TIP738: Heico: The Quiet Aerospace Compounder

27:27It's a subtle but powerful competitive edge. And another testament to just how good Heiko's business is, they've sold over 80 million parts over the company's life. They've had zero service bulletins issued, zero airworthiness directives, and zero in-flight shutdowns because of any of those parts. This underscores the unparalleled quality and reliability of HIKO's parts, especially in a highly regulated and safety-critical industry like aerospace. This is yet another aspect of their business that is virtually impossible to replicate, and further reinforces their reputation as the safest alternative to OEMs.

28:09I just really think it's interesting to look at Heiko's competitive position. They have all these factors working in their favor that create this really strong barrier to entry for their business. They have the industry expertise of reverse engineering these parts in a cost-effective manner. They know how to effectively and efficiently navigate the FAA approval process, which can be very strenuous, costly, and time-consuming. And on top of the technical know-how and the relationship with the FAA, you also need good relationships with the airlines. A company could go through the whole process with the FAA and come to find out that it's extremely difficult to convince an airline to switch to a new player within the industry.

28:50So I think that Heiko has a really strong first mover advantage where they've built all this trust with many of these airlines and built that reputation as a good partner. Their scale also shouldn't be overlooked as Heiko has the ability to offer really good prices because of that scale that they've built and working with practically every airline. It's one thing to build trust with one or two airlines, but it's a whole different thing to build that trust at scale. And there's likely a positive feedback loop too. As the airlines build more trust with Heiko, they'll start to wonder why they don't do more business with them because the parts are good, if not better than the OEMs, they're more cost effective, and Hyco's just a great partner to work with.

29:30It's like when a customer becomes more immersed within Costco's ecosystem. They might start with a monthly visit at Costco, getting very specific things, and then they realize how much they could be saving by getting their gas at Costco. Then they come to find out that they're offering a bunch of other great deals on a new grill or a new bed. And soon enough, they've gained enough of that trust that you're walking into Costco every week. Nick Sleep popularized the term scale economy shared implemented by companies like Amazon and Costco. As Costco has grown, their scale advantage increases, which allows them to pass on more savings to customers, increasing their advantage over smaller competitors.

30:10If we look at this dynamic from a slightly different angle, we can say that Heiko operates in what we can refer to as diseconomies of a niche market. Heiko sells all these niche parts and dominates the small market within each of these small niches. Economically, it made a lot of sense for Heiko to enter these niches. However, if a competitor tried to enter, they likely would not make a good economic return by doing so. The first reason is that the niche is so small, they would have to be able to steal a substantial amount of share to earn a good economic return. And second, there's very little incentive to switch from using Heiko's parts.

30:50So Heiko can be viewed as this conglomerate that's in thousands of different niches that they dominate. And despite the Heiko conglomerate being a large business, the ponds that they're fishing in are quite small, which helps keep the competition out. Within the PMA industry, Heiko really doesn't have that much competition. The main competition really comes from the OEMs. They're by far the leader in the PMA space, and it would be a little bit crazy to try and compete directly with them. I'm a bit blown away by just how good their competitive position seems to be. They sell over 19 ,000 parts, many of which they'll continue to sell for many years into the future.

31:30There's little incentive for the airlines not to use those parts once they switch to HICO, which creates a very sticky, recurring revenue stream for their business. The Heiko investment thesis hinges on the continued adoption of PMA parts and management's ability to continue to make value accretive acquisitions. In the commercial aircraft parts market, it's estimated that just 2-4 % of that belongs to PMAs and the remaining 96-98 % is still with the OEMs. It's somewhat amazing to think that Heiko has done so well over the past 30-plus years, yet they are still a small fraction of the size of companies like Boeing and Airbus.

32:10To further put their size into perspective, Heiko today sells around 19 ,500 parts, and some of the Boeing aircrafts have more than 1.5 million parts in it, so there's a long runway for PMA penetration to still run. OEMs can try to keep airlines from switching to PMAs due to warranties that are in place, leasing requirements, or embedded clauses in their contracts that discourage PMA usage. However, with the potential cost savings by switching to a PMA, it can really be an attractive option given that airlines are continually facing margin pressure and are always looking for ways to limit their costs.

