AAR Corp: Unlocking Long-Term Value Through Trax Software and Operational Synergies

The aviation and defense sectors are undergoing a digital transformation, and AAR Corp (NYSE: AIR) is positioning itself at the forefront. The company's recent milestones—including its $50 million+ Trax software revenue milestone and a landmark Delta Airlines contract—highlight its strategic pivot toward high-margin digital solutions. Combined with operational synergies from its Triumph acquisition and disciplined capital allocation, AAR is building a compelling case for margin expansion and stock appreciation. Let's unpack the drivers and risks behind this story.

The Trax Software Revolution: A High-Growth Engine

The Trax software, AAR's proprietary maintenance, repair, and overhaul (MRO) platform, has emerged as a critical growth lever. In fiscal 2025, its revenue doubled to $50 million, marking a significant inflection point. The software's scalability is underscored by its multi-year contract with Delta Airlines, which replaces legacy systems across Delta TechOps' maintenance networks. This deal represents the largest in Trax's history, signaling its ability to capture major airline clients and generate recurring revenue.

CEO John Holmes emphasized during Q4 2025 earnings that Trax's license fees could rise four to five times as customers upgrade to newer versions. The Delta contract alone could unlock sustained cash flows, while its modular design allows AAR to upsell capabilities like predictive maintenance and mobility solutions. This aligns with the company's goal of shifting from capital-intensive MRO services to high-margin software-as-a-service (SaaS) models, which command gross margins exceeding 70%.

Triumph Synergies: Cost Discipline and Cross-Selling Power

The 2023 acquisition of Triumph's aviation parts distribution business has been a strategic win. While integration costs initially pressured margins, the deal now enables $50 million in annual synergies, per management. Key benefits include:
- Cross-selling opportunities: Combining Triumph's global parts network with Trax's software allows AAR to offer end-to-end solutions. For example, airlines using Trax can seamlessly access AAR's inventory for parts procurement, boosting customer retention and revenue per client.
- Operational efficiency: Streamlining supply chains and reducing redundancies have already improved margins in the Parts Supply segment, which saw adjusted EBITDA jump 19% in Q4 2025.

Capital Allocation: Focused on High-Margin Digital Initiatives

AAR is prioritizing investments that maximize returns while maintaining a disciplined balance sheet. Its target to reduce leverage to 2.5x net debt/EBITDA by 2026 signals a shift from heavy capital spending to software and services. Funds are being directed toward:
1. Trax upgrades: Enhancing AI capabilities for predictive maintenance and expanding its customer base (e.g., the recent SIA Engineering and Amerijet wins).
2. Government contracts: Leveraging Trax's role in the U.S. Navy's E-6B Mercury pilot training program, which highlights its defense-sector potential.

This focus is already paying off: the Integrated Solutions segment, which includes Trax, grew sales 10% to $181.5 million in 2025, with adjusted EBITDA up 13% to $14.2 million.

Investment Thesis: Buy on Execution, Monitor Risks

Bull Case: If AAR can sustain Trax's revenue growth (potentially hitting $100 million by 2026) and realize synergies from Triumph, margins could expand to 15%+ from 12.4% in 2025. The stock, currently trading at 12x EV/EBITDA, offers upside to peers like Boeing (BA) or Textron (TXT), which trade at 10x-15x.

Risks:
- Execution delays: Software rollouts at Delta could face integration hiccups.
- Competition: Startups like AirHelp and legacy players like Boeing's Jeppesen are vying for MRO software market share.
- Defense spending cuts: A slowdown in U.S. military contracts could pressure government segment revenue.

Final Take: A Buy for Growth and Margin Stories

AAR's shift from hardware to software, bolstered by the Delta deal and Triumph synergies, creates a multi-year growth story. While risks exist, the company's focus on high-margin digital initiatives and balance sheet discipline position it to outperform peers. Investors seeking exposure to the aviation tech revolution should consider AAR as a buy, particularly if shares dip below $35—a level that would reflect a 10% discount to its 52-week high.

Recommendation: Buy AAR Corp for its software-led margin expansion and execution-driven upside. Monitor Trax's revenue growth and Triumph integration updates for catalysts.