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AAR’s Chairman Explains Change In Business Portfolio

To grow its business, MRO provider AAR diversifies its business portfolio and seeks more opportunities outside the U.S.

AAR Chairman and CEO David Storch reveals the thought process behind changes underway at the successful aviation services business. Chief Editor- MRO Lee Ann Shay interviewed him at AAR’s headquarters before the company announced plans to sell its cargo manufacturing businesses to TransDigm.

 

AW&ST: What’s the split of your portfolio and how do you expect it to change over the next 3-5 years?

Storch: AAR started in the parts business and over the years moved into maintenance and manufacturing. Over time, we tried to build a company that could weather different financial storms. At one point, 25% our revenues were from airlines—such as TWA and Eastern—in bankruptcy. As we successfully progressed through the 1990s, along came 9/11, and we had pivoted our business to many U.S. airlines that filed for bankruptcy. As we came through the 9/11 aftermath, we felt that it was in our best interest to have a more diversified portfolio. We shifted to a blend of manufacturing and services, domestic and international, military and commercial activities. Before 9/11, 87% of our business was with airlines, and now it’s 65% commercial and 35% military.

But the world landscape is different today: Unlike prior decades and cycles, U.S. commercial airlines are on a more solid footing. You’ve seen us grow MRO activities, but so far they’re all North- American centric—so we have our sights on international growth. We’ve expanded by taking advantage of certain dislocations; our first major move into MRO was United’s Indianapolis facility; the next was taking on Northwest’s former facility in Duluth, Minnesota, followed by the former EADS facility in Louisiana. The latest is in the state of Illinois, which has assisted us to expand our operation into Rockford.  As time goes on, I think the U.S. carrier base will grow and we’ll be in a good position to capture that growth. 

 

What’s your view of the widebody market?

The labor rate gap around the world is starting to close, especially in higher-cost places like Shanghai and Hong Kong. I’m betting that I can create a value proposition for airlines that will encourage them to do work in the states. 

 

Are you happy with the ramp-up at the Lake Charles facility?

It’s been slower than expected. When we took on that facility, A330 work was underway. We retained that type of MRO and recently captured more. The new widebody hangar is booked through the end of the fiscal year (May 31), but we still have capacity in our other hangars.

 

AAR recently was selected by AMMROC to support its military facility in Al Ain—and AAR is providing airlift in Africa.

When you think of AAR defense, there are three buckets: things we manufacture (shelters, containers, pallets), and that business has been soft. (AAR is selling its cargo manufacturing business to TransDigm for $725 million.)

Airlift has been very strong—but is going through a period of transition. It was heavily based on Afghanistan activity before, which has diminished, but we’re still there. Now we’re seeing activities in Africa that we didn’t see before—so we’re transitioning from one area of high demand to another.

The piece of business I particularly feel good about is supply chain. Military fleets are aging and budgets are shrinking, but aircraft have to be serviceable. While the U.S. military budget is declining, regions such as the Middle East have growing budgets and new fleets—including Saudi Arabia and the UAE. We haven’t had the success yet in Saudi Arabia that we’ve had in the UAE, but I hope that success isn’t too far off.

We view the Africa market opportunistically. On the commercial side, we won a 737NG component support contract with Kenya Airways and we’re looking at a few possibilities there—but we’re just getting started.

 

AAR started the consumables program with a U.S. major—a $48 million annual contract to procure and manage parts. Do you expect more airlines to outsource expendables?

This program is an extension of ways we can help airlines be more efficient—by managing their staffing and inventory levels with somebody who specializes in this. It’s a low-margin activity but it’s a nice addition to our suite of solutions. I don’t think there’s a blanket solution for airlines. What we’re trying to do is to create a value proposition that is compelling, and the broader that solution set is, the better our chance to capture more business—whether they need to source, procure, warehouse, manage obsolescence factors and or sell off what they don’t need.

 

How long will it be before AAR gets into full lifecycle support?

We’re doing a fair amount of that already with Mesa’s Embraer 175s. United owns the aircraft but Mesa operates the fleet. We have a maintenance agreement on the aircraft and a power by the hour agreement for the spare parts—so it’s pretty close. We don’t do the APUs, engines or landing gear.

 

The MRO market is very fragmented—is that part of the reason AAR created the 1MRO concept?

The 1MRO goal is that an airline gets the same experience at any of our facilities. Each unit will perform at high level and consistently. We have two company pillars: innovation and execution. You need both, and Apple does really well with this. That’s how I’d like AAR to shake out in aerospace—I want to be innovating and figuring out ways to help our customers be more competitive—giving them a great product and a great price, with a focus on safety of flight. If I achieve that, we have success. 

 

David Storch

Joined AAR Corp. in 1979 with responsibility to develop the engine business and became president of AAR Trading Group in 1987. In 1989, he was promoted to president and COO, followed by the additional role of CEO in 1996. Storch is only the second CEO since AAR was founded in 1955. He added the post of chairman in 2005.

 

 

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