Hi, this is Matt Brundage here at Bridgehouse, and I recently had the chance to speak with Mark Costa, Director of the Investments Group at Brandes Investment Partners. I asked him about CAE, a recently added Canadian name in the Brandes Global Small Cap Equity Fund, and the opportunity that Brandes sees with this name. Here's what Mark had to say.
Built a very strong and large position in commercial aerospace, you know, with passenger travel, getting locked down, and aircraft manufacturing getting shut down and airlines cutting their CapEx orders, I mean, it was a target- rich environment in commercial aerospace. And so we did build a large position. CAE's a more recent edition. And this just goes to the notion that, the market sort of gets nervous when negative shocks happen.
And this is one that got impacted by the negative inflation shock. So, CAEm this primary business is commercial airline pilot training. and that's a very strong franchise. It's the largest in the world. It's a two-player market. The other competitors are Berkshire Hathaway. Company, CAE owns, you know, 75% market share. in that business, it's a growing business just because air travel is growing. So the need for more pilots, is increasing.
And there's a huge aging population of pilots as well that need to get replaced with new pilots. And the training needs on new pilots, is much greater. It's much greater intensity. So there's more revenue opportunities for CAE. In addition to that, there's this huge product development cycle that's happened over the last decade. So new aircraft are coming onto the market, which requires new training for even the existing pilots.
So, and then on top of that, airlines are starting to outsource more of their pilot training, to CAE. So the value proposition that CAE provides is a 20 to 30% savings for pilot training. And you're seeing a lot of the large air, mainline airlines outsource this to CAE. So it's doing just exactly, to the thesis. What's really impacting sentiment, though, is, the markets really focus on the fixed-price contracts, that CAE struck on its military business.
And that military business is, again, one of the strong, dominant players in the world. it has a sole-source position to pilot training for the U.S. Army. They just won the the Canadian, military training for the pilots. over the next 20 or 30 years, it's one of the largest contracts it's ever booked. but the contracts that were struck for the inflation shock are being impacted by inflation. So it's unable to pass through the price inflation. And that's impacting margins.
And so that's really what's hit the stock. But it's only 15% of Ebit, of earnings today. So at this price we're getting it for free. The military business. It's again a growing franchise strong backlog, historically strong backlog. And when we look at it two ways, one is that the new backlog that's coming on has been negotiated in the current inflationary environment. So they will get a very healthy margin. They're predicting over 10% margins, guiding over 10% margins on that business.
And then on the legacy stuff that gets renegotiated with 3 to 5 years. So if you're patient and you're willing to wait 3 or 5 years, you should see that margin recover, again, on the military side, which is currently only like 15% of earnings. So we think it's a it's a great business to own. Again, it's, really taking advantage of our ability to dig through the thesis, understand the inherent, qualities of the business, and look past in the short term issues that might be facing the company.