Available capital and broader services driving aftermarket parts consolidation
The long-predicted consolidation of the aviation used-parts business appears to be finally happening, or at least accelerating significantly.
The case for consolidating aircraft aftermarkets, both in repair work and in supply chain provision, always has been strong. The logic is that bigger, more diversified companies can provide more comprehensive services to airlines that want to outsource functions that others can expedite more efficiently.
But several factors have slowed integration.
It can be difficult to find just the right pieces to assemble. Even when the optimum acquisition targets are identified, it can be tough to agree on the acquisition price. And even when the buyer and seller agree on terms, it has been hard to persuade financiers to enable deals in this economic climate where airline revenue, profits and traffic have been so unstable.
But inventories of used parts can be valued more reliably than future profits on repair services. Smart planners can see how different parts stocks complement each other, or do not. And financial markets are apparently shedding at least some of their wariness of aviation. Airlines have proven to be a lot more flexible, and thus survivable, than they often were in the past.
So deals are happening. Two recent transactions are major and probably point the way toward the future shape of the used parts market.
In mid-May, Kellstrom Commercial Aerospace acquired AirLiance Materials from. AirLiance CEO Roscoe Musselwhite became president and CEO of Kellstrom Commercial Aerospace, as the commercial warehousing and logistics operations of Kellstrom move to AirLiance's warehouse near Chicago O'Hare International Airport.
Kellstrom had been divided into two segments, Musselwhite explains. Its defense business provides parts and logistics for military aircraft such as theHercules and Falcon. The defense half also has a small maintenance shop that works on high-tech avionics and accessories. This shop has capabilities for both military and commercial repair, but has concentrated on defense work in the past.
“The other piece, commercial aero, is what acquired AirLiance,” Musselwhite explains. “Now consolidated as Kellstrom Commercial, it will move to Chicago.”
The new Kellstrom Commercial will maintain a sales office in south Florida, near Kellstrom's other businesses, and the two companies are still determining how many of the original staff will move to Chicago. The commercial portion of Kellstrom's business was never a manufacturer, but distributed new parts made by companies such as Britain's Meggitt. These included probes and sensors used on a wide variety of engines.
AirLiance, in contrast, was founded by airlines—originally, and —specifically to “understand what airlines need to run the supply chain and what they need from the maintenance perspective to keep flying,” Musselwhite summarizes.
The new Kellstrom executive thus describes the combination of Kellstrom and AirLiance as a “synergistic marriage.” AirLiance's airline heritage is joined to new part distribution by Kellstrom. “It's a textbook merger. There is very little overlap in products or major customers.” Musselwhite estimates the combined companies will be one of the Top-Five commercial supply-chain companies and will generate $150-200 million in annual revenue.
The combination also may show where financial strength is now, and it is not in airlines or Western MROs. LHT bought out Air Canada's and United's interest in AirLiance in 2011. Now LHT has sold its remaining interest. Musselwhite claims the sale was mostly a question of business emphasis. “Lufthansa Technik's major focus is repair of aircraft and engines. We were associated with that, but not part of their core business.”
The new partners are still considering whether to bring Kellstrom's repair shop over to the commercial side. In any case, the new commercial unit will offer repair management to customers as one of several services and levels of service. Musselwhite says his commercial business will offer a broad array of products attractive to airlines that are looking for something short of full cost-per-hour support.
And Musselwhite believes that larger companies offering broader service provide the clear direction of the aftermarket. “There will always be niche players, but scale is becoming more important. You can offer more services and in more places globally,” he says.
Scale is essential not only in selling parts, but in acquiring them. Competitive part providers must be able to acquire assets and break them down. Robust size and financial strength are needed to do that because airlines, which once sold one jet at a time, are now selling a dozen aircraft or a fleet in one deal. “Sheer size is important to stay in that game,” Musselwhite observes.
Other considerations also favor the large and strong. Product liability insurance is expensive and increasingly a necessity in part markets. Top customer service also can be costly. It is usually conducted most economically when spread over a large scale of operations.
