2007, when the Prime/FBA flywheel was beginning to show up more clearly in the numbers, through the end of 2025, Amazon’s split-adjusted share price compounded at roughly 24% per year.

The combination of Prime and Fulfillment by Amazon had started to reinforce the broader marketplace flywheel. Prime increased purchase frequency and made Amazon the default starting point for more customers. This habit formation was central to the economics of the model. In e-commerce, the most valuable customer is not necessarily the one who places the largest single order, but the one who starts more shopping journeys on the platform. Once a marketplace becomes the default starting point, it no longer has to win each transaction from scratch. More frequent customer visits generate more data, improve personalization, increase advertising opportunities, raise seller value, and create the order density required to make fulfillment more efficient. Prime was powerful because it moved Amazon closer to that position: not just a place where customers occasionally bought products, but the place they instinctively checked first.

Need something? You check Amazon first. That sounds simple, but for an e-commerce platform it is one of the most valuable positions imaginable. It means the company has moved upstream in the purchase journey. It is no longer merely competing at the moment of transaction; it is shaping where the transaction begins.

Additionaly, FBA improved the seller-side proposition by allowing third-party merchants to offer a better delivery experience. → Better delivery improved the customer experience. → A better customer experience made Prime more valuable. → More Prime members created more order volume. → More order volume increased fulfillment density. → Greater density helped justify further logistics investment. → The flywheel starts to kick in.

This is the historical pattern that matters for Sea Limited today.

Not because Sea is Amazon.

Not because Shopee VIP is guaranteed to become Amazon Prime.

And not because Southeast Asia or Brazil should be treated as identical to the United States.

The comparison is useful as it shows how an e-commerce platform can deliberately accept near-term margin pressure in order to build a more valuable customer relationship, a denser logistics network, and a stronger marketplace flywheel.

The question is whether Shopee VIP can play a similar strategic role inside Sea’s ecosystem.

Sea’s Current Setup: A Profitable Platform Re-Entering Investment Mode

To answer that question, it is important to start with the setup Sea finds itself in today.

Shopee has already gone through one major profitability reset. After the post-pandemic boom, the market’s central concern was whether the company could ever turn its enormous GMV base into a sustainably profitable business. For several years, Shopee had been valued primarily on growth, scale, and market leadership. Then, as capital became more expensive and investors demanded profitability, the question changed. Growth alone was no longer enough. The company had to prove that the model could work economically.

Sea responded by heavily cutting incentives, rationalizing spending, improving monetization, and demonstrating that Shopee could generate positive earnings.

As a result, growth slowed, but the business crossed into profitability, albeit at a level still well below what a mature Shopee could potentially earn.

As competition from TikTok Shop became a more prominent concern, Sea chose not to maximize near-term margins. Rather than harvesting operating leverage, management elected to reinvest more aggressively into growth initiatives (again).

The company is investing logistics, fulfillment, and Shopee VIP. This is why the current moment is so interesting. Shopee is no longer an unproven e-commerce platform burning cash to acquire users. It is a much larger, more mature marketplace that has already demonstrated profitability and is now deliberately choosing to spend part of that profit pool to strengthen the ecosystem.

The market’s concern is understandable. Investors had only recently become comfortable with Shopee’s ability to earn money. A renewed investment cycle naturally raises the fear that margins were temporarily inflated, competition is intensifying, and the business now requires a higher level of spending simply to defend its position.

That is the defensive spend view.

There is, however, another interpretation. Sea may be using its scale and profitability to move from a transactional marketplace toward a more habitual commerce platform. In that view, Shopee VIP is not merely a discount program and Fulfilled by Shopee (FBS) is not merely a logistics cost center. Together, they are an attempt to increase purchase frequency, improve fulfillment reliability, create more order density, and make Shopee the default shopping destination for a larger share of users.

This is the offensive reinvestment view.

The distinction matters because the two scenarios can look almost identical at the beginning. In both cases, margins compress. In both cases, near-term earnings estimates may come down. In both cases, investors worry that management is giving up profitability just as the business was starting to scale. The difference only becomes visible later. Defensive spend preserves the existing business at a lower margin. Offensive reinvestment expands the future profit pool by making the platform more valuable to customers, sellers, and advertisers.

That is the same analytical problem investors faced in the earlier case study. The Prime membership product and the FBA buildout initially made the financials look worse, even though they eventually helped the platform become more valuable. The question for Sea is whether Shopee VIP and FBS are creating a similar improvement in customer behavior and ecosystem density, or whether they are simply subsidizing transactions in a more competitive market.

What Shopee VIP Is Trying to Change

The strategic importance of Shopee VIP is not that it gives users another set of discounts. E-commerce platforms have always used promotions, vouchers, and free shipping to stimulate demand. The more important question is whether VIP changes the structure of the customer relationship.

A normal marketplace relationship is transactional. A customer opens several apps, compares price, delivery time, seller reputation, and available vouchers, and then chooses where to buy. In that world, the platform has to win every transaction again and again. Even if the marketplace is large, customer loyalty can remain shallow because users are constantly comparing alternatives.

