{audio:0:00:13} Steen, could you provide some background to when you joined Satair?

{audio:0:00:18} I joined Satair back in 1980 so I worked for Satair for close to 40 years, until the middle of last year. During my time in Satair, I held many different positions, as Satair grew as a company, from a mere $10 million to half a billion, when we sold it to Airbus. When I left, we were doing plus $2 billion, so it’s been a tremendous journey, with a lot of very good colleagues and a great learning curve, in many aspects; that’s the best way to learn, get exposed.

{audio:0:00:58} What were the services that Satair, historically, offered?

{audio:0:01:01} Historically, Satair was built on relationships with OEMs. When I talk about OEMs, I mean the likes of Collins Aerospace, TransDigm, Safran and Eaton. If I’m talking about airframe manufacturers, I mean Airbus and Boeing, etc. But Satair was really built, from the early nineties, around a very strong foundation of relationships with OEMs, since the seventies, such as Bennett, which eventually became part of Collins Aerospace. Pall Filtration we started with in the early nineties. So it was really with that foundation of the company that we had this idea of getting hold of strong OEMs would give us a foundation for the business that basically meant that airlines and MOs would be coming to your shop, because you were representing these esteemed companies. That was the whole idea, back in the early nineties.

{audio:0:02:04} So you were providing inventory management and sales and marketing, for the OEMs?

{audio:0:02:11} Yes; there are, basically, three different things that an OEM is looking for when they outsource their aftermarket. One is, of course, revenue. Can we help them grow their revenue by having further reach, getting into the smaller accounts? That’s the revenue side. The other one is the cost side. Building an organization, let’s say, in Asia, where you are supporting all the Asian operators, requires a lot of investment, capex, bricks and mortar, etc. Then, because we were handling all these customers, they basically needed a very small customer service function, because it was all outsourced to us. So cost savings, cost reductions and the last one is cash. As an OEM, you tie up your money in inventory, at cost of course. When you sell it to a distributor, when he takes over, firstly, you make a margin on the inventory. Secondly, you are constantly selling inventories into this distributor that will then maintain the inventory and increase it as the business increases.

{audio:0:03:22} Another important part, especially for large US companies, is accounts payable. Typically, when you are dealing in certain parts of the world, maybe it takes 90 to 120 days to get your money, after you have invoiced. When you dealt with Satair you, basically, had a 30 days net account with us and we always paid on time. This really means that you are cutting off two to three months of outstanding accounts payables.
{audio:0:03:52} Very roughly, those are the three major points where we were focusing on with an OEM. But any OEM would be looking at that. Vice versa, when they are thinking about re-insourcing the same products.

{audio:0:04:05} How has the market evolved? We’ve seen different players, different distributors or MRO players, partner with OEMs in different ways.

{audio:0:04:19} If you take it from the airframe perspective, Boeing acquired Aviall, in the mid-2000s, I seem to recall. They did that because Aviall had a much more efficient cost model, in terms of moving products around. As a distributor, you were working, back then, with EBIT margins in the high single digits. That was, of course, why Aviall was interesting. Then Airbus picked up Satair in 2011 and, again, that was because they wanted to have a bigger share of the aftermarket.

{audio:0:04:53} They wanted to take back some ownership in that market. How has that impacted the structure of the industry?

{audio:0:05:02} The ambition level was high, when we were acquired, in 2011. At that point in time, Airbus had a plan that they finished in 2010, I believe, that was called Road to 2020 or 2020 Strategy. It was a strategy plan for 10 years and part of that was to take back part of the aftermarket. Since the 1970s, Airbus has left the aftermarket to the OEMs. The plan was for Airbus to build great aircraft, highly technical know-how, but they really didn’t spend too much time on the aftermarket. Coming into the 2010s, we had 8,000 to 9,000 aircraft flying and, of course, that creates a humungous aftermarket.

{audio:0:05:44} I think another, very famous article, that came out in 2013 – I think it was Alix partners – basically showed the EBIT margins of Boeing and Airbus, when they built aircraft, and we were down in the mid-single digits. Then they compared it to large OEMs – TransDigm was one, at that point in time, but also Eaton, PACCAR, etc. – and they had much higher EBIT margins. The whole idea of this from an Airbus executive perspective was, we want to share that. You have installed it on my aircraft; it’s my IP and all these arguments that come up. The volume was huge, in terms of numbers of aircraft in the market.

