Aviation Maintenance invited executives from top independent business aircraft repair stations to meet for an Executive Roundtable on July 17. A lot has changed since this group met two years ago; business has become much more challenging and the aviation industry is just beginning to recover from a lengthy downturn.

The discussion ranged from the state of the participants' companies to productivity issues, insurance, backlogs, security, maintenance manual access, and information technology upgrades. This article is an abridged version of the 2003 Roundtable; the full version can be viewed at AM's website, www.aviationmx.com, in the October 2003 issue section.

Attendees this year included:

Paul Soubry, Jr., president, Standard Aero Canada; Jim Donlan, president & CEO, Dallas Airmotive; Thomas W. Mitchell, senior vice president, Jet Aviation; J. Robert Duncan, chairman, Duncan Aviation; Jace M. Stone, vice president and Peter Loeb, president & CEO, BizJet Lufthansa Technik Service Company; Walter Rittenhouse, vice president technical services, Banyan Air Service; Richard H. Smith, vice president, Business Aviation Services; Gary L. Driggers, vice chairman, Midcoast Aviation.

The state of the aftermarket

AM: How has the economic downturn affected not only the industry, but your company?

Walter Rittenhouse: We have a very capable staff now. Now it is not as difficult to find capable help. We have gone to additional shifts, not just to increase capacity but to reduce down time, and we believe we have the best turn times in southern Florida. We're working two shifts – this is all new – to 12:30 midnight from 7:00 in the morning weekdays; and 10 hours a day on Saturday and Sunday, 7:00 to 5:30, Saturday and Sunday. The idea is we can [allocate] 200 hours at an aircraft on Friday night to Monday morning. That has proven to be better value to the customers.

AM: After 9/11, Standard Aero didn't hesitate to move forward with the CF34 program. How is that paying off?

Paul Soubry: We signed our deal on September 10th at 6:39 p.m. We had no idea the world would change as fast as it did. We were the first independent to sign with GE. And then immediately following, we saw MTU and IHI enter into the fold. And, of course, Lufthansa was already there. Air Canada was teetering entering, and we knew Delta was going to move into it. The competitive landscape changed quickly. We're now seeing the forecasted volumes that we thought we would see through this period of time. We have seen the level that we were hoping to get. And now we have to figure out how to turn them quickly and do it at a profit.

AM: How about Standard Aero's strategic positioning for when things get better?

Soubry: What we decided to do back in the mid-90s was make sure we weren't too dependent on one market segment. So 30 percent of our business is military; about 30 percent regional aviation, and then some of that split between industrial and business-type applications and helicopters.

Jim Donlan: We have been assimilating some companies and procuring a company. And so we have been trying to digest, integrate, expand our product lines. Diversification is important. The economy has been bad, and it seems like all of the environmental elements out there are against us. But we fared well in the market by having that breadth of product.

Richard H. Smith: Being in the Midwest, diversification is one of our keys. We looked at the things we needed to improve, and it was outside salespeople. You think business will continue to come in and you don't have to do a lot of marketing, but we realized that if we we're going to continue to at least maintain, we needed to improve our outside sales. So we hired outside salespeople, improved our marketing. And diversification is the key because you're going to find areas of your company that are down, but then other parts will help support that during the downturn.

Gary L. Driggers: We're seeing a real pick up in the amount of activity for maintenance, especially for pre-buy inspections. The modification dollar was kind of hard to get. Nobody wanted to spend the money. And with very few used aircraft transactions going down, it really kept that end of the marketplace suppressed. But we're seeing a lot of activity right now in technical appraisals, with pre-buy inspections. And that is also driving the discretionary money. That has been coming back very strongly now in the modification base. And that is where we were hurt the worst was the downturn in the modification part of our business.

AM: Are we seeing an upswing in transactions?

Driggers: Airplanes are being sold at a rate right now that is way greater than what it was a year or two ago. I think the values of the used aircraft are helping to drive this. The values are down, and many companies are taking advantage of the opportunity to buy aircraft. Many of our regular customers are flying much, much more than they were previously. They are flying a lot of hours with sometimes fewer aircraft. The need for the aircraft is paramount. Companies that were flying 350, 400 hours a couple years ago are flying 600, 700, 800 hours on the same airplanes now, which is helping drive the maintenance business.