32:50It's worth highlighting a bit as to why the PMA market is still so small today given that HICO has been in this space for over 30 years now. There are a number of reasons that airlines might be hesitant to use a PMA supplier, a few of which I'll list here. First, using PMA parts can affect a plane's resale value. Some regulatory agencies or airlines may not be interested in purchasing a plane with PMA parts, so as a result, an airline might be hesitant to use the PMA part for certain parts of the aircraft. Second, OEMs have threatened to be difficult to work with if PMA parts are used. For example, if an OEM's repair team is called upon to fix an engine and the engine has PMA parts in it, then they just might not be interested in working with them.

33:37This would definitely not be good for the airlines as the OEMs will have specialized knowledge. However, it's not in the OEM's best interest to upset their customers while Heiko is taking the opposite approach of providing significant value and cost savings to their customers. Third, there can be the perception that the PMA part is just not as good as the OEM part. Given that it's cheaper and can sometimes be seen as essentially the same product, it can create the perception that there really isn't any good reason to switch because what they're currently using already works and they've never had any issues with it.

34:11If you put yourself in the shoes of the person making the decision at the airline, there's of course potential career risk if you push for these cost savings and it ends up being a really painful transition or the parts just aren't as good as you initially thought. This is especially true for the most critical and important parts of an airplane, which Heiko tends to avoid because the switching costs for the airlines are much higher. And fourth, it isn't like the OEMs are just going to throw their hands up and let the airlines start switching over to Heiko. If the airline says, hey, Heiko has a better part and is offering a 30 % discount, then the OEM might be willing to give a bit on price in order to keep the airline from switching.

34:51And if airlines work with a supplier who's already good, then they might not really be interested in switching to a lower-cost provider, especially if the cost savings don't really move the needle in the grand scheme of things. With all that said, HIKO still seems to be well-positioned to benefit from the continued growth of the PMA industry. The travel industry overall can also be quite cyclical with ever-changing economic conditions, and when times are tight for the airlines, they're going to be more open to cost-saving initiatives, such as switching to products that the PMAs offer. At a conference, Victor Mendelsohn was giving a presentation, and he held up a bag of parts that included pretty basic things like drain plugs and washers.

35:31He simply asked the crowd how much they thought that the OEMs would charge for that bag of parts. One person guessed$2 ,000, which is definitely quite expensive given the parts that we are dealing with here. It turned out that the OEM priced that bag of parts at$50 ,000, and the new version of them was almost$100 ,000. And the reason the pricing was so high is very simple. It's because they were the only supplier of that part, so they could just hike the price really as high as they wanted to. Given how expensive the maintenance of airplanes can get, it's easy to see why Heiko is such a critical partner for their customers, since oftentimes they're offering a 40 % discount to the OEMs.

36:12I was recently chatting with my friend Robert Leonard here the other day, and he's a previous employee here at TIP, and he made the comment to me about how airlines probably have one of the worst business models in the world. Airlines have high fixed costs, razor-thin profit margins, and volatile demand based on things totally outside of their control. And one of their biggest expenses, which is fuel, is very volatile. And again, they have no control over the price of fuel, and they face ruthless competition. They're oftentimes competing on price, they face a ton of regulatory constraints, and they seem to almost always be facing issues with labor unions.

36:50At some of the recent Berkshire meetings, pilots from NetJets were outside protesting issues related to compensation and working conditions. So while the airline industry tends to get hammered during an economic downturn, these downturns can actually be quite positive for HICO because when airlines face margin pressure, they enter cost-cutting mode. And one of the first levers they can pull is reducing maintenance costs without compromising safety. So rather than pulling back on purchases from HICO, these environments can accelerate PMA adoption, especially for non-critical parts where the risk of switching is minimal.

