When Paul Fulchino took the helm as president and CEO of parts distributor Aviall in January 2000, the company’s stock price hovered in the low $8 per share range. “When I came here,” he said, “this was not a pretty place. It didn’t have a value proposition worth anything.”
Six years later, on last January 31, Boeing vice president Alan Mulally called Fulchino at his Dallas office and broached the idea of Boeing buying Aviall. Not too much later, after meetings and negotiations, Boeing put a $50 per share offer on the table, which was lowered later to $48 per share in cash. On the day that Mulally first contacted Fulchino, Aviall’s stock closed at $34.56 per share.
Under the terms of the sale agreement, Boeing-Avenger, a special entity created for the acquisition, will purchase Aviall, which will then become a wholly owned division of Boeing Commercial Airplane Services. Aviall (Hall 4 Stand G19) will become part of a family of CAS-owned divisions that include Alteon Training and Jeppesen. The Aviall acquisition is subject to regulatory approval, and once that hurdle is cleared, the transaction should take place in the third quarter of this year.
“Aviall will be a standalone subsidiary,” said Lou Mancini, vice president and general manager of commercial airplane services. “We appreciate and admire the good brand that Aviall built and will continue that brand in the marketplace.”
Boeing’s primary reason for buying Aviall is because customers were asking the manufacturer to supply parts other than those it made. While the Seattle OEM’s Integrated Materials Management program worked well in terms of helping customers pare down their inventories by delivering parts when they need them, the same level of service wasn’t available with non-Boeing parts and supplies needed to run a modern airline. Boeing had previously signed up Aviall as a supplier to help customers get more timely service on non-Boeing parts. “Then,” Mancini said, “we had this idea that if they were part of the family, we could get more synergy between our operation and their operation. That gave us the idea of proposing an acquisition.”
Although much of Boeing’s business focuses on airlines, the company plans to continue serving the general aviation market. About 25 percent of Aviall’s business is general aviation-related, with the rest split between commercial airlines (35 percent) and military (40 percent). “The nice thing about that,” Mancini said, “is that Jeppesen is 40 to 45 percent general aviation, so we’ll have a pretty good footprint in that marketplace.” Aviall will continue to support military activity, too, although Mancini will co-manage this segment with his counterpart at Boeing Integrated Defense Systems. Boeing will retain Aviall’s top managers, including Fulchino.
For Fulchino, the acquisition makes sense because Aviall has developed strong capability in supply chain management, to the point where its costs as a percentage of revenue have dropped steadily. Working with Aviall enabled Boeing to see that “they’re going to have a more consistent higher level of service and lower infrastructure costs,” he said. This translates into lower costs for aircraft operators because they can buy most parts from one company and also because Aviall’s low cost structure saves suppliers money, which helps keep prices down.
Finally, Fulchino said, Aviall’s cost of capital is higher than Boeing’s. “We can be more competitive by having a lower cost of capital.” The bottom line is that Fulchino believes Aviall can reach its strategic goals quicker under Boeing ownership, and Boeing can help Aviall continue to become the preferred provider for any aircraft, engine or component manufacturer or supplier.
Under Boeing, Aviall will sell parts for any company that wants to be part of the latter’s distribution network. “Our value proposition is our ability to provide an efficient service at a very low cost,” Fulchino said. “We need OEMs to say that as a result of using Aviall, they lowered costs and enhanced revenue. Boeing operating Aviall as an independent wholly owned subsidiary protects that. Aviall’s positions with OEMs and customers will stay intact. We’re talking to Airbus as we speak. We’ll never restrict anybody. If the supplier wants to provide a service in the marketplace, we’ll help them.”
Aviall subsidiary Inventory Locator Service is included in the acquisition and will continue to remain independent from Aviall. “In the same way we’re going to maintain a firewall between ourselves and Boeing,” Fulchino said, “ILS has a firewall between itself and Aviall.”