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Tuesday, November 1, 2005

The Aviation Maintenance Executive Roundtable: The Independents’ View

On July 12, 2005 Aviation Maintenance publisher Dan Comiskey, editor Matt Thurber, and nine executives from independent business aviation maintenance companies met to discuss important issues affecting the aircraft maintenance industry. Topics ranged from the high cost of insurance to problems getting reasonable parts prices from aircraft, engine, and component manufacturers,and challenges finding qualified aircraft technicians.

The meeting was held at the Verizon Place Hotel and Conference Center, D/FW Airport, Texas and was sponsored by Raytheon Aircraft. Attendees included: Glenn Brown, president/COO, Stevens Aviation; Gary Driggers, vice chairman, Midcoast Aviation; Mark Karls, manager of aircraft maintenance, Savannah Air Center; Mark Matthes, executive vice president/COO, Duncan Aviation; Tom Mitchell, senior vice president, general manager maintenance, Jet Aviation Bedford; Chris Pratt, director of marketing, Dallas Airmotive; Walter Rittenhouse, vice president technical services, Banyan Air Service; Richard Smith, vice president and COO, Business Aviation Services; Paul Soubry, president, Standard Aero. The complete Roundtable interview is available at www.AviationMx.com, in the November issue.

Aviation Maintenance: How are your businesses doing?

Gary Driggers, Midcoast Aviation: We've been fortunate due to many factors. There has been some distance from 9/11 and poor performance by the airlines is driving people 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 be cautious.

Tom Mitchell, Jet Aviation, Bedford: We have found some real good growth in the last few years. 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 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 [aircraft on ground] airplanes back in the air is at an all-time high.

Walter Rittenhouse, Banyan Air Service: At Banyan, we work on the other half of the turbine fleet in the area, 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.

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 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.

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.

So we're kind of focusing 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, Glenn [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.

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 the paint will be online in March and the maintenance will be online in December of 2006.

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.

Glenn Brown, Stevens Aviation: Stevens is doing quite well. We're a Beech dealer, as well as do a significant amount of Beech maintenance. We have some outstanding contracts, including a military depot contract on the C-12 [military King Air] program, which is quite good for us.

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.

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.

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're seeing the OEMs [original equipment manufacturers] 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 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 overcapacity. 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: 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.

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 decrease turnaround time, and a big impact of that, as Paul was speaking about, is rental engines.

We have a 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. But certainly, rental assets are a factor. We have about 250 rental engines in our pool and it's quite a big operation.

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.

Brown: 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.

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.

AM: Will the advent of the very light jet pull new people into the business?

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.

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 maintenance hours per event than you would have thought maybe five or ten years ago, there is still a lot of work to do on these new airplanes. It's just a different kind of maintenance.

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 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. We're seeing very little push back from customers on the rates that we're charging and we're still not where we ought to be.

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, 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 timeframe 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 in that process.

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.

AM: What are the most critical issues facing your businesses?

Rittenhouse: The single most critical issue that we face is the cost of insurance. To me, it's always surprising that the insurance companies don't take an interest in the repair station. The same companies are insuring both the aircraft operators and the pilots and the repair stations. 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.

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.

Matthes: We've gone to London to meet with the underwriters. It's been 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. 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: I know from being on the board of NATA [National Air Transportation Association] until recently, that the number one biggest issue with the OEMs 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.

Pratt: The same [issue] we've seen over the 70 years that we've been in business, which is meeting customer expectations. Those have changed a bit. We've seen a tremendous emphasis on turn times on engines. We spend a lot of effort now, as we always have, with the use of technology, communicating with the customers on the status of their engine as it goes through the process.

AM: What about the cost of parts?

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, that's part of the communication process. Whether or not the servicing content has increased, I would say slightly. The technology that is available today makes the serviceable parts very, very good.

Smith: In spite of that, 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, 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.

AM: Paul, what about your CRJ customers?

Soubry: Cost for any of the airlines, clearly, the price is obviously the number-one driver. I think some of the challenges are for the last 10 years there has been consolidation and OEMs are getting more sophisticated in their own path of market activity and then you have companies like ours, getting larger and consolidating and improving.

From our perspective, insurance is also a big issue. I'm sure the cost of insurance has gone up 400 percent since 9/11.

AM: 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. And I think probably with our overhead, my pricing is probably lower than anybody else's here as small as we are. 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.

AM: 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.

AM: 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 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.

AM: 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?

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 the Citation I and II. 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 [somewhere else].

AM: 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 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...

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.

AM: Glenn, you have an interesting perspective because you were with an OEM [Rolls-Royce] until fairly recently.

Brown: I think I understand the challenges. 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.

AM: What about hiring strategies, how do you find the right people?

Rittenhouse: 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 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.

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. 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. We have not done enough as an industry to try to promote ourselves.

Brown: 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.

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.

Karls: Well, A&P-wise, in Savannah 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.

AM: Part 145 regulations are going to kick in soon. Are you ready?

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. 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.

AM: That's 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.

AM: 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.

Rittenhouse: My understanding 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.

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

Smith: We thought we were going to get there pretty soon, ours was up right 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.

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