Graham Warwick/WASHINGTON DC
AAR has just announced its third acquisition in less than nine months, a convincing illustration of what vision and financial muscle can achieve in the fragmented business of airline aftermarket support.
In December, the company reported a 33% increase in second-quarter sales, after a jump of 26% in the first quarter and growth of almost 17% in the previous financial year. Profits have grown even more spectacularly - by over 57% in the past six months, compared with around 32% for the previous year.
"The growth rate is exceptional," acknowledges AAR president David Storch, "and it is from a significant level of business to begin with." Sales passed the $500 million mark for the first time in the company's history in its 1995/6 financial year, approached $590 million a year later and have already passed $350 million in the first six months of its current fiscal year which ends in May. "We are growing faster than the market, and faster than our competition," Storch says.
BUSINESS MIX
Based in Wood Dale, Illinois, AAR appears, at first sight, to be an eclectic mix of businesses, leasing aircraft and engines, distributing airframe and engine parts, manufacturing cargo systems and composite structures and overhauling airframes and components. This mix is proving to be a strength as airlines seek to outsource more maintenance-support functions, and AAR is working actively to expand its services and programmes. Analysts estimate that about 80% of the company's business is in aftermarket support.
In recent months it has completed the acquisition of parts distributors Cooper Aviation Industries and AVSCO Aviation Service, and composites manufacturer ATR International. Cooper and AVSCO distribute new aircraft parts and so complement AAR's existing surplus-parts redistribution business. Their acquisition is part of a strategy to strengthen the company's inventory-management capabilities.
"We want to take care of all the spare-parts concerns of our customers, on the line and in the shop," says Storch. "There is more opportunity as we continue to expand our offerings to become more valuable to the customer," he says, adding: "The market is so huge." Recent deals include an agreement to warehouse Boeing-owned 737-700 airframe parts in the Netherlands and to provide a repair and exchange service. The company will also overhaul and manage all airframe rotable parts for Lufthansa CityLine's Aero International (Regional) Avro RJ85s, also in the Netherlands.
Late in 1997, AAR signed an agreement with Delta Air Lines to become the US carrier's sole non-manufacturer supplier of engine parts and bare engine accessories. Dedicated staff have been positioned at Delta's Atlanta, Georgia, base and Storch is confident that the company can help the airline achieve its savings objectives. The deal includes a joint marketing agreement under which AAR is assisting Delta in disposing of its excess engine parts.
In another initiative, AAR has formed a joint venture with General Electric to supply surplus GE CF6-6, CF6-50 and, where common, CF6-80A engine parts. The new company, called Turbine Engine Asset Management and combining GE Engine Services' strength in engine maintenance and repair with AAR's parts-sourcing, inventory-management and aftermarket expertise, began operations in December with the stated objective of becoming the preferred source for CF6-6 and -50 serviceable parts. The initial inventory combines the surplus-parts stocks of both companies.
In a separate deal, the two companies signed an agreement under which AAR became the exclusive provider of parts for Pratt &Whitney JT8D engines to GE Celma, a GE Engine Services subsidiary in Brazil. The company provides an inventory-management programme which includes the supply and repair of parts to support engine maintenance atGECelma. AAR provides similar support to GE Engine Services' subsidiary in Wales, Storch notes.
The other recent acquisition, of composite-structures manufacturer ATR, highlights another element of the company's strategy. AAR's existing manufacturing capability centres on cargo-loading systems for freighter aircraft, composite floor and bulkhead panels and air-transportable containers. During 1997, AAR was selected by FedEx to supply cargo-loading systems for 11 new A300F-600R freighters, and by Tower Air to provide a system for a Boeing 747-200 freighter conversion - illustrating the two main markets.
The ATR acquisition, meanwhile, brings the capability to make non-critical composite engine parts and airframe structures such as sound-suppression kits. In addition to increasing AAR's composites-manufacturing capability, the company comes with untapped aftermarket potential. "ATR does very little aftermarket business, but we see the opportunity to increase its visibility," Storch says, adding: "Aftermarket is what we are good at."
LOOKING FOR POTENTIAL
AAR continues to look for acquisitions in the manufacturing sector, and is particularly interested in companies with significant unrealised potential for aftermarket business. So far, AAR's acquisitions have been in the USA, but Storch is keen to establish both distribution and manufacturing presences outside North America and would consider both acquisitions and "green-field developments".
AAR could also expand its airframe-overhaul business through "opportunistic acquisition", he acknowledges, but the company is not going out of its way to add maintenance centres to its portfolio. Instead, says Storch, it is expanding its Oklahoma City overhaul base, where a new hangar is scheduled to be completed this month. The site is a "niche facility", Storch says, specialising in narrowbody-aircraft maintenance for customers such as the US military.
During 1997, AAR Oklahoma received its largest-ever contract, a $150 million deal to maintain US Air Force Boeing EC-18s and TC-18s (military 707s), and another to support several aircraft for the US Marshals Service. Storch sees airframe overhaul as an important element of AAR's "womb-to-tomb" support philosophy, providing an opportunity to acquaint customers to the company's parts-distribution and component-repair capabilities.
However ambitious his plans - Storch sees no reason why the company's current grown cannot continue for at least three more years - he will not do anything to jeopardise AAR's strong balance sheet. "There are few investment-grade companies in this business," he notes, and AAR jealously guards its superior rating. "We're financially conservative," he acknowledges.
That financial strength allows AAR to do things its competitors cannot, such as the recent deal to purchase British Airways' fleet of 14 Boeing 747-100s as they are retired from service between 1998 and 2000. The company has the option to lease or sell the aircraft, convert them to freighters, or dismantle them for parts. Each option suits a different part of AAR's business: aircraft trading and leasing, cargo-systems manufacture and redistribution of surplus parts .
Storch says that such deals are also important to AAR, because they demonstrate the company's willingness to invest in its customer, in this case to help with its fleet-renewal plans. "We have a strong balance sheet and we are positioned to go ahead and take the risk. Our financial strength gives BA the confidence that AAR will complete the deal over the length of time it will take," he says.
Storch says that the challenge ahead is to continue to balance AAR's business portfolio, and to stick with a strategy that works. "The company is taking shape. We are handling our growth nicely, but there is plenty of opportunity to get distracted," he admits.
Source: Flight International
