{audio:0:00:13} Can you provide some context to your role at Telair and the business you were managing, in 2015?

{audio:0:00:47} 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.

{audio:0:01:42} How was the business of Telair split between commercial versus military and original equipment versus aftermarket?

{audio:0:01:50} 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.

{audio:0:02:37} 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.

{audio:0:03:38} 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.

{audio:0:04:51} 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.

{audio:0:05:19} 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.

{audio:0:05:58} 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.

{audio:0:07:01} 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.

{audio:0:07:48} 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.

{audio:0:08:41} 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?

{audio:0:08:59} 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.

{audio:0:09:55} 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.

{audio:0:10:58} 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.

{audio:0:12:05} 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.

{audio:0:12:32} 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?

{audio:0:13:01} 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.

{audio:0:14:12} 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.

{audio:0:14:52} 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.

{audio:0:15:42} That means, this relationship is really based on trust and a good working relationship; being professional in your business area and showing them that you fulfil what you promise. If you do this, in time, in costs and in trust and everything else, you’re in very good shape for the next program. It’s not going to give you a guarantee, but you are in a good position.

{audio:0:16:09} Can we just walk through that? Let’s say Airbus is rolling out a new platform and Telair wants to supply the cargo-loading system. How does the negotiation work? Telair has to put up a certain amount of capex, to build the new technology for the platform and set a price to recoup that, in returns for the business. How does that negotiation go on how to price the actual hardware sell, originally, with the OEM?

{audio:0:16:38} Let’s assume you have the first platform; that means you have some experience. The OEM is making his calculation because he is defining how much he is willing to pay for the system. The supplier is calculating and making a quote. Under European law, you have to ask more than three parties, so the OEM has at least three to five quotes on the table. If one is quoting for $5, one is quoting for $4.50 and one is quoting for $250, something is going wrong. This is what typically happens. But it’s important if you have a first platform already because the customer will have different expectations. Boeing, for example, have different requirements and specifications from Airbus. There’s a third one coming up that everyone is talking about, which is Comac in China. They will have their individual specifications for their aircraft, as well.

{audio:0:17:56} For example, for smoke, for fire burn through, for vibrations, for loads. Even the structure of an Airbus airplane is differently calculated, for stress points, from a Boeing aircraft. That means that if you are designing a system for an Airbus aircraft, you have a totally different design, than for a system designed for a Boeing aircraft. You are quoting on a specification. They send you a request for creation, which is filled with specifications, frame specifications, what the system is supposed to do. You, as a potential supplier read this. You reply with a description of your system and the figure and number, by saying this is the unit price or system price.

{audio:0:18:58} Usually, the next step is the down selection. Maybe there were 10, at the beginning, and now we are down to three. The OEM discusses with the three, sits in a room and says, do I understand this correctly? At the end of this process, down selecting and then signing a contract, then you’re starting the design. This is important to understand. Nobody can afford this, for such a big system, to have the design completely finished, quoted, applied for or offered, and the customer says no. That would mean that you had made a design for nothing. In terms of investment, we are talking about really big numbers here. The development of the system is usually based on an agreement between the OEM and the supplier and then you start the design.

{audio:0:19:57} Now you understand why I say, before you even have a system on the deck or on the table, you have to trust the other person. If you have proof of your capabilities and your knowledge, from a previous system, it’s much easier and you know what the OEM has really requested. What kind of documentation is needed, how closely we will need to talk, from engineer to engineer, and so on?

{audio:0:20:28} Do they mention the aftermarket pricing structure before the design, as well?

{audio:0:20:34} Yes, because it’s part of the contract. Usually, you start your detailed, official design, after you have the nomination for the contract. I’m not talking about preliminary design, the draft sketch how it should work; I’m talking about the detailed design. That means you are calculating your unit price, your single component price, your complete system price and your spare price. The spare price has a separate requirement. For example, if you are looking for a spare tire for your car, you pay more than the original manufacturer of the car paid for the tire, because they ordered in hundreds, in thousands and you are just asking for one or two. This means, in the contract, the spare part price is already defined, which will be a different price from the normal price.

{audio:0:21:39} That’s pretty interesting. The supplier can, effectively, sell spare parts to the distributor, to then sell to the airline. Or the airline can buy the spare parts through the OEM, where the supplier sells them to the OEM?