37:26In this way, HICO acts as a kind of counter-cyclical beneficiary within aerospace, the worse things get for airlines, the more attractive Heiko becomes as a partner. Additionally, once a customer does eventually switch to the PMA part, there is little incentive for them to switch back to the OEM. Zooming in more on the acquisition front, Heiko made their largest acquisition to date in August of 2023. They acquired WinCorp Group for$1.9 billion in cash and$150 million in stock at a 13 times trailing EBITDA multiple, in the words of Eric Mendelsohn, the acquisition has gone extraordinarily well, outperforming their estimates and delivering tremendous value for shareholders.

38:11WinCore was a good target for Heiko because they were organized in a very similar manner since private equity saw the model that Heiko put together and they emulated it, which made WinCore a good cultural fit for Heiko. So it turned out that despite the high multiple they paid of 13 times, the acquisition did so well that the effective multiple they ended up paying is significantly lower than that. Over the past decade, Heiko has increased revenues every year with the exception of 2020, and that growth has accelerated with the acquisition of WinCorp. They continue to remain highly active in its acquisition strategy as they've completed four acquisitions this year in 2025.

38:50Like many other successful serial acquirers, Heiko has a decentralized operating structure, allowing for subsidiaries to focus on their specialization and do what's best for their business rather than taking a top-down bureaucratic approach. One thing that I like to see in most businesses is minimal share dilution. It shows that management is cognizant of the real cost of issuing shares and utilizes other methods of financing a deal. Heiko has increased their share count gradually over the years, but it's less than 1 % per year, and their stock-based compensation is very minimal relative to the size of their business.

39:26For example, in 2023, when they made their big WinCorp acquisition, it was largely financed with debt and minimal dilution was needed to finance the deal. They also keep their overall debt levels very conservative at around 1x debt to EBITDA. After the WinCorp deal, that increased closer to 2x, but that was a very value-accretive deal, and that's still a very conservative level of debt for this high quality of a company. Eric Mendelsohn has said that although the company generates$4 billion in revenue, they really think of Heiko more as 100 companies generating$40 million in revenue on average.

40:03Before I looked into Heiko, I sort of assumed that since they were in the aerospace industry, there probably was not a lot of room to grow. But to my surprise, Heiko may still be in the earlier stages in terms of their growth. Despite generating$4 billion in revenue, the industry overall is hundreds of billions of dollars. So they certainly have a lot of room to continue to grow and make acquisitions in these adjacent industries that are still related to their core business without needing to venture out too far. I also appreciate management's focus on the long-term. While Heiko has the opportunity to aggressively raise prices, this would tarnish their reputation as a great partner within the PMA space, so they intentionally restrain price increases beyond cost passers.

40:50This approach aims to foster customer loyalty, benefiting Heiko over the long term through increased volume and market share gains. Larry Mendelsohn has stated, we could charge more, but we don't. We leave money on the table in the short term to build something permanent. This approach to pricing and this long-term mindset reminds me a bit of Costco, which I've already mentioned today. Let's take a quick break and hear from today's sponsors. One part of being an investor that I don't think gets enough attention is how hard it can be to continue to improve as an investment researcher. And for myself, I'll often find that when I finish a great conversation with some industry expert or fund manager, my head is full of ideas.

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44:56Heiko is also balancing the interests of the OEMs as well. So if Heiko comes in and tries to steal a substantial amount of market share for a specific product or niche, then they risk the OEMs slashing their prices to retaliate. And this could really end up hurting Heiko. So they're pretty cognizant of finding the right balance of capturing enough market share to capture the cash flows they're looking to get, but also not capturing too much share and upsetting the OEMs. HIKO also benefits from the long cycle nature of the products they sell, as many commercial aircraft engines have decades of production and are used for decades after the product is out of production.

45:35This long product cycle is common across the aviation industry, and it gives Heiko tremendous revenue visibility. Today, Heiko offers over 19 ,500 different PMA parts, which includes their original catalog of around 12 ,000 parts and the 7 ,000-part suite that was added after the acquisition of WinCore. So this is a very diversified business. The next closest competitor in the industry has fewer than 2 ,000 parts, highlighting Heiko's dominant position in the industry, and every year, Heiko's generating around 500 to 700 new parts per year, which helps drive solid and consistent organic growth.

