Both TransDigm and HEICO operate in the aerospace aftermarket. Both companies earn outsized returns for their shareholders. However, the similarities end there. TransDigm and HEICO employed different, if not opposite, strategies to find success.
TransDigm clawed their way to the top of the market by cherry picking products with the best margins, unapologetic pricing strategies, and ruthless execution. HEICO isn’t just comfortable being number two, they optimise for it. The company operates with a quiet, consistent focus on prioritising cash flow, whilst delivering value to its customers.
Eric Ruden, research analyst at Ironvine Capital, said on the Business Breakdowns podcast that TransDigm and HEICO are “remarkably similar, yet remarkably different.” The story of TransDigm is covered here; this case is about HEICO.
HEICO was founded in 1957 as a company called Heinicke Instruments. It manufactured equipment for medical laboratories. The company had little to do with the aerospace market — until Heinicke Instruments acquired engine parts manufacturer Jet Avion in 1974.
Jet Avion was a pioneer of the Part Manufacturer Approval (PMA) business. The PMA business is a peculiarity of the regulated aircraft industry. Ruden explained:
“And the easiest way to think about how that actually works in practice is to think of generic drugs. So if you or I were to go to a pharmacy, typically, we would have two different options for prescription. You'd have the branded drug, which comes from the company that initially engineered that drug and held the patents on it. And then over time, that patent expires, it's typically opened up that other companies can manufacture that exact same recipe, but sell it to you at a lower cost because they didn't have the development costs and they're not carrying the brand premium. That in a nutshell is really what HEICO brings to aircraft parts and repairs.”
The PMA business gained momentum when a faulty combustion chamber caused a British Airlines plane to crash in 1985, leading to the loss of over fifty lives. The Federal Aviation Administration (FAA) responded by making the regular replacement of these combustion chambers in aeroplanes mandatory. These chambers were made by a company called Pratt & Whitney that couldn’t keep up with the sudden demand. This escalated to a point where airlines were forced to ground some of their fleets because they were unable to comply with this requirement. Heinicke Instruments emerged as the unlikely beneficiary of this situation — the only other company authorised to manufacture this part was Jet Avion, on account of a licensing agreement they had signed with Pratt & Whitney several years ago.
Victor Mendelson identified HEICO as a good target in the 1980s, while his brother and he were away studying economics and business at Columbia University. The Mendelson brothers had been watching the spate of leveraged buyouts with interest when a friendly stock broker told Victor about HEICO. The company was underperforming at the time and the Mendelsons concluded it was because the board owned no equity and was not incentivized to grow the business. While talking about why they thought HEICO was a good target, Victor said in an interview, years later:
“One, it had a unique product in a niche segment of a market. And t ...
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