{audio:0:21:54} If we turn back the clock a little bit, in the very old days, Boeing and Airbus didn’t even think about spare parts. The spare part business has been a totally different business, because there have been some companies around who dealt between the final end customer and the supplier; in this case, Telair. We take it very seriously because in the old days, Pan Am, which hasn’t existed for decades, needed a part and they called the distributor, the distributor called Telair, Telair manufactured the part, shipped it to the distributor and the distributor to Pan Am. Deal. Airbus was completely out of it. Airbus and Boeing, the big ones, they recognized that this was an important and valuable business. They started to take this under their control. Looking at the situation today, you see why Boeing acquired the distributor and why Airbus acquired the distributor. It’s no secret that Satair is a 100% subsidiary of Airbus and they are the distributor.

{audio:0:23:15} How does that pricing work then? The airline can still purchase parts via the supplier, via an MRO shop, or they can buy through Satair and the OEM?

{audio:0:23:28} The point is, it all depends on the contract. If the airline signs a contract with the OEM, including the spare parts, Airbus is signing a similar contract with his supplier, including the spare parts. If an airline does not accept to order the spare parts via the OEM, why should Airbus have a contract with the supplier about including the spare parts. They can, but they don’t have to. So the airline is really the dictating person, but it also depends on who is the bigger one.

{audio:0:24:13} Look at Amazon and the 767. They ordered quite a large number of 767 aircraft. If you are ordering many aircraft, you are in a better situation for negotiating. It’s very simple. If you are ordering one aircraft, once and forever, you will probably need to accept the general rules of Airbus or Boeing. Think about the leasing companies. The old leasing companies, such as ALC, they are buying numerous aircraft. Let’s use 20 aircraft as an example. They give them to their operators, their lessors. The airline is leasing from the leasing companies. The owner of the aircraft is the leasing company. The customer of Airbus or Boeing is the ALC company. If the operator, after three, five or 10 years, at the end of the leasing contract, gives back the airplane, you have to make sure that the airplane is in a good condition. Think about how many million pieces are needed to build one airplane. You cannot check every little piece; it’s impossible. So you can be sure that the leasing companies are requesting, from the operators, to have the spare parts from the original equipment manufacturer. They will never accept having a third-party in between.

{audio:0:26:03} I’m also going to bring up PMA here. PMA would, if possible, allow a third-party manufacturer exactly this part. Now there would be another person in the game and the leasing company will never allow this. As I said, after five years, the company is giving the airplane back. You check the books and you check they undertook the maintenance, what kind of hours they were flying. Then, of course, you see that there have been some parts replacements; for example, the cargo-loading system units have been replaced. You definitely want to make sure that they are original equipment because, otherwise, the value of the aircraft is changing and you don’t want to see that.

{audio:0:26:56} The air leasing company just cares about the net present value of the aircraft?

{audio:0:27:01} On that point then and this goes back to the industry commentary around Boeing’s Partnering for Success program, if you can call it that and where, effectively, the OEMs are squeezing the suppliers. How have you seen that relationship develop where the more consolidation, the higher the growth in the leasing companies or the more ownership that Boeing and the OEMs take in the aftermarket, it’s going to pressure the suppliers.

{audio:0:27:33} Of course. The more they control it, the more they influence it, the more pressure there is on the suppliers. However, the role I had at Telair, I’ll just make it very simple and black and white. Whoever sends me a purchase order, I check the conditions, whether it’s the OEMs, the operators or the distributors sending me the purchase order. The contract between the two parties having a purchase order is, mostly likely, defining the amount of money that I put on the invoice. At the end of the day, my role – and not only me, personally – as a supplier is that I have to make sure, whatever contract agreement I’m signing, that this is fulfilling my requirements. I mean requirements of margins, production costs, etc. This is really the basis for the whole aerospace industry, but if your risk share was Airbus or even a partnership with Boeing, this is most likely going in the direction of NRCs, the nonrecurring costs, and you want to share the risk a little bit.

{audio:0:28:46} So what the OEMs are doing here is, they would just like to avoid having a purely PO delivery note relationship; they want to get you on board. That’s the reason they call it risk share partnering.

{audio:0:29:03} How have you seen the pricing change between those two channels? Let’s say, for a supplier that’s selling to distributors or to airlines directly, versus to OEMs?