46:15I wanted to transition to talk a little bit more about Heiko's culture. By now, you've probably realized that Heiko's culture is quite unique. The Mendelssohns believe in having an ownership-minded culture. Since they operate in this autonomous and decentralized fashion, they want the employees to think like owners just like they do. Today, the Mendelssohn's own 8 % of the company, and the rest of the board owns 2.5 % of the shares, and the employees themselves own 2 % of the shares, as they have incentives in place for employees to purchase HIKO shares through their employee stock ownership plan.

46:49In their investor presentation, they note that the board of directors, management, and team members beneficially own around 20 % of HIKO's outstanding common stock. Now, what's interesting here, and a small but telling cultural detail is that they don't say employees, they say team members. This wasn't a PR move or some corporate fluff, it was a deliberate shift the Mendelssohns made when they took over the company in the early 1990s. Eric and Victor were fresh out of college at the age of 22 and 24, and they suddenly found themselves in charge of a company with people decades older than them, many of whom had years if not decades of experience in engineering and manufacturing.

47:32So rather than pretending to be authoritative bosses, they leaned into humility. They didn't want to refer to others as subordinates. They wanted a culture of mutual respect, and that started with language. Everyone was a team member. When someone feels like a team member, they're not just a cog in a machine. They're more likely to feel like an owner. And Heiko backs that up with actual ownership through stock incentives, their employee stock ownership program and a sense of shared mission. Today, there are over 400 HICO team members with more than$1 million in stock in their 401ks. And that kind of alignment just does not happen by accident.

48:11Larry Mendelsohn shared, we have a very exceptional 401k plan. If employees put in 6%, we match it normally with 5 % in the HICO stock. Many of our working people, I'm talking about factory workers, shipping clerks, secretarial help, are millionaires. Some are multi-millionaires. All are as a result of the stock that Heiko has given to them. They have personal pride in being a Heiko team member. That brings their interest aligned with all shareholders. So we think that most of our people are focused on building Heiko and being a part of a team, end quote. Heiko's culture is really a cornerstone of its success.

48:49And it's quite different from what you typically see in large industrial or aerospace companies. From the very beginning, the Mendelssohns understood that building a special business required building a special culture. One of the other striking things about Heiko is the level of humility and trust embedded in how they operate. The Mendelssohns still operate with what you might call a family business mindset. Even though Heiko is nearly a$40 billion public company, they're hands-on when needed, but they favor a decentralized structure where autonomy is granted to the leaders of their many subsidiaries.

49:23Rather than dictating strategy from corporate headquarters, they empower the people closest to the customer to make these big decisions. They trust their people and that trust breeds ownership, accountability, and innovation. It's not a strategy for every company, but no doubt it's a strategy that has worked well for HIKO. On an earnings call, Larry Mendelsohn talked about some of the little things that they keep an out for in making an acquisition. If they're touring a factory of a company they're interested in purchasing, they aren't impressed by those who understand the factory and how the pieces of the puzzle all fit together to manufacture a niche part.

49:59They really like it when the founder would tour around the factory and he would know the names of the people there and he truly cared about them. He would know their family and that employee might have worked with them for over 20 years. That sort of culture goes a long way and it's the type of culture that Heiko wants to build at the foundation. Turning to the valuation here, Heiko certainly trades at an elevated multiple relative to current earnings. The price-to-earnings ratio is 76, and the EV to EBITDA is 38, so the market is certainly pricing in significant expectations for future growth.

50:34Investors buying shares of Heiko today are like an NBA team training for Nikola Jokic. He's unquestionably one of the best in the league and has a track record to prove it, but the high price tag would only make sense if he keeps delivering elite performance for many years into the future. From 2015 to 21, you almost saw this secular trend in Heiko's multiple expanding as the EV to EBITDA reached almost 45 before settling back down. Despite the significant multiple contraction since 2021, the stock has still managed to double since then, continuing to generate excellent earnings growth and shareholder returns.