A membership product tries to change that behavior. It gives the customer a reason to start the shopping journey inside one ecosystem. If the benefits are used frequently enough, the platform becomes more habitual. The user does not necessarily stop comparing forever, but the starting point changes. That is the key.

For Shopee, this matters because the company operates in markets where competition is intense, average order values can be relatively low. TikTok Shop, Lazada, Tokopedia, Mercado Livre in Brazil, local players, social commerce channels, and offline retail all compete for consumer attention and wallet share.

Shopee VIP is designed to move the business in that direction. Free shipping with no minimum spend reduces friction for smaller, more frequent purchases. Daily vouchers create a reason to return to the app more often. The membership structure gives users a recurring relationship with the platform rather than a purely transactional one. If this works, VIP can increase order frequency, improve retention, and deepen Shopee’s position in the consumer’s shopping routine.

The Early Evidence: Small Penetration, Outsized GMV Contribution

Shopee VIP is still early, and the available data should be interpreted carefully. Some of the numbers rely on estimates, and the time period is short. It would be a mistake to treat the current data as proof that VIP will become a Prime-like product. At this stage, the data is better understood as a set of early signals.

Those signals are nevertheless highly interesting (and promising).

Sea first piloted the VIP membership program in Indonesia in the first quarter of 2025, targeting some of Shopee’s most loyal users with a paid membership product that included more generous free shipping benefits, larger discount vouchers, and priority customer service, as Indonesia is Shopee’s largest and most strategically important market in Southeast Asia, with enough scale to test whether a membership product could change behavior in a meaningful way.

The early response was strong enough for management to expand the program quickly. By the end of the second quarter, Shopee VIP had been rolled out to Thailand and Vietnam as well. Over the rest of 2025, the program was expanded further across Shopee’s Asian markets. By year-end, subscribers had surpassed 7 million, and management noted that VIP members were consistently showing a double-digit spending uplift after joining.

After proving the concept in Asia, Sea launched Shopee VIP in Brazil in April 2026, extending the membership model into its most important Latin American growth market.

Shopee VIP members increased from approximately 1.5 million in Q1 2025 to around 10.0 million in Q1 2026. That is a rapid adoption curve for a program that is still in the early stages of scaling — and notably, the Q1 2026 figure does not yet include any contribution from Brazil, where the rollout only began afterward.

By comparison, Amazon Prime appears to have reached roughly 10 million members only by the end of 2012, around seven years after its 2005 launch (although Amazon did not officially disclose Prime membership at the time, so this figure is based on third-party estimates). Shopee reached that same milestone in roughly one year.

However, the penetration is still low relative to Shopee’s overall buyer base. Based on estimates, Shopee had ~418 million active buyers in Q1 2026. Against that base, 10 million VIP members would imply only around 2.4% penetration.

The GMV contribution appears far more significant than the membership penetration would suggest.

“By the end of March, total subscribers across our Asian markets surpassed the 10 million, up more than 40% from the previous quarter, with strong program retention averaging above 80%. Across all markets, our Shopee VIP members have consistently demonstrated double digit spending uplift after subscribing by as much as 30%-40% in some markets. Shopee VIP members now contribute around 20% of GMV across Asia. Building on this success, we have rolled out our Shopee VIP program in Brazil in April.” — Forrest Li (CEO), Q1 2026 earnings call

In other words, a very small share of buyers may already be driving a disproportionately large share of marketplace activity.

This is probably one of the most important charts in the article, but it also requires the most careful interpretation. VIP members are almost certainly not average Shopee users. Heavy users are more likely to join a membership program in the first place because they can extract more value from free shipping and vouchers. Therefore, part of the apparent outperformance reflects selection bias. VIP is not necessarily turning average users into power users overnight; it is likely attracting Shopee’s existing power users first. In that sense, the early adoption curve may partly reflect the low-hanging fruit: the users for whom the value proposition was most obvious from day one because they were already ordering frequently enough to justify the membership.

However, that does not make the data unimportant. In fact, it may be strategically desirable. A marketplace’s most valuable customers are its high-frequency, high-trust, high-retention customers — the classic Pareto principle applied to marketplace behavior. If VIP allows Shopee to identify, retain, and further monetize these users, that alone has value. The stronger version of the thesis is that VIP not only captures existing power users, but gradually increases the frequency of users who would otherwise have ordered less often.

My estimates suggest that quarterly GMV per VIP member is dramatically higher than GMV per non-VIP buyer. The exact ratio should not be treated as a precise metric, because the calculation relies on a handful of undisclosed metrics. But the directional message is difficult to ignore: VIP members are economically much more valuable than the average non-VIP buyer.

Sea’s own disclosure provides a useful sanity check for this estimate. On the Q3 2025 earnings call, management noted that Shopee VIP members in Indonesia “bought three times more frequently and spent five times more than non-subscribers” during the quarter, while accounting for about 10% of total GMV in Indonesia.

Why Frequency Is A Key Variable

Frequency determines how often the customer relationship is “refreshed”. A user who buys once per year has limited strategic value. A user who buys several times per month is very different. That user generates more GMV, more data, more opportunities for advertising, more seller value, and more logistics density. Over time, frequency can become one of the most important drivers of marketplace quality.