Depending on definitions, there may be 200-1,000 companies in the commercial supply chain business now. Musselwhite predicts there will soon be five or six “very strong players” and the main question is how many of the smaller ones will survive. Scale is essential for “discriminators” like breadth of service and geographic reach, so “integration is proceeding rapidly,” Musselwhite says. Of the Kellstrom-AirLiance combination he firmly believes, “one plus one equals three.”
That seems to be the view of most experts in this tricky parts distribution business. “Yes, we will see more consolidation, in both new and surplus parts,” predicts Michele Dickstein, president of the Aviation Suppliers Association. Dickstein has been seeing consolidation in new-part markets for a couple of years and says it started to happen in used-part markets about a year ago as several engine manufacturers purchased companies in California and Texas.
Dickstein attributes the pickup in consolidation to two major factors. The first factor is that part vendors are trying to meet customer demands for broader offerings. Second, there is more capital and it can be obtained fairly easily. “Capital distrusted aerospace before. Now they are backing these guys with money.”
So Dickstein expects the current consolidation to continue. But she does not believe there is any minimum scale necessary to be a competitive part dealer. “Small companies can still carve out a profitable niche. But scale is an advantage, and sometimes large companies are more efficient.”
And companies are not just growing larger, they are offering more services. The Aviation Suppliers Association is seeing more part dealers offer repairs and repair management, especially for rotables. “That ties into cost-per-hour contracts, and these are becoming more prevalent,” Dickstein says.
While expecting more consolidation, Dickstein acknowledges that the other major recent merger, Diversified Aero Services' acquisition of Aero Inventory, was a surprise. “DASI was not a big player, and Aero Inventory had very major stocks. That was a surprise for everyone.”
Wayne Mihailov, DASI chief commercial officer and former Aero Inventory executive, was not surprised by the deal. And he is confident it makes perfect sense. “DASI with this acquisition changes the game,” Mihailov argues. “They were very good at consistently finding the right aircraft and right parts to buy. There were no ghost parts, what they listed they had. Now Aero Inventory takes DASI global, into the U.K. and Asia. Aero Inventory brings $400 million worth of inventory and an e-commerce platform second to none.”
Aero Inventory grew fast and flew high until the recession hit in 2007-09, leaving it with surplus parts and stingy capital markets to finance them. The result was bankruptcy and some major restructuring before the company was acquired by DASI. One of DASI's strengths is liquidating surpluses, and capital loosened up considerably. Furthermore, Mihailov says DASI has simply been smart at spotting the parts that will be in short supply and picking them up at the right price and time.
The new company will deal in used rotables, including managing their repairs, and in new consumable parts. Mihailov says the breakdown will be roughly even between rotables and consumables. The firm will support a variety of models, including MD-80s;Classics, and ; ; and ERJ 145s. The DASI executive will not estimate revenue but is sure the combination will be one of the top players in surplus parts.
Mihailov sees consolidation as a long-term trend in used parts sincebought Aviall. He judges that part dealers generally need around $20 million in annual revenue to be efficient in the business and to penetrate major markets. “Airlines have multiple types in their fleets now, and it is hard to sell to them if you only support 10% of their fleet.” But there are exceptions to any rules of thumb. “There are firms that only sell $15 million a year and have a 40% margin,” Mihailov notes.
Mihailov is extremely confident his e-commerce platform will be essential to at least some sales. “It makes no sense to spend a half hour on the phone negotiating over a $50 consumable.”
For the future, DASI sees plenty of tear-down work ahead. With Boeing and Airbus cranking out narrowbodies at a fast pace, Mihailov predicts overcapacity and the grounding of significant portions of older fleets. “Our goal is to have the most efficient platform to liquidate those aircraft.” He expects it will take about three months to get the old Aero Inventory and DASI working together smoothly.
Working together may be the key. As aftermarket entrepreneurs have learned before, it is not just a matter of putting the right parts together, but of keeping the combination profitable amidst the wild swings in aviation markers.