AAR (AIR) Q4 2026 earnings review
Strong Top-Line Momentum While Reshaping the Portfolio
AAR delivered an exceptional Q4, capping off FY26 with 23% YoY GAAP revenue growth and a 32% surge in Adjusted EPS. The core engine—Parts Supply and Repair, Engineering, & Software (RE&S)—fired on all cylinders with 39% and 35% sales growth, respectively. Management announced a strategic shift: winding down the asset-heavy Legacy Commercial Programs (LCP) to redirect capital toward higher-ROIC businesses. Despite short-term margin drags from the HAECO Americas integration and tough comps in Used Serviceable Materials (USM), the company successfully deleveraged to its target 2.03x and guided for accelerating 21-23% Q1 FY27 growth in its go-forward portfolio.
🐂 Bull Case
Excluding the businesses AAR is shrinking, growth is explosive. Parts Supply grew 39% (with 19% organic growth in new parts distribution) and RE&S grew 35% driven by Component MRO and Trax software.
Net leverage plummeted from 2.82x in Q1 FY26 to 2.03x by Q4, hitting management's target range. This was fueled by $94M in FY26 adjusted operating cash flow, providing significant dry powder for future M&A.
🐻 Bear Case
While overall Adjusted EBITDA margin ticked up to 12.5%, Parts Supply margins compressed 250 bps YoY due to tough USM comps, and RE&S compressed 50 bps from HAECO integration dilution.
Government Solutions sales declined 8% YoY to $130.2M in Q4 due to the ramp-down of the WASS program, contradicting the broader narrative of universal top-line momentum.
⚖️ Verdict: 🟢
Bullish. AAR is aggressively pruning low-ROIC revenue (LCP segment) to lean into double-digit growth engines (New Parts Distribution, Trax software). The deleveraging story is a massive success, significantly de-risking the aggressive FY26 M&A spree.
Key Themes
Parts Supply Outperformance
Parts Supply remains the undeniable growth engine, posting a 39% revenue increase to $423.8M. This was propelled by a 19% organic growth rate in new parts Distribution and recent acquisitions (ADI). The exclusive, two-way distribution agreement model (recently expanded via Woodward for CFM LEAP/GEnx) continues to lock in recurring OEM revenue and capture massive market share.
Government Solutions Margin Mix-Shift
A fascinating dynamic emerged in the Government Solutions segment. Revenue decelerated by 8% YoY to $130.2M (driven by declines in the WASS State Department program). However, Adjusted EBITDA margin exploded by 670 bps to 16.0%, and Adjusted Operating Margin leaped from 8.2% to 14.4%. The revenue loss is being entirely offset by the transition to vastly more profitable program mix and mobility systems growth.
Parts Supply Margin Compression
Management's narrative highlights a 'shift to higher margin offerings,' yet the data shows the Parts Supply Adjusted EBITDA margin contracted steeply from 17.1% in Q4 FY25 to 14.6% in Q4 FY26. This was explicitly attributed to lapping a highly lucrative $6.5M gain in Used Serviceable Materials (USM) in the prior year. This highlights the inherent lumpiness and margin volatility of the whole-asset/USM trading business.
HAECO Integration Drag on RE&S
The RE&S segment saw Adjusted EBITDA margins compress by 50 bps YoY to 11.5%. Management stated this was entirely due to the expected short-term dilutive impact of the HAECO Americas acquisition. While the integration is 'ahead of schedule,' it remains a mathematical drag that investors must tolerate until margin parity is reached in late FY27.
Pruning LCP for Higher ROIC
AAR announced a segment realignment and the wind-down of its Legacy Commercial Programs (LCP). LCP generated nearly $60M in Q4 but operates with a dismal 5.5% Adjusted EBITDA margin. Winding this down willfully sacrifices top-line revenue over the next 3-4 years to vastly improve the company's overall margin profile, cash generation, and return on invested capital.
Software and Tech Deployment Acceleration
AAR is rapidly deploying technology to capture recurring, high-margin revenue. The Trax software platform is driving recurring revenue growth inside the RE&S segment, heavily anchored by a massive deployment at Delta Air Lines (expanding from 2,000 to 6,000+ users). Furthermore, AAR launched Airvoyant, a new AI-powered aviation procurement solution, moving the company deeper into aviation SaaS.
Stable Macro Environment
Despite ongoing global geopolitical risks and elevated fuel prices, management noted that commercial flight activity remains consistent with recent averages. High travel demand continues to drive intense utilization of existing fleets, forcing airlines to rely heavily on aftermarket parts and MRO services—playing perfectly into AAR's core competencies.
Other KPIs
Reversing the elevated leverage profile seen earlier in the year. After peaking at 2.82x in Q1 FY26 following an M&A spree, management successfully generated cash and expanded EBITDA to drive leverage down to 2.03x. This is at the very low end of their 2.0x-2.5x target range, restoring balance sheet flexibility.
Cash generation accelerated significantly. For the full year, adjusted cash from operations (excluding the AR financing program) was $94.3M, up from $28.5M in FY25. Q4 alone generated $57.8M, representing a 50% conversion rate on Adjusted EBITDA.
Guidance
Accelerating significantly from the 12% GAAP growth posted in Q1 FY26. Management excludes the Legacy Commercial Programs to give a clearer picture of the core operating portfolio, indicating massive confidence in Parts Supply and MRO backlogs.
Stable. The midpoint of 12.5% matches exactly what was achieved in Q4 FY26. This indicates that while HAECO dilution is still present, the structural improvements in Gov Solutions and scale in Parts Supply are successfully establishing a new margin floor.
Decelerating slightly from the ~19% full-year rate posted in FY26, largely because FY26 benefited from massive inorganic jolts (HAECO, ADI). A low-teens growth rate for the core portfolio remains highly attractive and suggests sustained organic share capture.
Key Questions
HAECO Accretion Timeline
With the HAECO Americas integration reportedly ahead of schedule, when exactly do you expect this segment to cross from being margin-dilutive to margin-accretive for the RE&S business?
Government Solutions Revenue Floor
Government Solutions margins were stellar, but revenue contracted 8% due to the WASS program. Have we reached the bottom for WASS-related revenue headwinds, and what is the timeline for new awards to return this segment to top-line growth?
Capital Allocation Priority Post-Deleveraging
Now that net leverage is down to 2.03x, effectively resetting the balance sheet, does capital allocation pivot heavily back toward M&A, or will we see an acceleration in share repurchases given the recent lack of buyback activity?