Interview Transcript

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

In your most recent interview, you mentioned that Airbus had dual-sourced Korry with Safran.

Yes, that's correct.

Could you elaborate on this experience of dealing with a dual source versus being a sole source on the Boeing side? How did it impact your strategy, pricing, sales conversations, and overall business strategy?

Yes. Airbus tends to dual-source more than Boeing does. The strategy was to understand the value we were providing to Airbus relative to our competitor. Airbus was trying to commoditize us for their benefit. We had to consider our delivery, operational performance, and the features of our devices. This situation did put pressure on pricing, as it does whenever you have multiple bidders.

Do you think Airbus was trying to commoditize Korry because the product is quite substantial? From what you mentioned in the last interview, it was virtually every switch in the cockpit, which is not a small component but a significant cost.

Indeed, the higher the cost to the buyer, be it Airbus or another company, there is a benefit in trying to reduce those costs. I've observed this with Airbus, outside of my experience with Korry. They apply the same principle to other components and equipment outside the cockpit. However, they don't apply it universally, and I can't provide insight into why they make the decisions they do. It seems to be more of a strategy that Airbus pursues than Boeing.

Let's consider an A320 or any other airplane. The total purchase price for the Original Equipment Manufacturer (OEM) for the entire Korry product line of switches in the cockpit would be approximately how much?

That's confidential information I'm not at liberty to share.

I see. But it would be substantial compared to, say, other TransDigm product lines where it's just a valve. My assumption is that if it's a cockpit full of switches, the total cost could be in the tens of thousands of dollars.

It would depend on which TransDigm company we're talking about. There are certainly some TransDigm companies that probably have much larger ship sets than Korry. Maybe not in terms of the number of pieces, but in terms of the overall value. It's been a while, so I can't really compare one to the other in terms of the overall price or cost of an aircraft. Korry is relatively small. There are components like landing gear and engines that obviously cost a lot more.

Even so, Airbus thought it was important to dual source.

Yes, and there are probably other factors. Now we're starting to discuss Airbus's decision-making process and why they do the things they do, which is a bit outside my area of expertise. There could be many different factors at play. For instance, the ease of dual sourcing, things like fuselage have a huge cost. But people aren't going to dual source that because it's simply not easy to do. Plus, there are other costs, like capital, that come into play. Sometimes it's not just about the cost of acquisition, but also the ease of doing so. Interchangeability sometimes comes into play, like with interiors, which Korry didn't sell. Sometimes it comes down to the preference of who airlines like to work with and many other factors.

So, it's not just about the price, but the fact that switches are, in theory, more interchangeable?

That could indeed be a factor, yes.

Could you walk me through the process of how dual sourcing would work? Let's say there is an airplane being built today, which will be in production for the next 20 years, like an A320. And let's say right now TransDigm has a subsidiary, Korry, or any other, that is supplying a particular part. The airlines are bothered by what's happening in the aftermarket. Boeing is aware of this. So, Boeing decides to dual source this and from next year on, they want an alternative for all the airlines. What would that process look like?

If Airbus, for instance, has a supplier and wants to add a second one, that's what we're discussing. This process is generally the same for all companies. Each Original Equipment Manufacturer (OEM), whether it's Honeywell or another, has their unique steps and decision-making matrices. Once they've identified an opportunity, they'll issue a Request for Proposal (RFP). In aerospace, this usually involves a commercial proposal and a technical proposal. These might be combined or separate, depending on the company or government.

If the companies don't already have a contract with the OEM, the RFP will include their latest terms and conditions. For companies like Airbus and Boeing, there'll be multiple contracts due to aftermarket support contracts and others. The RFP will also include specifications about the product. All parties have to respond to this RFP.

The timing of the RFP depends on the contract with the existing suppliers. If the contracts are sole source or exclusive, the RFP might have to coincide with the contract's expiration. There might also be performance-related factors that could potentially break the contract. This affects the timing. The specific wording in the contract determines whether the contract can be sole sourced. After the RFP is issued, bidders prepare and submit their proposals.

If a dual source is approved at the OEM level, from that year onwards, when an A320 is produced, Boeing will have an option at the OEM level to choose between TransDigm or, let's say, Triumph. Nine times out of ten, will they choose Triumph or the newly approved dual source?

Could you please repeat the question?

