Some spare-parts companies are enjoying growth
Karen Walker/ATLANTA
THE AIRCRAFT spare-parts industry is unsure of itself. At the same time as some companies are enjoying growth, others face uncertain futures. New regulations around the corner are welcomed by some, but feared by others.
The reasons behind these contradictions lie in events of the past 18 months. Strapped-for-cash airlines are emerging from recession with new ideas. Many no longer see the sense in sitting on huge inventories of spare parts when they can turn those assets into cash and task others with their storage and upkeep. Emerging airlines are finding willing customers for their low-cost tickets, but must keep costs down to be competitive as they establish a foothold in the market. They often cannot consider setting up their own spare-parts depots, and instead look outside for this service.
All of this is good news for the parts' suppliers. An increased reliance on outsourcing, however, has also cast a spotlight on an industry which is not itself formally regulated and the reputation of which is tarnished by the few that take advantage of this fact. The Valujet Airlines crash in Florida in May increased the intensity of this scrutiny, and has hurt both reputable and disreputable companies alike.
The stark truth is that fraud and criminality exist in the spare-parts industry. The US Department of Transportation, for example, has obtained convictions for more than 120 people on charges related to "bogus" aircraft parts (parts which are either counterfeit or which have been stolen from crash sites). In an effort to help airlines be assured of the parts they purchase, many of the reputable suppliers are making an unusual request: they want regulation. Companies such as Atlanta, Georgia-based Avatar Alliance argue that, if they were directly accountable to the US Federal Aviation Administration just as an airline is once it has acquired a part, it would be beneficial to both the reputable companies and their airline customers.
"The problem doesn't lie with the airlines," says Avatar's executive vice-president Frederick "Rick" Sine. "They are the targets. The airlines don't need more regulation. They need to be assured of reliable sources of airworthy parts, whether they buy them from the manufacturers or from resellers like Avatar."
At the same time as this voluntary call for regulation is sounding through the industry, a draft rule-making paper is being circulated to US companies for review and comment. If adopted, the paper, a joint effort by representatives of the industry and the FAA, would order certain protocols for the aircraft-parts industry. The paper could be put into effect by the end of 1996.
CHALLENGES AHEAD
For those companies which believe that they can only benefit from new rules and standards they already meet or exceed, the challenges of the next few months lie not in improving their operating procedures, but in winning contracts and partnerships in a fiercely competitive industry.
Chicago-based AAR, one of the handful of major players in the business, cites the pressure of trying to stay one step ahead of its US competitors, such as the Air Ground Equipment Sales Group and Aviation Sales.
Terry McManus, president of AAR's Allen Group, believes that growing the company into a full-service provider is an important strategy in the drive to stay ahead. "We think of ourselves as a one-stop shop. There may be people who do individual tasks bigger than we do, but one of our strengths is the ability to manage whole projects including, where needed, the ability to provide financing."
McManus, a former chief executive at Aer Lingus of Ireland, saw AAR post record sales of $500 million at the end of the company's latest financial year in May. He attributes this to a re-organisation within the company, which has merged its individual enterprises into a business offering a full cross-section of services, but which provides the airline customer with a single point of contact and one invoice. The company's three businesses of trading aircraft parts, of overhauling all parts except for complete engines, and of manufacturing cargo-loading systems can be packaged into what McManus describes as a smorgasbord of services from which the airline can pick and choose.
Like other parts suppliers, AAR has witnessed the airline industry rising rapidly in the last 18 months from the floor of recession, with established airlines seeking alternative ways to manage their spare parts and overhaul shops, and start-up airlines seeking a complete service in this area.
"There is a huge pent-up demand by airlines who want their spare-parts inventories managed in a more efficient way," says McManus.
Avatar's Sine agrees. "Most airlines have much more inventory than any reasonable analysis would tell you they have to have. In the past, they have taken the view of 'if we need it, get three', which becomes extremely expensive. In the airlines' efforts to be masters of their own destinies, and in their over-riding fear of an aircraft being late, they have built up a ten-year supply of spare parts, and the manufacturers are still making those parts," says Sine. "Only now, as the financial pressures have been reduced, are you seeing some of the chief financial officers starting to wake up and realise they are sitting on this tremendous asset, which is probably grossly over-stated as to its true value, but which they have to write down on their books. They are paying for it in property taxes, storage costs, heat, lighting and for its management. That probably adds up to 30% a year to the price of the part, just to keep it on the shelf."
Where the airlines traditionally have adopted a "just-in-case" attitude towards spare parts, outside suppliers can score high marks by providing an alternative "just-in-time" service, in which they guarantee always to deliver the right part exactly when it is needed.
For those airlines familiar with the safety net of knowing that each item waits in triplicate in a nearby hangar, it takes something of a leap of faith (albeit backed by inked contractual agreements) that the supplier will actually deliver. Some airlines remain reluctant to hand over such a vital aspect of their operations, but according to Sine, the past year has seen the most dramatic changes in attitude. Most of the time, the delivery schedules and prices are worked out ahead of time and an airline will inform its supplier when certain parts should be delivered. All of the major suppliers, however, provide a 24h service, so that an emergency request for a part is handled promptly. "There will always be that absolute panic call - 'We want it now' - and you must be able to respond," says Sine. "We recently had such a call on a Saturday for a nose cone. We arranged everything, including transport, and that airline did not miss a flight."