This is why membership programs can be so powerful when they work. They are not merely monetization tools; they are behavior-shaping tools. A well-designed membership product reduces the friction of placing incremental orders and gives users a reason to return more often. The more frequently the customer returns, the more natural it becomes to start future shopping journeys on the same platform.

For Shopee, this is particularly important because the company does not operate in a winner-take-all environment. Consumers can compare prices, search on other marketplaces, discover products through TikTok, buy through social channels, or return to offline retail. Shopee’s challenge is to become the most convenient, trusted, and habitual commerce destination.

Shopee VIP directly targets that challenge. Free shipping with no minimum spend lowers the barrier for small orders. Daily vouchers increase the incentive to open the app regularly. If those benefits create a loop in which users check Shopee more often, buy more frequently, and build a stronger preference for the platform, then VIP can improve the quality of Shopee’s GMV, not just the quantity.

That distinction is important. Subsidized GMV is low quality if it disappears once incentives are reduced. Habitual GMV is much higher quality because it reflects a deeper customer relationship.

This is also where management’s disclosure on post-subscription behavior becomes important. Sea noted that across markets, Shopee VIP members have consistently shown a double-digit spending uplift after subscribing, reaching as much as 30–40% in some markets. That does not eliminate the selection effect — VIP is still likely attracting Shopee’s existing power users first — but it suggests that the program is not merely identifying high-value customers. It appears to be increasing their spending after they join.

VIP and FBS: The Buyer-Side and Supply-Side Flywheel

Shopee VIP should not be analyzed in isolation. Its strategic value depends partly on how it interacts with Shopee’s logistics and fulfillment investments.

The buyer-side logic is straightforward. VIP makes the platform more attractive to consumers by reducing shipping friction and increasing the perceived value of frequent purchases. This can increase order frequency and create more predictable demand.

The supply-side logic comes through FBS. As more items are fulfilled through Shopee-controlled infrastructure, Shopee can improve delivery reliability, service consistency, and potentially cost efficiency. Better fulfillment improves the customer experience, which makes VIP more valuable. More VIP members create more order volume, which improves logistics density. Greater logistics density can justify more fulfillment investment, which further improves service quality.

This is the potential flywheel:

Amazon Prime created the customer demand for fast, reliable, low-friction shipping. FBA helped sellers participate in that promise. The two initiatives reinforced each other. Prime without fulfillment capability would have been difficult to scale. Fulfillment investment without Prime would have had less demand density behind it.

Shopee VIP and FBS may develop in a similar direction, although the economics will differ by region. Shopee’s markets generally have lower average order values and more fragmented logistics environments than Amazon’s early U.S. market. That makes the execution challenge harder, but it also makes density more valuable. If Shopee can aggregate demand, increase fulfillment control, and improve delivery reliability in markets where logistics are structurally difficult, that can become a meaningful competitive advantage.

Prime vs. VIP: Where the Analogy Holds

I’m not making the point that Shopee VIP will become as large or as powerful as Amazon Prime. The point is that both programs are attempts to form the consumer relationship from occasional and transactional to (even more) frequent and (even more) habitual.

Several similarities stand out.

Both programs were launched or scaled after the platform had already established meaningful market position. Neither was the first step in building the marketplace. Instead, each came after the company had already accumulated scale and could begin using that scale to improve the customer proposition.

Both programs created near-term pressure on reported profitability. Customer benefits, free shipping, fulfillment investment, and logistics infrastructure are expensive. The strategic logic may be strong, but the accounting impact appears first through the P&L.

Both programs were connected to fulfillment. Amazon Prime and FBA reinforced each other. Shopee VIP and FBS may do the same. A membership promise becomes more powerful when the platform can control delivery quality, and fulfillment infrastructure becomes more valuable when there is enough recurring demand to support it.

Both programs aim to increase frequency. A membership product that does not increase frequency is far less valuable. A membership product that makes the platform the first place customers check can change the long-term economics of the marketplace.

And both programs were introduced during periods when the market was uncertain about the payoff. In Amazon’s case, investors had to underwrite Prime and FBA before the flywheel was obvious. In Sea’s case, investors now have to decide whether VIP and FBS are defensive spending or offensive reinvestment.

Early Trajectory

Viewed through that framework, Shopee’s early trajectory is striking. On several of the early indicators we can observe, Shopee appears to be moving faster than Amazon did at a comparable stage. VIP reached roughly 10 million members in about one year, while Amazon Prime appears to have taken roughly seven years to reach a similar level based on third-party estimates. Shopee is also scaling VIP alongside FBS at a time when its GMV growth remains strong and the business has already demonstrated profitability.

Where the Analogy Could Break

The comparison also has clear limitations.

The first and most important difference is the nature of the value proposition. Amazon Prime was primarily built around convenience, especially fast and free shipping. Shopee VIP appears to rely more heavily on a combination of free shipping and daily vouchers. That matters because convenience-driven loyalty is usually more durable than discount-driven loyalty. A customer who stays because the platform is faster, more reliable, and easier to use is more valuable than a customer who stays only because today’s voucher is attractive.