Of course. If TransDigm was initially the OEM for a specific part, and Boeing has now issued an RFP for a dual source, and let's say Triumph wins that. From that year onwards, when A320s are being produced, which company will typically have their part on the plane? Will it be Triumph?

If both suppliers have contracts, they are not second-sourced, meaning they are not replacing TransDigm, but both supply parts. This is an assumption and depends on the specifics of the sourcing strategy. In some cases, the OEM might decide to source a certain number of parts from both suppliers for various reasons, such as capacity guarantees or beneficial pricing.

For instance, if Triumph offers a better price, the OEM might push more supply to them and TransDigm would get less. There could be numerous reasons for choosing one supplier over the other. It might be that one supplier fails to deliver on time and the other can provide more. I've encountered combinations of these situations throughout my career at TransDigm and other companies.

There are also instances where the OEMs have arrangements allowing the airlines to select their preference. This happens frequently with interiors, sometimes purchased by the airline and shipped to the OEM for installation. Other times, the OEM purchases and supplies the part based on the airline's preference. In such cases, the sale tends to focus more on the airline as we try to convince them to use our product and instruct Boeing or Airbus to use us.

So, the airlines tell Boeing and Airbus that they want a specific part installed in the 100 planes they have ordered for the year?

Yes, that's correct.

Is this a common practice, or do Boeing and Airbus typically dictate the providers?

I'm not sure how common it is, but throughout my career, I've seen all the scenarios I just mentioned.

Once there's a dual source approved at the OEM level, even if the dual source is not on the airplane and TransDigm remains the OEM, can the airline go to the dual source in the aftermarket once they take control of the airplane?

It depends on the term I mentioned earlier, interchangeability. If the products are truly interchangeable, certified as such, then in theory, they could do that. But then you start to get into the system. There are a lot of technical factors that come into play then, and how it was certified could influence their ability to do that.

So, part of the strategy seems to be maintaining your territory if you're a sole source and it becomes a dual source. You referred to this as the system. Can we discuss some of those strategies? Would one of them be the concept of rolling the dash?

Indeed, rolling dash numbers can have an impact. Although it's not really a system-level concern, it does have an effect.

What are some system-level things?

System-level issues might include, for example, let's discuss aircraft interiors. Let's say you have two different companies supplying seats, Collins and Safran. Both produce seats and tray tables. However, the way the tray tables for Safran attach might be different from the ones for Collins, and they might not work together even though they're both tray tables. This is a system-level issue. Third parties can come in and replace parts, but the individual components, the line replaceable units (LRUs), might not be interchangeable, even though the systems could be selected by either an airline or the OEM to be installed.

TransDigm does quite a bit of that.

I can't speak for the other operating units as I'm not familiar with them.

But Korry had a focus on LRUs.

Yes, everyone focuses on LRUs. However, it would be challenging for someone to do that with Korry. If we consider the systems that Korry provides, for example, for the Boeing 787, the cockpit's overhead panel is delivered as a whole to Boeing for installation, unlike the older models where each switch was installed independently. This makes it more difficult for someone to replace parts because the individual switch is unique and can be replaced and fixed, but it's part of a larger system.

Were you at Korry before or after Airbus decided to dual source with Safran?

The decision was made before my time at Korry.

And it was maintained throughout your entire tenure?

Yes.

How did you manage sales and price increases over time using a value-based approach? Was it significantly more challenging than on the Boeing side or in any periods of your past experiences where you were a sole source? Or was it more of a conversation and a process, where if you maintained your strength in product quality and delivery, there wasn't much of an issue?

The process wasn't more challenging than any other. The capacity to adjust pricing was different due to the added pressure. However, when updating even a sole-source contract, there's always a risk that if we increase the price too much, they might give the contract to another company to design and certify the equipment. This is always a possibility. Especially for high volume aircraft like Boeing's 737 and 787. The risk is much higher for these than for an out-of-production plane that only requires spares and is an old platform with few in flight. There's more flexibility in the latter case. That's just how it works when you're manufacturing 40 a month. The amortization period is much shorter.

Could you tell me whether, at the aftermarket level, the products of Safran were truly interchangeable with those of Korry? Not when selling to the OEM, but at the aftermarket level.

I'm not entirely sure, as I don't recall that being a significant issue. We didn't discuss it much, which is likely why I don't remember.

