Aerospace

Dear Friends,

Suffice to say, 2019 is off to an interesting start! For our firm, despite the first quarter traditionally being a slower time, we had two closed transactions that both represented strong achievements for the practice. We were thrilled to represent Triumph Group (NYSE: TGI) in their divestiture of the NAAS Aviation Services business to STS Aviation. Additionally, we represented Florida Turbine Technologies, an engineering-focused service provider to the US Department of Defense in its sale to Kratos Defense (NASDAQ: KTOS).

For participants in the commercial aerospace supply-chain, the first quarter of 2019 has turned into arguably the most eventful period in over a decade. Spurred by two tragic crashes, the B737 MAX has been involved in more headlines over the past 30 days than most platforms experience over their 40 year lives. The initial ripple-effect is just now being felt as Boeing recently announced a ~20% reduction in build-rates. From our perspective, there appears to be two issues, one near-term and one long-term. The short-term issue revolves around the “fix” to the faulty MCAS system and how quickly the FAA will allow for flights (and deliveries) to resume. Media reports indicate that this will be resolved in a period of weeks which would alleviate issues around aircraft storage and working capital. The longer-term, ultimately more critical issue is the viability of the order book and whether the record-setting backlog will ever be realized.

Boeing is now dealing with a plane that has reached the consumer consciousness to an unprecedented extent. It’s difficult to state with confidence how long and to what level the traveler will retain a negative bias and how that impacts the operators of the aircraft. That said, airlines today are left with very limited options outside the MAX. Capacity growth and increased fuel efficiency remain strategic priorities of most airlines, and getting in the back of the line for an A320 is not a solution. We remain hopeful that the worst of the supply-chains’ MAX-related nightmares are behind us but the next few months will be critical as Boeing navigates an unhappy customer base.

Please see our Q1 Review Here…
KAL Capital A&D Newsletter Q1 2019

Sincerely,

KAL Capital Team