The second difference is market structure. Amazon’s early Prime years benefited from rising U.S. e-commerce penetration, improving household internet adoption, and a relatively attractive logistics backdrop compared with many emerging markets. Shopee operates across Southeast Asia and Brazil, where average order values, payment methods, delivery infrastructure, geography, and consumer income levels can vary widely. Free shipping is harder to monetize when order values are low, and fulfillment density has to be earned market by market.

The third difference is competition. Amazon competed with traditional retailers and other e-commerce players, but Shopee also faces social commerce such as TikTok Shop. That changes the competitive battlefield. Shopee’s advantage must come from trust, selection, value, transaction reliability, fulfillment, and habit. VIP can help reinforce those advantages, but it does not eliminate the threat from entertainment-led commerce.

The fourth difference is the maturity of the broader ecosystem. Amazon eventually layered Prime on top of a business that would also benefit from a rapidly growing third-party marketplace, advertising, AWS, and an expanding logistics network. Sea has its own ecosystem assets, including Shopee, SeaMoney, and Garena, but the shape of the long-term monetization stack will not be identical.

What the Market May Be Missing

The market often struggles with reinvestment cycles because the costs are visible before the benefits are measurable. The expense shows up immediately in margins. The benefits show up later in retention, frequency, fulfillment efficiency, merchant demand, advertising monetization, and long-term earnings power.

Sea’s current valuation appears to reflect considerable skepticism. Investors see TikTok Shop competition, renewed spending, and lower near-term margins. They may be less willing to underwrite the possibility that Sea is reinvesting from a position of strength rather than weakness.

This distinction matters. Sea today is not the same company it was during the most painful part of the post-pandemic reset. Shopee has already demonstrated that it can generate profits. The marketplace is larger, more developed, and more deeply embedded in its core regions. Management now has a stronger base from which to invest.

If Sea were merely increasing subsidies to protect share, skepticism would be justified. But if the company is using its scale to build a stronger frequency and fulfillment loop, the market may be valuing the investment cycle incorrectly.

The potential upside does not require Shopee VIP to become Amazon Prime. It only requires VIP to improve the slope of Shopee’s core variables: frequency, retention, logistics density, and monetization. Even a modest improvement in those variables can have a large impact when applied to hundreds of millions of buyers and a very large GMV base.

What Needs to Be Proven

The coming quarters should be evaluated less on one single margin number and more on whether the strategic indicators continue to improve.

The first metric to watch is VIP penetration. A program with roughly low-single-digit penetration still has significant room to grow. If VIP penetration continues to increase while maintaining strong engagement, the program becomes more relevant to the overall Shopee ecosystem.

The second metric is VIP GMV share. If VIP members continue to account for a disproportionate share of GMV, Shopee may be concentrating more activity among its highest-value users. The composition of that GMV will matter, but the direction is important.

The third metric is frequency. This is the most important behavioral indicator. VIP only becomes strategically powerful if it increases order frequency and keeps users engaged over time.

The fourth metric is retention. A membership product can look strong early if it attracts heavy users, but the long-term value depends on whether those users remain members and continue to consolidate spending inside the platform.

The fifth metric is FBS penetration. VIP and fulfillment should ideally scale together. If more orders are fulfilled through Shopee-controlled infrastructure, the company may gain more control over delivery reliability, speed, and service consistency.

The sixth metric is logistics cost per order. The long-term case depends on density. If more frequent ordering improves cost efficiency, then near-term logistics investment can become a source of future operating leverage.

The seventh metric is competitive position. If Shopee continues to grow faster than the broader e-commerce market while TikTok Shop growth moderates, the defensive-spend bear case becomes less convincing.

Together, these indicators should help answer the central question: is Shopee VIP merely subsidizing transactions, or is it changing the structure of the customer relationship?

Subscribe now

Valuation: back to IPO-level pessimism

Measured on forward EV/Sales, the stock is now trading close to the lowest level in its public market history. EV/Sales is the more useful long-term valuation lens because Sea was not sustainably profitable before 2023, making a historical EV/EBITDA comparison less meaningful across the full period.

The contrast is striking. During the 2020–2021 growth bubble, Sea traded at more than 15x forward sales. Today, the multiple is closer to 1.5x, roughly back to the lowest levels seen since the IPO (also seen early 2024).

The market is no longer paying for a heroic growth story. It is assigning Sea a valuation that implies much lower expectations, despite Shopee being larger, more efficient, more entrenched, and closer to sustainable profitability than it was during earlier parts of its history.

If Shopee VIP helps increase order frequency, deepen customer loyalty, improve retention, and shift a greater share of spending into Shopee’s ecosystem, the market may eventually have to reassess not only the growth profile, but also the quality and durability of that growth.

At today’s valuation, the stock does not need a return to 2021-style optimism to work. It needs evidence that Shopee can compound profitably from here.