{audio:0:06:26} Maybe I should add that Boeing had actually been doing that for several years. Landing gear is a good example. Boeing bought the landing gear from Goodrich, back then – Collins Aerospace today – but they, basically, took care of the aftermarket. Goodrich did not have the Boeing landing gear aftermarket, at least for the newer models.

{audio:0:06:44} The airframe OEMs were trying to go out and aggressively take back the aftermarket, from the OEMs?

{audio:0:06:53} There are two ways of doing it. Firstly, you could insource the actual equipment manufacturer. A good example, from Airbus’s perspective was the nacelles, which were outsourced to Safran and Collins Aerospace, across different models. The idea was to insource that and be responsible for the full nacelle, from an airframe OEM perspective. That’s one model; insource certain programs or systems. The other model is, of course, to tell an OEM, if you want to be installed on my new aircraft, these are the conditions. You give me a good price for production and you should give my company, Satair or Aviall, an option to acquire the aftermarket and take care of that, on your behalf. That will give the OEM savings, etc. It was a mix of very aggressive insourcing and then another model where, basically, you are taking back the aftermarket.

{audio:0:08:01} But the problem here is, you can do it on a new model, but it’s very difficult to go out and say, this is my 330 program and, by the way, I’m going to insource it now. Or this is my 777, so I will take back all the aftermarket. That simply doesn’t work.

{audio:0:08:18} The first option, the insourcing, has a lot higher capex requirements, in the system? Do you think the airframe OEMs prefer the second option and focus on the second option now?

{audio:0:08:38} I think, at least until Covid-19, the ambition was to do more of that insourcing. Boeing built the avionics company and they went into a strong partnership with a seat manufacturer and, of course, Boeing had other ambitions with the non-commercial type of aftermarket. I think they have strong ambitions but yes, a huge investment is required to get started on that. In our industry, we are not looking at a two-year business plan. We are talking 10, 15, 20-year business plans.

{audio:0:09:08} Do you think Covid-19 has impacted the strategy from the airframe OEMs?

{audio:0:09:13} Airbus has been doing avionics for many, many years. Some of the very critical computers, on an Airbus aircraft, were handled and the system was owned by Airbus, even though they had sub-contractors.

{audio:0:09:27} Can we walk through the second option? I think it’s pretty clear that the airframe OEMs want to move into the aftermarket. Let’s go through that negotiation. If the OEM wants to be installed on the airframe platform, how does that negotiation, typically, flow from both the new parts on the original platform and then the aftermarket?

{audio:0:09:49} At least from a historical perspective, you go in and you compete to win the production, called FAL in Airbus language, final assembly line business. That’s where you, as an OEM, compete with your normal competitors. For a lot of systems, it doesn’t make sense to have several options, so when you win that program you are installed into either an act of god removes you, or you have serious quality and delivery problems and then Airbus will sanction that. The same goes for Boeing, of course.

{audio:0:10:25} That’s the traditional method. As part of that you basically negotiate the aftermarket conditions, as well. There is a price for production and then there is multiple which says, this is the aftermarket pricing, going forward. That aftermarket pricing is policed, on an annual basis. It’s increased at a certain percentage, based on indices. There are some famous US indices on labor rates, etc. By the way, this is also typical for the Boeing side; I’m just using Airbus as an example here. Then you have access to the aftermarket. Airbus has a function where they keep track of your performance in the aftermarket. If customers are complaining about this and that, they will take care of that, as well. But from a pricing perspective, you are pretty locked into that contract term.

{audio:0:11:14} So, for example, if there is a $1,000 SKU, a component that is on the platform, if I win that contract for the new platform, that’s great, because I’m on it for 15, 20 years, plus I’ve got the aftermarket for 30 years. We agree a price upfront, which gives me a low margin, such as 5% or whatever it may be, on the new platform. Then for the aftermarket, the airframer OEM says, okay, you can supply the aftermarket, if you sell via my distributor – Satair or Aviall – at this price?

