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July 12, 2005

Verizon Place Hotel and Conference Center, D/FW Airport, Texas

Glen Brown, Stevens Aviation
Gary Driggers, Midcoast Aviation
Mark Karls, Savannah Air Center
Mark Matthes, Duncan Aviation
Tom Mitchell, Jet Aviation Bedford
Chris Pratt, Dallas Airmotive
Walter Rittenhouse, Banyan Air Service
Richard Smith, Business Aviation Services
Paul Soubry, Standard Aero

Matt Thurber: How are your businesses doing and what are your expectations for the next couple of years? Do you think things are looking up for a steady period or are you concerned that this is looking good now but you're not sure about the future?

Gary Driggers, Midcoast Aviation: We've been very fortunate since the last time we met due to many, many factors. There has been some distance from 9/11 and poor performance by the airlines is driving people more to higher use of general aviation. We've been extremely busy and are getting busier. We have a new facility and we're hiring people. I am optimistic, but I have seen bad times in this industry enough to know that you should always, basically, be cautious about things.
I would say, barring any catastrophic events, any September 11-type event or anything that would turn the world or the U.S. economy upsidedown, we're viewing the next two to three years as being the best of all times. In the history of Midcoast, we have never had this kind of volum. And it's not just volume, it's good-quality volume.
We're getting the kind of revenue and margins that we need to be successful and to grow the business. The product lines that Midcoast works on generally are the larger and long-range businesses jets, Hawker 800XP-sized airplanes and up. And that market right now is extremely, extremely good.
We're seeing increased productivity, in the form of the amount of flying hours that the general fleet is operating. For Midcoast customers, we're seeing probably a 20- to 30-percent increase in the flying hours of our customer base right now.
Many of the flight departments out there, lots of them, are buying new airplanes and still keeping their existing ones, so that's always good for our industry.
The used aircraft market right now, especially used jets, is strong, very strong. The prices are rebounding. The number of airplanes in inventory has gone down. With those turnover sales come refurb opportunities.
We at Midcoast are extremely optimistic about the near-term future.

Dan Comiskey: Is that a reflection of your current customer base, doing more work as you said because they're flying more hours? How many new customers are you picking up or is that because of growth?

Driggers: I would say it is both. We see a lot of repeat customers, and we're always hoping that's the case. But we strive to bring new customers into the business all the time. We also see the same flight departments getting bigger, flying more often, which presents more opportunities on the refurb side and avionics upgrade mandates. And of course, we've had some avionics mandates over the last year, too, that have generated business. RVSM has added additional revenue and there is always other work resulting from those opportunities.

Tom Mitchell, Jet Aviation, Bedford: We have found some real good growth in the last few years since we last met. I think Gary said a lot of things that I would echo in regards to the intensity of corporate aircraft, it's extremely well-accepted right now and we're having space-constraint problems, which is a good problem, so we're looking to grow our facilities physically in order to incorporate more units coming at us, the bigger aircraft, so that's a continued challenge. The only thing I might add is the corporate aircraft is being used as such a business tool, there is really no tolerance for down aircraft and the stress on us to get AOG airplanes back in the air is at an all-time high.

Thurber: So there is less tolerance for unavailability?

Mitchell: Yes, the principal's involvement with an airplane that was broken used to be…now, it's basically, get the airplane up at all costs, 24/7. So that's kind of a shop challenge this year.

Comiskey: When you say "at all costs," does that mean that when you have a contract with these companies, that you have no ceiling on the work level that you can do or is it an understood thing that you have a certain flexibility in terms of what you can invest based on a given time line?

Mitchell: What I meant by "at all costs" is, no matter what it takes to get the part in, counter-to-counter, keep people 24 hours if you need to. The importance of getting that airplane back in the air is more like an airline than it used to be.

Walter Rittenhouse, Banyan Air Service: At Banyan, we work on the other half of the turbine fleet in the area. We work on everything from a Hawker on down. After 9/11, it was disastrous for us, we had very difficult times.
The mandates in avionics helped us, but in maintenance, that has not turned around. We have been consistently busy throughout the year. Different things happen, these months of June, July, and August are our off-season. That means nobody wants to be in Florida and we, traditionally, are very slow, and it's at the end of our fiscal year, as well. So we always think, "well, we've had a good year, but we have to see what happens with the last few months." The last few months have been very busy with maintenance and structural work, which is very gratifying.
You mentioned "barring another terrorist attack." I was very gratified that with the London attacks, that the stock market reacted favorably to it. I think that terrorism is built into our way of life today. And hopefully, that is true of general aviation as well in that we won't take an economic hit in the future if that's what will happen. But it seems that financially, the world is building that into what we're doing today. We deal a lot with Latin America. We deal a lot with Southern Florida, and that's a different kind of market. But they, too, are visiting us and that is notable, that we are seeing a lot of activity out of South America, despite their particular political and economic problems.

Mark Karls, Savannah Air Center: As far as the maintenance side, it's kind of a young business. The company started out in the paint portion of the business and completion was shortly followed thereafter. So for me, the maintenance side is kind of a by-product of refurbs but it is a growing business for us, and as far as the refurb business, it's always been strong at Savannah Air Center, and maintenance is just kind of growing right now. So we're seeing a lot more activity, from a Hawker-sized aircraft up.

Thurber: Are there customers who just really would rather work with an independent, like Savannah Air Center instead of going across…

Karls: Yes, I think especially with the Gulfstream operators, you know, you hear a lot of anti-OEM talk, so yes, they try to…

Thurber: So they want an alternative?

Karls: Yes.

Richard Smith, Business Aviation Services: One thing that has not been brought up with the aging aircraft is the trickle down of sales. Gary had mentioned the fact that new aircraft sales are up, which means that there are used aircraft. Those aircraft need to be refurbished, and so we're kind of seeing a trickle-down effect. But I do see the cost of refurbishing, the parts and labor to get these things back up here is buying the dollar amount of airplane, and what you have to put into engines, props, paint, and interior is the same value as the aircraft.
For the guys on the end, they're putting that money into the airplane, but it is a little bit hard to take that, and people are doing it because they're finding the convenience and the ease in doing business. It's not the pleasure travelers, it's the business person that's finding that they can't get where they want to go on the airlines, it's not reliable enough, and they end up going out and purchasing a turboprop or a small jet for their corporation, and you see the aging aircraft, which need more maintenance.
So we're kind of focusing in on that side of the aging aircraft, trying to keep the fleet going. Because Business Aviation is a fairly small FBO, we're in Sioux Falls, and with 160 employees, we try to keep the bottom end of the aviation market a little bit up.
One of the things that I was interested in is Gary [Midcoast Aviation] is building, Tom [Jet Aviation Bedford], you're building, we're building, Glen [Stevens Aviation] is building. We're also part of the 20 Group, and the 20 Group members that are building new buildings is remarkable.
So it tells me one thing as a whole industry: we're all optimistic about a future in aviation. We are going to see some growth in it. We think there is some stability. All of our crystal balls are looking the same. So if we continue to keep doing what we're doing, I think there will be a good future for us at least through the next 12 months or so, two years.

Thurber: Mark, isn't Duncan building some new facilities?

Mark Matthes, Duncan Aviation: We have a couple of projects going. We're expanding in Dallas and Michigan. We're pretty much doubling the size of the service capacity and adding a new paint facility as well. We started a month ago and it should be done in…the paint will be online in March and the maintenance will be online in December of 2006.
So far, that's what is going to be rewarded and justified, expansion. We have been planning to build up there for three or four years. We were kind of waiting for the economy to improve and pick up, and then we saw a sign that there was expansion. It's the way we look at the economy. It has built up tremendously.
Downtime is, we're definitely aware of that, and one of the things we're trying to do is look at ways to maybe run the airplane around the clock so we can have multiple shifts working on the aircraft to shorten the downtime and meet the requirement that the customer has, because it definitely has gotten bigger than what our expectations are.
As far as the overall business is concerned, we seem to be fairly strong in all areas except for avionics. We kind of got through the mandate period and have a bit of a hangover from that. We're trying to figure out what the next step is. We have some, what we call the glass box project, cockpit upgrades.

