Labor shortages, the MAX crisis, technological enablers and lucrative opportunities: John Holmes, the president and CEO of aircraft maintenance powerhouse AAR Corp., talked about all that and more with Aviation Week & Space Technology Editor-In-Chief Joe Anselmo and Chief Editor, MRO Lee Ann Shay at the company’s headquarters outside Chicago.
AAR’s annual sales are approaching $2.2 billion, and yet a lot of people still don’t know much about your company.
We’re the largest MRO in North America, but AAR for a long time was a difficult company to understand because we did a lot of different things. We had manufacturing, cargo and, for a little while, an airline where we were owning and flying aircraft. And then we were selling new and used parts and making repairs.
The team and I have been really focused the last 4-5 years on simplifying that story. We do three things: sell parts, new and used; repair aircraft and aircraft parts; and provide programs by putting those two things together under long-term contracts for an integrated solution for commercial and government customers. It’s good to be able to say that in 20 sec.
How has the Boeing 737 MAX crisis affected the MRO industry?
We service Southwest Airlines, Air Canada and United Airlines—all of whom are MAX customers—and we’ve had to work with them to support changes to their maintenance schedules. The impact on the aftermarket parts supply business is neutral to slightly positive, but over the long term it will be positive because it’s going to extend that [demand] for at least a couple more years. There’s so much demand for those parts that once 737NGs and A320s start to retire, it’s going to be good for guys like us because we will actually have some [parts] we’ve had demand for.
Further out on the curve, the retirements will outstrip demand, but at that point, the MAX will start to break open and mature, and you’ll have a whole other revenue stream. But certainly the MAX grounding has shifted that curve out to the right. I had the chief operating officer of a well-known MAX operator in here this morning, and they were like, “Yeah, we’re canceled through the end of June, and we’re not counting on having that aircraft back this summer.” This is taking a long time.
What about Comac’s C919 and beyond that, the 929? Are those programs you have an eye on?
We’re certainly aware of what’s happening there. Given what’s going on with the MAX, I thought if there were ever a time where [Comac] might see some traction, it would be now. But, obviously, we haven’t seen that. Our time is being spent on current-generation platforms, where we’ve got so much opportunity.
How serious is the shortage of maintenance technicians?
I spent my first year as CEO dealing with that. I don’t think the seasonality in the business was well understood, particularly in the investment community. We would go from an average of 55 aircraft in work to the low-30s during the summer [the airlines’ busy season]. And then in September, you’d go out and say, “Okay, let’s get everybody back. We’re busy again.” In September 2018, we went out and the people weren’t there. We would have a contract labor provider say, “We’ll have 100 guys show up at your facility on Monday,” and we would get seven. And the people we were getting weren’t as experienced. We had to lower our financial guidance, and our stock went from $48 a share all the way down to $29.
[Since then] we have been very aggressively enhanced our recruiting efforts, raised wages where we needed to and changed agreements with certain customers so we could afford to keep a workforce together. We’ve announced seven different EAGLE (ethics, airworthiness, greatness, leadership, engagement) Career Pathway partnerships. We also started a school in Chicago with Olive-Harvey College [to train students in aviation sheet metalworking]. We wrote the curriculum, found the instructor, donated tooling and equipment and have been recruiting the students. All of that is giving us a proprietary workforce into the company. And it’s working.
Another thing is that our customers kept a lot more aircraft in our hangars [in 2019], unlike [in] prior years, so that we could hold the workforce together during the summer.
AAR has begun using automated drone technology for maintenance in Miami. How is that progressing?
The first step is aircraft inspection, looking over the skin to see if there are any indentations. And then it’s going into more detail on inspections. Could you have a drone that could use a sensor to test whether or not I put a screw in properly? We will have to do this in close coordination with the FAA, because we want to make sure that all the repairs are conforming to their standards. We also want to make sure a drone doesn’t escape a hangar and fly out onto an airfield.
You’re also using augmented reality.
There are big, expensive ways to do it, where I’m wearing glasses and looking at the plane, and things are turning red and green and telling me what to do. Or, you can have an experienced mechanic looking over the shoulder of six less experienced mechanics and seeing what they’re seeing on their screens and literally giving over-the-shoulder guidance as somebody is performing a task. That’s much less of an investment and allows us to leverage a person with 20 years of experience to help a person with five years of experience.
Defense accounts for about one-third of your business.
After the 9/11 attacks [in 2001], our defense business really took off. And for a period of time we were majority defense. But we like balance, and ideally over time we will have about a 50/50 balance between government and commercial customers. That government business has changed a lot.
Before 9/11, we were manufacturing pallets, shelters and containers. We still do that, but the government business we do today is much longer-term, sophisticated supply chain management contracts where we’re the prime contractor.
We made a strategic decision about five years ago to migrate from being a subcontractor to a prime contractor to the government. We were doing complicated work for Northrop Grumman on the KC-10. And we thought, “We’re doing a lot of really difficult things here. Is there a reason there needs to be someone in between us and the customer?”
Since then, we’ve won several billion dollars’ worth of prime contracts. The INL Global Aviation Support Services contract with the U.S. State Department and the [Naval Air Systems Command] C-40 and P-8A maintenance contracts are big ones. We also sell used material to the U.S. government. We’ve said for a long time that if the Air Force bought parts like Delta [Air Lines] does, it would save a lot of money.
The C-40 was an interesting win.
We’re really proud of that award because it demonstrates the power of the aftermarket. Two Boeing 737-700s will be converted into C-40 aircraft. The original solicitation from the Navy was only for new aircraft. And we had to work over a long period of time to get that changed to also allow for used aircraft. It’s a great solution: You get two aircraft; we put new engines on them and do all the engineering work to convert them from passenger to a combination of passenger and freighter. We put it all together in our facility in Rockford [Illinois]. There’s nobody else in the world that could have done all of that work in-house the way we did.
We estimate the government is going to save $60 million, and they’re going to get the aircraft a year sooner than they would have had they bought two new aircraft.
AAR announced a joint venture with Indamer to open an MRO facility in Nagpur, India, in 2019. What’s the status?
India considers to be a work in process. It's our first time doing anything like this in India, so we've learned along the way. Things have taken longer than our initial expectations, but the long-term market opportunity remains compelling. The Asia-Pacific region in general is a focus for us. We're seeing good growth in Japan, and we continue to drive business in the Middle East. We’ve also had a fair amount of success in Australia and New Zealand.
How is the focus on sustainability affecting how you do business?
It’s affecting everything we do. We have a number of facilities that have reduced their waste by 70-80% and facilities that have reduced their electrical consumption by 30-40%.
Where do you see the company in five years?
We’ve got a long-term organic growth target of 5-10% annually. The last two years we’ve been growing in the teens. Half of that is from commercial growth, and the other half is largely due to government contract wins. The State Department contract, for example, is $200 million a year for 11 years. And there are more out there of that size. They don’t happen every day, and they take a long time to secure, but when you get them, you’re on them for a long time.
Are you looking for acquisitions?
We definitely are, and we have a lot of balance-sheet capacity. We’ve talked about the desire to bring more intellectual property to the company. Certainly, anything that would expand our geography would be interesting. But anything we buy has to be connected with the businesses that we’re in. If we find a business that fits that criteria and the math makes sense, we’re prepared to move.