18-The Picture of a Predator

 

Can a relatively small competitor, positioned well behind the industry leaders, both grow and prosper in an industry? This competitor has succeeded…with considerable help from its much larger industry leaders. However, we have found several companies who have succeeded well in the industries where they are clearly followers. We cite these companies in our 2025 update to this blog.

Posted 5/5/08

Heico Corporation is a Predator, a low end competitor. In our research, we have found that there are four types of low-end competitors. They differ from one another in the benefits they offer, compared to the industry-leading products, either to the user or to the buyer of the product. We call the industry-leading companies and products Standard Leaders. See HERE for short audio description of the four low-end competitors.

Heico Corporation is a Predator type low-end competitor. Compared to the industry Standard Leader product, it offers the same benefits to the user of the product with lower benefits to the buyer. Its products work the same as those of the Standard Leaders but the company is not well known. Heico becomes a low-end competitor by way of the substantial discounts it offers on its products.

A bit more information about Heico and its industry. Heico supplies replacement parts to airlines, who use these parts to overhaul and maintain their airliners. Not everyone can make these parts. Before a company can make and sell these parts, the plans and prototypes for each product must be specifically approved by the FAA. Once approved, they then may be used as replacement parts. There are about 125,000 parts in the airline industry. Heico has approval from the FAA to produce 6,000 of those parts, and it adds 400 new parts each year. The company is highly profitable. For the last three years, profits have climbed by at least 14% annually. Heico is fast-growing as well. Sales are growing at the rate of 18% a year.

You might imagine that Heico is up against some relatively weak competition. Not so. Its main rivals are companies like General Electric and Pratt & Whitney. Heico controls only 2% of the total market for component replacement parts. The company gained that 2% by offering airlines prices that averaged 25 to 30% less than those offered by the largest competitors.

Heico is taking advantage of the price umbrella of the large name-brand parts makers. These companies price replacement parts very high in order to raise the profitability of their relationships with the airframe manufacturers. The big competitors hold these price umbrellas very high and this, in turn, has allowed Heico to offer discounts of 25 to 30%, despite enormous disadvantages in potential economies of scale.

The large parts manufacturers are in a Leader’s Trap, where they assume that their customers will stay loyal despite the low priced offerings of a low-end competitor. Over the long term this never works.

The Leader’s Trap is almost certainly going to be costly to the larger competitors because Heico has one very important wild card in its hand. Since 1997, the company has had a strategic alliance with Lufthansa, which is the world’s largest independent provider of engineering and maintenance services for aircraft components and jet engines. This is a very large customer endorsement of Heico and its products. With this Lufthansa implied assurance of Heico’s quality, the company’s 2% share will turn into 4, the 4 will turn into 8 and the 8 will continue to grow until the larger competitors decide that it is time to confront Heico. That confrontation will be bloody.

To learn more about low-end competitors and the way they operate in an industry, go to StrategyStreet.com and review Step 15 of the Basic Strategy Guide and the page Diagnose/Products and Services/Innovation for Customer Cost Reduction/Value Proposition.

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Update 2022:

The industry has not yet had to deal with Heico. The company has continued with its Predator approach to the market. It proclaims its savings for its customers due to its aggressive pricing, providing quality products at cost-saving prices. Since the date of this blog, Heico’s gross, operating and net margins remain both high and growing through 2021. Its revenues have multiplied by five times since 2008, with ROEs ranging from 10 to 17%. Despite this record of successful and profitable growth, the company’s share remains small, so the industry leaders have been able to ignore its aggressive prices.

For a lengthy discussion of the four types of low-end competitors and how to deal with them, go HERE.

Short audio thought HERE.

Use these last two sources to confront your low-end competitors.

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Update 10/26

Heico is a dwarf in its industry… But a very successful dwarf. There are no updated market share statistics; Heico last reported a share of less than 2% of the replacement parts market, in fiscal 2015. But its organic sales growth runs well ahead of its market’s, so it is gaining share, as we predicted in 2008. Within its niche, FAA-approved replacement parts sold at lower prices than the original manufacturers’ parts, it is the dominant independent supplier. However, over the last 10 years, the company has nearly quadrupled its sales, with high margins. Its stock has handily outperformed the NYSE Composite Index, and over the last ten years it has beaten the Dow Jones U.S. Aerospace Index as well. It has achieved these outcomes with adroit management and some help from much larger competitors.