51:11When looking back at recent history, revenue has grown in the mid-teens, which has been driven both by organic growth and growth through acquisitions. Slightly more has come from the organic side, which is nice to see given that today, they hold a significant market share in the PMA industry. Barclays estimates that organic growth will be around 7-10 % over the next few years from 2025 through 2027. Part of the organic growth story is simply the growth in air travel globally. Historically, air travel has grown at around 4-5 % per year, and as I mentioned in my episode on booking holdings, as more people enter the middle class and these emerging economies have more people having discretionary income, this helps fuel the growth in global travel, benefiting companies like Keiko and Booking.

51:57They also benefit from this trend of aging fleets at these airlines. Due to significant delivery delays from OEMs like Boeing and Airbus, driven by supply chain issues, labor shortages, and increased demand, airlines are holding onto aircraft for much longer. The average age of airline fleets continues to creep up, and as these airlines age, maintenance needs increase substantially, and this fuels strong demand for replacement parts. Heiko's return on capital is quite attractive. Return on capital, excluding goodwill prior to their Wincor acquisition, was in the 25 % to 30 % range. And when making acquisitions, they're pretty disciplined in meeting a hurdle rate of at least 15%.

52:39It's just so hard to pinpoint the intrinsic value for this high quality of a business. On the one hand, the company has such a durable business and strong competitive position, but on the other hand, it's trading near its all-time high valuation. But with that said, if they can continue to grow in the double digits for at least the next decade, both through organic and acquisition-driven growth, and if the Mendelssohns are still running the show, then I could certainly see investors still doing well holding onto shares over the long run. Remember that even Berkshire Hathaway initiated a position in the company in 2024 in the$150 to$180 range.

53:18Based on some of the estimates I'm running, they're going to need double-digit growth for well more than 10 years to justify today's valuation and take it for what it's worth, but Heiko's CFO stated in its Q4 2022 earnings call that they have the stated goal of growing their cash flows by 15 % to 20 % annualized, which is a goal they've achieved pretty consistently now for 35 years. It's also worth noting that there are other aerospace companies that trade at elevated multiples, although not as elevated as HIKO's. GE trades at 39 times earnings, and Transdime trades at 51 times earnings, while HIKO trades at 76 times earnings, which is partially elevated because of amortization write-offs that compress for ported earnings.

54:01Given that PMAs account for a small part of the overall aerospace aftermarket industry, this leaves plenty of room for Heiko to grow due to their advantageous position of being a high-quality provider of parts at a lower price than the OEM counterparts. However, we also don't want to adjust a financial model to our liking just because we've fallen in love with the business. There are always good opportunities available in the market, and we shouldn't be afraid to add to a company like Heiko to our watch list instead and to simply wait until the market isn't quite as optimistic on a company's future prospects.

54:34When we look at the potential risks for investors in Heiko, the company currently trades at a premium valuation and this elevated multiple implies that even strong business performance may not necessarily translate to outsized shareholder returns if market expectations are not met. If Heiko's growth slows or if the broader market re-rates high multiple stocks downward, the share price could face meaningful pressure. Since the market has high expectations for a company like Heiko, any unexpected headwind could lead to a significant drawdown on a relative basis. Another risk is slowing aftermarket growth.

55:10In recent years, we've seen slowing sales of new aircraft deliveries, which has been a tailwind for the aftermarket industry. Should this slowing trend turn the other way around, you could see less of a tailwind for Heiko's business. And lastly, one more risk to consider is simply the FAA becoming more of a bottleneck or a pain to work with. They could potentially slow their approval process even more or potentially hand out fewer approvals. I've long wanted to do a deep dive on Heiko here on the show, and my interest was reignited after chatting with Joseph Shapochnik back on episode 731, where we briefly discussed the aftermarket industry.