If you had to guess, why do you think that was the case? Why wasn't Safran, a strong engineering organization and your dual source alternative, seen as much of a threat? Was it due to a lack of interchangeability or some other reason?

Our products performed exceptionally well. They were reliable and favored by pilots, which mattered once they were installed. Bigger threats were probably things like PMA parts. Safran also had to maintain a certain level in the aftermarket. However, a PMA supplier could potentially come in at a much lower price if they could reverse engineer it and pass all the hurdles, creating more pressure. That was a bigger threat than worrying about Safran starting a price war.

During your tenure, did you notice an increase in Boeing and Airbus providing manufacturing or cost assistance to dual source threats or PMAs? Or is that a rare occurrence in the industry?

For Korry's parts, we didn't see any evidence of that. It was a topic of discussion and speculation, but we didn't see any signs of Airbus or Boeing proactively trying to develop such a strategy. We knew it happened at airlines. You can predict who should be purchasing how much based on fleet sizes in the industry. Some airlines weren't buying enough parts, leading us to believe they had found a PMA source. We didn't always know who those were, but it did happen. As for other areas, I'm speculating about Boeing and Airbus's behavior and may not have the same insight.

On the commercial side of Boeing or Airbus, they need to exercise caution. This is because promoting something that could potentially take away the aftermarket from their suppliers could complicate future contract negotiations. However, when you consider the aftermarket divisions of Boeing and Airbus, they operate independently, acting like distributors. They aim to find the cheapest parts and secure the best deals, and I believe they will do whatever they can.

When you identified a potential PMA entrant by examining the numbers, what was your response? Did you proactively reach out to the airline to discuss possible solutions?

Historically, that wasn't something Corey frequently did.

So, if a PMA market player wanted to enter and share part of the market after bearing the entire cost and process of reverse engineering and approvals, you were comfortable letting them proceed?

Yes, at that time, we felt there were bigger threats. Whether that has changed since I left, I'm not sure. But back then, we believed we had larger opportunities and risks in other areas.

What were these bigger risks in other areas?

We were focused on developing other product lines. We were very confident about our core components business and our market position, and we were aiming to expand in other areas.

Let's discuss this for a moment. According to public information on LinkedIn, new business contracts worth more than $70 million were closed during your tenure at Korry.

Yes.

I'm not certain if these were new product lines or existing ones, I assume it's a mix of both. I'd like to discuss this. One of the less talked about aspects of TransDigm subsidiaries is the new product, the third P, and profitable new business. Could we discuss the engineering focuses and how you identified new product lines that you could compete well in?

Certainly. One of the contracts we're discussing involved a product from an existing line that had been in the business for several years. We were facing a number of obsolescence issues and believed there was an opportunity to provide a more modular product. The aim was to reduce our design costs for new contracts instead of starting from scratch each time. We invested in R&D before TransDigm acquired Esterline and began to develop that product. That's one of the sales that resulted from the new design that addressed obsolescence issues and allowed for a more modular approach for quicker design cycles.

So it was an existing product line, but with improvements.

Yes, a modernization of it.

You see the business case as a one-time capital expenditure spend, which will make us more attractive to Boeing and Airbus in the future.

Yes, and it will also make us more appealing to other larger market segments. The product I'm referring to was not for commercial aircraft.

You mentioned increasing EBITDA by 70% within 18 months through negotiations. Could you break down what percentage was achieved through price, volume, and cost cuts?

A significant portion was due to value-based pricing.

Let's discuss value-based pricing. There's a lot of talk about it in the industry. Even Charlie Munger, before his passing, mentioned in one of his last interviews that he had looked into TransDigm. He noticed that they would find a niche product and then increase the price by ten times. He didn't think that was the right way to do business. Could you comment on that?

He didn't?

No, he considered it immoral, stating that the price hike was too steep. Let's discuss this. Is this an exaggeration? Is it a common practice? Generally speaking, I'm familiar with value-based pricing, especially in relation to TransDigm. But when it comes to the actual extent of the price increases, let's delve into that.

Yes, of course. Our approach was to understand our product's position in the market, the risk of losing the product, and what we could do in terms of pricing. We didn't simply increase everything by a certain percentage. We took a more nuanced approach. We evaluated different areas, assessed the product's value on the platform, and then determined what we believed the product's value should be for various reasons. As you mentioned, you're familiar with value-based pricing, so we made adjustments based on that.