Heico is a superb operator in highly technical niche businesses. It competes in two separate businesses. Its Flight Support Group is the leading independent producer of aftermarket replacement parts for airliner repair and overhaul needs. This niche is small: the engine makers (General Electric, Pratt & Whitney and Rolls-Royce) have historically been the sole source of nearly all engine replacement parts, and FAA-approved independent parts have been estimated at only a few percent of the total. The average airliner has 2 million parts. Each of these parts undergoes a strict FAA evaluation and certification procedure before an independent company produces replacements. This is a time-consuming and expensive process, yielding a substantial barrier to entry for Heico’s competitors. Heico has gained FAA approvals for about 20,000 replacement parts and is able to offer them to its customers at savings of 30% or more of the OEM replacement price. Flight Support has also moved well beyond parts into repair and overhaul, distribution and specialty products, and these value-added services earn high margins. In repair and overhaul Heico competes with the engine and component makers, airlines’ own service centers and other independent service companies; in electronics it competes in a fragmented field of niche makers.

The second business is the Electronic Technologies Group. This group designs and manufactures difficult to produce critical electronic components for specialized needs in the defense, space, medical and telecom industries.

Heico has grown both these businesses organically and through careful acquisitions. Acquisitions explain part of the sales growth: Heico has completed about 107 since 1990, and acquisitions supplied $174.5 million of the $627.4 million sales increase in fiscal 2025, with organic growth the rest. In the third quarter of fiscal 2026, Flight Support’s 18% growth included 12 points of organic growth and the Electronic Technologies Group’s 36% included 18 points. Net sales for that quarter rose 23% to $1.41 billion and net income rose 33%. It maintains extraordinarily close relationships with its customers. It can respond promptly to changes in their needs, especially in comparison with more bureaucratic OEM competitors. Where opportunity exists, it acquires smaller firms with significant growth and profit potential. It allows these firms a great deal of autonomy and then supports them with its corporate services, producing an entrepreneurial culture with some of the benefits of economies of scale.

This outstanding performance begs the question of how Heico can compete with OEM manufacturers and still offer substantial discounts to its customers. I think it likely that they benefit from intentionally high prices the OEMs maintain on replacement parts. This is a common strategy when dealing with military and government contracts. Bid the contract low and earn attractive returns from the sale of replacement parts. This would explain some of Heico’s extraordinary performance. In StrategyStreet terms, the OEMs are in a Leader’s Trap under their own Price Umbrella, and Heico is an unusual Predator: FAA approval protects it as well as price, and it earns operating margins of about 26% while undercutting them. However, Heico is still far too small to have a major effect on competitive prices. The Standard Leaders don’t really have to respond to them right now.

So, this leads to another question. In the more common market situation where competition is intense, can a smaller competitor succeed against larger competitive leaders? We have found that they can. HERE is a description of several successful smaller companies in competitive markets and their common strategies to compete with much larger industry leaders.

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Quick Hits

Five patterns from the StrategyStreet system this story confirms.

1. A Price Umbrella can fund a Predator’s discount for years while the leaders do nothing. The large parts makers price replacement parts high to protect their margins with the airframe makers, and Heico undercuts them. By 2026 the leaders were still ignoring them, and are likely to continue to do so. The confrontation predicted in 2008 has not appeared. Heico’s market inroads in a niche market are too small to worry the leaders.
2. A supplier that adds a new product line may have entered a new Business, with a different set of competitors, products and customers. Each business needs its own strategic plan. Heico competes with the engine makers in replacement parts, but in repair and overhaul it also faces airlines’ own service centers and independent service companies, and in electronics a fragmented field of niche makers. The Price Umbrella that helps in parts does not automatically help in these businesses.
3. Acquisitions pay when they add high-margin products and shared services, not just sales. Heico buys smaller firms with growth and profit potential, leaves them autonomous and supports them with corporate services, gaining some of the benefits of economies of scale. Acquisitions supplied more than a quarter of fiscal 2025’s sales increase, and operating margins in both groups were about 26% in the third quarter of fiscal 2026. These acquisitions provide the added benefit of strategic business diversification.
4. A regulatory approval process can slow rivals as well as shield the entrant. Each replacement part needs its own FAA approval, a time-consuming and expensive process that Heico calls a substantial barrier to entry. This is one of the Constraints on Expansion on rivals. Heico still adds about 400 to 550 approved parts a year, so the barrier protects its lead, not its growth.
5. Heico has used superb Reliability to grow its business. The company stays extraordinarily close to its customers so that they have learned to trust Heico well beyond the assurance of FAA approval. This reputation is another barrier to entry for other smaller firms who might be attracted to Heico’s market.

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