AIR Aerospace & Defense · Aviation aftermarket · MRO · Government contractor · Thesis updated June 30, 2026

AAR grows fast, but HAECO squeezes margins

Q3 FY26 sales grew 24.6%, helped by strong commercial demand and recent acquisitions.
Nine-month operating cash flow turned positive at $43.4 million, after using $15.3 million a year earlier.
That cash flow included a $50 million customer prepayment, so the next test is whether cash stays positive.
Repair & Engineering margin fell to 5.7% from 8.8% as the lower-margin HAECO Americas business came in.
Government gross margin improved to 24.3% from 18.7%, showing better mix in programs and contracts.

01 Running thesis

Cash improves, margins get tested

AAR is growing faster. In Q3 FY26, consolidated sales rose 24.6% from the year before. Commercial sales led the move, while government and defense sales also grew.

The biggest good news is cash. For the first nine months of FY26, operating cash flow was $43.4 million, compared with cash used of $15.3 million a year earlier. That helps answer the old bear case that growth was eating cash.

The catch is quality. AAR received a $50 million customer prepayment in the quarter, and $43.8 million of it was still deferred revenue at February 28, 2026. Investors need to see cash flow stay positive without that kind of help.

The new bear case is integration. HAECO Americas added sales to Repair & Engineering, but the segment's operating margin fell to 5.7% from 8.8%. If AAR can lift HAECO margins over time, the bull case gets stronger. If not, growth may come with lower profit.

Mar 2026→Q3 FY26 sales growth accelerated to 24.6%, and nine-month operating cash flow turned positive at $43.4 million. The view stays balanced because HAECO Americas also drove clear margin pressure in Repair & Engineering.

Jan 2026→Q2 FY26 showed faster sales growth and better government margins, helped by Parts Supply and government demand. Negative operating cash flow and early HAECO margin pressure kept the risk side active.

Sep 2025→Q1 FY26 confirmed growth in Parts Supply, with consolidated sales up 11.8%. Cash use rose because of inventory investment, so growth quality remained a key question.

Jul 2025▲The FY2025 10-K showed sales up 19.9% and stronger Repair & Engineering profit after the Product Support acquisition. A new Section 232 trade investigation added a watch item.

Mar 2025→The Product Support deal looked accretive, but the Landing Gear Overhaul exit created a large impairment charge. The portfolio looked cleaner, while reported profit took a near-term hit.

Jul 2024→The initial thesis framed AAR as a scaled aviation aftermarket company. The key debate was strong aftermarket demand and acquisition upside versus debt, cyclicality, and government program risk.

02 Business model

An independent shop for aircraft uptime

AAR makes money after planes are built. Airlines, aircraft operators, defense agencies, and governments need parts, repairs, logistics, software, and field support to keep fleets flying.

Parts Supply sells new OEM parts and used serviceable material, which means parts taken from retired aircraft or engines, checked, repaired, and put back into service. Repair & Engineering does maintenance, repair, and overhaul work, often called MRO.

Integrated Solutions runs fleet support, logistics, flight-hour parts programs, and software such as Trax and Aerostrat. Expeditionary Services sells pallets, containers, and shelters used by military and aid groups.

The model can break when working capital rises, when acquired businesses carry lower margins, or when government programs change. AAR has been buying growth, so execution now matters as much as demand.

03 Product portfolio

Four ways AAR gets paid

Growth engine

Parts Supply

This is AAR's largest segment in Q3 FY26 and its fastest grower. Sales rose 45.0% as distribution demand stayed strong and ADI added revenue.

Growth engine

Repair & Engineering

This segment repairs airframes and components for commercial and defense customers. HAECO Americas lifted sales, but it also pulled margins down.

Steady

Integrated Solutions

This unit handles fleet management, logistics programs, flight-hour support, and software. Q3 FY26 sales rose only 3.0%, and an inventory provision hurt profit.

Option

Expeditionary Services

This smaller unit makes mobility products such as pallets, containers, and shelters. Q3 FY26 sales fell 32.1% because pallet volumes were lower.

04 Business segments

Parts now lead the mix

Parts Supply46%growing fast

Repair & Engineering31%growing fast

Integrated Solutions20%modest

Expeditionary Services2%declining

Segment shares use Q3 FY26 third-party sales from the Form 10-Q for the quarter ended February 28, 2026. Commercial customers were about 72.9% of consolidated sales, while government and defense were about 27.1%.

05 Risk factors

What could go wrong

HAECO margin drag lasts too long

High impact · Medium odds

Repair & Engineering sales grew 22.9% in Q3 FY26, but operating margin fell to 5.7% from 8.8%. Management blamed the mix of work, including lower-margin HAECO Americas operations before integration. If AAR cannot improve those margins, the deal may add size without enough profit.

We watchRepair & Engineering operating margin moving back toward prior levels over the next few quarters.

Cash flow depends on prepayments

Medium impact · Medium odds

Operating cash flow turned positive for the first nine months of FY26, which is a real improvement. But the quarter included a $50 million customer prepayment, with $43.8 million still recorded as deferred revenue at February 28, 2026. If that support fades and inventory needs rise, cash conversion could weaken again.

We watchOperating cash flow before large customer prepayments and changes in inventory.

Section 232 tariffs hit aircraft parts

High impact · Medium odds

AAR disclosed a U.S. Department of Commerce Section 232 investigation in its FY2025 Form 10-K. The review covers imports of commercial aircraft, engines, and parts. New tariffs or limits could raise costs or change buying patterns across AAR's parts and repair businesses.

We watchAny Department of Commerce decision tied to the Section 232 aerospace import investigation.

Integrated Solutions contract pressure

Medium impact · Medium odds

Integrated Solutions had a $4.9 million inventory provision in Q3 FY26 tied to exiting a consumables and expendables product line. The segment also recorded unfavorable cumulative catch-up adjustments of $1.7 million. These issues are small next to total company sales, but they show contract and product-line risk.

We watchMore inventory provisions, catch-up adjustments, or weaker margins in Integrated Solutions.

Government program shifts

Medium impact · Medium odds

Government and defense customers are important to AAR, especially in Integrated Solutions and Expeditionary Services. Expeditionary Services sales fell 32.1% in Q3 FY26 due to lower pallet volumes. A stopped or reduced program can move results quickly in a smaller segment.

We watchNew stop-work orders, contract terminations, or lower volumes in government mobility programs.

06 Quick answers

In one breath

What does AAR Corp. actually do?

AAR supports aircraft after they are built. It sells parts, repairs aircraft and components, runs aviation logistics programs, and supplies mobility products for military and aid uses.

Why did AAR's cash flow improve in FY26?

For the first nine months of FY26, operating cash flow was $43.4 million, versus cash used of $15.3 million a year earlier. Part of the improvement came from working capital timing and a $50 million customer prepayment.

What is the main risk after the HAECO Americas acquisition?

The main risk is margin pressure. HAECO Americas added Repair & Engineering sales, but the segment's operating margin fell to 5.7% from 8.8% in Q3 FY26.

Is AAR more commercial or government focused?

In Q3 FY26, commercial customers made up about 72.9% of consolidated sales. Government and defense customers made up about 27.1%.