AAR Corp. (AIR) has been selected to provide maintenance and operations for the U.S. Air Force as part of a Northrop Grumman team. The contract is worth $600 million for nine years. The announcement was made following U.S. Air Force’s selection of Northrop Grumman as the prime contractor for comprehensive depot maintenance and logistics for the U.S. Air Force’s fleet of 59 KC-10 air refueling aircraft.

The Northrop Grumman team will provide supply chain services and logistics support for the KC-10 extender, a tanker and cargo aircraft. AAR will provide a supply chain program to support maintenance and operations of the KC-10 program from facilities and air bases in the U.S. and overseas.

Management believes that a strategic partnership with Northrop Grumman will further increase its cash flow from operations.

During the first quarter of fiscal 2010, the company generated $34 million of cash flow from operations and ended the first quarter with $122.8 million of cash and cash equivalents on hand from $112.5 million in the first quarter of fiscal 2009. However, weak conditions in the commercial markets have stretched sales and margins in the aftermarket businesses supporting commercial airlines.

The global airline industry continue to experience significant financial difficulties, with several carriers filing for bankruptcy protection and recent warnings regarding industry profitability largely due to volatility in oil prices and the economic downturn. Additionally, the recent surge in oil prices also remains a problem. Furthermore, we do not expect a significant recovery in the global airline industry even in 2010.

Zacks Investment Research
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