{audio:0:29:16} I’m smiling a little bit because I’m just thinking about a negotiation I did, on the topic of the relationship between Telair, under the umbrella and business model of Transdigm. The philosophy, the strategy, the complete design and set up of Telair, was really to go after the serial business. Before you become a supplier, you have to fulfil some qualification documents and processes that you have to have in-house etc. The total set up has to be developed to become a serial supplier. You have to have a reasonable engineering department because, as I said, you are starting with a blank sheet of paper. Telair’s strategy was to work with Airbus and, in the same manner – you are most likely requested to do it and we were happy to do it – also negotiate about the spare parts.

{audio:0:30:40} I said earlier that Telair’s achievement was that they were a serial supplier, for all Airbus models – except the A380 – which was a very good and successful story because usually, if you sign such a serial contract, this is for the lifetime of the program. There are some exceptions but this is usually the case. That gives you a much better way to calculate your business case, not only for the system, the design work, but for the entire company. You can look at the order books and you know, with high probability, how many systems you have to design, over the next 24 months. That makes you very comfortable. This is the type of set up that Telair had.

{audio:0:31:33} At the same time, Airbus was discussing, with Telair, about the spare parts. Again, if you are sitting at the table, as a supplier, you get the chance to have more business than just the singular business, because spare parts are on top. You can easily calculate serial business by the production rate of the aircraft. There is maybe a shift or a delay or it’s a bit earlier, but you can get a general idea.

{audio:0:32:06} Good question, but what do you consider low margin?

{audio:0:32:12} For example, some of the hardware or OE, original equipment sales to the OEM, can’t some of them be done at breakeven or very low margin and then the spare part is where the real money is made, for the supplier?

{audio:0:32:28} It’s hard to say because this really depends, most likely, on the strategic decision of the company. Each company works differently and each person that guides and manages a company also works differently. One thing is for sure, the serial business has less margin than the spare parts business. That’s no secret. However, it gives you a stabilized process. It’s not a guarantee, but the probability of getting this business is high. I’m sure you’ve also seen that the MROs, the maintenance, repair and operation institutions, are facing major problems because of this virus, as well. Less airplanes in the air, less operational hours, means less repair. That means less spare parts. If I made a calculation in the past, on behalf of Telair, saying average flight hours was XYZ, average of the failing of a system is after so many hours, then I make my calculation and say to the production line, please consider this many parts or spare parts, put them in the stock and let’s hope they call it up. You can be sure that the spare parts are now in the stock of each supplier or distributor and there is a lot of dust on them.

{audio:0:34:03} I’m curious about that dynamic between the supplier and the OEM. The OEM knows that, effectively, they are giving the business to the supplier? Once you get on the platform, as you said, you’re on that platform for the lifetime of the aircraft, which can be 20, 30 years, so the OEM can purchase the original equipment at a low margin. How have you seen the OEM, potentially, take back more and more margin from the aftermarket? Clearly, they’ve bought Satair, they’ve bought Avioll; are they actively looking to claw back some of that margin from the aftermarket, from suppliers?

{audio:0:34:48} Yes. In my old story about Pan Am, the OEMs didn’t even think about the spare parts, as a potential for good business. Of course, look at the numbers. How many airplanes have been in the air? How many were flying? How many flight hours? Today, there are thousands of airplanes, up in the air, at the same time. Nobody forecast that situation. Everybody, including the OEMs, are learning. The OEMs took the lesson and decided that they wanted to step into it. That’s the reason why before, there were distributors, independent of the OEMs. Since the OEMs recognized the business was there, the distributors are under the control of the OEMs.

{audio:0:35:37} How does that work? You can sell spare parts directly to Airbus and directly to Satair? Are they two separate agreements or does Airbus own both, effectively?

{audio:0:35:48} In this particular case, Satair is the distributor for Airbus and that means that any spare part goes to Satair.

{audio:0:35:55} So it’s one agreement and it’s the same thing from the OEM and Satair?

{audio:0:36:00} You may have two agreements or one agreement but, at the end of the day, the shipment address is a clear location.

{audio:0:36:08} What about the selling of spare parts to the MRO shop? Could that be a different one or is it only going through Satair, at this point, for the likes of suppliers?

{audio:0:36:15} It depends on your contract. If you have a contract with the OEM, which excludes any other sale than spare parts, to the OEMs, whether this is the distributors under their control, it’s still the same umbrella. Or the contract is saying, I’m the OEM; I’m ordering a spare part and the price is defined as XYZ. It’s a totally different story.

