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Tuesday, June 1, 2004

Begin The BRAWL

James T. McKenna

Steve Townes equates industry consolidation to a barroom fight. His Ranger Aerospace firm has bulked up with Keystone Helicopter. Now, he says, get ready to rumble.

Chat with Keystone Helicopter Corp.'s top managers in their headquarters office's wood-paneled first-floor conference room for 20 minutes or so and they're likely to lay out their secret plan for you. Spend the same amount of time with Steve Townes, the investor who led a buyout of the company a little more than two years ago, and he`ll to do the same.

The plan is an open secret. Townes said 54 key managers throughout the organization have copies, and any is free and willing to share the general details, which do seem simple.

Start with a map of the United States. Draw three big circles—one over the Northeast centered near Philadelphia (where that conference room sits), one about two-thirds of the way down Florida's peninsula in the Southeast and one centered over Dallas. The circles cover the key parts of the "largest and most steadily growing helicopter demographic in the world," Townes said, home to 2,000 twin-engine and 4,000 single-engine helicopters.

Build a company with facilities to service those aircraft at the heart of each circle, Townes and his executive team at Keystone Helicopter say, and you'll be positioned to rule the rotorcraft maintenance world. And that is exactly what they aim to do.

"The focus of Keystone and Keystone Ranger Holdings is to be the consolidator," said Dave Ford, the newly promoted president of Keystone Helicopter.

Keystone Ranger Holdings is the company set up by Townes' firm, Ranger Aerospace LLC, to complete the January 2002 buyout of Keystone Helicopter. It includes Ranger and its financier partners.

The acquirer and the acquired took the next big step in executing their plan April 23, when they closed on a deal to take over Composite Technology, Inc.

"Our objective is to carefully grow Composite Technology as an integral element in our overall consolidation strategy," Townes said. Rotor-blade and composite repairs are a steady, growing part of the military and civil aftermarket. That makes the company "a solid strategic fit, and an important expansion of our geographic service footprint."

Formerly owned by Helitech Industries Pty Ltd. in Australia and Dyncorp, Composite Technology became one of the world's largest independent rotor blade repair companies in preparation for the acquisition. In addition to its Grand Prairie, Texas headquarters, the rotor-blade repair company has facilities in Andover, United Kingdom; Rio de Janiero, Brazil; Singapore and Winnipeg, Canada.

The takeover was completed formally by a new holding company, Ranger Composites LLC, controlled by a syndicate of Philadelphia-area private-equity firms. The syndicate includes Ranger Aerospace, Meridian Venture Partners, Argosy Investment Partners, Spring Capital, LLC and other private investors.

The terms of the deal were not disclosed.

CTI overhauls and modifies rotor blades for what it says is almost every helicopter type built in the world, specializing in bonded metal and composite structures. It processes on average more than 250 rotor blades a month for both military and civil helicopters. It says it is licensed by Agusta, Bell, Eurocopter, Kazan Helicopters, MD Helicopters, Schweizer and Sikorsky, as well as by respective local aviation regulatory authorities. CTI also manufactures composite parts, maintains a rental pool of spare rotor blades and offers rotor blade exchange.

"This new affiliation is expected to expand our capabilities, broaden our services and enhance our competitive position," Mike Topa, long-time president of Composite Technology, said in a prepared statement. "Our focus remains on customer service, quality, worldwide support, reduction of direct operating costs and strict adherence to design authority's standards."

Topa will report to Townes.

More Acquisitions Ahead

Ranger Aerospace has acquisitions in the works for two other helicopter-related companies in the Dallas circle that may close late this year, Townes said. But he was cautious about that. "Until the money moves," he said, "you don't have a deal, you have a pursuit."

The fact that, two years after the Keystone deal, Ranger has completed only its second acquisition is proof of the company's deliberate approach, Townes said. "We have a 5-10-year plan and we are executing it. We're not jumping ahead of ourselves."

As far as that plan is concerned, Keystone might better be called Foundation. Unlike a keystone, the wedge-shaped stone added last to an arch to hold it together, the company is the first piece and the basis of Townes' plan for a rotorcraft maintenance, repair and overhaul empire.

Keystone Helicopter was founded in 1953, by Peter Wright Sr., a U.S. Navy dive bomber pilot who later flew for Claire Chenault's famed Flying Tigers in World War II China. At the start, Keystone Helicopter was a flight operation based in Philadelphia, but it became involved in a variety of other operations. It set up flight units in South America. In the United States, it flew heavy-lift and search and rescue missions, tracked high-altitude balloons, recovered space capsules launched from NASA's Wallops Island, Va. base, and conducted power line and forest fire patrols, and mining and petroleum surveys. It also sprayed for mosquitoes, transported executives and managed the U.S. Distant Early Warning Line program in Greenland.