Peter Loeb: We also have been affected, like everyone else, by the downturn. But, the last two years were dedicated to restructure and reshape the company. There are three areas: one was diversification, and we're doing that, adding new engine product lines to our portfolio. [We] negotiated with Rolls-Royce, adding the engine product line to our portfolio. With our sister company Lufthansa Aero, we're maintaining the CF34 product line at our facility. And we have renewed our commitment to the one-stop shop capability that BizJet has. As a result we have invested in our facility, in hangars, in the infrastructure within the company. We restructured our sales force under Jace [Stone]'s leadership. In the past, we had two sales forces because we had two companies. We restructured that and are now selling the company's products with one sales force in a new regional sales concept. And we're very well positioned. 2002 has been better than 2003. We see a significant increase in demand for our services. I think the used aircraft market is moving, and we're at capacity. Actually, we're over capacity. Right now, we're hiring in let's call it a cautious hiring mode. We see the silver lining on the horizon.

Thomas W. Mitchell: Our company was thought to be sold, and/or going to sell, so that caused some impact, but what we realized is, through the due diligence process, it uncovered enormous opportunity to restructure the company. And so we have taken 2002, which wasn't a tremendous business year, to restructure. And now in 2003, the stars are aligned with interest rates on airplanes very low. People putting off purchases that are inevitably going to happen are now starting to happen. We're seeing our restructuring and our location at Dallas and Palm Beach and Boston to be strategically to our advantage. We see a good near-term horizon, and certainly a good 2004 to develop.

J. Robert Duncan: I have been in this business 38 years. And over those 38 years, our company most years has grown at about a 15-percent rate. And I am talking about the employee base. We have seen a couple of times where that has leveled off. And we used that as an opportunity to look at our costs. We have been effective in cutting some of our expenses. We have controlled our capital expenditures. We have held all the employee base together. That is very important to us. That is a commitment we make to our employees, and we had a plan several years ago when this kind of thing would happen exactly what we would do. And consequently, our turnover rate is the lowest it has ever been. Our business is growing again. We haven't been able to recoup the cost increases in the area of insurance and health care costs. And it's resulted in decreased margins in our industry, and that can't last for the long term.

Insurance

AM: Have insurance costs risen dramatically for your maintenance businesses?

Rittenhouse: We're in the process of negotiating right now, and we're assured that the steepness of the increase has flattened out. And we expect to pay the same now as we did last year. Deductibles continue to increase dramatically. The fact is that we're self-insuring to a greater extent than we did in the past in an effort to keep those prices down. An interesting side point for this discussion is that insurance people are encouraging us to be more careful about what work we do, to look at the log books. And, if there are not other insured entities already in the log book, to think twice about taking on that job. If your name is in the log book, you're now a target.

Driggers: They are not making the profits on the investments that they have in the past. The only way that they are going to overcome that is one of two ways. They have either got to increase premiums, or they've got to have investments that make more money for them. The insurance situation has hurt the entire industry hard. It is squeezing margins because we're all hit with it. I don't know of anybody that didn't get an increase in insurance rates over the last year or two. And I don't think that them looking at your business and trying to find out whether you have got good practices and they are safe, or you're doing more than the FAA requirements is really an issue with them. There are people that don't do a very good job and have high loss ratios that are probably being hit harder than other people, but I think everybody probably is being hit right now.

Duncan: It is my understanding that business aviation is thrown in this total bucket with all aviation. So the insuring of our industry is peanuts compared to the airline risk. And so when the airline risk goes way up, we get pulled along with it. And there really isn't much that we can do about that.

Soubry: What we're now seeing is a dramatic increase in deductibles. And so we are effectively self-insured for a vast majority of the projects that we take on.� So you're getting hammered on the premium, and then you're getting hammered downstream effectively due to the size of the deductible.