{audio:0:36:40} For example, if Telair said to the OEM, I want to own the aftermarket to the MROs or directly to airlines, then the OEM could push back and say, I want you to set it at this price?

{audio:0:36:55} Yes, because you may get pushback, even for the serial contract, if you don’t accept the conditions for the spare parts.

{audio:0:37:09} But how true is that because, as you said, if you’re the sole source supplier or if you have proprietary technology, how willing are the OEMs, really, to go against the sole source suppliers?

{audio:0:37:23} Every business should be based on a win/win solution for both parties. If you have a win/lose position, it’s just a question of time till you breach the contract. If you don’t have many suppliers for unique technologies, you have a much better negotiation position and you can request much more, than if you have a bunch of suppliers, where the discussion is just about price. This is also the reason why I said that, at the beginning, it’s very important to understand the portfolio of Telair and that they have the design capability. Are you familiar with the expression build to print?

{audio:0:38:17} In this case, that means you get a complete drawing and you don’t have to do anything else, apart from just producing the part, according to the drawing. It’s a totally different situation. You can imagine sending out this drawing to, say, 10 different companies, globally. It’s easy and it’s easy to receive 10 quotes back, because the drawing is precisely describing what is needed.  Everyone remembers the time there was a discussion about an A380 freighter and as we’re talking about Telair, so we should talk about freight systems, cargo-loading systems. If you had an A380 freighter, you would have a double-deck freighting system, plus the lower cargo bay. That means three, in total, which is similar to the 747 UPS, for example. This requires the kind of calculation to make a code which is not comparable at all, to a drawing for a build to print person.

{audio:0:39:34} This all relates together and that’s the reason I’m saying that you have to see the whole, entire picture. If I am one, out of three potential suppliers, for the entire cargo-loading system, for an A380 freighter, I am in a much better and much easier situation for discussing something, as opposed to build to print or metal parts, which is aluminum or titanium or something and other countries, all around the globe, can do it as well.

{audio:0:40:02} That’s Transdigm’s strategy, isn’t it, where they take the ownership and the aftermarket because they have sole source and proprietary?

{audio:0:40:09} Yes; this is the reason I am also mentioning it because, as you said before, talking a little bit about Telair, the general situation with the OEMs, but also about the ownership of Transdigm’s philosophy, this is the reason I am giving a hint in this direction. As I said before, the Transdigm business model is amazing and positive. This was a kind of revolution, of the worldwide market. You can see, when Transdigm was founded and really started to do business, people were looking at it and were saying, uh-oh. They are still there, making good money. They have also been impacted heavily by Covid, as I said earlier. Yes, you are absolutely right. This is the reason why Nick Howley came up with this idea and said, there is a business model which raises his interest and which was the foundation of his company.

{audio:0:41:16} It’s almost as if you have to turn Telair upside down, once Transdigm bought the business?

{audio:0:41:23} Upside down or whatever you want to call it; in the end, there must have been a business case.

{audio:0:41:29} But wasn’t it reliant on the serial business? The whole essence of Telair was supplying that serial business and being on the platform for the lifetime. Then Transdigm comes in and says, actually, I own the aftermarket now. Surely, that creates tension with the OEM?

{audio:0:41:45} That’s what I mean. When I was talking about the business case, I was not talking about the business case of Telair itself. I was talking about the business case for the acquisition. Transdigm was well aware of the history, the set up and the situation of Telair and all the figures and the numbers. There was a very professional due diligence. I’m not commenting; I’m not validating why Transdigm bought Telair. The amount of money can be read in the press; it’s all public. My point is, why they did it and what kind of impact did that acquisition have for the market and for the company. For cargo-loading systems, for these kind of professional, complete systems, there are not many companies around the globe. There is a limited number and the number is less than five. That’s number one. Of course, that raises interest by saying, that smells as if there is a potential for unique, proprietary and so on.

{audio:0:43:16} In the end, you can imagine that Transdigm’s philosophy is having a small amount of people organizing the administration and a huge quantity of companies which are, most likely, independent, and redoing their business. That is the business model which is public. Go on the Transdigm website and you will see there are more than 50 companies there; I think it’s around 55. The group of Transdigm is small. This is not a huge organization of several hundred people managing these companies.