Partnerships forged between supplier and airline are another way forward. AAR has recently sealed such an agreement with Air France, with which it already had an established a relationship as a straightforward supplier. The company has opened an office at Air France's headquarters in Paris and, under the new arrangement, works with the airline to manage its spare-parts resources. As Air France identifies surpluses, AAR either buys them or advertises them for sale. "The Air France deal is designed for two partners who know each other well," says AAR's McManus, who says that he expects his company to be announcing more partnerships, possibly as many as seven, during the next 12 months.
AAR, which has more than 32 bases worldwide, including major offices in the Netherlands, the UK and the USA, is also marketing its "Tiger-Team approach", which solves particular problems for airlines. When an airworthiness directive was issued highlighting a problem with the landing gear of the Boeing 767, AAR assembled specialised teams, approved by Boeing and the FAA, which could travel worldwide and solve problems at each airline's own hangars. By knowing exactly what is needed to be done being trained in the procedure and having the right tools, each team was able to reduce a two-week job to two days. To date, the Tiger Teams have repaired 50 aircraft.
Miami, Florida-based Aviation Sales has seen its sales double to $140 million in the past two years. The company went public at the end of June, raising over $60 million to greatly reduce its debt. As the overseer of that project, Aviation Sales' president and chairman Dale Baker has been expanding the company to a full-service organisation rather than a straight trader of parts. Almost one-third of the company's business now lies in services such as repair and warehouse management and auditing.
Baker says that, with the public share offering now behind it, the company's strategy is three-pronged. It wants to focus on the core business of parts sales, but also to continue expanding the service businesses and to continue overall growth through acquisitions. "All airlines are focused on reducing their inventory stock," says Baker. "They are working very hard to manage their inventories and take a more prudent approach. We have had a tremendous increase in the number of approaches from airlines, some wanting very long-term agreements."
PROVING INNOCENCE
The most important aspect of all of the mainstream suppliers' businesses is quality control. In the absence of any FAA regulations, reputable companies must take the attitude that each and every part that enters their hangars is guilty until proven innocent. In such an environment, therefore, there is great emphasis placed on the tracking of a part's history and original source, and the subsequent maintaining of paperwork relating to that part.
"This industry has a terrible reputation," admits Avatar's Sine. "On the one hand you have companies such as ourselves, Aviation Sales and AAR which have made considerable investments in their businesses, but, at the other end of the spectrum, there are people who buy a bit of stock and get into the brokering situation. While there are some very credible people in that area, that is the part of the industry that is absolutely uncontrolled," says Sine. "That's where you find counterfeit parts and misrepresented parts, giving lots and lots of problems. They are there because the FAA has taken a hands-off approach and has said to the airlines 'It's your problem - sort it out', so the airlines are very unsure how to deal with it."
What an airline most often requires is documentation (written proof that the part it receives is genuine) because it is answerable to its governing authorities, such as the FAA, once it has received the part. The mainstream companies take no chances in this area. Avatar, which was formed in 1994 after purchasing almost $400 million in surplus parts from Delta Air Lines, is typical in its attitude towards incoming parts at its 11,150m2 (120,000ft2) depot south of Atlanta.
"You have to suspect there is something wrong with it until you can prove it is okay," says Sine. "Every time it changes hands, you have to re-do that exercise. Because we went into this business with stock from Delta, we knew we had parts that were absolutely traceable to a major US airline over which there would be no question. However, there was still a significant percentage of parts that we ended up rejecting because we could not gather up all of the paperwork. These are absolutely approved, properly maintained parts, but they cannot be verified," says Sine.
Tracking a part's history, admits Sine, can become a task worthy of a detective in a novel, but there can be no exceptions. Aviation Sales' Baker agrees, and believes that his company has been at the forefront of efforts to ensure that the industry, while not formally regulated, is effectively self-regulated to a high standard. Some four years ago, it put forward two of its senior staff to work on the 14-member strong Aviation Rulemaking Advisory Committee. The committee, which contains representatives from major US carriers such as United Airlines, has worked with the FAA to devise an 800-page document which, when adopted, will make compulsory certain standards for operating procedures. The document is being circulated for comment, and is expected to come into effect before the end of the year. "It clarifies the vagaries that may exist today and provides clear guidelines," says Baker. Aviation Sales has also invested $1 million in a pioneer digital-imaging system, which stores every part's documentation on an optical disk, which can never be altered.
McManus, whose 30 years' experience with Aer Lingus gives him first-hand knowledge of the accountability of airlines, says that, when he came to AAR, he was most struck by the almost identical procedures and standards, which were in place. He does not see a need, therefore, for regulation, but points out that any reputable company would welcome it at the moment because it makes good business sense for them. "We believe there are people who should not be in the industry, but we have nothing to be afraid of," says McManus, echoing the sentiments of the large majority of his competitors.
Source: Flight International