After struggling to make money operating helicopters, Wright decided it might be easier to do that fixing them. The maintenance business is "not as exciting, not as romantic as flying," he has said, "but it's steadier and pays better."

With that decision, Keystone began building what would become a reputation as one of the premier helicopter maintenance operations in the eastern United States. It was one of the first Bell Helicopter service centers in the United States.

Enter Townes. Flush with cash from his sale of Aircraft Services International Group to BBA Group, he set up Ranger Aerospace to scour the aviation marketplace for opportunities to seize a dominant position. He quickly focused on helicopter MRO. "You don't find any giants in the field," he said. "There are lots of small companies."

Convinced he could cobble key companies into a dominating market force, he wooed Wright to sell Keystone Helicopter. The company at the time was looking at what more it could do to expand its market share. It also was looking at its facilities. The 67,000-sq.-ft. West Chester headquarters and maintenance shop was profitable. But suburban sprawl had made the areas around it appealing bedroom communities for Philadelphia and Wilmington, Del. commuters. The site was potentially more valuable to the Wright family as real estate for housing than for a maintenance business.

The acquisition led to a $75-million cash infusion for Keystone Helicopter, a tripling of capital investment and, with a year, the purchase of a new headquarters site in Coatesville, Pa. with $3 million in training, tax and other credits from the state government. The facility at that site formerly made Hoppe gun-care products.

Townes swears Keystone Helicopter was a good investment. "If we never invested in anything else, it would have been a good decision," he said. With the infusion from the buyout (and Sikorsky's selection of Keystone in 2000 as the main center for completion of S-76s), the company has grown about 20 percent in each of the last three years, its officials said. Keystone had revenues of $86 million in 2002 "and could reach $125-150 million a year all by itself," Townes said. Keystone's annual maintenance revenue has jumped, in some recent cases, by 85 percent, and its flight operations revenue has increased 30 percent. But as the Composite Technology acquisition shows, he apparently has no intention of stopping now.

The 15-acre site for the new headquarters, which the company is calling the Heliplex, abuts Chester County/G.O. Carlson Airport about 19 miles west of the current one. The company's Engine Services Div. already is in place in the 52,000-sq.-ft. facility on that site. The plan was to move the other units there over an 18-month period and, in phases, add 80,000 sq. ft. to the building, a ramp control tower and perhaps a taxiway to the adjacent airport. But that plan is being accelerated. In early April, Ford approved installation of a state-of-the-art paint booth in Coatesville, in preparation for moving the helicopter completions work there.

The new facility is the showcase of Ranger's ambitions for Keystone Helicopter.

"We're truly going to make that the best-equipped, most technically proficient helicopter facility we can," Townes said. The mahogany paneling in the facility's office area is being removed. "When customers visit, they see a utilitarian, business-like appearance."

The move gives Keystone Helicopter's divisions the opportunity to set up for efficient operations. Like the facilities of most older companies, its West Chester grew as the business did, with space added and units positioned as the existing structure permitted. In the new facility, "it was really nice to be able to lay out our flow of work," said John Loney, vice president and general manager of the Engine Services Div.

"As an organization, we are far more focused on being effective and efficient," said Peter Wright, Jr., the son of the Keystone Helicopter founder who has worked at the company since the early 1970s. Today, he is the company's vice chairman and a member of the Keystone Ranger Holdings board of directors. "We're looking at all things—facilities, training, tooling, processes."

The engine division is one of four divisions at Keystone Helicopter, which today employs about 450 people. The engine unit is an FAA- and JAA-certified powerplant repair station and an authorized Rolls-Royce 250-series engine maintenance center as well as a Turbomeca Service Center. It does overhaul, repair, and testing of all 250s, repairs and tests Lycoming LTS101 engines, and maintains Turbomeca Arriel engines. It has test cells for 250s and Lycoming engines. It also offers prototype and machine-shop services in-house, as well as thermal spray services and non-destructive testing.

Keystone Helicopter's Flight Services Div. encompasses aeromedical operations that began in 1981, when the company entered a contract with Allentown Sacred Heart Hospital in Allentown, Pa. to provide flight, maintenance and management services. The company still has a contract with what is now Lehigh Valley Hospital. That is one of 10 hospital-based aeromedical programs Keystone has established in Maine, Massachusetts, Ohio, Pennsylvania and, most recently, Arkansas. Those contract programs involve the operations of a fleet of 35 helicopters flying from 28 locations throughout the Northeast. Roughly half of the helicopters are owned by the contracting medical facility, with the other half owned by the company and leased to the hospital partner. The division's 135 pilots and 45 mechanics keep its aircraft flying 17,000-18,000 hr. a year.