As a result, our prices varied greatly. Some prices remained the same, some might have even decreased, though I can't recall any specific instances. In some cases, we had tough negotiations with a customer where we were losing money on a contract. The last time the contract was up for negotiation, several years prior, the pricing remained the same, and we were still losing money. In such cases, we had to implement a more aggressive price increase because it didn't make sense for us to continue selling the product. We conducted a lot of analysis to determine a price point that would allow us to make a profit and potentially win the contract. But we were also prepared to lose the contract if necessary.

When you mention a customer, are you referring to the Original Equipment Manufacturer (OEM) or an airline?

In this case, it was for a new production aircraft. Actually, it was an out-of-production aircraft, but it was not an operator.

How can it be out of production?

The aircraft is no longer being produced, but it's still in operation.

But in that case, wouldn't the contract be with an operator, like an airline, rather than a manufacturer?

No, it's not always the case.

Could you elaborate on that? If it's not being produced but it's being flown, why is the contract with the operator?

I'm not referring to commercial aircraft, but other types of aircraft.

I'm still having difficulty understanding, though.

Depending on different parts of the market and different contracts, some allow you to sell directly to the operators and some don't.

I understand now.

In this particular case, that's how it works.

If you were to segment the aftermarket, more so than when you were renegotiating with OEMs or in situations like this, but when you were negotiating with operators, if you were to categorize the post-acquisition increase within 18 months, the value-based pricing, and say a percentage of products that were hiked by, remained flat, doubled, or increased tenfold or more, what would that distribution look like?

There was nothing that increased tenfold. I can't think of any product that had such a significant increase. As for the percentage, I can't really provide a breakdown on that. In terms of part numbers, I believe most of them had increases below 10%.

Is this in the aftermarket?

Yes, I believe so. I can't recall exactly. It's been five years since we first started.

So it's not even a doubling. You're talking about a 10% increase in one go. It's just an adjustment.

No, you misunderstood. You were asking about the percentage of products that had price changes.

No, I was asking by how much they changed.

Yes, and you were asking me to categorize the percentages in each category. Okay, I misunderstood.

Yes, that's what I was asking. So, you mentioned 10%.

I believe more than half of the part numbers had price increases below 10%.

Below 10%?

I think so. It's been a while.

So you're saying more than half had price increases below 10%. This isn't even a doubling of the price.

Forget about a tenfold increase. Yes, I agree. I don't remember anything that increased anywhere near tenfold.

Broadly speaking, when it came to Korry post-acquisition, were the larger price increases on the OEMs or on the operators?

The impact varied. Some OEMs didn't experience any change, and the same goes for airline parts that we sold directly to airlines. It wasn't a universal effect. The price increase depended on the part numbers, particularly for those associated with low-volume parts that had been in operation for many years and weren't being used on new production aircraft. Those prices might have increased more due to a variety of reasons.

For instance, as I mentioned earlier, one reason could be that our costs were higher. We weren't producing many of these parts anymore, and we needed to increase the price to continue production. While people needed the parts, we also couldn't afford to produce them at a loss.

You mentioned earlier that you have experience working with individuals like Joel Reiss. I'm not sure how familiar you are with Mike Lisman, Alex Feil, Peter Palmer, or Paula Wheeler, but I'd love to know your thoughts on this new group leading the company.

Given the time you spent there, you must have also interacted with some of the legacy TransDigm guys like Bob Henderson. Could you talk about the similarities and differences between these two groups of people?

Additionally, could you tie in your thoughts on the company culture? Is it a culture driven by the people, or is it one where new recruits are quickly indoctrinated? Are people chosen because they fit the role, and once they're in, they keep the momentum going? I'd appreciate it if you could discuss the legacy personnel versus the newer ones.

I had the opportunity to work with Bob and presented to him on several occasions. Joel was our Executive Vice President at the time, and although I knew of Mike, I didn't interact with him much. I also met others during various quarterly reviews. They are all highly intelligent and capable individuals. I learned a great deal from them; they have a deep understanding of business and are adept at identifying problem areas during reviews.

Upon acquisition, there's an immediate introduction to the three P's and TransDigm's approach. This starts on day one, with multiple touch points and training sessions, not just for the executives, but for the entire business. I believe it was Bob who presented to the entire business on the first day. Joel also provided training on various aspects of TransDigm, pricing, productivity, and more.