55:45Joseph has outperformed the market over the past decade and its newly launched ETF, Brainwater Equity, includes four businesses in the aerospace aftermarket industry. This includes Transdime, which is an OEM, so they supply parts to the manufacturers like Boeing and Airbus. GE Aerospace, this company broke off of GE in 2024, and it trades under the ticker GE. They're a leading manufacturer of jet engines for commercial and military aircraft and have a massive aftermarket servicing business. And then third, we have Lohr Holdings. This is a new issue as they IPO'd in April of 2024. Their primary business is serving as an OEM, but they also do have a PMA segment as well.

56:27In HIKO, which of course is one we've covered today. So we had Transdime, GE Aerospace, Lohr Holdings, and HIKO. So Transdime is especially well-regarded in the value investing community. Since inception in 1993 through 2022, Transdime has returned over 1 ,750x its primary equity and delivered a remarkable 36 % IRR. And this, of course, makes it yet another case study worth looking into. In addition to Joseph Shapochnik, one previous guest on the show who also owns Transdime is Brian Lawrence. According to Lawrence's most recent 13F, he has it as his second largest position with over$29 million invested.

57:08Like Heiko, shares of Transdime have compounded at high rates for multiple decades. Interestingly, Eric Middleton has sort of taken a jab at Transdime for their approach to price increases. Additionally, one thing worth noting on Transdime is they're much more lever than Heiko. Transdime's net debt to EBITDA is over six, while Heiko's is around one. So Transdime has more of a private equity approach to the industry as they'll buy companies with more debt and not be as hesitant to flex their pricing power. I've heard that sometimes they'll even do price increases of 100 % or 200 % or more, and this isn't something I think you'd see too often at HIKO.

57:49Transdime has a fairly similar business model to HIKO. Just over half of their business is in the aftermarket and the remainder is the sales on the new fleets. They benefit directly from the continued growth in the industry, and they generate inorganic growth through acquisitions as they've acquired over 90 companies since inception. One can think of Transdime as the more aggressive player that will do less deals and look to generate very high returns, while Hyco is a family-run company that won't use high amounts of leverage, and they're much more focused on durability, longevity, and compounding at moderate rates for decades.

58:25Transdime's success is rooted in its strategy of focusing on protected niches as approximately 90 % of their sales come from proprietary products and about 80 % from sole source products. So they're in a very similar position to Heiko since there are high barriers to entry as a result of the costly and time-consuming FAA approval process for new parts. Furthermore, these components are uneconomical for new competitors to replicate due to their low volume and niche specialties. This focus on the aerospace aftermarket has provided them with predictable, subscription-like recurring revenue with high free cash flow margins for decades.

59:03Nick Howley is the well-known genius behind Transdime as he's the founder and executive chairman, and he stepped down as CEO in 2018. Howley was on the 50X podcast with Will Thorndike, author of The Outsiders, which I'll be sure to get linked in the show notes. He was also profiled in the book Lessons from the Titans, which covers some of the most successful stories from the industrial sector. I found one funny line from Nick Halley that I thought would be worth sharing here. Oftentimes, we hear that we should be invested with managers who are in it for something more than the money. Oftentimes, the mission of the company.

59:37Elon Musk, for example, talks about his mission of making life multi-planetary or accelerating the world's transition to sustainable energy. When an investor asked Halley why they should be invested in Transdime if he's selling millions of dollars of stock, he was brutally honest in his response. He said, This may come as a surprise to you, but I'm in this for the money. I haven't had many chances to sell stock under private equity ownership, and now I do. My wife wants a beach house, so we're going to get a beach house. You can believe what you want, but I'm not going anywhere. I've got more money to make, and if you choose to, you can make it with me.

1:00:15I just love the brutal honesty there, and I just sense this sort of killer attitude from Hallie, where he really just loves winning and wants to win at all costs. From the book I mentioned, Lessons from the Titans, the authors write, the people there work harder, sleep less, and make more money than at any other company I've ever encountered. If you're a typical product line manager in an average industrial business, you likely take home$250 ,000 in annual compensation. That same product line manager at Transdime can make a million dollars. All this wealth creation is a result of a compensation plan that reinforces the desired outcomes." They also give an excellent example of one of their acquisitions just to give a sense of how strong the moats can be within this industry.