Mitchell: To further exacerbate the condition is the type of aircraft and a tragic wingtip scrape or hangar rash. It is one event that should not have occurred. When it does occur, the claim is another flaming arrow coming at us from the cost of doing business that we don't know how to avoid, other than to further train. And we even are discussing rewards for inducing more safety, safe thinking in the workplace.

Driggers: We have done that at NATA [Safety 1st line training program] to try to make people aware in the maintenance arena that this is not just a line service function. In maintenance, you're still stacking hangars and moving airplanes about, and the two are integrated. And there are over 500 companies now that have signed up for that program. And what we're hearing back now is that there is a tremendous decrease in the amount of hangar-rash type accidents. I just don't even see that as an option any more for a company to have some sort of formalized training, whether it be the NATA Safety 1st function or whether they do it internally.

Smith: You can't just train a person once and say they are done and put the stamp on them. We have an ongoing training program. We have a safety committee that is established in our company where all the department heads get together on a monthly basis to discuss any issues. You have just got to be proactive on safety. Safety has got to be in their face all the time.

Donlan: From a BBA [owners of Dallas Airmotive] standpoint, I have about six things that they measure me on. And recordable incident rate is one of the six. And then I pass that down to my staff, and all the way through the operation. I think it is one of the things that you have to do in an organization to make sure you're protecting your people, that you're training your people. And so if it's part of the report card all the way through the system, people tend to watch it, tend to monitor it, tend to offer up improvements. It has been pretty effective. I think we have probably had a 35-percent improvement over the past two years that I have been there in lowering our recordable incident rate. And that is because it is part of everybody's remuneration. It has to start at the top. We had [sister company] Signature, ourselves sit down with a group of insurers three months ago. And we said, "let me explain our business." We explained what we're doing to improve our business from an insurance standpoint. We're all ISO approved, and just to explain to them the care that you are taking throughout your organization. You can't just give up and say I am going to pay whatever. I think it's helped us from a cost standpoint. And I think they feel a little bit more comfortable after having that dialogue.

Loeb: Safety, we always have that as part of the objectives that we communicate with our direct reports. But it also needs to come from the bottom. It needs to be a grassroots movement. What we decided to do is we have a safety program. Every employee gets one vacation day after a certain period of accident-free days. And that creates an incentive for every employee to think safety, and to also help others to think safety. [With regards to insurance], the one advantage we have, being affiliated with a large global player, is we have some leverage. We sat down with the insurance companies and tried to take advantage of the umbrella of insurances that Lufthansa is able to offer.

Duncan: We continue with our safety and technical training, which is absolutely necessary in our industry. But for years we provided a lot of leadership training for our work force. In the last two years, we have shifted the focus of that to productivity training, teaching the people on the floor and in management how to make the company more productive, getting them to understand better the financial implications of what they do, how they can make a difference in the financial results of the company.

Productivity

AM: How can we improve productivity and efficiency with all the pressure to cut costs?

Smith: We have joined together with all of the departments throughout our whole company, and we share the profit at the end of each quarter. If the company is profitable, we take a percentage of that and give it back as a bonus to each of the employees. So we found that people now are not only looking at their department to make sure they are watching controllable expenses, but they are watching your department, too.

Donlan: We started a thing about a year and a half ago called Gainsharing. It is a bit of a spin-off of a profit program, but it is more what the employees can control. And it is more what cost takeout can you do. And it is tied to certain metrics and measures that we agree with the workforce at the beginning of the year. It is in our budget, and whatever they can beat in the budget, they get paid on a two-quarter average.

Mitchell: I see, when I have the opportunity to talk about the economics of how we're doing, a true interest from our shop floor people that I am surprised, and I am glad to see. We do need to involve them more, instead of just letting them know every six months or a year how good we're doing.

Rittenhouse: We traditionally study productivity to see and to identify the non-productive jobs and try to use that to encourage them to be thinking about productivity. Just this year, we started another initiative to study billable versus unbillable. In other words, a productive technician who is engaged in an activity that he can't bill to the customer should never happen, because we have support staff to do that. The technician who walks across to the warehouse to pick a part, for example, trying to find a consumable and can't find it and he's walking around the shop trying to find it, you can't bill the customer for. Lawyers do it. Doctors do it. They make sure it's billable. Our productive employees, if it is not billable, you shouldn't be doing it.