The quarterly business reviews are also a continuous form of indoctrination. It's not just about presenting; you also get to observe others present, which is a learning experience. While the departure of people like Bob and others brings a new wave and potential risks, the focus remains on TransDigm's approach.

At one quarterly review, a movie was shown featuring different site presidents discussing a topic I can't recall. There's an old saying at TransDigm, "If you're not working on one of the three P's, you might as well go play golf." This was echoed by every president in their interviews, demonstrating how deeply ingrained this philosophy is.

Did you find your experiences with Joel to be similar to those with Bob? How do their approaches to reviews and suggestions compare?

Everyone has their own style. Bob had a very soothing approach, almost like a radio announcer. Joel's approach was slightly different, but I can't quite put it into words.

Joel appears to be very intense, even in his LinkedIn photo. Would you say that's an accurate representation?

I would say, yes, when comparing and contrasting, Bob was always someone who seemed to just know. He'd seen it, been there, and understood. He had a slightly more grandfatherly approach, even though it was very clear. I remember the very first annual plan we did. He had a way of saying things that were very direct and ensured you knew that you were accountable. He would talk about your business plan in a way that was very clear about where you stood, but it felt somewhat grandfatherly. However, it was very clear what the rules were. Joel, on the other hand, is a bit more intense.

In terms of case studies of peers, did you ever use that approach within Korry or TransDigm? Who were the peers in the industry, the other OEMs that TransDigm or Korry admired in regards to how they approached strategy, pricing, and things of that sort, or even just manufacturing quality? Who were some of the people?

Are you referring to other businesses?

Yes, like Eaton or Honeywell. Who was really appreciated?

I don't recall that topic coming up very often.

Could you tell me about when you were Vice President of Sales? What was the most challenging part of your job?

During the time I was there, the most challenging part was integrating the new approach. When I came in, I had a different role and got promoted to be the VP of Sales. The approach that Esterline had was very different. For example, we had a contract where we didn't raise prices, even though we were losing money because people were worried about losing volume. So, I had to take three people who were new business unit managers, who hadn't been exposed to the financial requirements of understanding a P&L, hadn't been tasked with running their business unit prior, and help coach and mentor them. At the same time, I had to get our data flipped over to work like TransDigm likes to see it, with the breakdowns of the market segments, price, and market volume. All these things were different than how Esterline did it. I had to clean up data so that it was more efficient, and we could do those things. Also, I had to address all the new negotiations and pricing, and try to get people to work in the new TransDigm approach. That was the most difficult thing I had to do because it had to be done quickly.

How much friction was there between you, who was focused more on the revenue side, and your peer colleague who was focused more on the cost side? Ultimately, you both had this plan to adhere to. You were both tasked with different things, and they both needed to work together. So you were doing your job, and he had to do his job. How was that relationship with whoever was handling the cost side of things?

At Korry, we had a very good team dynamic. The person responsible for operations and I, along with the rest of the senior staff, had a great working relationship. We collaborated effectively and worked through problems together. Despite each of us having our own issues, we managed to work through them as a cohesive and productive team.

During your time there, which other subsidiaries impressed you during the quarterly reviews? Who would you consider the gold standard?

Champion, for one, had an excellent reputation. I can't recall if I ever saw them present, but they were highly regarded. There was another company that specialized in interior panels, but I can't remember their name. Their president was also highly respected.

Did these companies' reputations correlate with the mission-critical nature of their products? Or were they just excellent at making things work, regardless of the product's importance?

The reputation was more about the management team's ability to deliver results, rather than the importance of the product. It was crucial to know where your numbers were coming from and understand what was happening in the business.

For instance, in 2020, during the COVID-19 pandemic, the vice presidents of sales, instead of the business unit managers, presented all of the business units during the annual plan review. This change was made because it was deemed important for the VPs of sales to have a deep understanding of the business.

So, to answer your question, the management teams of these other businesses were considered good because they had a firm grasp on their business and could explain their performance, whether good or bad.

Earlier, we discussed Boeing dual sourcing TransDigm products with another competitor. In your experience, how often was Korry or TransDigm simply removed from a platform? In other words, another supplier was approved and you no longer had the license going forward?

During my time at Korry, we were never removed from a platform.