Thurber: Do you think there is good opportunity for the glass cockpit refurbs?

Matthes: We think there is. In certain airplane types, with a certain value and certain age, and the price point we're after, I think there is probably some opportunity there.

Glen Brown, Stevens Aviation: Stevens is doing quite well. I have to say that I echo a lot of the things that I'm hearing. Our business is very similar to Banyan's, life is very good right now. We're a Beech dealer, as well as do a very significant amount of Beech maintenance. We have some outstanding contracts, including a military depot contract on the C-12 program, which is quite good for us.
Similar to what you were just describing, we're looking into the same sorts of things in terms of avionics improvements and upgrades. So we're looking at expanding at our sites and looking at turnaround time improvements and all the things you do to try to improve your customer's availability, including second shifts and mobile repair parties and all of the things that you do to get them back up in the air as quickly as possible. So business is quite good right now.
I agree with the comment that terrorism is built into the industry now. We didn't see the ripple effect that we did with the 9/11 attack, and it is a testimony to the community now; the people understand how to deal with the threat, they just keep operating.

Thurber: What percentage of your maintenance business is the military side versus retail?

Brown: It is a significant chunk of the business.

Thurber: Do you transfer knowledge from the military side to the civil work?

Brown: Absolutely. The expertise we have gained with that program has been terrific. It's been a great program for us. It's astonishing, we literally take the wings off and bring it right down to the spars, it's a full refurb. So it has given us tremendous expertise.

Thurber: Paul, how is the engine business these days?

Paul Soubry, Standard Aero: Like Stevens, we've tried to look at the balance of the marketplaces, so we have a large military component and commercial component and even within our commercial world, we try to ensure that we are not too dependent on any one segment. We really work to try and balance helicopters and regional jets with turboprops.
We continue to push the industrial engine marketplace as an area where we can do research and development, so we can do coatings or repairs with no airworthiness oversight in a very short period of time, getting a tremendous amount of operating data and then transfer that knowledge into the flight world.
In our business we intended to use the concept of a portfolio. So many of us have legacy engines and are now attempting service newer technology engines in the last couple of years. The offerings from the engine OEMs now have such a different scope, at times we are even limited from an opportunity to bid, specifically in the business aviation world.
In the regional world, what we're seeing is the time extensions. We're bidding regional jet programs now that are 10, 15 years long, and they're upwards of a billion dollars. So the amount of risk we're taking or having to assume is tremendous as an independent compared to the OEM.
The other thing that is a concern for us, good and bad, but the reality of what is happening now is that for many years, we were out there banging heads with our friends from Dallas Airmotive and everybody else trying to win a maintenance, repair, or overhaul event, and now the operator has so many choices to solve the same engine problem.
The broker community has really grown up in the last couple of years and is very sophisticated with selling either exchanged engines, overhauled engines, even brokers who have new engines from the OEMs to try to solve that problem, so we now have more and more competitors at the table. We're seeing the OEMs offer a complete enhancement-type program, so we get a project we think we're going to maintain, we buy a license, we buy inventory, we train people, and then the OEM shows up with a brand new engine. So there's a very different economic situation.
Operators, the FBO community and so forth, are getting a lot smarter on TBO extensions and how to play that game with the airworthiness authorities. Again, thinking we have a maintenance event, we secure a rental engine and all of a sudden, the operator gets a TBO extension, which in this line of work will last for one or two years.
I think the other thing that's still difficult in the engine MRO business is this whole concept of dealing with working capital, investment in facilities and expansion and so forth. A lot of the engine community has been doing that for many years. So we're stuck with the fixed assets and in the last couple years, we're getting more and more working capital. It hasn't been turning as well as what we really want it to, so that makes it very difficult to be able to really use your balance sheet well.
I say that business is good and not great. I think a lot of us are still trying to navigate through the new engines but I think we still suffer from over capacity. An FBO, an operator, an airline can go to any place, anywhere, anytime, with no switching costs, and they can take their engines. Most of our markets are 200 to 300 percent over capacity. So there's contraction of turn time and added services and so forth...

Driggers: How big a factor is the turn time issue as far as advantages and disadvantages, assuming that the price is pretty much equal? That's the new driver, downtime.

Soubry: I think the customer has created this whole open market of new engines or time-continued engines or TBO extensions or exchange engines so we are working to compress time. Ironically, most of the industry on most engines, 30 to 45 days is a much more reasonable turn time, a competitive number, and we're all getting that time.
If you went in and said to the customer, "I can do it in 15 days," there is no price premium for the 15 days. So then you start to say, getting 20 days out of my turn time is a huge issue, fixed assets, people, infrastructure, whatever, but we don't see any price premium for speed.
Maybe that will change, the compression of time.

Driggers: Compression of time also creates more availability. As you get the aircraft in and out more efficiently, capacity gets bigger.

Brown: Plus the other thing it produces, in the engine business, it helps you turn your rotable assets that much faster; you need fewer of them. So if you are turning engines 30 days versus 60, you basically need half the assets in terms of a lease pool, which is a major capital investment for you.

Soubry: Absolutely. And that's with our company and maybe some issues of analysis, and as such a diverse engine portfolio, we have had so many different types of assets tied up.
I think one of our issues associated with the business, going back to this comment about the balance sheet and cash flows, we never really get paid for cost of capital. We really get paid for burn rate, but we never get paid for cost of capital for rental engines. Therefore, it makes a tough economic decision on some of those maintenance transactions.

Chris Pratt, Dallas Airmotive: I certainly agree with what everybody says about turn times, it is very important. I think the cost of being down is becoming more a dominant factor in the flight departments and the maintenance directors' minds, so there is a lot of pressure on us to increase turnaround time, and a big impact of that, as Paul was speaking about, is rental engines.
We have a very large rental engine fleet, and managing that fleet has become a major focus of our business because, obviously, with all the different models you have out there, you are juggling which ones are available. Any delays you may have in-house impacts the next person getting a rental engine and returning that. Another issue here, too, is getting a person with a rental engine to give it back to you. They [customers] have the rental engine and they don't want to take the airplane down for a day or two so you can swap the engine back out. Meanwhile you're saying, "I need my engine back."

Pratt: It's not something most people would ever think would be a problem, because you'd think you'd want your own engine back right away. If a rental engine is running well and it's really not costing them to have it on the airplane, it's fine.
But certainly, rental assets are a factor. We have about 250 rental engines in our pool and it's quite a big operation. In general, on the business, to get back to the earlier comment, we probably saw it pick up, say, middle of last year, where things really started to turn around a bit and we noticed that the inputs were increasing. We've been very strong this year on the number of inputs pretty much across the board.
If there is a weakness anywhere for us, I would say right now, it might be on the turboprop end. I don't know why that is or if that is just an anomaly right now. But all of the rest of the engine product lines--and we cover almost all of them for business and general aviation--are very strong. So we're very upbeat about what is happening.
We think the industry, again, with all of the usual caveats, is in the upswing of the cycle. I think that's reflected on the OEM side of the airplanes. But backlogs, they're starting to build and they seem to be fairly healthy ones. So the activity is up, and activity being up is good for our business.

Comiskey: A new customer to you is somebody's current customer, so who is losing on this deal? Who are you taking the business from? Are you seeing any new customers entering the business?

Brown: From our perspective, we see both. We see new entrants coming in the market, people who are buying an airplane for the first time as we do a good bit of general aviation work, so you're seeing new entrants as well as other people's customers. Every time new aircraft sales go up, that's generally a good thing for the industry. The tide lifts all the boats. So it is good for us from that perspective.
The other thing you see very often when the owner's aircraft gets out of warranty and is no longer under the umbrella of the warranty, the natural tendency is to take it to the factory. You start seeing more third-party maintenance, especially if that operator has a mixed fleet and an older aircraft where they've already made that leap with you…so a lot of the third-party growth comes from migration from a warranty umbrella, if you will.