{audio:0:11:49} Price to be negotiated, I would say, in most cases, but yes, for the newer discussions, that has been seen. It’s part of the conditions, upfront, for the RFP. If you come in later and do it, you can run into different issues, legally speaking. Of course, you want to have that as the RFP upfront, because then, as an OEM, you can build it into your proposal. Maybe you have a little bit more margin on the production side or you know you can get better margin by more efficient production. But at the end of the day, you build it into your proposal and you build it into your overall margin requirements.

{audio:0:12:26} How have the OEMs looked at this relationship with the airframe OEM?

{audio:0:12:32} To some extent, the airframe OEM is a huge customer of Collins Aerospace, both Airbus and Boeing so, of course, you want to keep a good relationship. You have a huge content on their platform and you don’t want to get into an argument where you may lose part of the business. On the other side – and I’m using Collins and Safran as an example – they have built huge aftermarket organizations, as well; inventory investments, people selling, etc. It’s also an issue when they are met with requirements of outsourcing to Satair or Aviall or to whoever. It’s giving them some concerns, because they don’t really get the cost savings, per se. You would like to outsource everything if you were really into outsourcing. It’s not just doing bits here and there. So it’s a challenge, but it’s also something that you need to negotiate in good faith, because it is coming from the OEMs. They have not been quiet about it; they have been very open about it.

{audio:0:13:40} Did you see a material change in the way the airframe OEMs approach the aftermarket, after they purchased Satair and Aviall? Did they really change the pricing negotiations and structure?

{audio:0:13:51} I think it took a longer time than expected, in both cases. Again, back to what I said before, it’s difficult to change an old platform where everything is running smoothly, with production, supplies and the aftermarket and then suddenly go in and become very demanding. It became, absolutely, a negotiation and discussion point, more than just, you will do this.

{audio:0:14:23} If an OEM supplier is supplying a component for an old platform, it’s hard for the airframer to come in and say, now you have to supply at this price, or you negotiated a price via Satair or Aviall?

{audio:0:14:39} At the end of the day, it’s a margin issue. They are selling to the aftermarket and now there is a guy in between who also needs a margin to invest and survive.

{audio:0:14:50} Can you just explain the difference between if the OEM is supplying the large airlines with internal MRO shops, versus the smaller airlines that go via third-party MRO. Does the pricing structure differ?

{audio:0:15:07} In those two cases, I wouldn’t say so, to a large extent, but it does apply to different customer types in the market. For example, an airline buys an aircraft and as part of that airline purchase, you get access to the contracts that Boeing and Airbus have signed with their suppliers, the OEMs. You can see the basic conditions, in terms of AOG service and so forth. It means that you are required, as an OEM, to be an organization capable of supporting airlines, who are the owners of the aircraft; you could include lessors here, as well. Then the airline – using Lufthansa as an example – can say, my MRO shop, which is Lufthansa Technik and I want to extend the same conditions to Lufthansa Technik, in the form of a letter. Then the pricing will be equal to both companies.

{audio:0:16:01} But if you are a broker or a dealer, if you are not an owner of the aircraft, that could be a small MRO shop and there could be different pricing schemes in place.

{audio:0:16:11} Does the OEM have a pricing agreement with the MRO shop or the internal MRO shop, in that sense, if they don’t choose to go via the airframe pricing model?

{audio:0:16:24} There could be different models in place but, at the end of the day, this is not an industry with a lot of discounts hiding here and there, because there are some grandfather rules. If you give a discount to a certain large airline, you will actually have to give the same discount to a small airline, in another corner of the world. That’s, basically, the mechanisms of the market and especially the competition laws that we have across the world.

{audio:0:16:55} What I’m trying to get a sense of is, if I’m an OEM supplier and I’ve got parts that are on existing platforms, old platforms, what is in my best interests today? What are the different types of contracts that I should be thinking about making with different parties?