Can you discuss Korry specifically, and TransDigm more broadly, in the context of when Covid hit? I've read a lot about what you were able to do during that time, which is quite impressive. However, in those early weeks, considering the capital structure and the nature of your market, what was your reaction? Was it panic? Or was there a sense of calm, a belief that you would figure it out given your strong positions? How did you feel, especially as you were in charge of sales during a time when sales could potentially drop to zero?

I did not panic. Of course, there was a lot of uncertainty and concern. I can only speak for myself and how I approached it. I've always been one to face problems head-on, work hard, figure it out, and get through it. That's just my personality. We spent a lot of time trying to predict what would happen to airline sales and the impact on our business, including our employees.

However, it was never a 'sky is falling' situation. We knew that our business wouldn't drop to zero because Korry has a lot of business in the military and business jets sectors, among others. So, unlike some businesses that were almost purely airline-centered, we weren't in a state of panic. There was a lot of uncertainty and a lot of effort to make sense of the situation.

One thing I appreciated was TransDigm's approach. Some businesses I've worked with in the past would set a bar and tell you to figure it out, which during the pandemic would have been unrealistic. TransDigm, however, acknowledged that people were going to miss targets due to the uncontrollable nature of the pandemic. They asked us to aim for the EBITDA percent instead of the EBITDA dollars, understanding that for some businesses, even that would be impossible. For instance, businesses that were almost 100% airline-based would have to apply different rules. That was the approach we adopted, and we tried to devise a strategy to hit that percentage.

You mentioned that you enjoy tackling difficult tasks. Let's say I provide you with a challenging task and place you at the helm of the industry, or in Boeing or Airbus, and grant you significant freedom. If the goal was to reduce Korry’s EBITDA by 50% within the next seven to ten years, essentially aiming to destabilize their current position, what approach would you take to realize this bearish scenario?

So, you're asking how to dismantle a company?

Take your time to consider how to competitively dismantle it. What can be done? What would be your first step? What would have the highest probability of success? Would it even be within Boeing? Or would it be within the airlines? I'd like you to create the scenario.

Well, if we consider market share, Korry is prevalent in almost all aircraft in the western world, with the exception of some European defense aircraft. They're not on those, but they're on almost everything else. So, changing a lot of aircraft would be challenging. Korry has also been delivering parts since the 1930s. There are many old aircraft with Korry parts that will continue flying for a long time. These parts are high margin because they are expensive and produced in small quantities. It wouldn't make sense for someone to redesign a replacement because only a few are bought each year. So, it's a very diversified market or product type.

Considering that, what's the most effective way to harm them?

Commercial airlines are a significant part of their business. I don't recall the exact percentage, but it's substantial. If you could hypothetically make Boeing and Airbus commercial disappear, particularly Boeing, that would cause significant damage. Boeing buys at a very low rate, so the margins aren't always great. But if all the airlines disappeared, that would certainly hurt.

From our conversation, it seems like if I were in charge and wanted to be practical, the first thing I would do, if I were at Boeing, is to dual source Korry. Airbus already dual sources, so I would follow suit. I could theoretically exclude them, but they have good products and delivery times. So, I would dual source in some way. The second thing I would do is to get every PMA approval desk at an airline to approve the dual source as well. I would also ensure that the dual source had comparable interchangeability with Corey's products. That would be my strategy. Now, is that a valid strategy and, even if it is, how time-intensive do you think that would be?

Is it realistic to think that Boeing would manage two suppliers, considering the cost and logistics involved? Although the switches on an aircraft are small compared to avionics or other systems, adding another logistics chain could be a significant effort.

Furthermore, there's the investment in time for a design cycle. While it's not as lengthy as developing a new engine or landing gear, there is still a test period that would involve Boeing. They would likely need to conduct a flight test, which is quite expensive. Justifying a flight test solely for Korry switches would be difficult. It would probably need to coincide with a major upgrade, like a blockpoint style upgrade for the overall cockpit.

Would the flight test be conducted through Calspan?

Yes, potentially. However, it's worth noting that Calspan is now owned by TransDigm, which could add to the expense. For a chip set like Korry's, it's theoretically possible, but where does it rank in terms of return on investment?

Would it make sense on different airline platforms? If Korry's on all of them and a company like Heico PMAs the Korry product line and gets approval from all the airlines, could they install it on all aircraft platforms? Or would they need to go platform by platform?

It depends on the certification. If you go to a new model, theoretically everything has to be PMA for that model because the requirements could be different.