Conclusion

Shopee VIP is still early, and the Amazon Prime analogy should be treated as a framework rather than a forecast. Sea is not Amazon. Shopee VIP is not Prime. Southeast Asia and Brazil are not the United States. The logistics, competitive, and consumer behavior realities are different.

Still, the early signs are worth paying attention to.

VIP adoption has grown quickly. Penetration remains low. VIP members appear to account for a disproportionate share of GMV. The program is directly connected to frequency, shipping, vouchers, fulfillment, logistics density, and merchant monetization. Most importantly, it is being scaled at a moment when the market is worried that Sea’s reinvestment is defensive.

That creates the potential for misunderstanding.

If Shopee VIP proves to be mostly a discount program, the market’s skepticism will likely be justified. But if VIP becomes a habit-forming product that increases frequency, retention, and logistics density, then Sea’s current investment cycle could be much more attractive than the near-term margin debate suggests.

In the earlier case study, the membership product and the logistics initiative made the financials look worse before the strategic payoff became obvious. Margins compressed, operating income declined, and investors had to underwrite a flywheel that was not yet fully visible. Once the evidence began to turn, the market’s interpretation changed quickly.

Sea may be approaching a similar type of moment.

The right question is not whether Shopee VIP will become as important as Amazon Prime. That is unknowable and probably too ambitious as a direct comparison. The better question is whether Shopee VIP can change the slope of Shopee’s frequency, loyalty, fulfillment, and monetization curve.

If it can, the market may be looking at Sea’s reinvestment cycle from the wrong angle.

What looks like lower margins today may eventually prove to be the cost of building a more durable and more profitable platform.

That is exactly what I want.

But as the amount of research grows, finding the right article should not become more difficult. A publication built around long-term investing also needs a structure designed for the long term.

I have therefore reorganized and streamlined the Slow Compounding website to make the existing research easier to explore.

My goal is to build a research hub that readers return to regularly—not merely to consume the latest article, but to revisit companies, industries, and analytical frameworks over time. Rather than creating a chronological stream of content that quickly disappears into the archive, I want to build a structured body of research with lasting substance and long-term usefulness.

Two Ways to Explore Slow Compounding

The structure organizes the research along two complementary dimensions:

1. By company

2. By type of research

Every company covered on Slow Compounding is classified as either a Compounder or a Serial Acquirer.

Within these two sections, each company now has its own drop down menu entry. Selecting a company takes you to a dedicated collection of all articles published on that particular business.

This means that readers researching one specific company no longer need to search through the archive or navigate between different article categories. Company Snapshots, Deep Dives, Updates, and CEO Interviews can all be found in one place.

At the same time, the Research menu organizes everything by article format. Slow Compounding currently features five different types of articles:

• Company Snapshots

• Deep Dives

• The Fundamentals

• Updates

• CEO Interviews

The same research can therefore be approached from two directions.

Readers interested in a particular company can browse through Compounders or Serial Acquirers. Readers looking for a certain kind of article format across companies can browse through Research.

More Than Company Writeups

Slow Compounding has never been intended to become a collection of isolated stock pitches.

A high-quality company cannot be understood properly without also understanding the industry in which it operates, the economics of its business model, its competitive advantages, its capital-allocation opportunities, and the valuation framework used to assess it.

The new Frameworks section therefore brings together the two broader pillars behind my research:

• Investment Philosophy

• Valuation Bible

The Investment Philosophy explains how I think about business quality, reinvestment, capital allocation, risk, and long-term ownership.

The Valuation Bible focuses on how business performance ultimately translates into shareholder returns—and why the duration of growth, reinvestment opportunities, valuation changes, and capital allocation often matter more than a single static multiple.

The Resources section now brings together the Navigation guide and the growing collection of practical Tools. These include downloadable Excel models that allow readers to apply the concepts discussed throughout Slow Compounding to their own assumptions.

New readers might also find the Start Here 👋 section at the beginning of the menu helpful, providing a simple introduction to the publication and the best places to begin.

Subscribe now

My Most Ambitious Deep Dive Yet

The timing of this update is not accidental.

I am currently in the final stages of completing what has become the largest and most ambitious Slow Compounding Deep Dive so far.

I have spent the past two to three months (!) working on it. Along the way, I read more than 1,100 pages of earnings-call transcripts, worked through an entire doctoral dissertation, and reconstructed 35 years (!) of quarterly financials, and much more.

The contrast could hardly be greater. A recent study found that the median individual investor spends approximately six minutes researching the specific stock being traded, while even the mean investor spends only 29 minutes. I have spent months. That is the level of depth I want Slow Compounding to stand for.

The company will remain unnamed for the moment, but the subject has taken me deep into an industry that is much more complex than it appears from the outside.

Consider a few facts:

Understanding the business therefore required going far beyond the company itself.

The result has grown far beyond what I initially expected—and is now in the final editing stage.

Coming Soon

The new Slow Compounding structure is already live and should make it significantly easier to explore both the existing research and everything that will be added in the future.

The upcoming Deep Dive will be the first major publication released within this more streamlined research hub.

