Satair & Aerospace Distribution | In Practise

Satair & Aerospace Distribution

Former VP at Satair

Learning outcomes

  • 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
  • How airlines look at aftermarket pricing
  • 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
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Executive Bio

Steen Karsbo

Former VP at Satair

Steen worked for Satair, the leading global aerospace distributor owned by Airbus, for close to 40 years. He joined in 1980 when the company was generating $10m revenue and retired in 2019 with Satair a subsidiary of Airbus and $2bn in annual revenue. Steen worked across sales and marketing, structuring contracts, and representing suppliers across platforms and product lines.Read more

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Steen, could you provide some background to when you joined Satair?

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.

What were the services that Satair, historically, offered?

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.

So you were providing inventory management and sales and marketing, for the OEMs?

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.

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. 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.

How has the market evolved? We’ve seen different players, different distributors or MRO players, partner with OEMs in different ways.

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.

They wanted to take back some ownership in that market. How has that impacted the structure of the industry?

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.

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.

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.

The airframe OEMs were trying to go out and aggressively take back the aftermarket, from the OEMs?

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.

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.

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?

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.

Do you think Covid-19 has impacted the strategy from the airframe OEMs?

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.

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Satair & Aerospace Distribution

July 23, 2020

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