{audio:0:43:51} So what does that mean? It’s very simple. The companies have to be independent, have to operate independently and they are doing the business. For Telair, I think there was a huge impact because this was the kind of company that was focusing on serial business. The whole set up was centered around doing design work and also production. Aftermarket is a very similar production to the normal serial products, because usually, it’s the same product, the same process. The only change is, the purchase order for the kit for say, machine MSN 755, is five pieces and you ordered seven pieces for your manufacturing and two are going in the stock because they are reserved for aftermarket.

{audio:0:44:46} For the production company on serial production focus, there’s no difference for aftermarket or serial, unless you have an urgent purchase order. This is also a point that we haven’t yet addressed. You can imagine, if there’s an aircraft on ground – the expression AOG is very popular in the aerospace industry – it’s getting the attention of everybody. An airplane is only sufficient and efficient if it’s in the air and flying. Then it makes money; very simple. We are seeing the impacts at the moment, because no airplanes are flying because of the virus. That means that you have to get the aircraft in the air. If it is on the ground because there is a failure or a unit is damaged, it costs you money; every day, every minute, every second. You want to have the spare parts ASAP. This is the reason you see red boxes flying around the globe, sometimes on the grounds of the airfields and so on. They are marked red boxes and they will be carried around the globe, for every spare part you need.

{audio:0:45:52} However, if you, as a supplier, don’t have these parts in stock – and it’s usually a requirement to have an amount of XYZ in your stock – then you definitely have to produce it within a specific amount of time. For your production, that means you may shake up the whole production line by saying, wait, don’t make part number five; make part number three. All these little stories tell you about the different business model, the different behavior. Telair was set up for serial development and serial production.

{audio:0:46:39} Obviously, it’s designed completely differently now but would you expect, under Transdigm, that the OEMs would backlash against Telair now, and not give them the serial business for new platforms?

{audio:0:46:52} The division, the strategy and the procedure of Transdigm is very clear. It’s aftermarket proprietary. Their focus is not on serial parts. But now, you also have to consider the situation of the market. Have you heard about a new aircraft model, over the last couple of months? No. Have you heard all the rumors and problems about the 737 MAX? In the current situation, the big OEMs are not creating, not designing, any new major platforms. They are doing modifications of existing platforms. For example, you heard about the A320neo, A321neo, the new engine options. Before that is was the classic engine option, the co. For companies like Telair, completely orientated to new designs for systems, it has been a requirement that you have to adjust the company to the current needs.

{audio:0:48:06} So the big OEMs are not creating new platforms. However, don’t forget that, firstly, there is a Chinese OEM coming along. Secondly, there have been two major acquisitions, up in the air, which was Bombardier, under the wing of Airbus and then Embraer, under the wing of Boeing. I know something happened and the last one is, most likely, breaking up. If you do this, there is intention behind it. I’m pretty sure you heard about the A220, which is the Bombardier small airplane. This was a nice thing for Airbus. Is it a new platform? No, because this airplane was, most likely, already designed. But Comac is coming, the C919; this is most likely already designed. The C929 is coming and is in the design phase, which has huge potential. Now we are talking about some kind of aftermarket, the so-called P2F, which is passenger to freighter conversions.

{audio:0:49:22} PFW is a very famous company, here in Dresden, the eastern part of Germany. You can Google it. They are doing conversions. The old airplanes, which are really ageing and are more than 20 or 25 years old and they have too much mileage and too many take offs and landings and so on, for passengers. They are modifying these aircraft. You rip out all the lavatories, galleys, passenger seats, IFE and you make a freighter.

{audio:0:49:55} Even if there’s no new platforms, I guess it still means that most of the money is then made in the aftermarket? Is the OEM going to allow the suppliers to capture that margin?

{audio:0:50:12} I need to be careful with my answer about, is the business for aftermarket really bigger than the business for serial? Be careful. I don’t think this is true. If you think about how many aircraft are now manufactured. It’s like a bakery. Before Covid, they manufactured aircraft like hell. Both business areas are very interesting; the serial business and the aftermarket business. The difference is that the margins on aftermarkets are higher. It’s very simple; you have less quantity and more margin but you have to react faster and, as you can imagine, your cost set up is higher than it is for serial production. Setting up a machine and producing 100 pieces is cheaper than setting up a machine and producing one.

{audio:0:51:20} In terms of margins, you need to compare apples to apples. You can’t say that the cost of a serial part is the same as a spare part. Does that answer your question?