It is also the clearest example yet of what I want Slow Compounding to stand for:

Patient research, primary-source work, long-term thinking, and a willingness to go several layers deeper than a conventional company writeup.

The structure is now simpler.

The research is getting deeper.

And the next Deep Dive is almost ready.

While working through the company, I kept coming back to the same questions lately: how long is the real growth runway? When does above-average growth fade? And what does that mean for valuation if a standard DCF forces the business into a low terminal-growth assumption too early?

What began as a quick note on terminal value and growth duration became a much longer than planned article. But I also think it became much better. The more I worked through the math, the clearer the point became: for durable compounders, the key valuation question is often not the terminal growth rate itself. It is how long the business can avoid becoming a terminal-growth business in the first place.

You can download the Excel file behind the calculations right here:

Dcf Calculation

156KB ∙ XLSX file

Download

Download

One quick note before we start: if you are already very familiar with DCF mechanics, you can skip chapters 2 and 3. These chapters are mostly a refresher on present values (PV) and why the terminal value (TV) is simply a shortcut for cash flows beyond the explicit forecast period.

1. How Most Investors Use a DCF

Investors learn to apply a DCF as a valuation model: Forecast the cash flows. Discount them back. Add the TV. Compare the result to the market cap.

• PV < market cap? Overvalued ➜ Sell

• PV = market cap? Fairly valued ➜ Do nothing.

• PV > market cap? Undervalued (with the difference representing the margin of safety) ➜ Buy

Done.

That is technically correct. But, it also hides the million-dollar question behind every DCF: how durable is the growth? How long can the business continue to compound at above-average rates before it truly fades into maturity?

Durability, i.e. time, is one of the key ingredients in the compounding equation. A standard DCF often gives such businesses ten years of explicit growth and then forces them into a low terminal-growth assumption of 2-4%. That can be reasonable for the average mature business. However, it can be far too conservative for a company that still has a long reinvestment runway (exceeding the explicit 10 year growth), pricing power, high incremental returns, and a culture that can keep extending the opportunity set.

The problem is not the DCF math. The math is fine. The problem is that the spreadsheet often ends before the business does.

We look at an intentionally simple example. Starting free cash flow (FCF) is 100. We use a 8% discount rate and we assume 10% growth. The terminal growth rate is 2%.

1. What is a DCF?

In its simplest form, a company is worth the sum of all future FCFs, discounted back to today. This is necessary because investors are trying to determine what those future cash flows are worth now. Cash received next year is less valuable than cash received today, because today’s cash can be reinvested immediately and future cash flows are less certain. If cash arrives in year ten, it is discounted for ten years. The further away the cash flow, the less it is worth today. The discount rate is the bridge between the future and the present.

However, no one can forecast cash flows year by year into perpetuity accurately. Apple’s growth in 2065? I have no idea. The usual workaround is to model a detailed forecast period first — usually ten years — and then use a simplified and conservative terminal value for everything that comes after. The TV is simply a shortcut for all the cash flows beyond the explicit forecast period.

This means the enterprise value in a DCF consists of two building blocks:

• the PV of the FCFs during the detailed forecast period

• the PV of the TV.

For the math-gurus among my readers, the DCF can be written like this, where

• (FCF_t) represents the free cash flow in year (t),

• (r) is the discount rate, i.e. the return required by the investor,

• (N) is the length of the explicit forecast period, and,

• (TV_N) is the terminal value at the end of year (N):

The explicit period is the part most investors spend time on. Revenue growth, margins, capital intensity, reinvestment, working capital, taxes. The TV is often treated as a plug at the end. But it should not be viewed as a black box. It is simply a shortcut for all cash flows after the explicit forecast period. So, before getting into the details, let’s recap the math behind the TV:

2. The Terminal Value: A Shortcut for Infinity

We assume that a company generates 100 of FCF today. For the next ten years, FCF grows at 10% per year. After year 10, the company does not stop growing. It simply matures. From year 11 onward, FCF grows at only 2% per year forever.

The chart below shows the first 30 years. For simplicity, only the first 30 years are displayed, but the underlying assumption is that the cash flows continue beyond year 30 into perpetuity.

The table then shows the same mechanics in numbers.

Instead of discounting every single cash flow from year 11 to infinity manually, investors use a shortcut: the TV.

In our example, year-10 FCF is 259.4. The first cash flow after the explicit forecast period is therefore year-11 FCF:

The TV at the end of year 10 is then calculated as:

With an 8% discount rate and 2% terminal growth, this gives us:

This 4,409.4 is the value in year 10 of all future cash flows from year 11 onward. It is not yet today’s value. To get the PV of the TV, we still have to discount it back ten years:

This is the shortcut. Instead of forecasting year 11, year 12, year 13, and every year after that into perpetuity, we calculate one TV in year 10 and then discount that TV back to today.

The chart below proves the same point in a more intuitive way. I manually extended the cash flows for more than 250 years and discounted each of them back to today. The cumulative PV of all those post-year-10 cash flows converges toward the same value as the PV of the TV: roughly 2,042.

