TransDigm: Telair Acquisition & OEM Aftermarket Pressure | In Practise

TransDigm: Telair Acquisition & OEM Aftermarket Pressure

Former Chief Customer Officer at Telair, Transdigm

Why is this interview interesting?

  • Core Telair business pre-TransDigm acquisition and relationship with OEM
  • The different contracts between OEM, supplier, distributors, and airlines
  • How and when the serial and spare part price is set between OEM and suppliers
  • How the OEM could take back ownership of the aftermarket with Satair (Airbus) and Aviall (Boeing)
  • Potential pressures on TransDigm's model

Executive Bio

Bernhard Bertrams

Former Chief Customer Officer at Telair, Transdigm

Bernhard has 29 years experience in the aerospace industry. He is the Former Chief Customer Officer at Telair, a cargo-handling system supplier that Transdigm acquired for $750m in 2015. Bernhard worked with Transdigm through the due diligence phase and for 2 years post-acquisition. Prior to Telair, Bernhard spent 10 years at Airbus as Program Manager and at various other suppliers such as Diehl and Akka Technologies. Read more

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Interview Transcript

Can you provide some context to your role at Telair and the business you were managing, in 2015?

In talking about my job at Telair, I think I also need to give a little bit of background as to who Telair is and what their focus is. My role was as a CCO, the Chief Customer Officer. It is not the commercial officer. That role is all related to customer relations. It’s not only drinking beer and going out for a nice dinner; it’s about establishing a business relationship from the first cold acquisition, as we say, until the end of contract negotiations. So all the legal and commercial aspects as well as customer service, even after the delivery of the goods. This was all under my responsibility.

How was the business of Telair split between commercial versus military and original equipment versus aftermarket?

Telair is mainly focused on so-called OEMs. It supplies military and commercial; however, the majority is commercial business. Commercial means all commercial flights and that includes aviation, general aviation and everything. Telair’s portfolio is cargo-loading systems. Everyone has seen airplanes such as Pipers and Cessnas in the sky – unfortunately, not now, because of the virus – but you usually see them. They don’t have a cargo-loading system at all; it doesn’t make sense.

But any aircraft which is of a size to load more than 10 or 15 passengers and upwards, usually has a cargo bay. The cargo bay, most likely, has two different areas. One is the general usage of the cargo bay, which is quite often at the lower deck of the aircraft. In some configurations, it is in the aft or in a special configuration at the front of the cabin. Usually, there is a little differentiation we have to do, because manually loading means that there is a loading person, taking the cargo, whatever it is, whether it is a box or a suitcase, and put it in the cargo bay, by hand. Telair is not involved in this at all. It doesn’t make sense. There is not really any requirement, from a system perspective, because there is no system.

So for this one, it needs to be covered, air-controlled and, probably, pressure-controlled, fire-controlled, for smoke and toxicity and this is most important. But more importantly, and what we are really talking about is the bigger aircraft. Taking for example, a very big aircraft such as the 747 or the biggest one you can imagine, that has recently been delivered, a 747 to UPS. The 747 is one of the biggest airplanes we have and they have two main-deck – upper deck and lower deck – and main cargo-loading systems. To load these quickly, you’re using standardized containers, which are called ULDs. They have a standardized platform and clear dimensions. These ULDs are loaded with the freight, whatever the freight is. It can be liquid, food, medicine or luggage, whatever it is that has to be carried from A to B.

Most people around the world know what Amazon is and that means loading and shipping crates, over the globe, is really becoming demanding. Back to our point here, Telair is a company designing, really having the idea, and manufacturing and selling and aftermarketing the complete cargo-loading system.

Earlier you asked who the customer was. Is it military, civil or commercial? Usually, we don’t have helicopters with cargo-loading systems. There are a few helicopters around which have some kind of cargo loading, but Telair is not active here. The majority of Telair’s portfolio is really Airbus. Airbus also has the unique opportunity, being the supplier for the 747 system at Boeing. But for all other Boeing airplanes, they have a contract with another company, a competitor, also providing similar systems.

There’s no secret, this is public – Telair owns all cargo-loading systems for all Airbus models, with one exception, the A380. That means that, from scratch, they had an idea, with a blank sheet of paper and had a concept. Such a cargo-loading system has, mainly, three components. Of course, there are hundreds of different components, but three main ones. It is a rail system. You have to guide the ULDs from the entry area to the position where they are supposed to be. The second is the transportation from the entrance area to the point where it is. Think about how big a 747 is; you don’t want to push it by hand. The third one is to latch and to fix and to secure it in the position where it is supposed to be. These three components are the main components of the entire system.