{audio:0:51:32} My question was more around, how do you see the OEMs adapting their supply chain, given this new landscape we are in? Given all that we’ve discussed, not many new platforms, they’ve acquired these new distributors, they’re clearly aware of the margin in the aftermarket but also, they are manufacturers. How do you think this is going to change the supply chain, going forward?

{audio:0:51:57} My personal opinion is that I believe, very clearly, that the OEMs will be hungry for more of the aftermarket, because the serial business is going down. They see the potential in the aftermarket and, therefore, they will be more aggressive and more precise, I’m pretty sure. My assumption is they will not be as flexible as before. If you go to them and say, I’m ready to sign a serial contract but aftermarket I will do myself, they will say no. The serial contract for you will only be signed if you also sell the aftermarket parts exclusively. That’s my personal assumption.

{audio:0:52:45} Have you heard about the payment flight per hour? For the engines, for example, they totally changed the business model, because they are now paying by the usage of the engine. This happened 15, 20 years ago; maybe 25. Nobody ever heard this expression and now it’s very popular. This model, for example, will also be up in the air, very soon, I’m pretty sure. Also, for cargo-loading systems and spare parts, I’m pretty sure. If you have a military airplane, a fighter and these military airplanes are often, quite old. Look at the Eurofighter and look at the time when it was designed and it’s still flying. There’s only one display unit in the cockpit that is broken. You need one more. Don’t ask me what you’re paying for this one display unit. But do you want to ground an aircraft which probably has a value of $50 million, $60 million, because one display unit has broken?

{audio:0:53:56} The point you made about the OEMs wanting to take back more of the aftermarket, because of the lower serial business, do you think this could pressure Transdigm?

{audio:0:54:07} I’m pretty sure it will, but it doesn’t mean that Transdigm is in financial trouble; I would never say that. But this needs to be considered in the business case for Transdigm, for sure. As I said, there is more pressure on it and they may try to prepare themselves for it. I’m talking here about my personal opinion but, for example, why is Transdigm not making a frame contract with the distributors? Again, I’m not managing Transdigm but I’m pretty sure they had this idea and maybe they decided not to do it. This is something that even I would suggest, myself.

{audio:0:55:00} Why wouldn’t they do that?

{audio:0:55:01} When we were talking before, we gave the answer ourselves. You asked me if it was true that the aftermarket margins are higher than the serial margins. Why is that? It’s all about quality. This is totally the same. If Transdigm go to the distributor and make the frame contract, there should be something in the contract. I couldn’t assume it was talking about total value, volume or quality of parts. There must be a part number list, otherwise it doesn’t make sense.

{audio:0:55:32} Can Transdigm actually make this contract? They’re not set up to move into the serial business at all, are they? Even if they were to switch, it’s difficult for them.

{audio:0:55:44} I’m not saying that Transdigm is entering the serial business now. That is not my point. My point was more about making a frame contract with the distributor and the MROs.

{audio:0:56:03} Maybe I took it a step further and just thought, okay, if the OEM is not going to work with any supplier, unless they’re doing serial business, where would that leave Transdigm? As you said, they’d have to make a big contract with a distributor, which could be likely, but that would crush their margins?

{audio:0:56:27} That’s what I’m saying. Why should the distributor do it and why should Transdigm do it? It’s the deal between two parties. Two parties are planning to talk to each other, so there must be a benefit, a win/win situation, for both parties. If not, it doesn’t make sense. Transdigm will have to give something and the distributor will have to give something. The question is always a game now. If you have to give up more than you can win, then the contract doesn’t make sense.

{audio:0:56:58} What can the distributor give to Transdigm, apart from letting them do what they do?

{audio:0:57:03} It’s very simple. For example, you can give them a concrete volume. The distributor is working, most likely, on behalf of the OEM. So via the OEM, the distributor can squeeze all the customers to say, you have to go more to your OEMs than to any third party. Think about, as I said, the PMA parts, in the past. For example, I’m a leasing company, so I’m leasing my aircraft to an operator. I’m telling him, you are not allowed to have any MRO parts on board and you are not allowed, at all, to have any PMA parts. So the only possibility is to go to the OEMs. So, an ALC ordered the aircrafts from the OEMs. The OEM is forcing the leasing company and saying, you have to order everything from my distributor and in the contract it is clear. That means the whole game, everybody is involved and it is probably shaking it up a little bit.