Often, to speed up the OEM process, Boeing will approve Korry on a new platform. Would this make it easier for a PMA company to come in, or is that not the case?

The challenge for PMA is proving that they still meet the requirements, which can be difficult without the necessary information. Typically, they partner with airlines to get this information. However, in theory, it can be done. If you have the same part number on different planes, like a Cessna 167 and a 737, it makes the process much easier.

During your time at Korry, did you find PMA players, like Heico or EnCore, to be a significant concern or particularly aggressive?

No, PMA was not one of my main concerns at that time.

Currently, low-cost carriers are becoming a significant percentage of flight capacity. My understanding is that due to lease terms, they are more reluctant to use PMA than larger airlines. As someone who has been in this industry for a while, do you see this as a tailwind for TransDigm subsidiaries, or is there an offsetting factor?

Indeed, lease companies requiring OEM replacement parts is definitely a benefit.

I understand that some of these aspects are changing and that legally, these have been phased out. However, culturally, it's still what is suggested. Can you elaborate on that? Is it still in hard writing, or is it more of a belief?

I can't definitively say whether it's a real thing or not as I haven't seen those contracts. What I can say is that different airlines, even legacy ones, have varying approaches. For instance, Southwest is very aggressive on PMA, while others aren't. There's no contractual reason for this; it's just their strategy. There are many factors at play, including supply chain decisions, buyer relationships, and preferences for OEM parts.

Considering these changes, such as dual sourcing and the rise of PMAs, how long do you think Korry can continue executing their current strategy? This includes increasing volume and price annually while keeping costs flat across the portfolio. Do you foresee these forces impacting their ability a decade from now, or is this a long-term trend?

I believe it's a long-term trend. When we think about cockpits in general, there are other technologies to consider. For example, if you compare a cockpit from the 70s to a modern one like the 777x or the 787, you'll notice a significant reduction in switches and indicators. This trend continues with newer platforms like Gulfstream, which Korry is involved with, where even more switches have been replaced with touchscreen displays. However, some switches will remain due to certification requirements. The bigger impact will be how OEMs utilize new technologies to reduce the number of switches in future platforms. Additionally, the push towards fewer pilots in cockpits could also affect this trend.

Presumably, if the number of manual switches is decreasing and the amount of technology is increasing, that could also be a tailwind or a benefit.

We were really trying to understand the trends you mentioned, which are a decade out. We were trying to determine what it would look like, how threatening it could be, and how we should position ourselves. There were many early conversations and hypothetical scenarios.

During these unit reviews, what were your thoughts when you looked at all these subsidiaries and business units? Did you ever get a sense of how TransDigm had, over the preceding decades, compiled all these business units? Did you find it impressive? Did you think it was calculated? Were you familiar with companies like this in the industry, and what were your thoughts on that?

Are you asking why they acquired the companies they did?

Yes. Were you impressed by it or did it start to become clear?

In terms of the strategy of why they bought AvTech versus another company, it didn't necessarily feel like a strategic platform approach. It felt more like they were seizing opportunities to add on. Their strategy was always about the percentage of proprietary products or products that include proprietary information. That's a part of their strategy they're very public about. From that perspective, it made a lot of sense. I appreciate that approach, as I'm currently looking at smaller businesses to buy. I consider the balance between proprietary and build-to-print products. In terms of individual acquisitions, it sometimes felt opportunistic, but I believe that's part of the nature of the business.

Broadly speaking, did you have a takeaway regarding the strength of those business units?

I think that overall, the decisions they made up until they bought Esterline were good acquisitions. With Esterline, because it was a larger conglomerate, it came with a few business units that didn't fit within TransDigm's business model. They sold those off, which made sense. When they decided to sell off two or three businesses, it was clear that they were not going to stay, which made sense.

During those business unit reviews, did you hear other business units talking about threats from dual sourcing or PMA entrants, or were there other issues, similar or different from yours?

Each unit had its unique points and issues. Some were military companies, and their issues were quite different from ours, with some overlap. Each unit was unique in its own way.

One of the positive aspects about TransDigm was their understanding that different companies have different market dynamics. In some companies I've worked with in the past, there was this expectation that everyone was supposed to improve by a certain amount. TransDigm, however, understood that the level of aggression needed to be realistically set, and it would vary. For instance, it would be different for a company like Airborne Systems, which makes parachutes, compared to Champion.