{audio:0:17:13} First of all – and this is just a hint from an old fox – don’t go into contracts because it actually fixes the price for many years. As a starting point, you would just like to do ad hoc services, but if you do that, your supply chain will be interrupted again and again, because then suddenly, people are buying 10 or 16 and you expected to sell two, over the year. Then you go in, either yourself or the distributor, and you set up contracts with an MRO, which gives a high degree of reliability on the supply side and it means that you can do a call-off order and you will have the parts within 72 hours; this is routine. Four hours is not routine. That’s quite interesting if you have standard lead time of 220 days and you now have a partner that can guarantee to supply you in 72 hours. You save money, as the MRO and you have a very reliable supply chain in the background.

{audio:0:18:15} That’s what you want to do with an MRO of a certain size, to make sure you have them under good control, in terms of both payments, pricing but also, for sure, the supply chain and the on-time performance in delivery of spare parts.

{audio:0:18:30} How do you look at the MRO's like AAR or Lufthansa Technik or even MTU Aero? How do they look at these relationships with the suppliers?

{audio:0:18:43} First of all, they are trying to minimize the number of suppliers because the more suppliers you have, the larger the functions of following up and so on. There’s a big trend towards minimizing that. Let’s take a very simple example of someone who is flying Airbus aircraft only and the optimal solution would be that I buy everything from Airbus or an Airbus-controlled company, because then I only have one company to follow up with; the pricing in the aftermarket is set for a lot of components. In this respect, I can rely on a partner who knows my aircraft and who has access to all the parts. That’s the optimal solution. That is not working today, to a large degree, for many different reasons. You will have five to 10 noticeable suppliers, OEMs or distributors, that are supporting your MRO activity. That’s the model we are seeing, most of the time.

{audio:0:19:39} I think we’ve seen AAR partnered with Safran, as well, to a higher degree, to improve the relationship there. Are you seeing the MROs partner with the OEMs, more closely, to consolidate their relationships?

{audio:0:19:57} Yes, indeed. AAR are also in the distribution business. Their selling argument is that they know the aircraft and they are working on it every day. But you can also say that for Safran, in this example, it’s a bit of a blessing in disguise, because they are also competitors. AAR is overhauling Safran landing gear and Safran also has a landing gear business; it’s the usual mix.

{audio:0:20:24} Take AAR, versus other MRO shops; what is the advantage of AAR having distribution and MRO?

{audio:0:20:34} A strong argument from AAR, for sure, is that we open up aircraft every day; we see how your equipment, Mr OEM, is working. We see workaround solutions; you can improve here; you can do this. They can take the OEM on a walk at the MRO production line, where he can see how his equipment is working in real life. It’s sometimes difficult to get access to that at a busy airline. They have some very arguments around these type of solutions.

{audio:0:21:11} I want to go back to the airframers taking control, or trying to take more control, of the aftermarket. Who do you think has power in the relationship, for the old platforms, between the airframer and the OEM?

{audio:0:21:25} If you are a smaller OEM and you are trying to get on some newer platforms, from the airframer OEM, basically, you have a trade-in opportunity. You could say, I have this old 777 or A340 application and I would be interested in outsourcing that to a distribution arm, Mr Airframe OEM. Then we negotiate a good price for the production line, for a new piece of equipment you are working on here. Again, it’s trading, it’s finding ways around that.

{audio:0:22:01} But it does seem that it’s still pretty difficult for the airframe OEM to take back ownership of the aftermarket?

{audio:0:22:07} Yes; it’s not a walk in the park. There’s a lot of different angles there and it will take several hours to get through all of them. It’s not as easy as we may have thought, to begin with.

{audio:0:22:18} If I’m an OEM supplier, and I’m supplying the aftermarket on my own, like a TransDigm would, for example, why would I choose to go and work with Satair or Aviall, with the airframe?

{audio:0:22:35} It goes back to revenue, cash and cost. There’s a business case in the background. If I’m outsourcing this business and my revenue is $100 million a year, my spend on carrying inventory, accounts payables, etc. is $18 million, so my net is $82 million. If I can get somebody to do it, so my net is $87 million or $93 million, I’ll consider it.

{audio:0:23:02} The likes of TransDigm, for example, they wouldn’t take the pricing from the airframer? They would price themselves and still distribute via Satair and Aviall?

{audio:0:23:11} In those cases where they are not bound by a contract with the airframer, yes.