{audio:0:58:17} This is typically down to the management of a company and it is a request that, I’m pretty sure, is on the table, from Transdigm. If you ask me, personally, today, would I buy stock in Transdigm, I would say, yes of course, because there is no risk that this company is going bankrupt. If you want to buy it today, as opposed to yesterday or tomorrow, it’s the same as me saying, tell me the lottery numbers for tomorrow. It’s the stock market. You have to get the vision, the feeling. What we all see is that the MROs are facing major trouble. They are laying off tons of people. They have to; they have to react to the market and, of course, there is also an impact on Transdigm. There’s no influence. The market is dictating your business.

{audio:0:59:14} So you think we’re going to see a large decline in organic growth, in aftermarket, across the board, which would impact Transdigm?

{audio:0:59:22} I’m not giving a hint of what’s happening with the stock from Transdigm. I cannot do this because I am not some high-level person who is flying 10,000 feet and has two wings. What I’m saying it is more than obvious, and you can read it in the press, that the aftermarket and the MRO business is going down. I believe that the aftermarket business is a business with delay on the serial operational business. The overhaul and repair business is following the daily flights. If you don’t fly, there is no operation, with a delay, of course. But if you start flying, you don’t send it into maintenance the next day. So the worst level of hardship has not yet arrived for the MROs; it’s coming.

{audio:1:00:25} Finishing up on the future of the structure of the industry and I just wanted to elaborate slightly on the point you made about OEMs taking back the aftermarket and the potential scenarios. You said that the likes of Transdigm or other suppliers, could make some kind of frame contract with the distributors. Are there any other ways that you could see the OEMs moving more into the aftermarket, which could really shake up the whole supply chain?

{audio:1:00:56} During this discussion, I have been wearing the hat of a supplier, like Telair. I have given you the vision and the outlook. As we’ve moved to looking at the vision and behavior of the OEMs, and the specialist companies like Transdigm and so on, I’ve changed my hat. If you look at the whole situation, I describe it as a puzzle. All the puzzle pieces are needed to make the picture, but different companies have different pictures. If I was now in a decision-level position with an OEM, I would clearly give the instructions by saying, show me the business potential, stepping more into the aftermarket. I’m not saying I’m making the decision, but I need some facts before I make a decision. I would definitely find out what kind of potential business is there, in addition to what I’m having today. Then secondly, what does it mean? What are the potential solutions and what does it cost for me?

{audio:1:02:08} If I were in Transdigm now, in a management position, at a decision level, I would also monitor it carefully by saying, what is the impact for me, if the OEMs become more demanding at dictating the aftermarket business? The cake is still the same. The cake is getting bigger and bigger, because we are delivering more airplanes, but the cake is still the same and it has to be shared. It’s just a question of how big your portion of the cake is.

{audio:1:02:40} Let’s walk through that. If you just take Boeing or Airbus, for example, let’s say that Transdigm supplies a spare part for one of your platforms. You know that they’re earning a certain margin; you know that there is an opportunity there, for the OEM. But if the supplier is the sole source supplier and you have to then switch out and go to another supplier, that’s going to cost you a fortune, as well. So really, how much of an opportunity is that for Boeing or the OEM, if you have a sole source supplier? That’s the whole reason why Transdigm do this?

{audio:1:03:17} Taking Telair as an example, the philosophy and the strategy was to become and to be a serial supplier. If Airbus is giving you a headache by saying, if you really want to become the next supplier for the next platform – and there must be something under preparation – do you want to do this? If you want to become my supplier for serial, for the next platform, we need to talk about the aftermarket. It’s always about bringing the people to the table so they can talk to each other. It’s not like a discussion with an enemy. Our duty is always to be successful and make money. That’s our duty; that’s our mission.

TransDigm: Telair Acquisition & OEM Aftermarket Pressure

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)

TransDigm: Telair Acquisition & OEM Aftermarket Pressure

Former Chief Customer Officer at Telair, Transdigm

inpractise.com/articles/tdg-telair-oem-aftermarket-pressure

Why is this interview interesting?

Executive Bio

Bernhard Bertrams

Former Chief Customer Officer at Telair, Transdigm

Interview Transcript

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TransDigm: Telair Acquisition & OEM Aftermarket Pressure(June 25, 2020)

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