Rittenhouse: It's also the fact that the competition can't keep up with the escalating insurance policy, with the escalating training mandates, and other things that just make our business so much more expensive. The need for these kind of facilities is a big segment of people who used to do maintenance that just aren't doing it today.

Thurber: Will the advent of the very light jet pull new people into the business or is it just going to be people moving up from smaller airplanes or a combination of that?

Mitchell: We have discussed the very light jet concept; I guess it's coming to us. It's interesting. I think the opportunities are yet to be determined. But to be honest, a very light jet is less of an impact concern than a very large jet that doesn't need any requirements but consumes a lot of space.
So a very light jet, I think, poses potential opportunities to the extent that you could put 15 of them in an average hanger if you needed to.

Thurber: That's a good point, but last night Gary Driggers was talking about the footprint of a Global Express, how much it really takes up in the hanger and how much more revenue you have to try to extract from that event to pay for taking up so much space. The problem is, the newer aircraft require a lot less maintenance per flight hour than just one or two generations ago. You go back two generations and you're talking about an order of magnitude of difference. So how do you make that footprint pay for itself?

Driggers: On an average maintenance event for these newer, more sophisticated aircraft there are even fewer hours required because more redundancy has been built into the aircraft. But it's not just so much that, it's the type of maintenance we're performing on these newer airplanes that is different. It's so much electronically and computer-generated and black box oriented.
The airplanes are getting bigger, they are getting more complex, and even though there probably are fewer less maintenance hours per event than you would have thought maybe five or 10 years ago, there is still a lot of work to do on these new airplanes. It's just a different kind of maintenance.

Thurber: For that different kind of maintenance, can you either charge more or make it pay off because you've got a raise in price paying for test equipment you bought?

Driggers: I think all of that is justifiable for the type of rates that we're trying to see in the industry right now. One thing I'm glad to see over the last five or six years is that we have finally recognized, as an industry, what our costs are and that we can't do this for free. The test equipment that we bought, training, and other investments, all of this justifies the competitive rates we have to charge to make a fair living.
The operators want us out there to be able to work on their aircraft, and I think they're starting to come to the realization that we have to charge appropriately for all of that. We're seeing very little push back from customers on the rates that we're now charging and we're still not where we ought to be.
I think there has been a good movement upward, but it's taken this long for the business, the management skills, and the industry to mature into focusing on us to get out of the "hobby status" that we were in just creating jobs and creating viable, sustainable revenue-generating and profit-generating businesses.

Thurber: But don't the customers expect a professional service and not a hobby-like service?

Driggers: Absolutely. The biggest problem we've had for many years, in my estimation, about rates is that we were all so competitive with each other that we kept the prices below levels that we needed to expand and grow our businesses professionally and make any money. But I think our businesses are becoming more sophisticated now. Our bankers and people who know our businesses are expecting growth in the way we turn their investment, and I think we've become more sophisticated from the standpoint of how we're looking at our businesses now. I know that we're taking a much more long view of where we need to be in the future and how to get there. That's been one thing, I think, over the last especially five or six years that's encouraging about our industry because I think we're growing up.

Smith: I see two folds in that. One of them is educating the customer. I don't think we've done the job that the automotive industry has done in educating the customer, as in training and the equipment and the FAA requirements that we have that cost money, so I don't think we've done the job that we should have in educating the customers, and I think that we're doing a better job at doing that at this point.

Matthes: I think part of it, too, is the ability to collect on the hours that you are owed by performing the job in the time frame to do it. I think there was a period of time that you could maybe not be as accurate with your program in that the customer would come in at the end of the job and say, "that's fine, I will pay you the bill today." When they are signing off on it, they need to understand exactly where they are at that process.
So if the others are not surprised, you've got to go back as far as management and say, "I need another $100,000 for the airplane," and there is not an issue there because we've kept them blind all along. So part of our objective is the communication from the very beginning, education as to what it is going to cost: communication.

Driggers: I think the customer's expectation levels are higher now, and that's okay, they should be high. If we're going to be the kind of professional business that we say we are, then they should have high expectation levels for the work we do and they should be willing to pay for that.

Brown: I think both you guys are pointing out different ends of the maturation cycle. Part of it is maturation on our side in terms of what are the real costs, not when we get it back in terms of "okay, well, I'm going to give you a lower number," you get low on the over and aboves. I think that maturation, customers see that and they have a lot of respect for it. The days when you could do that sort of thing, frankly, are long gone. You won't get that guy as a repeat customer. So yes, I agree.

Thurber: What are the most critical issues facing your businesses these days as you try to continue growing, remaining profitable, providing good jobs for your employees, a good return on investment?

Rittenhouse: The single most critical issue that we face is the cost of insurance. Of course, we're in Southern Florida, and we have had a couple of visitors [hurricanes] last year and we've had one again this year. That directly affects our insurance rates.
To me, it's always surprising that the insurance companies don't, in effect, take an interest in the repair station. The same companies are insuring both the aircraft operators and the pilots and the repair stations, it's the same insurance company. They insist that the pilots have the appropriate training and they don't insist that the aircraft is maintained properly. They don't insist that the aircraft is taken to an insured entity, to a repair station that has appropriate levels of insurance.
In Southern Florida, of course, there are a lot of shadetree mechanics and in our airport, you can get shop rates all over the spectrum and, of course, we're at the high end.
You would think that it doesn't affect our liability, the share of liability when there's an event. We say, okay, we're going to insure you, but you have to have your maintenance done properly because the rate plan will be this. They take no interest in that, not at all. But that would certainly lessen the liability issues if they would do that, because what happens is, no matter who is getting a majority of the revenue stream off of the maintenance, when there is an incident, who gets sued? The one with the deep pockets. So you may have done a very minimal amount of maintenance, but you're the one that ends up in litigation.

Thurber: The only entity that really requires an insurance minimum coverage level is an OEM- service center. Would you agree? You guys have requirements, minimum insurance requirements, right?

Rittenhouse: Our repair stations are insured, but that doesn't mean that the aircraft that we're going to end up in liability over are coming to us, they're going to other people.

Thurber: Has anybody else ever had an insurance company take an active interest in the maintenance side of the operation, to any extent? I think that is very interesting. I mean, once again what are the benefits to the insurance company. If they took an interest, would it reduce their claims?

Driggers: It certainly wouldn't help them.

Thurber: As an independent MRO, do you welcome this kind of a relationship if the insurance companies wanted it?

Driggers: If insurance rates would go down by setting standards and working with the insurance companies, we would be glad to see that. There are only about three different markets out there to place insurance with right now, and I just don't think there is any interest at any level within the insurance industry now to drop rates.
I think with 9/11 and then the hurricanes, whatever, it's given them reasons to jump the rates up and I would be surprised if they let anybody go in there and help on any of our accounts to try to drive the rates down. It just seems like if they don't like our rates, they go to somebody else. Well, the next guy's rates are exactly the same, so it just looks like they found the reasoning they needed to get back into a profitable situation.

Brown: If anything else, the accident, injury just gave them a perfect excuse. Even though when you look into those…I'm not aware of one of them that was maintenance-related but it's a perfect excuse for raising the rates up.

Matthes: We've actually gone to London to meet with the underwriters. I'm very impressed by their process. It's been very beneficial for us. They understand our business better. You start forming a relationship and they begin to know who you are and what your history is so you've got them being available to you. It's been a good experience for us. The only thing we've done is raised our deductible from $25,000 to a significantly higher number than that, but we can afford that one, so in essence, you're self-insuring that part of the risk.

Rittenhouse: Another part of the insurance issue is that we have to do a better job of marketing the fact that we are insured. The flying public doesn't realize the sensitivity of having an insured entity do their maintenance. The OEMs do, but the operators don't.

Driggers: It's amazing how much you get asked that question.

Rittenhouse: But our marketing people should be marketing that. They should be saying "this is our liability [coverage]," and you have a quote there of what's their liability.