Loeb: We talked about cutting expenses, and it is of course extremely important. The problem with focusing only on expenses is it is quite difficult to communicate that to the employees. They very often misunderstand cutting expense as looking at buying cheaper products or using pencils from both ends. What we introduced, and I think with a great deal of success, is to try to get the employees more involved in developing solutions to increase the process efficiency and effectiveness in production, and cutting expenses kind of indirectly by being more efficient. And the way we have done that is we formed task forces for the different product lines, and allowed employees from all different disciplines and functions within the company to participate in these task forces. And we measure the increases in efficiency in financial terms and share that information with employees, so that they get a feedback on whether they were able to increase the efficiency of the processes.�

Soubry: In the engine world, we traditionally have huge working capital associated with inability to forecast specific events. The variability, once you get in that engine, whether you're going to repair, replace, exchange, so forth. New versus used. We have effectively taken centralized functions and support functions and redeployed them inside the cells of the businesses. So we no longer have central inventory in warehouses. In some of those businesses, we have taken the warehouse or inventory function and put it right inside the cell. So the team that does the work also has two or three inventory people who actually do planning, buying, stocking, selling. The ability to work at an operating station, to be able to reach for key inventories has not only improved productivity and labor efficiency to the facilities, but is reducing the amount of working capital we have tied up.

Training

AM: Would anybody be opposed to an FAA requirement for mandatory training?

Driggers: Under the new FAR 145, there are requirements for people to be trained. I wouldn't want the FAA to get too specific as to how we train our people and exactly what we teach them how to do. I think that there ought to be some minimum standards to hold a repair station certificate or have an A&P, or be able to sign things off.

Rittenhouse: You would think that the insurance companies that are insuring the aircraft would insist upon the maintenance being accomplished by an insured installation. You would think that the aircraft owners would insist that you had insurance. They don't know better. The insurance companies know, and you think they would insist upon it.

Driggers: You will be responsible for what your vendors do. There is not going to be that wall there, that curtain. If you're putting a part back on an aircraft and your company is signing it off that it was overhauled by another vendor someplace, you're ultimately going to be responsible for it under the new 145.

Smith: I would think that like our 145 where we need an approved drug program, a very similar thing. When we take our aircraft in, we need to make sure they are in an approved drug program. But it's going to affect the smaller maintenance departments. That could be very tough. They will just fold up. I know a lot of us guys here in this room will not work on the small airplanes. We can't afford to.

Driggers: It is going to put a burden on the FAA just to enforce this. They are struggling to keep their head above water right now. I think there is probably going to be people out there that will probably operate on the ragged edge of legality, and may be able to even get away with it until something happens or they just get caught.

Security

AM: What about security costs?

Driggers: We have had increased security costs. We have kind of locked down the facility. We have had to go to expanded computer control card access from all of our employees, so they can get in and out of the facility. Video cameras, higher fencing on our portion of the airport. It is just a matter of time before the TSA finally adopts some sort of a standard for the different types of airports. They are going to spread this cost amongst tenants at the airports.�

Mitchell: What's coming soon is a background check for every employee. Security costs in perspective to everything else has not been a big deal to us at any one of our maintenance locations.

Donlan: We are embodied in some cases in a Gulfstream facility or somebody else's facility. In those cases, we adhere to what they had to upgrade to.

Driggers: People are always your first line of defense.

Smith: I'd like to see some standardization. You fly into one airport and I show my pilot's license, driver's license, and my passengers walk free. And then I go to your facility, my passengers get wanded. I have no idea, when my planes go out to different facilities, who put these regulations in effect.

Driggers: We have a lack of any standard. And I think we're, as an industry, trying to be very careful about asking for one. Be careful what you ask for, because you may get it. I think it is coming. Once the TSA got finished and the Homeland Security got finished with airline security, now they can turn their attention to something else. The guys at TSA have been good so far about not coming down with any hard core regs at this point until they have studied the issue. When it's all said and done, I think we're going to be able to live with what we get.