It clarifies what the TV really says, i.e. the classic model does not say the company stops growing after year ten. It says that every cash flow after year ten grows at only 2% indefinetly. That assumption may be perfectly reasonable for many businesses. But, it is also exactly where a DCF can become too conservative for durable high-growth companies.

3. The Base Case: A Fixed 10-Year DCF

With the basic mechanics of a DCF fresh in mind, we can now build the first case step by step.

The value today is the sum of two parts:

In this example, the PV of the explicitly forecast cash flows from year 1 to year 10 is 1,107.7. The TV at the end of year 10 is 4,409.4. Discounted back to today, that TV is worth 2,042.4 (as calculated above).

So the fair value at year 0 is:

That is the base case: a fixed 10-year DCF with ten years of high growth and a 2% terminal growth rate thereafter.

4. The part nobody shows: the DCF roll-forward

Most DCFs stop here. The analyst calculates one fair value today, compares it to the market cap, and moves on.

But that misses a useful second step.

The year-0 fair value of 3,150.1 is only a snapshot. If the business develops as modeled, the DCF starts to roll forward with every year that passes. It evolves over time. Each year, one cash flow is received, the remaining cash flows move one year closer, and the TV is discounted over one fewer year. DCFs are not static!

That is what the roll-forward shows.

The table below takes the exact same fixed 10-year DCF and rolls it forward year by year.

The table breaks the fair value at each point in time into the same two building blocks we used in the year-0 DCF.

• Column A shows the PV of the remaining explicit FCFs. At year 0, this is the PV of the cash flows from year 1 to year 10, which equals 1,107.7 (as discussed above). One year later, the year-1 cash flow has already been received, so column A only includes the remaining cash flows from year 2 to year 10. By year 10, the explicit forecast period is fully consumed. There are no high-growth cash flows left to discount separately, so column A falls to zero.

• Column B shows the TV. In the fixed 10-year case, the TV is calculated at the end of year 10 and equals 4,409.4 (as discussed above). This number represents all cash flows from year 11 onward, assuming the business grows at 2% forever after year 10.

• Column C shows the PV of the TV at each year. At year 0, the terminal value of 4,409.4 is discounted back ten years, so it is worth only 2,042.4 today (confirming what we calculated above). At year 1, it is discounted back nine years. At year 2, eight years, and so on. The closer we get to year 10, the higher the PV of the TV becomes. By year 10, no discounting is left. The PV of the TV equals the TV itself: 4,409.4.

By year 10, the model has used up the entire high-growth period. The fair value then consists entirely of the TV, because from that point onward the company is assumed to be a mature 2% grower.

The chart below visualizes the same mechanics.

The green bars show the PV of the remaining explicit FCFs (Column A). At year 0, they still contribute 1,107.7 to fair value. As time passes, this component declines because the high-growth cash flows are gradually received and disappear from the remaining DCF. By year 10, the explicit forecast period is fully consumed, so this block falls to zero.

The purple bars show the PV of the TV (Column C). This component moves in the opposite direction. At year 0, the TVis still ten years away and therefore heavily discounted. As we move closer to year 10, the discounting effect becomes smaller. By year 10, the PV of the terminal value equals the TV itself: 4,409.4.

Together, the two bars form the fair value at each point in time (Column D). The composition changes dramatically, but the logic stays the same: fair value is always the sum of the remaining explicit cash flows and the PV of the TV.

Additionally, the green line shows the implied FCF multiple (i.e. the fair value at each year divided by the FCF of that year), assuming the stock trades exactly at fair value at every point in time. It starts above 30x and then declines during the high-growth period. This makes intuitive sense. At year 0, the company still has ten years of 10% growth ahead. By year 5, only five years of high growth are left. By year 10, none are left. The business has mathematically become a mature 2% grower.

From that point onward, the multiple stabilizes. Once the company is in the terminal-growth phase, the valuation is simply a growing perpetuity. With an 8% discount rate and 2% perpetual growth, the value is approximately 17x FCF.

Once the company has entered the terminal-growth phase, the implied FCF multiple is no longer driven by the remaining high-growth runway. It is mechanically determined by the discount rate and the perpetual growth rate.

The terminal value formula is:

Since next year’s FCF equals current FCF grown by (g),

we can rewrite the formula as:

Dividing both sides by current FCF gives the implied current-year FCF multiple:

With an 8% discount rate and 2% perpetual growth, this becomes:

This is why the green line stabilizes at roughly 17x once the company has fully entered the terminal-growth phase.

Subscribe now

5. The Return Composition

The previous chapter showed how the fair value evolves over time. Now we can take the next step and look at the return composition.

If the business develops as modeled and the stock trades at fair value at every point in time, the investor’s expected return equals the discount rate. In our example, that discount rate is 8%.

The 8% return has two components:

The table below shows this decomposition year by year.

• Column E shows the expected return in absolute dollars. This is simply the beginning fair value multiplied by the discount rate.

• Column F shows the actual, undiscounted FCF received during the year.

• Column G shows the increase in fair value. This is the change in the remaining fair value of the business after the cash flow has been received.

Sounds confusing?

Let’s look at the first year.