Brown: Another thing we are looking at right now is there are a lot of independent MROs in the Beech community and there is a group called the Pinnacle Group we've joined. We just met about two weeks ago and the primary thing on the agenda was talking about insurance and how can we invest and pool together and buy insurance at more competitive rates. Just from the volume impact, the savings are substantial, so we're very interested in that.

Driggers: I know from being on the board of NATA [National Air Transportation Association] until recently, which you probably all are members of, that the number one biggest issue, in fact, with the OEMs out there right now is insurance. It seems to be the one problem nobody seems to be able to crack.

Brown: Wages and salaries are our biggest expense, insurance is next, by far.

Rittenhouse: And it will be the biggest effect in our industry in the upcoming years.

Thurber: What about the engine business, what do you guys see as the critical issues that you're facing these days?

Pratt: I can say from our standpoint, probably the same one we've seen over the 70 years that we've been in business, which is meeting customer expectations. Those have changed a bit. I think we have touched on it here in earlier conversations because we've seen a tremendous emphasis on our side on turn times on engines. We spend a lot of effort now, as we always have, but I think even more so, with the use of technology to help us, communicating with the customers on the status of their engine as it goes through the process.
We have sales reps and field service reps but we also have an on-line program called Turbine Update so you can log in and check the status of your engine. This is particularly helpful to international customers, which are some 40 percent of our business, where if it is 10 o'clock in the morning there and it's 2:00 a.m. here, they can still go online and check on their engines, see where it is in the work flow process. They can also use that to approve workscope changes, take a look at a part that--as you take an engine apart and discover it has a problem deeper inside, and then put a picture online for the customer to take a look at. They can understand why there was a change in the workscope.

Thurber: So that speeds up the communication loop.

Pratt: It speeds up the loop. I think it was touched on earlier that it also helps prevent any surprises from coming up but gives a better opportunity also to plan when the engine is going to be done, when it is going to be back on the airplane, so it makes for a happier customer in the long run.

Thurber: What about the issue of the cost of parts. Are you having to deploy the use of more technology to avoid having to buy new parts, using more repairs to keep your customer's costs reasonable?

Pratt: We have repair schemes and give the customer the option of whether they want a serviceable part, if that is an option, or a new part on the aircraft, that's part of the communication process. Depending on the customer, if you're dealing with, say, an airline, they're much more prone to go with all-new parts than the general aviation operator who, depending on how long he is going to keep the aircraft or the engine, will decide as to whether he wants to use serviceable versus new. So we offer them both options on that.
Whether or not the servicing content has increased, I would say probably slightly. I couldn't give you a real number on how high that percentage is but it is interesting. The technology that is available today makes the serviceable parts very, very good. So there is some good technology out there that enables us to do repairs that a few years ago we wouldn't have even thought about.

Smith: So in spite of that, though, you asked about the costs, then there is the availability of that part. You know, "well, we don't have the serviceable one but we have a new one." Then you have to go back to the customer "well, we've all talked about it now, they want a quick turn time, so we'll go ahead and put the new part in it and that is driving up the cost." So we want to get it back up in the air and the cost is higher.

Thurber: So for quick turn time, you might not have a choice but you just have to go with what is available.

Smith: Part of the aging aircraft thing is the availability of these parts can be a real problem. We're probably on the lower end of the food chain here, so…

Pratt: Yes, I would say in our situation, we're a fairly large company, so we have quite a large inventory to supply that. We really haven't run into too much of a problem with that, unless it is a particular part that maybe is being campaigned at the moment where there's a problem coming in there but we haven't run into too much of that.

Thurber: Paul, what about your CRJ customers, are they looking more at a turn time and less at cost or?

Soubry: Cost for any of the airlines, whether they are small commuters, clearly, the price is obviously the number-one driver.
I think some of the challenges that the MRO community has now is, for the last 10 years there has been consolidation and OEMs are getting more and more sophisticated in their own path of market activity and then you have companies like ours, of course, getting larger and consolidating and improving.
We're dealing, for the most part, with cognitive customers and so we deal with an FBO, we deal with an airframe OEM, or we deal with warranty work or campaign work for the OEM. We really don't have a huge opportunity for upselling because we find ourselves in a triangle to some extent with the end customer.
So we deal with an FBO and the activity of the engine operator and we find ourselves being the odd man out to some extent.
A couple of issues just from our perspective, the insurance is also a big issue for an MRO. I'm sure the cost of insurance has gone up 400 percent since 9/11.
There's another one that I find interesting and I think, at this point, is the importance of educating the operator on the insurance aspect of how they are covered. That limit still kind of blows my mind to some extent and given this as the lease companies are not insuring or assuring that the airplanes are maintained to the same standards all the time. I would think, if I was a lease company, I would want to make sure whoever maintains that airplane is doing this to the minimum this or minimum that, or OEM standards.
What's happened in the last 10 years is residual values are bounced around on airplanes and so now we're seeing more lease companies ending up holding the bag. I think that any companies that believe in the OEM authorization need to push that they're being maintained to the OEM specification.

Thurber: Is that a matter of communicating with the leasing companies better, educating them, as you educate a customer?

Soubry: That's what we're trying to do. It's hard in dealing with people way up the chain whether it's just an investment or whether there is the understanding of a unique issue--the issue that I bring up is that insurance is only one issue for a lease company and how that will affect the residual investment plus the whole discussion about new parts versus service versus repairs.
What still is kind of hard to swallow from our perspective is parts prices for the engine really end up going up two times, three times inflation every year yet we barely get our labor recovery each year. We're almost having to find ways to absorb the difference between what our customer will pay on parts inflation and what the OEMs are charging. So that just orients us more to serviceable strategies, repair strategies and so forth.
Chris mentioned technology and using the availability for customers to check online. We've got some customers now that have asked us to basically not send an invoice and not send an engineering report. They want a web address, they want to go to the web address, they want to see their invoice. They want to double click and go to the actual parts investigation, they want to go to the nondestructive and destructive tests, they want to bounce over to the OEM and want to check everything, they want to go to the website, they want to go back down to the parts list prices, they want to go to the old parts price list and make sure we offer the best quote for the part. All cool, but the cost of providing that infrastructure and the cost of making that live and breathe is amazing. But five years from now, we're all going to have to be there.

Thurber: If they want to get into that level of detail.

Soubry: Again, we're dealing with an FBO or a cognizant airline or the the military who knows exactly what they're looking for. I'm not sure the end operator knows what they're looking at.

Brown: You know, it's all the same stuff. They're looking to go through exactly the same thing.

Soubry: Yes, exactly the same issue. It's happening now and progressing well, but I think we're going to get to the speed of data management that is beyond what we're doing today and there is going to be a cost for that and so far, we haven't found a way to get paid pay for it.

Thurber: Mark, are you seeing this level of interest from your customers?

Karls: As small as we are, I don't think it's really an issue. As far as the cost, it's always right there in front of them at all times. And I think probably with our overhead, my pricing is probably lower than anybody else's here as small as we are. It was interesting listening about warranties from the OEMs and the fact that I think even with customers that have the warranties still on their aircraft, just with our pricing, we can just about suck them through the warranty work and have it come out at the same cost anyway.

Thurber: So being small is an advantage as far as communicating with the customer?

Karls: Yes. Daily, when we have an order and an issue, usually if something comes up, he's approving it right then and there.

Thurber: What about the support that you're getting from the OEMs?

Mitchell: I will repeat something that Paul said that I think really strikes a chord and that is the triangle, the relationships we have with the OEMs and the customers. Our relationship with the end user is extremely strong, I believe, and extremely effective, and I think should be a warning shot to OEMs who are bold in making decisions in a vacuum. And by that, I mean, making decisions that are going to affect the end user's ultimate experience with their airplane, by way of pushing away the local representation of a repair station.

Thurber: So you are important? What you're saying is that you are an interface for the OEM with the end user.

Mitchell: I believe we are. I think Paul made a good observation on that.

Thurber: So is there a place for the OEMs to provide service directly to the end users but also for the independents to do the same and work together to accomplish that goal?