{audio:0:23:15} So there’s no power, really, at the airframer OEM, to set pricing for those old contracts?

{audio:0:23:23} Not unless there is already a contract in place. It’s difficult to go in and say, now I want to install a contract for my 340 or my 777 platform. It simply doesn’t make sense.

{audio:0:23:33} Do you think it’s only going to be for all new platforms that the airframer rolls out? Is that where they will be strictly taking back IP and trying to own more of the aftermarket?

{audio:0:23:42} I think new platforms are the best platforms to do this from. The other option, as already seen by Boeing and Airbus, is to insource complete systems.

{audio:0:23:52} On the aftermarket pricing, if I’m a company that’s similar to TransDigm or I want to own more of the aftermarket, I own the parts and I own the intellectual property, but I don’t want to take the pricing from the likes of Airbus or Boeing, would I still distribute via Satair and Aviall, and then Satair and Aviall would then sell my products to their airline MRO, the independent MRO, to supply the aircraft?

{audio:0:24:20} That’s correct, but in those cases, Satair and Aviall and others, if there is an official pricing policy in place, that would be followed, by those companies. It’s not that I can outsource it to Satair and then I can jack up the price by 20%. That’s not the way it works. But for non-airframe OEM controlled products – this is typically where we are talking about lower tiers, tier 3 or tier 4 – that’s where you have more pricing flexibility.

{audio:0:24:51} Those sub $5,000 SKUs that you could actually just have a higher price, once you own the business?

{audio:0:24:58} Yes; and this goes for any sound business. You want to optimize the pricing you can get, to optimize your profits. That’s the basic requirements for any management.

{audio:0:25:08} This is what TransDigm does very well, where they own that aftermarket and have margins that they keep themselves?

{audio:0:25:18} I would say that TransDigm has been really, really good at promoting and selling tickets to the market, on their ability to control the pricing. But remember, TransDigm is working on margins both in terms of decreasing cost of production and, at the same time, having price increases. A lot of companies are doing that and it’s just part of the TransDigm DNA and what they have been selling to the market, for many years. I envy them that; they have been good at doing that, for sure. But everybody is doing. Look at the margins from the engine guys, when they have their aftermarket business; it’s very high too.

{audio:0:25:56} Do you think we’re seeing other suppliers, that maybe have bigger systems, trying to follow the TransDigm way and own that aftermarket, away from the airframers?

{audio:0:26:05} I think that if they are sound businessmen; they have been doing this for years. They’ve just been staying below the radar for a number of reasons.

{audio:0:26:12} Is that because they want to get on the new platform business?

{audio:0:26:14} They want to get on new platforms, so they may be more focused on increasing margin, by decreasing cost, because you get more volume, you have more aircraft flying and all that good stuff. I think there are newcomers that are putting pressure on the old-timers, in terms of reducing cost and so forth. You can just see Elon Musk, on the space side, what he has done for costs; that’s tremendous. I know the airframe OEMs have been following that, very closely. That’s really disruption, at a high level.

{audio:0:26:46} How does the distributor structure the pricing agreements, for that non-airframe OEM controlled contract?

{audio:0:26:57} As I see it, the contract, basically, says that the distributor shall adhere to any conditions that the OEM has already signed up to. If they haven’t signed up to anything, then the OEM is responsible for issuing a price list, on an annual basis. This is all regulated by something called the World Airlines and Suppliers Guide, WASG, so all of that is already there. It means that you issue a price list once a year, typically in the September timeframe and then it’s effective from January 1st. Of course, you introduce certain price increases. You look at your cost model and sometimes the price goes up more than the average. That’s, basically, what a distributor will do. They will inherit the pricing model, already put in place by the OEM and then they earn a discount from the list price.

{audio:0:27:46} That list price that the OEM puts out is public to everyone? It’s the same price whether it’s an internal MRO shop or an independent MRO shop?

{audio:0:27:55} Again, back to the fact that they are basically saying that the price is applicable to the owner of an aircraft and his designee. There may be other pricing platforms in place for non-owners, etc.