At year 0, the fair value is 3,150.1. This is the PV of all future cash flows in the model. Since the model uses an 8% discount rate, the value should roll forward by 8% over the next year as long as the cash flows materialize as assumed.

In other words, one year later, the total value available to the investor should be:

This 252.0 is the return implied by the DCF for the first year. Again, it is the mechanical roll-forward of the PV by one year at the discount rate.

During year 1, the company generates 110.0 of FCF. Once this cash flow has been received, it has to be removed from the remaining fair value calculation, as it is no longer a future cash flow; it is now in the past. The fair value at year 1 therefore only reflects the cash flows that still lie ahead.

At the same time, the fair value of the remaining business increases from 3,150.1 to 3,292.1.

So the total expected return in year 1 is:

Relative to the year-0 fair value, this equals 8% (as expected):

The bridge below shows the same arithmetic visually.

The year-0 fair value of 3,150.1 first rolls forward by the expected 8% return. In dollar terms, that adds 252.0 and brings total value to 3,402.1.

But during year 1, the company also generated 110.0 of FCF. Once this cash flow has been received, it is no longer part of the remaining fair value of the business. It is now in the past. The fair value at year 1 only reflects the cash flows that still lie ahead.

After deducting the year-1 FCF from total value, the remaining fair value at year 1 is 3,292.1.

The chart makes the roll-forward logic clear: the investor’s total value increases by 252.0, but 110.0 of that return has already been received as FCF. The remaining 142.0 shows up as an increase in fair value — and if the stock trades at fair value, this is the part of the return that would come through share price appreciation.

So far, we have only looked at the bridge from year 0 to year 1. Now let’s zoom out and apply the same logic to the full 30-year period.

The blue bars show the FCF received during each year (110.0 in year 1). The orange bars show the increase in fair value (142.0 in year 1). Together, they add up to the expected return in dollars (252.0 in year 1), which equals 8% of the beginning fair value in each period.

6. Closing the Loop to the 3 Engines Model

The chart shows the same idea as a percentage of beginning fair value.

Here, the total bar always adds up to 8% (unsurprisingly). That is the discount rate.

In the early years, a smaller part of the return comes from FCF-yield and a larger part comes from fair-value accretion. The business is still in the high-growth phase, so a meaningful portion of the return comes from the fact that the remaining cash flows move closer and the TV becomes less heavily discounted.

This brings us back to a framework I often use when thinking about shareholder returns: the 3 Engines Model.

Instead of EPS growth, we use FCF-growth. Instead of dividend yield, we use FCF-yield. Instead of the change in the P/E multiple, we use the change in the FCF multiple.

The basic intuition is:

The word “approximately” matters here. Growth and multiple change do not work perfectly additively. A 10% increase in FCF and a 5% decline in the FCF multiple do not simply net to 5%. The higher FCF is applied to a lower multiple, so the two effects interact.

For that reason, the fair-value change is calculated as follows:

In year 1, the company generates 110.0 of FCF on a beginning fair value of 3,150.1. That is a 3.5% FCF yield.

At the same time, FCF growth is 10%.

But the implied FCF multiple falls by 5%.

• At year 0, the fair value is 3,150.1 and FCF is 100.0, so the implied multiple is 31.5x.

• At year 1, the fair value is 3,292.1 and FCF is 110.0, so the implied multiple falls to 29.9x.

That multiple compression is the model doing exactly what it should do. One year of high growth has been consumed. The business now has nine years of 10% growth left, not ten, i.e. consuming part of the the valuation “premium”.

Once we have reconstructed the fair-value change, we can add the FCF-yield to close the return bridge:

7. Interim Conclusion: What the Fixed 10-Year Case Tells Us

Let’s summarize what the fixed 10-year DCF has shown us.

First, the TV is not a mysterious add-on. It is simply a shortcut for all cash flows after the explicit forecast period. In our base case, the company grows FCF at 10% for ten years and then fades to 2% perpetual growth. Instead of forecasting every cash flow from year 11 into infinity, we calculate one TV at the end of year 10 and discount it back to today.

Second, the year-0 fair value is only a snapshot. In our example, the business is worth 3,150.1 at year 0. But if the business develops as modeled, that value rolls forward over time. The fair value at each point in time is still made up of the same two blocks: the PV of the remaining explicit cash flows plus the PV of the TV.

Third, the return implied by the DCF equals the discount rate if the stock trades at fair value and the cash flows arrive as expected. In our example, that return is 8% per year. But the return is not one single thing. It comes from FCF received during the year plus the increase in fair value.

Fourth, the 3 Engines Model closes the loop. From a FCF perspective, total return can be understood through FCF-yield, FCF growth, and the change in the FCF multiple.

Now we can finally ask the question this article is really about — in case all the DCF mechanics made you forget it for a moment:

Subscribe now

8. The Fixed 20-Year Case: What If the Company Fades Later?

Now we can change one assumption.

In the classic 10-year case, the model assumes that the company grows FCF at 10% for ten years and then fades to 2% perpetual growth. That is the standard DCF structure used by most analysts.

But what if the business is more durable than that?