Mitchell: Where I'm coming from is, the airlines have figured out that the OEMs can't do it all, so they have networked service to provide a valuable service to keep airplanes in the air. Right now, I see concerns with OEM-controlled parts, controlling manpower into your hanger and interfacing with a customer that's forced to sidestep local representation due to OEM service rules.

Rittenhouse: Following that same thinking, in our case, we do major work on Lear 20 series, 30 series, on the older King Airs, Hawkers, CitationJets and also on Citation 1 and 2. And the factories, themselves, are not as interested in those model lines but in southern Florida, we're the principal repair station for those models and yet, you get no support from the factory, you get no break on the price of parts.
You would think that it would be in the OEM's interest to partner with facilities like ours, to be able to support that particular fleet and that particular customer base, because those are the operators that are going to be buying the current models in the future, and if they're not satisfied with the support they're getting, of course, they can fly. They can relocate to a service station, but they don't exist in our marketplace, in the same cities, so they would have to move several hundred miles.

Thurber: So the OEMs, instead of trying to do it all themselves for every single customer, you would think that those companies would work with the independents to make sure they are taken care of and focus on the newer owners or whatever works best.

Rittenhouse: So often on the newer aircraft, they have maintenance contracts and so they are under warranty and are going to go into the factory store. On the older aircraft, they find they are so price conscious, they're much more likely to come to us, but they still need that factory interest, if you will.

Thurber: But there is still a market, Mark, right, for the customer that wants to deal with a smaller independent company?

Karls: I work each OEM differently, because to me, they all have different support. One group, you know, I know a lot of people that I could, like, call to do back orders and other ones, they may have like Raytheon, they have the Flight Options [fractional] program, all I have to do is say "oh, we're not working the Flight Options," so depending on where we are…

Thurber: So you work on more than just Gulfstreams. What else?

Karls: Gulfstreams, the whole Challenger product line, I think they refurb multiple models, but maintenance is all Gulfstream--the Bombardier line and the Hawker.

Smith: One of the things I'd like to say, we see the erosion of margins in parts. And, I don't know if that is a signal coming out that somebody who is not an authorized dealer but Walter even mentioned, list-plus, and you kind of feel a little guilty doing list-plus just so you can make a margin on your parts. That's a serious problem we see.

Thurber: So do you have to try to make up on the margin with your labor rate?

Smith: No, not…just list-plus.

Thurber: And the customers, how do they feel about that?

Smith: Well, you know, our customers are becoming more savvy. We talked about that they might want to see technical features in the future where they can get it on the Internet. We're a full service FBO, so we have fuel; customers are more savvy about buying fuel. Engine overhauls, they just don't take it to a…you don't say "buy a new engine." They go out and research this. They're becoming more savvy, and we have to adjust to those times so that we can provide them the best quality and service and market ourselves, and we need the support from the OEMs.

Thurber: Glenn, you have an interesting perspective because you were with an OEM [Rolls-Royce] until fairly recently. Have you switched your thinking at all?

Brown: I think I understand the challenges that Raytheon has. Because for example, Rolls-Royce in the aftermarket for corporate engines for years didn't own their aftermarket; the majority was run by Dallas Airmotive and Standard Aero. It was only about in the mid-'90s that we decided we really wanted to do something other than just build engines and sell parts. We knew that there was substantial value there and that was when we turned off the tap on new authorizations which, again, puts third parties in a real -- real tough spot, and there was no question.
My strategy for the last five years was, in essence, the same as Raytheon, which is get as much of that aftermarket under our control as is possible, without killing off the networks that supported us, because that was how we got better-quality earnings going forward. You know, if you sell an airplane, that's kind of a one-shot deal.
What you really want to have is not just the sale of the aircraft, you want to sell power by the hour or maintenance per hour and keep them in the family as long as you can. That's a good strategy for any OEM, whether you're an airframer or whether you're an engine guy.
So we understand the forces that are at work, but being on the other side of it, yes, it hurts. When profit margins are cut, that hurts our business. I think to your credit, you guys have done it slowly, you know, allowed the businesses to adjust, but I mean, there is really not a whole lot of subtlety to what is going on and the business model that we have supported you guys with has got to be adjusted accordingly.

Rittenhouse: Just to get it on the record the way that works, traditionally, in aviation and certainly in automotive, the affiliated dealer gets a long discount, whereas it leaves him the discount to offer to the non-affiliated repair station. This means that the repair stations can still sell at this price and make a decent profit.
But what so many of the OEMs have done in aviation is reduce that discount at their repair stations so that it is impossible for them to resell to the non-affiliated repair stations at the discount, and that's where in some cases, there is no discount offered anybody. That doesn't make sense as a business plan to promote your product and have it properly maintained.

Thurber: In general, though, OEMs have talked a lot about reducing prices with their customers recently, and have you seen that flowing down to the customers? Like Gulfstream talks about it a lot, Raytheon has made a big effort, Cessna has worked on that, but what is the end result?

Rittenhouse: That if the OEM gets the list price down just be reducing the discount they offer to the repair station, the aircraft operator benefits at the expense of the repair station.

Thurber: I'm still hearing that from an independent perspective. The independents are saying almost with one voice, we want to work with the OEMs to help your customers, to benefit them in the long run.

Brown: We have customers that go to one inspection with us and they do another inspection up at Greensboro. They'll just shop you just to make sure that you're still competitive. It's pricing but it's also a relationship. I think if the relationship is good, you're in good shape; if the relationship is a little wobbly, then you're going to get shot.

Driggers: And there are times somebody has a minor maintenance event that would require a major step to you rather than somebody much closer, and it doesn't really justify the travel of the airplane.

Rittenhouse: But if you don't get these model aircraft that we're talking about, those particular models, they could just as easily go to the affiliated repair station. They could just as easily go to the OEM's repair station, and they choose to come to the independent.
Why? Because the aircraft operator perceives that he is a second-class citizen there. They come to us for the customer service. They know that our business plan is to serve them. They know that we're tooled up and prepared with the expertise to serve them. They're number one with us.
When they go to the OEM service station, they're interested in the new aircraft. They're interested in new models, a new maintenance plan, in other words, they're under warranty. And their perception is that it costs them more because they don't get the customer service.

Brown: I think that perception is a reality. You know, whichever OEM organization you are going to, new aircraft get more attention.

Rittenhouse: In our facility, they know that we're there to serve them and they know that, and we make sure they know that.

Smith: I think it comes out in the aircraft sales. When you see somebody buying an airplane, they want to take it to the OEM and have an old plane made new. And that's a two-way sword, you know, if you go there, they're going to make that old airplane new and it can cost you a little bit to get it out, but that's what I see.

Soubry: Just two points relative to that: the vast majority of our world, whether it be engines or the airframes, they're not under long-term contract and so there is no switching cost. The ability to switch is immediate, and if you look at the percentage, that is actually tied up under the long-term contract, that's very small. It's the nature of our world.
So this is why we see OEMs getting back to the long-term service contracts. The OEMs are trying to capture the decision rights from day one. That's what we're going to have to deal with as independents.
I wanted to throw out something about parts, which I think is something that we should watch from the engine side as we've seen in the last year. Rolls-Royce has really pioneered this now, where they have taken the distribution of engine parts outside of the OEM for the first time. Historically, all these turbine parts went through the OEM and you had materials like spark plugs and they were going through the usual general aviation distributors.
So what we see now is Rolls-Royce taking the entire balance sheet and inventory and sell it to a third-party who we now deal with. The problem is, I have no leverage at all on the OEM anymore.
When you have the manufacturer of the part, whoever that is, they are the OEM, then the part goes to a distributor, then it goes to us as an authorized maintenance provider to the end operator. What happens is, the first guy that gets squeezed on markups is the independent maintenance provider. The OEM still wants his markup because he has the handling fees and markups and infrastructure and so forth.
The other problem is when the OEM can't deliver the material now. We as the independent provider say "here is my order book," and they can't deliver and so who do I go after now? The OEM who can't provide the parts or the middle guy who can't deliver because the OEM hasn't provided?
Honeywell has followed suit on some of the accessories. Rolls-Royce has done it on two major programs, the 250 and T56.
On the positive side, companies like Aviall have done a phenomenal job of using worldwide infrastructure and technology, they're doing a great job of fulfillment. But now you create a triangle, and from an independent provider standpoint, we are caught in the middle.
I'm sitting there with record high WIP levels. My rentals are flying because I can't get them back because I can't get the customer engines back, my turn times are lousy, and unfortunately, the customer doesn't care who can't supply the parts.
So it's just a new dynamic that I think we need to watch. Fast forward five years, will more OEMs jump on that third-party distribution bandwagon?

