“HEICO is like maybe the generic drug company of the aerospace industry. They sell a product that is something like the functional equivalent of the original equipment manufacturer's component, but they do so for a really steep discount.”

From the recurring revenue aspect generated by these aftermarket sales, the two businesses are definitely very similar. And I think, and I think many of our regular listeners will already know that I really like businesses with recurring revenue, which is why we own companies like Intuit and Adobe, where customers are pretty well locked into those contracts and arrangements and the product is pretty hard to replace. So they just end up paying those two companies annually. I mean, with Adobe, for example, we use their entire suite of products for the most part pretty regularly as part of producing this podcast and our YouTube channel and everything else we do. So it's all the more attractive when a business has such a high quality business model and it falls within our circle of competence in some ways, because like with Adobe, we've become pretty well acquainted with their offerings and what they're able to do and what they're not able to do. And that for me is really the hangup I have when I think about the aerospace industry. So how about we try to zoom in more and better understand things better for folks who are not deeply acquainted with aviation manufacturing. And so I know Heiko is broken into different segments as well. And with them, there's a segment called the flight support group that makes up the majority of revenue. So I don't know, I'll throw it over to you, Kyle, if there's anything you want to add there.

Yeah, that's completely correct. So as of the latest quarter, the flight support group makes up about 67% of revenue. Now, this segment uses proprietary technology to both design and manufacture jet engine and aircraft replacement components. So they sell to commercial and military customers. But here's where they kind of separate from Transdyme. So Heiko is very intentional about setting prices consistently about 30 to 50% below the OEM prices. But this is only the start of their competitive advantage. So another vital aspect of Heiko's business model is the regulation of its parts. So as I mentioned earlier, you can't come in with a cheap replacement part and expect anyone to actually buy it from you. So in the U.S., the Federal Aviation Administration has a program known as the Parts Manufacturer Approval. Nearly every single component that Heiko sells has been approved specifically by the FAA.

Right, exactly. I think that's the perfect metaphor. And you can get the idea there that the time that it takes is obviously a big part of the advantage as well. So, the cool part about Heiko is that they don't outright copy the parts. They actually are designing it and having to engineer it themselves as well. And this probably explains why they're able to reduce the price on it while still making some very, very high margins. So, the second part of Heiko's business is called the Electronic Technologies Group. This part of the business deals more with things like niche electronics. Think of devices like laser rangefinders used in military targeting systems or amplifiers and antennas that send and receive radio signals, all the way to backup power supplies or even power conversion kits. They sell a very wide range of electrical components. And this part of the business accounts for the remaining 33% or so of its revenues. Both of the segments have a large aftermarket parts business, but from what I can gather, the flight safety group offers much more in aftermarket sales compared to the electronic technology group. So, with these two business models broadly expanded on, I have a question for you, Sean. Without going into much more specifics than what we've already covered so far, which business model do you think you prefer?

Well, it's a tough question

because when you strip away the details, it does seem like the two businesses are remarkably alike, right? They both lean heavily into the aerospace parts aftermarket with well over half of their revenue coming from parts that have to be replaced during an aircraft's 30-plus year lifecycle. So, a lot of overlap there. And right, they both kind of grow through a mix of organic growth and acquisitions, and they both enjoy some regulatory protections and barriers to entry that make it hard for new competitors to come in and get a part certified. So, for me, the real differentiating factor probably comes down to pricing and the really philosophy that these two companies have, because the approach that they take is very opposite from each other. Transdyme's model is built on being the sole source for a part and then using that position to basically justify radically higher prices in some cases over years and just to really drive most of the revenue by just pushing prices higher. Some people might call it price gouging, whereas Heiko comes in with an FAA-approved alternative, and they're basically trying to cut costs, right? Their prices are deliberately maybe 30 to 50% below the OEM. So, I think I like that business model better. If I had to pick, I would probably lean toward Heiko. When your pitch to customers is the same quality at a much lower price, they're going to be very happy to keep buying from you and probably to do so for a long time. And every new part you get approved wins more business because you're saving the airline money rather than charging it more than you otherwise would. So, it's kind of a win-win-win all around. And yeah, it just strikes me as being much more sustainable. Whereas Transdyme's approach is clearly more lucrative per part, but it does kind of depend on customers really having no alternative. And I do think that makes the relationship somewhat more adversarial or parasitic over time. So, with all that said, I can see the case for Transdym's pricing power being a very compelling component of the business from the shareholders' perspective, even if it's a bit predatory in some ways and more likely to attract regulatory scrutiny, which makes me think it's somewhat less sustainable. But I come with my own biases. And so, I'm kind of curious to see whether you see it differently.