Duncan: Looking at the big picture, I don't think there is any question that the change that 9/11 caused–and the security that has been imposed on the airlines–has been positive for our industry and will be positive for our industry. We have several companies in our hometown of Lincoln, Nebraska, and I can think of three or four new users of business aircraft since that period of time. These are people that have bought shares or a portion of an aircraft or bought an aircraft because of the difficulties in coping with the airline's security requirements. I think this bodes really well for our industry.

�Shop rates

AM: Are shop rates rising?

Mitchell: Jet Aviation has in the last number of years implemented an AOG rate. A task that we're asked to do within 24 hours or less notice we apply an AOG rate shop rate. And we have had almost no push back on that. As long as I have been in aviation, everybody is so fearful, if we pull someone off of a job to work on an unscheduled task, and then go put them back on the job, that requires overtime. Someone has to pay for it. Our premium is about 35 percent higher than the [normal] rate, and about 50 percent of our work is unscheduled. So it is significant, and it has not been anything but applying the cost where it belongs. It has just been basically achieving a better overall shop rate.

Rittenhouse: Our piston shop was just an adjunct to our turbine airframe shop when I went to Banyan. We have now separated the piston shop completely. It is in its own hangar, its own lobby, its own parking lot, its own administrators, its own service manager, its own inspection department, its own library. Everything is separate, and with the idea of giving superior service to the piston customers and making them feel at home, which in southern Florida there are a lot of high-end business people. We raised the shop rate four times in the last year. It is now $70.00 an hour for pistons. Every time the shop rate goes up, there is an increase in customer base. The perception is they must be good. They must know what they are doing, and they want the best, and so the shop rate has worked in our favor. We're trying to be the Lexus dealer of the piston aircraft. And there's people that want that kind of service.

AM: But you have to charge a decent amount to buy tools and pay people.

Rittenhouse: If you're going to have a quality shop, then you're going to have to have a shop rate. The real issue is where does the aircraft operator want the best technicians working? Does he want the best technician working on his computer network? Does he want him working on his Mercedes? Does he want him working on his airpane? By what he is willing to pay in a shop rate shows that he wants them working on his computer. It doesn't make sense. If we're going to keep the best people in this industry, we need the shop rate that will support that. And the aircraft operators should be knocking on our doors asking us to raise our rates so we can do that.

Duncan: We pride ourselves on being a fairly efficient and effective organization, and our productivity is pretty high. In normal times, when we're growing 15 percent a year, we cannot get enough margin to sustain that growth internally. In other words, the business does not have enough earnings to pay for accounts receivable, the work-in-process inventory, and all of the things that go along with it. So we can't earn enough to grow at the rate that we want to grow at. It is a difficult situation, and I don't know what's going to enable us to break out of this cycle. It's been this way in the industry ever since I have been in the business.

Rittenhouse: The rates are better now than they were five years ago, but they are not where they need to be. To do what we need to do, we don't have the shop rates to support it.

Duncan: But I would also say, and I haven't gone back and done an analysis on this in a long period of time, but the rates that we would need to be–profit level to allow reinvestment in the business–are not significant compared to the full cost. In other words, the fuel costs have gone up far more and increased the cost of operation far more than any rate increases we would need to make.

Mitchell: The customers do hold our feet to the fire for value. For example, when their APU doesn't start out on the ramp, they expect somebody to be trained and able to troubleshoot to get them on their way. That is when they don't mind paying the rate. If we don't give them the value, then I don't think we would have that latitude.

AM: Let your competitors undercut themselves with low rates?

Smith: We're at $70.00 an hour. What we do is we try and do a survey. It is always disappointing because, like a consumer price index, we should attach maybe our rate to our insurance premium. You hate to stick out, but the rate just doesn't keep up.

Donlan: I think in aviation we kind of eliminate discounting in this market more than increase rates. The give-aways reduce when your shops are full as much or more so than actually changing your rates because you're constantly chasing rates.