Thurber: One of Aviall's strengths, though, is the infrastructure it has and the technology it employs to improve the communication between the buyer of the parts and the OEM, presumably, that was part of the loop. But does that benefit the customer, and is it easier for you to work with a well-set up operation like that?

Soubry: I can't comment on the airframe side, the engine side has gone the other way. It went from totally OEM now to moving to a third-party, which just creates a different dynamic all together. And of course, when you buy parts from the OEM directly on the engine side, you're only buying, you know, life cycle material and other parts and so forth, you still need to buy stuff from somewhere else. Now, you can buy a suite of material from Aviall, which is good, but if the material isn't there to provide, you're stuck.

Thurber: But the customer really rather would they just call you and say, you know, take care of it and not have to go through all this hassle?

Thurber: And what was the response from the OEM when you talked to them about this?

Thurber: How about in response to technical problems, not just parts-associated, but actual technical issues, technical support? Is everybody getting a good response on that side of the house? Mark, I mean, you probably work with Gulfstream a lot, are they willing to work with you?

Karls: When I look at the OEM support as far as technical support, I always look at what the profile says as far as the customer's viewpoint of the OEMs, and it's almost opposite for me. The ones that have the worst rating probably give me the best technical support, probably because they didn't push as many increased support [costs], and I have no problems with the ones that are the lowest. The ones that are always on the top, I have the most problem with.

Thurber: Well, to turn it around, do you charge for providing that kind of service to your customer too, right?

Karls: Yes, you end up passing it on to the customers.

Matthes: See, we don't. If it is a separate engineering, corrosion, we'll pass that cost through. Something comes in and we're troubleshooting something, we use our own tech support.

Driggers: Same with us.

Matthes: It's part of the value we offer to the customer.

Thurber: But these would be your regular customers.

Matthes: Not necessarily. We had a guy drop in the flight control. We have not seen that before.

Rittenhouse: But you're not paying the OEM for tech support. They're saying they don't pay the OEM and they…

Matthes: We're, again, applying time and effort and not charging for it.

Thurber: What about technical data, give the recent developments of technology; are you seeing the improvement in the quality and the way the technical data is distributed or are there more things you would like to see OEMs do in the way that technical data is distributed and produced?

Rittenhouse: We find that some of our manuals are late; that we don't get them on time. I would like to see all technical manuals on the Internet with a basic description rather than CDs that we're not supposed to network anyway. I would like to see that--I'm sure you guys agree-technically, that's feasible today, the expense of publication would be reduced. That way, you wouldn't have to worry about updating libraries. Of course the OEM would provide a password to keep the unauthorized out. You would have to pay for it, but it would be much better and faster and efficient. In this day and age, it should be 100 percent on the Internet.

Thurber: As a user of technical data, would you rather have it available from one aggregator, one source instead of having to go to each OEM's website? Like where you could just go to one website and if you are looking at something at Gulfstream or Hawker or Falcon then go through that one portal to find it.

Rittenhouse: Today, we are getting CDs or paper manuals even yet. You would rather go to one source like ATP and just have it all managed by them. But even at that, you can't be sure you have the most recent, you can't be sure you're up-to-date. If it is on the Internet, if it's on the web, I don't think it matters. You can type in one address and have one icon as easy as another icon. Probably whatever gets you closest to the source and is the most recent and easiest to keep up-to-date is the biggest concern as far as economical.

Thurber: It's not that expensive?

Rittenhouse: Yeah, it's reasonable. But to have one icon for Raytheon and another icon for Cessna, then that's not a problem, the guys are used to that.

Thurber: What does everybody else see with this? Is it getting better?

Mitchell: Higher quality, for sure, but I think there are ways we can still improve.

Brown: We are seeing improvements, and I think the issue perhaps that preventing people going whole hog on the web right now is download speeds, a lot of them are still slow, and I think within the next three or four years, as we see more high speed web access, becoming prevalent and then once you see that shift, we'll see tech pubs via the web.

Rittenhouse: High-speed access is very reasonable.

Thurber: A lot of companies have gotten smarter about employment issues, and hiring processes. Walter, can you tell us what you're doing?

Rittenhouse: It might not work for everybody but for us, it works well. We deal with multiple temporary agencies, anybody that is willing to work with us, not just one. We have a requirement and we just put it out to all of them and see what they come up with, using the temp-to-hire situation. Now, sometimes we need temporary help just to get through a project and I'm sure some of you do that, too. But if we're looking to hire a person, the best interview in the world is to have them come in and work on the floor for a few weeks and it's relatively inexpensive.
We have a pretty reasonable pool of talent back in Florida but still for the specialized kind of things that we do, we tend to bring people in from other parts of the country.
Yes, temp-to-hire, no matter what the skill set is. If they say they can do it, you get them on the floor and if it doesn't work out, you just call the agency and get another one.
Now, we also have an agency where we talk about the issues. We do a very interesting thing with the training program. We're very strong in the training programs. You know yourselves that most group leaders don't want to start out guys right out of school. They say it slows them down, it doesn't help them. But you say, well, you have to contribute to the industry by training these people and bringing them along in our future talent pool. But the group leaders really would rather not have them.
We've turned that around and banned it because we give them a test on aptitude, a mechanical aptitude test, to hire people with no experience. You hire people for aptitude, for training, and for experience, but a guy right out of school doesn't have any training or experience other than just basic A&P training. So an aptitude test determines if he has the manual dexterity and the smarts to be a good mechanic.
It's been very successful for us to the point where the group leader, now they ask for them. They campaign to get another apprentice because they worked so well, and then they actually will work better for us than experienced people.
We've gotten some really super, super technicians; of course, at a very low price because they're right out of school. Then we accelerate them rapidly to keep them from going to the competition. So it is a very good program for us.

Thurber: You say that only about 20 percent of the test takers are actually people you want to hire.

Rittenhouse: Yeah, we have a 5.9 average, which doesn't mean anything, but that's the way the grading system works. Anybody that goes over gets an interview because they're interviewed for other issues. But anybody under 5.9 [doesn't get an interview]; it increases our odds. It's not to say that if you score lower that you wouldn't be a good mechanic, but the success rate is much greater, and you know yourself that you don't want to invest in people that don't turn out great because that's very expensive. So our success rate with the apprentices has been much, much greater and in fact, almost 100 percent success rate.

Thurber: Have you had experienced people who have taken the test?

Rittenhouse: Sometimes our employees ask if they get to see how they are doing, and I say "well, you know if you don't score a 5.9 or higher, you're fired," and then they decide they don't want to take the test. But yeah, it's very good to see, the ones that do well turn out to be very good technicians.

Comiskey: Does anybody here have a problem with the number of mechanics they need?

Driggers: It's difficult to get the number of people we need right now. We're doing it, but they're coming in, one here and one there. I don't think that the technical schools are putting out the number of people that they used to in the past. I think a lot of young people are finding that there are other careers they want to go into rather than this. I think there is a lack of education at the high school level in particular, and I don't think young people understand what our industry really is, what kind of money they can make, what kind of security they can get from it.
I have found that in some of the places where I have given talks that guidance counselors in high schools do not understand our business at all. We have not opened our doors up and made an overt effort to go out and try to educate them so they can help educate young people out there that this is really a high-tech business. I think that medical technology and all kinds of other things have gotten in the way of people coming into our industry. But we have not done enough as an industry to try to promote ourselves.