{audio:0:28:07} Effectively, there are two price lists. There is one from the airframe OEM, for the contracts they own, and then one from the individual suppliers, or the OEM suppliers, for the parts for which they own the aftermarket?

{audio:0:28:18} Yes; it’s like any other industry. If you buy two boxes of Coca-Cola, you pay a high price for that. If you buy two trains full of Coca-Cola, you get a lower price. It’s a typical pricing model.

{audio:0:28:32} Clearly the airframe OEMs are trying to take back ownership of the aftermarket, but it must be an interesting dynamic when they see, like you said, that TransDigm’s profits or the engine OEMs and what they’re doing and their price list, versus what they are trying to roll out and own the contracts?

{audio:0:28:50} It’s a huge dilemma, of course. Also you get complaints from customers, from time to time saying, this bolt, it looks the same as this one and this one is $2 and this one is $60 so it doesn’t really make sense. That pops up, on a regular basis. But at the end of the day, as an airline or an owner of an aircraft, you are interested in your cost per operating hour. That means, as a large airline, with a huge procurement organization, you are zooming in on your big spend items. You’re back to the 80/20 ratio. I’m looking at 80% of my spend being with 12 large OEMs and that’s where I’m going to focus all my negotiation and bargaining power. Then the other 20% is floating around, under control, out of control. I think it’s a natural way of controlling your business. You cannot be into all the details.

{audio:0:29:45} So the airline doesn’t really pay attention much to those sub $5,000 SKUs?

{audio:0:29:53} Speaking honestly, they want to go out and find somebody who takes care of what they would call consumable expendables. These are typically items in the $1,000, $1,500 price range. They then tell these guys, for the next three years, this is the price we negotiated; you take care of it and I don’t want to hear about it. Just deliver on time. That’s been a very strong trend. Then I, as an airline procurement guy, I can focus on the 80% of my spend.

{audio:0:30:19} Who would the airline procurement guy get to do that?

{audio:0:30:22} That could be the likes of Satair or Wencor or Proponent?

{audio:0:30:28} Let’s say that I work for Delta and I see these small parts, these small SKUs that are increasing in price; I say to Aviall or Satair, go and tell this OEM supplier that I want to negotiate the price. If you’re Satair and you come to me, if I own the IP and I’m on the platform for another 30 years, what could you actually tell me?

{audio:0:30:51} 20% of the spend is 80% of the SKUs, so it’s a huge task to maintain all your systems to operate that. Again, you are back to, what’s my pocket price for this and it makes good sense to outsource stuff that is huge in numbers and volumes but actually lower in SKU costs, or price per unit. I think, yes, you then go back and say, well, we know the market price is around $100, because we paid roughly $95, five years ago and it’s $100 today; we know where the price should be. Then you have normal pressure on the pricing and, maybe, there is a package discount, at the end of the day, something to make it edible.

{audio:0:31:35} As a distributor, you control your costs, to an extreme and, of course, you want to control your purchase costs, as well. You go back to the OEM and say, if I do a fixed cost for three years, I would like you, Mr OEM, to also fix the price for three years. In return, I’ll give you a PO up front. It’s a win/win.

{audio:0:31:57} Would the OEM supplier want to do that, though?

{audio:0:32:00} Again, they are the same. They look at 80/20 and all these smaller parts. I don’t want to go to my sub-contractor and buy 50 screws at a time, if I can buy 5,000. Normally, it’s a volume game and it’s a matter of not getting too many POs coming in the door. If you’re Delta, you like to place a PO, maybe once a week. If you’re an OEM, you don’t want to get a PO every week; you want to get one every quarter or every six months, because you’re busy doing production for production lines and OEMs.

{audio:0:32:37} Do you think this could pressure the margins for companies like TransDigm, if the procurement airlines start to tell Satair and Aviall to go and put pressure on price?

{audio:0:32:49} I think if you put pressure on price, upstream at the OEM, or downstream, then of course, they will look at what the market conditions are; will I take a little pressure because I can take some cost out? Back to the fact that I have a distributor and he may place an annual order with me, with two shipments per year. That makes good sense to maybe give a little margin away, whether you are a TransDigm or Eaton. Again, it’s a business decision.