EMS' share of revenue produced for Keystone Helicopter has declined as the company built up its maintenance, repair and overhaul capabilities. Just a few years ago, it accounted for 40 percent of revenues. Today, that's down to 25 percent.

"We've decided to grow that one good contract at a time and watch the market and see where it goes," said the younger Wright. EMS remains "a significant business. We're just being cautious."

A Critical Capability

That caution due in part to the growth of independent EMS operators, unaffiliated with any medical facility directly and competing for patient transports with operators that are.

Keystone's Engineering Div., called KeyTech, was created to provide design, development and certification engineering services for aviation applications. It is an FAA Designated Alteration Station with capabilities in structures, avionics, design engineering, systems, software and flight testing. It can assist customers (or Keystone itself) in gaining FAA approval of supplemental type certificates, parts manufacturing authorization, and major repairs and alterations, as well as compliance with technical standard orders.

The engineering unit is a small but critical one in the eyes of Keystone Helicopter's top managers. They are seeking to marry high-tech engineering capability with their well-established maintenance offerings to succeed in what they see as a highly competitive niche. Original equipment manufacturers "more and more are looking to the aftermarket to investment in new `mission equipment' and create and certificate aftermarket products," Ford said. But their cost of engineering those products with staffs hired originally for the development of aircraft will be much higher than those for maintenance shops like Keystone.

He added that the company already is seeing huge demand for engineering services. "We do almost as many fixed-wing projects as we do for helicopters."

Keystone Helicopter has been steadily growing KeyTech. Just a few years, the division had a dozen degreed engineers on staff, Ford said. Today it has 36 and is looking to add more.

Keystone's Helicopter Services Div. is the full-service maintenance and completion center. It is an FAA- and JAA-certified airframe repair station and a factory-authorized facility for Bell, Eurocopter, MD Helicopters and Sikorsky. The company says it is also an authorized dealer for virtually every major avionics manufacturer.

The division does a wide range of airframe maintenance services as well as avionics integration and installation, component repair and overhaul, painting and refinishing, and upholstery and interior design. It typically has $8 million in parts on hand, Ford said, with a like amount tied up in work in progress.

The selection to be Sikorsky's main S-76 completion center (which coincided with the choice of Aero Vodochody to produce the airframes) was a boost for Keystone Helicopter, but it had a couple of downsides. One was that, as the company focused on spooling up its completions work, maintenance customers "didn't see the same level of attention," Ford said. That has led to the company refocusing on the needs of its MRO customer base.

"We don't want to leave any customer behind," said Rick Hinkle, the company's vice president of program development and customer support.

To boost customer support, the company in February launched its Keystone Helicopter Instant Service or KHIS (pronounced "kiss") team. The team has a truck on standby ready to carry mechanics, tools and spares to a customer whose aircraft needs emergency repairs, such as gear box and engine change-outs, avionics and mechanical troubleshooting, structural repairs. The service is available around the clock. Ford said the program is intended to "help our customers when they need us the most."

The other downside, Ford said, was that Keystone Helicopter got pigeon-holed. "We're not a Sikorsky house." The West Chester maintenance shop has experience on Agusta A109s, Bell 430s, Eurocopter AS365s and MD900s, he said, and last year the company completed two green BK117s.

Helicopter maintenance is a growth segment, according to Keystone Helicopter executives. There is a surge of new aircraft entering the market, "and we're not melting down the old ones," Townes noted. The younger Wright noted that operators are holding on to current aircraft much longer these days. "The only time you talk about new aircraft is when it's economically unfeasible to retrofit the old ones," he said. The common question is, "Can I get 10 years out of it?"

Demand for retrofitting also is spurred by upgrades of avionics, such as enhanced ground proximity warning and aircraft tracking systems. "That's real bread and butter for us," Hinkle said.

Overall, these executives said, maintenance customers are focused on tightly managing their aircraft budgets and maximizing the availability of aircraft

A key target for growth of the maintenance work is in military contracts, Townes said. "In five years, I want to have a military services division. That's truly a strategic goal."

Toward that end, Keystone Helicopter in March named Chuck Hurdleston as its director of program development for government programs. He's been with the company since 1998 and has been that division's sales manager for five years. He is responsible for federal, state and local government helicopter programs, including military program development efforts.

"There is not any part of our customer base that is not concerned first and foremost with downtime and secondarily with cost," the younger Wright said.

To make the best use of downtime, Ford said, Keystone is seriously looking at offering training to flight and ground crews of aircraft in its shops for maintenance. "You have flight and maintenance crews at loose ends during that time. We may be able to offer a service to them."

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