Brown: Let me answer your question perhaps in a different way. I think it depends on where you are in the country. If you're in Los Angeles or southern California where it has been an aerospace top area for years, people get the business. So recruiting mechanics in that part of the world is not as hard.
Where we're centered in South Carolina, there is a very active motor sport business, you know. If you're out trying to recruit a top mechanic and you're saying "okay, you want to work on a NASCAR team or go sit in a hanger all day," that's a pretty tough recruit, to be honest with you.
We're not competing with other aviation businesses, we're competing with NASCAR. You know, the good guys are going to those programs because there is a lot of money and a lot of fame and exposure in that kind of business down there.

Driggers: There are other industries out there, too, as people go to technical schools to get their A&P certificate that are competing for those same people.
If a young guy or girl is going to go out and become a mechanic, the odds are that they'll make more money going to the local auto dealership as a technician than they will coming to the airport. Now, I think that over the last five or six years, we've done a lot to try to equalize that, but we're still not there.

Smith: So one of the things you're bringing up and I think it's what you're saying, is retention of the ones that you have…

Driggers: That's critical.

Smith: At the last 20 Group meeting, we had 18 FBOs represented. I asked the question, "how many of you guys have had any kind of management training in the last year?" There were about four or five guys that raised their hands that had some management training.
People will usually leave a manager, not a job. I think as an FBO owner, I think one of my responsibilities is to make sure that my director of maintenance didn't get to his position just because of seniority and could be a poor manager. I think it's important that we train our people to be managers of the people so that retention is there.
The other thing I want to add to employers, we have developed a very good relationship with a school, an A&P school. You buy them a box of donuts and take them out to lunch and stuff, and they will recommend their top students.

Brown: Just for a donut?

Smith: Well, in South Dakota, we're cheap out there. It really works. You get the cream of the crop from the A&P school and you don't have to go through the interview process. He says, "look, I've got these four or five guys," and we bring them in on the bottom and they are the best out of the school.

Driggers: If you have technical training schools anywhere in your area, we are willing to take care of them.

Smith: Yes, go see them.

Driggers: If we have parts and things that we can't use anymore, they are like gold to these schools. Just make sure that they are part of the loop. We invite them in. We do all this to try to make sure that those technical schools in our area are good schools. We try to show them what we do so they get a good dose of us. And you're right, it is that you'll wind up with people from the schools you support, and most of them end up being the top mechanical schools.

Brown: That's been how we've been able to do it, and we've got a real good relation with Greenville Tech, there in South Carolina. We work with Embry-Riddle, as well. They have been an excellent source for guys that have gone through the A&P and gotten credit for it and then gone back and received a B.S., and you know, those guys will be the next level of foremen and supervisors that we hope to try to bring them up. You have to have that relationship with the schools, if you don't, you're just dead.

Driggers: But it's not just a good relationship. we're finding difficulty with the economy. With the economy the way it is right now and the way our businesses are all kind of rolling out, there is a lot of discretionary money being spent right now. Those are skills that are even harder to find, trying to find good qualified people that are craftsmen that have good physical, hand-skilled use of tools and things like that. It's the hardest thing we've got to do.
It's allowed us, once we've understood the problem and know the kind of demand that we've got, we kind of put the requirement on ourselves right now to reenergize our efforts for in-house training. We were looking for experienced this or experienced that before; they're not there.
So what we're going to have to get is people who have minimal experience levels, bring them in and actually put them through an in-house training program and absorb that cost and understand that's just the cost of doing business. And since we've done that, we have really found that this has become easier, but it's still not easy.
Just getting those people who have the minimum qualifications that you need that have the personality and the ability to go to work with other people, once they have that skill set, we're bringing them in-house and then making them an entry-level cabinet maker with us in our cabinet shop. We'll bring them in with minimal qualifications that we've decided are acceptable.
We have an in-house training class right now where they have to be able to build a little cabinet that we have and it's about $500 worth of material and two weeks of their time, which is totally dedicated to just doing that before we let them ever touch anything that goes on an airplane. There is a lot of expense that goes into doing this to try to keep people. We have gone to three shifts now and all of our modification disciplines as well as maintenance. Filling those shifts--and you're balancing those shifts out with the right number of experienced people, skilled people to new hires--has really created a bit of a dilemma for us, but it's working. It just never goes quite as fast as you want it to go.

Thurber: What about management training? Duncan spends a lot of money on that, don't they Mark?

Matthes: On management training, teach people how to treat other people or problems, people or their coworkers, we have probably run, I guess, 500 or 600 people through the program over this past six years. But I agree with what Gary was saying about in-house training, as well. We can pay them a proper wage, but if we don't provide them proper career opportunities or learning opportunities as their needs develop, we will lose them. We have a turnover after three years that goes away. So you have the first three years for them to, and then the last three years for them to get, they get part of the organization.

Driggers: Younger people these days, I think, are looking at their career more down the road than they ever did. There was a point in time that somebody that was very young was kind of looking for what they could make just then and not really thinking about five, 10, 15 years down the road. I think that they are much more long-term conscious now.

Comiskey: When they leave, do they go to other aviation businesses or do they go outside of aviation?

Matthes: Generally, it's outside aviation. We'll lose some people with the OEMs somewhere or go look for a flight partner somewhere but that's probably, I would say that is 15 to 20 percent of what we lose.

Thurber: What about Standard Aero? What are you seeing in your facilities, Paul?

Soubry: We have done a lot of what is being discussed. We have teamed very aggressively with technical and vocational schools and try to go to the point where we actually include our teachers on the curriculum. So our teachers design the curriculum and give the actual courses, so we kind of hand pick them.
We have done some programs where we have co-sponsored those classes and subsidized the education by preselecting employees that go into the courses so we know who we are getting before they get out. So we're trying to move upstream on the selection and as Gary said, it's a cost of business. We now know up front.
The other thing that we've done has been discussed is foundation and development. We have created three strategic programs that are two-week long classes in-house with external help on strategic leadership, one on operational excellence, operations control systems and stuff and the other one is business and strategy development. Then the last thing we did is create our own little internal university. The university hosts annual events where we have all the folks come and talk on leadership and management.
For example, we worked with a company that makes board games and we customized a board game that is like Monopoly. It's all about engine MRO and so we simulate the business. Basically, you get inventory, you get fixed assets, you get whatever, and everyone has to play the board game as part of the leadership development program and it's really hard but real.

Rittenhouse: Do you market that game?

Soubry: No, it's just an in-house thing.

Thurber: These things are helping with training?

Soubry: I think Gary's point and what Duncan is talking about is exactly where we've gone, is that complementary style of using externals. But there is a certain percentage yet that we need to treat with style and internal leadership, and we just recommend, we want to make that meaningful. We want to implement the actual design control systems we use. We put all of our leaders through finance courses and how to read reporting, like how to do cash flow management and so forth. It's not an accountant's job, it's not a business-type job, it's everybody's job to be able to say, "okay, P&L, balance sheet, working capital, I can make decisions, I know what it means," as opposed to just, do my job.

Thurber: Mark, how do you approach these issues at the Savannah Air Center?

Karls: Well, A&P-wise, in Savannah, like I said, I've got the ones that don't make it over there or are mad at Gulfstream, so I always have a good flow of A&Ps. But my whole night shift, when you set up those crews, as long as you have one or two guys on the crew that are really savvy on the airplane management team, I can throw as many green guys in there as I need to do the project and it seems to go well. One thing I do like about our green guys is that they're overly cautious. You know, they're the guys that…I mean, my senior guys probably get in more trouble than the green guys.

Thurber: And do you work on developing people and helping them grow?

Karls: Yeah, that's probably an area that, as our company grows, that we need to look at pretty significantly. Because right now, there is really no leadership training for them. But I know we'll be going there as soon as we grow.

Thurber: The next subject is Part 145 regulations that are going to kick in. They were delayed a year, so it's going to be April 2006. And you are all repair stations, I assume, so you're all going to have to have formal training programs.
The question is, are you well on the way to preparing for this requirement? Are you going to do it all in-house? Are you going to seek outside resources? Are you going to create training programs that you might even sell to other companies? What's the plan?