{audio:0:33:17} We could see more longer-term contracts between the distributors and the OEMs, like TransDigm, which would be, typically, lower cost but just higher volume and easier to manage, for the OEM?

{audio:0:33:31} Yes. Then because you have lower operational costs, opex etc. then of course, you keep your margin where you have told the market you will keep your margins. You also work on your internal production costs, at the same time.

{audio:0:33:45} What do you think is the big risk to the model of Eaton or TransDigm and those suppliers that, typically, own the aftermarket?

{audio:0:33:53} The big risk is that the airframe OEM will be insourcing new platforms. The other big risk is that the airframe OEM is so eager to get access to the aftermarket, they may reopen contracts for existing platforms. If you are delivering a system for the A320 production which, before the crisis, we were approaching 700 or 800 aircraft a year, and you have 10,000 flying, that’s an interesting reopening of a contract, from a financial perspective, for the incumbents, but also for the competitors. But it’s high risk for the likes of Boeing and Airbus to reopen that because, suddenly, you need to get the production line used to that. Now I have two different manufacturers in the field; one in the old aircraft and one on the new. There are a lot of things to be considered before you do stuff like that.

{audio:0:34:46} You could say that it’s a little bit of a safe haven for those who have the contracts today. You really have to screw up the aftermarket and your performance, for Airbus to get mad at you and start saying that they will reopen the contract now.

{audio:0:35:00} But they’re not going to reopen contracts for small components, for less than $5,000?

{audio:0:35:06} No; because that’s, basically, not them having these contracts. That’s the sub-contractors of the sub-contractor, of Eaton or Rolls Royce.

{audio:0:35:15} They would only be looking at the big component or sub-system level. What could happen though is that the likes of TransDigm or Eaton or those supplying low-dollar SKU components is that they could be disintermediated, effectively, if the system supplier actually takes a new business and has the whole system?

{audio:0:35:35} For sure. You could say, when Airbus decided to insource the nacelle system, that had a big potential impact on Collins Aerospace and their sub-contractors. Especially those who were not selected as suppliers for the new Airbus system. A few were but a lot were not. In those cases, you basically lose your new aftermarket business, but you have a lot of old aftermarket business, on the existing platforms.

{audio:0:36:04} I guess this is why the TransDigm model is so interesting because they have hundreds of different SKUs, across different parts of the platform?

{audio:0:36:12} Yes, they are on many different platforms, so of course, they have many different prospects to keep an eye on but also to optimize. I’ve seen that with others, as well. You optimize the platforms and as they platform is dying, you need to keep going on the supply chain, so you increase prices because now your cost goes up, due to the fact that the volume is lower. All those things are playing into those prospects. Then, of course, some of the old platforms are getting packed now, with big numbers. Are they coming back? There’s a big question mark there.

{audio:0:36:46} Arguably, that would make it more likely for the airframe OEMs to reopen new contracts for systems, potentially?

{audio:0:36:54} Yes, but look down the list of systems where the spend is high, from an airline perspective and the volume is high from a production perspective. If you start with engines, Boeing and Airbus are not talking about insourcing engines, because that’s a huge R&D investment. Then you have APUs, you have landing gear, you have nacelle systems. As you go further down, it becomes more and more expensive in capex investments, versus your return. You are not going to insource galley equipment, simply because that would take so much effort to do it. It was insourced by Airbus, some years back, in some partnerships, but that business is so unique, for each airline, so you don’t want to get into that type of business.

{audio:0:37:43} Could they reopen those contracts though?

Satair & Aerospace Distribution

The two core ways airframe OEMs can take back ownership of the aftermarket

Challenges for airframe OEMs in controlling the aftermarket pricing on old platforms

How pricing works between supplier OEMs and distributors and how airframe OEMs look to control price

New contract structures that could be drawn between TransDigm and Satair or Aviall

How the industry structure will evolve as airframe OEMs take back aftermarket on new platforms

Satair & Aerospace Distribution

Former VP at Satair

inpractise.com/articles/satair-aerospace-distribution

Why is this interview interesting?

Executive Bio

Steen Karsbo

Former VP at Satair

Interview Transcript

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Satair & Aerospace Distribution(July 23, 2020)

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