The rebound in air travel presents a growth opportunity for Leidos | Tech US News

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The figures considered the industry standard for viewing air travel don’t lie: Passengers are returning to airports in droves after nearly two years of not doing so.

A cursory glance at these monthly reports from the International Air Transport Association, which represents the world’s airlines, finds these words and more: “recovery,” “takeoff,” “shoot,” “persist” and “accelerate.”

During Leidos’ third-quarter earnings call with investors on Tuesday, company executives sounded an upbeat note that the peak post-pandemic rebound in air travel will fuel growth in an aviation detection technology business it acquired two years ago .

Reston, Virginia-based Leidos announced the nearly $1 billion acquisition of former global automation and security products business L3Harris Technologies in February 2020. The transaction closed in May of that year, nearly two months after the the COVID-19 pandemic was delayed.

While air travel has essentially frozen around the world, Leidos has sought to use that period as one of working with clients to reimagine how passengers move through airports and reach their destinations. That also included updates to the current systems used to screen travelers.

On Tuesday’s call, CEO Roger Krone warned analysts that “there’s a long way to go for this recovery” internationally because that part of Leidos’ business is different from that of U.S. airports.

While the US airport business is funded through clearances and credits, the international side relies more on ticket surcharges and is therefore more volume dependent. Asia-Pacific remains in a period of low travel given China’s continued emphasis on “Zero COVID”, for example.

That’s true even with increased customer activity that Krone cited as benefits for Leidos: requests for proposals, demos, requests for specifications and others.

“Each airport has a different governance structure. They have to trust that the volume is there, and then they start engaging with the contractor base, (then) they put out RFPs, let’s talk,” Krone said. “We do demos … then it literally takes months, or a year or two, before there’s an acquisition, you get certified, you get an award, you build the equipment, it’s delivered.”

Airports present a complicated and opaque business that government contractors must consider before entering, as each airport has its own governance structure to work with, as Krone pointed out.

Some airports are owned by the city or municipality in which they reside. Other airports are under the responsibility of independent organizations, which receive that authority from local governments.

Consider also this plethora of federal agencies with some presence at airports: Federal Aviation Administration, Transportation Security Agency, Customs and Border Protection, and the National Transportation Security Board just to name a few.

But even with that in mind, the US side of Leidos’ aviation detection business has growth prospects.

“There are opportunities to insert new technology, what we call computed tomography or computed tomography at the checkpoint for carry-on baggage, and we’re in the process of getting our equipment certified,” Krone said. “We continue to see success nationally in the US along with our competitors.”

One of the big reasons for that success, as Krone characterized it, goes back to the period when there was almost zero foot traffic at airports. Leidos sought to ensure its detection equipment was up-to-date and even adjusted the detection algorithms for substances, including fentanyl, at the customer’s request.

“We took the time, when maybe production wasn’t where we wanted it to be … we used it to invest in technology to make sure our products were competitive around the world and now we’re benefiting from that,” Krone said. “Our team is literally flying around the world talking to airport owners and operators about what’s available.”

Across all Leidos businesses, fourth-quarter revenue of $3.6 billion was up 3.6% from the year-ago period, while profit declined 7.7% to adjusted EBITDA of $372 million of dollars (earnings before interest, taxes, depreciation and amortization).

Leidos raised its full-year sales guidance to $14.2 billion to $14.4 billion from the previous range of $13.9 billion to $14.3 billion, suggesting a growth outlook of 3.6% to 5, 1% for this year. The company left its adjusted EBITDA margin forecast at 10.3% to 10.5%.

A second macro trend of interest to analysts on the call was how Leidos is working through a period of inflation that brings with it increased costs for the business, especially with regard to labor for all publicly traded companies.

Chief Financial Officer Chris Cage said the company’s budget for merit increases has increased with the expectation that it will do the same in 2023 as it has for the past two to three years.

Typical increases have been just under or around 3%, Cage said, but the company is now seeing those rates “in the upper mid-3 to 4 or more in certain cases.”

Almost half of Leidos’ business is reimbursable, which means customers also share in salary increases. That’s taking into account how Leidos is structuring its pricing rates for 2023, Cage said.

“It’s absolutely something we’re spending a lot of time as a management team and being thoughtful about, especially for the talent areas that are in the greatest demand,” Cage added.

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