Pratt: I know at Dallas Airmotive, we are ready for this already. We have our programs together for Part 145. We have submitted those to the FAA. We have worked with our underwriter, Marsh, who developed human factors training and they are supportive.

Thurber: You worked with your insurance underwriter?

Pratt: He actually helped us develop the program. He spent a fair amount of time with us in doing that. And when everything rolls out, he will be supportive.

Thurber: That's for human factors training for everybody in the food chain?

Pratt: Yes, it's really important because it's so much focused on what caused something to happen and, of course, the insurance companies will be interested in that because there is always interest in trying to reduce your injuries on site and so on.
What is the real reason behind it? Was it the person's lack of attention to something or was it the work environment itself or some procedure or process in place? And that would always be something to get the insurance company's interest level.
One of the other things to mention here is that we are also an ISO-compliant company. Whenever we have special needs for training, we will work with the OEMs to bring in their trainers, say on a particular engine program, say PW300, bring people to do hands-on training on-site. We have people coming in throughout the year on a constant basis, coming through the facility.
Also, we have regional turbine centers throughout the country, nine of them in the U.S. And one of the things we help do there is--they tend to be small shops with three or four people, maybe five--is they go on-line and take some courses, and apparently it is pretty effective.

Thurber: One of the questions with regard to 145 training is, do you get the feeling that the FAA is going to require that they approve your training program or that they also approve your training in the program? I think that's an important distinction because that could be a lot more FAA involvement.

Mitchell: If it's consistent with the rest of 145, you have to do what you say you're going to do. As far as an approved training syllabus, I understood it to mean that it meets their standards that they have given you and therefore, you are required to abide by those, that you say you're going to do.

Brown: You are vulnerable to it.

Thurber: But they are not going to actually delve into the contents of it to a degree.

Driggers: I can't imagine they're going to have sufficient manpower to do that.

Thurber: Have you clarified that with your FAA office yet, Walter?

Rittenhouse: No. My understanding, though, is that you can't come to an incumbent repair station and be able to just give evidence that all of the jobs that are being performed within the repair station have training records to back up the technician, how deep that's going to go. That's pretty extensive at any rate so there's going to have to be a lot more documentation, a lot more curriculums put together formally in order to comply with the spirit with what the training records are all about.
For us in a repair station, we work on such a wide variety of airframes and such a wide variety of tasks, that that's a daunting goal to reach. We feel that this one-year delay has helped us a lot, it's been very good for us. We are way ahead of the games today whereas the original debut would have been more oppressive.

Thurber: Everybody else ready for this mandate?

Karls: We've had the skeleton of the training program put together, but definitely glad about the delay. If the FAA came out and said what has to be training, have they ever been specific about it?

Thurber: How are you planning to deal with this issue, Richard?

Smith: We thought we were going to get there pretty soon, ours was upright at the same time. We're a consistent Diamond award winner from the FAA for training. We do train all of our technicians because it's more like you said, it's on the documentation side. It's going to vary. It's going to have to meet all the rest of the regulations that we have to follow, they want to be able to see that paperwork and we're in progress. We're going to do it in-house and we'll take it. It's like any other regulation that comes down.

Rittenhouse: I don't think we completely understand where this is going to end up, but like Richard says, we'll get through it. We'll see just what is required.

Thurber: Talking about the FAA brings up another point that I keep hearing complaints about, that is, lack of FAA resources to help you do your jobs in terms of local certifications, repair schemes, supplemental type certificates. Is that still a problem and if so, how are you dealing with it?

Driggers: Yes, it is a problem. Especially on the interior side of the business where you have to get certification. It's a big problem, and it's going to be a big problem based on the information the FAA put out. For every three projects they get rid of, they're only going to take two back.
Industry associations have really lobbied the FAA and Congress to try to get some money, to get some teeth put back into the appropriations to make sure that this particular role that the FAA provides is not diminished. That's part of the Jobs Creation Act. We've got a number of senators and congressmen right now just lobbying legislation to make sure that there is adequate money in the FAA budget and that it will stay in that particular project so that they have the resources necessary to actually go through the certification process as they have done in the past. The FAA is going to be more selective about what they choose to work on. And it has been publicly stated in the FAA that they don't see interiors, if you will, as being a major safety consideration.
Safety considerations are the ones that appear are going to always have top priority. But if they don't continue to do the certification projects that are necessary for other parts of the business, it's going to have some severe impact on the economy of our businesses.
I think that there has been a huge ground swell of us going to our different congressional sources and making sure that they understood the ramifications of this going south. From what I have seen so far, I have been very, very pleased with the kind of response we're getting.
Also, there is nothing more important than getting to know your ACO [FAA aircraft certification office]. We have really focused on getting to understand them and helping them understand us. We have quarterly meetings with them now. We go down to Wichita and meet with them. We have a new ACO chief in Wichita, and helping her understand what it is we do and why we need what we need has been a Godsend. It's really been very important for us to stay close to those people. They're not our enemy, you know. They have got to be our friends in this thing and partners with us if we're going to continue to grow our businesses.

Thurber: Would anyone like to see the FAA permit more delegation of authority?

Driggers: Absolutely.

Soubry: Sure.

Thurber: Is the FAA willing to do that?

Driggers: They say they are. They say one of the things that they are looking at to help overcome this problem is delegating more. Midcoast is a DAS [designated alteration station] as some of the other people here are. The FAA have got to allow the DASs to operate fully as DASs. They're just not going to be able to meet demand if they don't delegate.

Thurber: What's everybody else's experience?

Smith: They're not willing to extend themselves out very far. They want to make sure they're within their guidelines all the time because they don't want to see the exposure out there to them.
I have mentioned a couple of times the aging of aircraft is a problem. That's going to be something that I think they're going to look very heavy into is fixing those old airplanes up and run them out the door.
We have already received fairly good response from the FAA that we see a problem out there, this is the solution for it, and they will give us some support on this. I guess I can say we get pretty good support from them; I think better than some other areas. Because regionally, when I talk to other FBOs, there are so many horror stories. But I think generally, we have a very good relationship with them, so far.

Thurber: Does everybody here have ISO quality systems or is that not common?

Matthes: We do them for government programs. We just went through that this last year, became ISO-certified.

Thurber: Is it helping?

Matthes: Yes, it really has. Besides being able to fly the plane and, you know, all the obvious things that happen that way, it really made us look inward a little bit more and understand that continuous improvement is part of this processing.
To document those things that you do every day that sometimes you just don't take the trouble to document, it was a big process and we went through it and I'm glad we did. And now every year, they come in and they're pretty tough. They look you over in places you didn't even think they could find, but it keeps us on our toes. I think it's good for us.

Pratt: We are ISO in all our facilities. It's a big help, as Gary mentioned, internally, in your systems, it takes a lot of effort to get it done and you are constantly audited. It's regarded as a requirement, particularly in Europe; this is how they gauge you. It's like having the FAA certify on something. It's a fairly high standard, and we put an awful lot of effort in it. It kind of raises our level. I think that our quality control is much higher than it has been before.

Thurber: And it's worthwhile?

Pratt: It's a very worthwhile exercise for us. It does make you look inward, it does make you look at the processes and how you're doing some of these things and the documentation of it. It's very heavy documentation, of course, but it's a good reality check on your business.

Thurber: Does Jet Aviation do that?

Mitchell: We looked at the ISO but we didn't feel it was a perfect fit for us in our type of business, so we have a similar program that fits with our people and it is a good program that we initiated earlier this year. Similar traits as the ISO, but we're not quite a manufacturing type.

Thurber: Speaking of Europe, are there companies looking at the EASA certification as the European Aviation Safety organization starts to get going there? Is this going to be necessary for your businesses?

Pratt: We are already EASA-certified.

Driggers: We are also.

Matthes: Also.

Rittenhouse: Banyan is also EASA certified.

Comiskey: Is the international market a significant market of growth for you?

Driggers: Mostly in and out, yes. The bigger selling stuff, yeah, if they'll fly over here, especially Global Expresses.