As you can imagine, you also need a control unit; you push a button and you have a joystick where you drive the containers from the front to the end and then it’s on. For clarification, Telair’s portfolio is on the airplane. It’s not on the ground. There’s a unique little design, in a subsidiary company, a daughter company, which is a Swedish company. They have a belt system which brings the luggage from the ground, into the aircraft. But this is also a bit unique. Looking at the biggest portion of Telair, everything that’s flying equipment needs special certification and, therefore, is very complicated and, as such, is expensive.

The last part that I mentioned, which I’m sure we will talk about later in more detail, is the so-called aftermarket. Telair designs, together with the OEM – the original equipment manufacturer of an aircraft – and they give you the requirements and specifications. There are so many loads that you can bring into this frame and so many loads you can bring into that frame. Then you design it together. You deliver it to the OEM who installs it and delivers it, together with the aircraft. Whenever the aircraft needs a spare part, usually you call the OEM, or you can call the supplier directly or you’re calling a distributor.

I read, in the Transdigm M&A announcement, years ago, when they purchased Telair, around 45% of the revenue was aftermarket. I’m curious as to how you actually classify aftermarket revenue, versus OEM revenue?

It’s very simple. We have a very important due date, which is the so-called TOT, transfer of title. The aircraft is leaving the OEM facility. The customer has paid the check and taken the aircraft and it’s under the control of the airline now. That also means, for the Telair equipment, this is the transfer, so the owner is no longer the OEM. The owner is now the airline, the operator. Anything that happens now is under the control of the operator. The reason I am stressing it is that it depends on the contract of the operator now, whether he has to order the spare parts from the OEM or whether he should not. What I’m saying is, there are maybe two or three chapters.

There is a contract between the supplier and the OEM, which is between Telair and Airbus, for example. This contract contains two major lines. One is the unit price or the system price, for the entire system, and the second line would be defining the price for spare parts. There is another contract which is between the airlines and the OEM and that says, they buy the aircraft for X amount, they pay Y amount for the cargo-loading system and, in case they need spare parts, they will pay Z for these parts. Or the airline will go to a distributor which are companies, around the globe, who are doing nothing other than trading. They buy some equipment, on one hand and sell it, on the other side, to third parties. This, of course, is a separate contract between the supplier and the distributor.

In the past year, if you were reading about Transdigm acquiring Telair, there is an important point. The model from Transdigm is purely aftermarket and proprietary parts. Proprietary is very simple. Usually, having the proprietary rights means that you are the owner of the intellectual property. That means that there is nobody around the world who is allowed to make this part, similar to yours. It’s like copyright. That means anybody who needs this part, needs to go back to you. This is what Transdigm’s model is based on, which is an excellent model. I know Nick Howley and I know all the people there. It’s an excellent and model and it has been successful over many years. Their focus is proprietary parts and this means that people are really dependent on you. By people, I mean the airlines, the operators, whether you are talking about helicopter or fixed wing.

That means that whenever a part fails and needs to be replaced, they will be calling Transdigm or the subsidiary, to say, I need the part number XYZ and they will pay the set amount of money. This is where Transdigm can, most likely, define the price level for these units. This is their business model.

We can get into Transdigm in a bit of detail, later on. Taking a step back and looking at the supplier and the OEM relationship, such as Telair and Airbus or Boeing, to begin with, can you elaborate and share your views on how that relationship between the OEM and the supplier has evolved, over the last decade or so?

The establishment of a relationship between a supplier and an OEM is really important, especially for this kind of business, in the aerospace industry. I think I’m right in saying that most of the business is based on trust and experience. This is really key in the aerospace industry. The discussion is between a potential supplier and a potential procurement guy. They are asking if I am capable and I am saying, yes, I am capable. Based on what? I have to have references, as this is the best you can ask. That means that the first foot in the door is the hardest and the toughest one. If you have a foot in the door, you are at least on the list to be considered for the next platform or the next program they are establishing, assuming you did a good job before.

That means, you are designing together. Both parties are really investing a ton of money; I’m really talking a ton of money. Why both sides? It’s very simple. I can design something, but if it does not fit with the needs or expectations, then I’m designing against the wall. The OEM is also tracking the design steps very, very closely. That means that even the design engineers from the OEM are working very closely with the design engineers of the supplier. That close relationship takes time and money, as you can imagine.

The decision, from the OEM, as to who their supplier is, is commercially driven, logistically driven and trust driven. Also, don’t underestimate politics. As we saw in the press, the French government is fighting against Airbus’s decision to have a supplier in the US. You can see that there can be political influences. The relationship between Telair and Airbus was created and generated over years and decades and it takes a long time. If you want to be successful in aerospace, you have to have time and you have to have money, otherwise you will not be successful.

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TransDigm: Telair Acquisition & OEM Aftermarket Pressure

June 25, 2020

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