1:01:02The authors write, "...anyone who's ever been on a commercial flight knows what an aircraft's seatbelt looks like and how it works. I bet you can picture the exact look and feel of the buckle and hear the flight attendant over the PA system saying, fasten your seatbelt by placing the metal fitting into the buckle and adjust the strap. Why is it that almost every aircraft seatbelt has a buckle just like the one you're imagining? That's because almost no one but the maker of the original buckle has ever certified other designs with the FAA. As a result, a company named Amsafe accounts for more than 95 % of the global aircraft seatbelt market.

1:01:42How good a business is Airplane Seatbelts? After all, it's only three pieces of metal and a spring. Well, you can ask Transdime. They paid$750 million for AmpSafe in 2012, and it's generated a 20 % plus return on its investment. Aircraft seatbelts are a fantastic business, especially in the right hands. Look inside Transdime's product portfolio and you'll find thousands of other widgets that don't appear complex. Products incorrectly deemed crappy because you literally find them in the airplane restroom, laboratory faucets, drain assemblies, and door locks. Then there are overhead bin latches and extruded plastic vents that push cold air into the cabin.

1:02:24Along with a litany of valves, pumps, cables, and connectors that all play a role in the flights of millions of people around the world every day. These businesses are phenomenally profitable, and they're all owned by Transdime, which has fully understood and maximized the returns from each of them. Through 2019, prior to the disruption caused by the COVID-19 crisis, the value created from these businesses made Transdime the best performing stock in industrial since the company's 2006 IPO, increasing by roughly 50 times over, including dividends. A company that started with an initial equity investment of$10 million 25 years ago grew to an enterprise value that was over a thousand times larger.

1:03:07End quote. So now you know why so much in an airplane practically never changes, and the same seatbelts that we saw 10 years ago are the same ones we use today. Although this is not great for us as consumers because there can be no new innovations, it's excellent for investors because there's no new competition coming in to arbitrage away the high margins and returns that businesses like Heiko and Transdime are generating. Lastly, the book outlines three primary value drivers to Transdime's strategy that I'll outline here. The first is value-based pricing, which to some can be perceived as leveraging their monopoly position to aggressively raise prices to unfair or excessive levels, but it's really about focusing on extracting the appropriate value commensurate with the types of parts they're producing.

1:03:54For every part, Transdime is maniacally focused on earning an appropriate economic return. So as older planes are retired and production runs of spare parts become less frequent and more challenging to predict, Transdime wants to be compensated not just for the direct cost of the part, but the cost of keeping production lines going with skilled labor and good machinery. This leads to price increases at a company level at around 5 % per random. The second key value driver is productivity. Transdime seeks to raise prices above the rate of inflation, which they see as 3%, but keep the rate of growth of costs below 3%.

1:04:30They have a culture of innovation and encourage each of their businesses to get more for less year after year. The simple way to see if they're effective at limiting their costs or not is to simply look at margins. Since 2015, their net profit margins have improved from 16 % to 22%. And the final value driver is the focus on profitable new businesses. Too often, new lines of business are pursued that generate sales growth, but not profitable sales growth. This is not the case at Transdime as the company does not entertain business development efforts unless they have a clear path to profitability.

1:05:05There are no exceptions to this rule. Even with these strict principles, the company has been successful in its new business generation efforts and has done so with a tightly managed R &D and CapEx budget. Anyways, I think for those interested in HIKO, it's also worth studying some of these other successful companies in the industry. It's clearly a large enough industry for multiple winners. HIKO especially is a truly special business, and I always enjoy studying these businesses with longtime management teams that have created a unique culture that's extremely difficult for others to replicate.

1:05:40I've covered similar companies in the past that are in different industries, including Copart, Costco, and Hermes, and I see many parallels amongst all of them. With that, I think we'll close out the episode there. Thank you for your time and attention today. I hope you enjoyed the episode, and I hope to see you again next week.

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