TransDigm: Esterline Technologies Acquisition | In Practise

TransDigm: Esterline Technologies Acquisition

Former VP & Product Line Manager, Esterline Technologies

Learning outcomes

  • Esterline's pricing strategy pre-TransDigm acquisition
  • Why Esterline was focused on moving up to sell bigger systems to OEMs
  • How the OEM looks to capture margin and control the aftermarket pricing
  • Structure of aftermarket pricing with distributors versus direct from supplier
  • How airlines look at the pricing of spares and parts
  • The risk of the TransDigm model and potential backlash from OEMs
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Executive Bio

Mark Cochran

Former VP & Product Line Manager, Esterline Technologies

Mark spent 26 years working at Esterline Technologies, the aerospace supplier now owned by TransDigm. He worked in the Utility Controls System in the Avionics and Control Division where he was responsible for 6 interface systems producing over $75m in revenue annually selling directly to OEM’s and the aftermarket. Mark has experience developing platforms with commercial and military manufacturers and has negotiated pricing contracts throughout the aftermarket. Mark left Esterline 3 months after TransDigm acquired the business. Read more

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Mark, could you provide some context to the platform and product segment that you worked with, in Esterline?

You can think of it as a division; we called them platforms. Most of what we did was handle what we would classify as the man-machine interface, between a system input, on board an aircraft and the pilot themselves. This division made things like displays that pilots could touch. They made rotary controls that the pilots could use. They made control panels that the pilots would be able to input into. Our division or our platform also did software associated with all of that. We also did some communication development or communication equipment for ground vehicles. In other words, a customer for us would also be the US Army or any other army around the world. So those types of things. Basically, information coming out of the pilot, into the system and then the system goes off and manipulates it, one way or the other.

Which products were you dealing with, mostly?

A little part of our division was called Korry Electronics, even though it was part of Esterline. Korry itself dealt with, generally, the control panels. Let’s say, you go on board a 787 or a 767, you look to the left and into the cockpit, there will be a number of control panels and we would generate those. We would create those and sell them to different OEMs and different airlines, all over the world.

As you said, you were in the Esterline control and communication systems platform, what was the split, roughly, between OEM business and aftermarket business?

Aftermarket, if I include all the spare parts and everything, would probably run at about $45 to $50 million. The OEM business itself, when I left the company, was running around $75 to $80 million, but that was growing, because many of the platforms that we were supplying to directly, were still in a development phase or still on a smaller number of production runs.

In terms of the structure of Esterline and the team, what’s the FTE structure or what did the team look like?

A classic team for development or just in general?

For example, take the Esterline control and communication segment, what would that org structure look like?

The platform would have a vice president or director or general manager. There were a number of those people that would report into group VPs at the corporate headquarters, in Bellevue, Washington. The platform itself, would have individual units as part of it. Our platform had six individual units, I believe, when I left. Each individual unit had its own vice president or president of that particular company. The units could run anywhere from 25 million a year, up to 180, depending on what it is that they were doing. Most of the time, some of the larger ones would have a president who would run that. He would have his own senior staff. Some of the smaller ones would also have their own person running that group and their own senior staff, but it would just be at a smaller level.

How would you explain the core organic unit growth of the control products that you were selling to the OEMs? What was the underlying growth rate, without pricing increase, just the pure unit growth?

The unit growth, year over year, was heavily dependent on the rates of what the OEMs were doing. We would win a contract from an OEM and an OEM could be anywhere from Sikorsky to Boeing to Airbus; it could be Embraer, Gulfstream. We would end up signing a contract with these OEMs for a number of different years. As long as our pricing worked out well and we didn’t raise our prices too much, then they would stay with us. That’s how the business was set up.

Can we walk through winning a contract. How does it work? Let’s say, I’m an OEM, I’m building a new platform, what is the typical process of winning a negotiation and winning a new platform?

This is a long answer. Originally, what we would do is, we would be working with OEMs, like Boeing or Airbus or Embraer or Gulfstream or Bombardier, trying to understand what it was that they would like to see from our part of the aircraft. Like I said, many times, when you get on an airplane and you can look to the left in the flight deck and you can see a number of different control panels, in the overhead, they call it and buttons and switches and knobs and everything else. We would work with the OEMs, to see if the system was still going to be the same and how many different things we would have change with our system, in order to actually be in a position where we could even bid on the business.

In other words, as with Gulfstream, if they didn’t want push-button switches and they didn’t want rotary devices and they didn’t want it in the overhead, they wanted something that looked much cleaner, like touchscreen displays, then we would have to work on that, in order to support where it is they were going. We would work with them, early on, in order to help set the development requirements. Then, from that standpoint, we would know what the OEM wanted out of us and, as long as the business case worked, we would bid on a program and if we won, we would sign a contract and we would be the supplier for those particular things, for that OEM, for a number of years.

Does the OEM share what they are looking for with many different suppliers?

They do, but if you are very early on, in terms of conceptual phases, and you’ve got a piece of technology that they want, when it comes to a point of being able to put a bid out on the street, they will send it to a number of suppliers, but realistically, there’s only one supplier that is probably going to give them exactly what they want. That’s the supplier that’s been working with the technology early on and going, with them, all the way up to the point where they are writing the requirements.

So yes and no. But we spend a considerable amount of time, with all the OEMs, going down that path. Do you want touchscreens? Do you want the old push-button switches? How do you want us to certify this? We would flush all of that out, very early. Literally, Gulfstream has one OEM. You wouldn’t want to physically, really, build one system for just one. You would want to build a system that would work for both Gulfstream and Bombardier and Airbus and Sikorsky and everybody else.

Typically, the OEM would only work with one supplier, very early on in that concept phase?

Yes, normally. If there was another supplier that had something interesting, then they would keep us both at arm’s length, until we zeroed in on what it was that they really wanted. The way it works is, very early, if you can show them that your technology roadmap is going in the same direction that they want it, then they will spend time with you. They will help you figure out, from their standpoint, what it is that they’d like to see you do, versus us just guessing.

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TransDigm: Esterline Technologies Acquisition

June 5, 2020

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