Aviall prospers despite a challenging economy
When Paul Fulchino became Aviall’s chairman, president and CEO in December 1999, annual sales for the 70-year-old Dallas parts distributor were growing at a predictable and respectable rate. Back then, end-of-year sales totaled $371.9 million, with net earnings of $9.7 million.
The company was already at the top in the fragmented aircraft parts aftermarket, and armed with 30 years of experience in transportation and management consulting, Fulchino decided to use Aviall’s strengths to recreate itself. He boldly predicted revenues would top $1 billion within five years. He miscalculated–it took only four years.
Gross sales for last year were $1.013 billion, with a gross profit of $169.6 million. Aviall’s operating margin has grown nearly two points to just under 7 percent over the last four years, and the corporation is queuing up to become a Fortune 1,000 company.
It’s a feat that has some of his peers in the industry saying that Fulchino has “out-Welched” Jack Welch, the General Electric CEO whose leadership strategies made him the most talked-about and emulated manager in business history.
“I think the job is about half done,” Fulchino told AIN. “I don’t think by any stretch of the imagination we should rest on our laurels. I think it would be a travesty if we were to get this far without going to the next level, which is where we are recognized as the gold standard.”
The business plan Fulchino envisions doesn’t seem to be overly complicated or revolutionary. In fact, it’s a textbook example of using sound principles.
Foremost, he found he had inherited a team of executives and other employees who were rich with experience and open to his ideas. All they needed was a plan and some encouragement.
“We have an open culture here,” Fulchino said. “Everyone knows they are clearly responsible for the company and feel they share in its accomplishments. Everyone has a defined job description, they know their job and what is expected, they know the channels of communication and they know how they’re measured and rewarded.”
However, he added, there is a discipline in the form of a performance management system that involves review, appraisal and accountability.
“The bottom 15 percent [of employees] are red-circled and they go on a performance-improvement program. If they don’t work out in 90 days, they’re gone. It works–the majority of them stay because they get religion.”
At the other end of the scale, the top 15 percent are also red-circled, but for an entirely different purpose. Singling out the best employees doesn’t necessarily lead directly to raises, but they will be put in positions where they can assume more responsibility and accountability, which ultimately lead to that end.
“My real motive here is to have the entire corporation raise the bar,” Fulchino explained. “If you settle into an organization where there’s not a lot of differential treatment between the best and the worst performances, you’re going to have a culture that basically doesn’t care if it’s accountable or not.”
‘Pick and Shovel Work’
A prime performance improvement Fulchino installed on his arrival at Aviall was a heavy investment in controls and systems technology, what he calls “pick and shovel work.”
“We invested $50 million in technology platforms so we were able to do things for our suppliers and for our customers that other companies could not do,” he said. The technology allows customers to place orders more easily by telephone or electronically, and using the data gathered from orders and deliveries allows Aviall to track sales trends and provide OEMs with forecasts of future parts requirements. And in November 2001, to make day-to-day corporate life simpler and more efficient, the company moved to a new dedicated, centralized 280,000-sq-ft office and warehouse complex at Dallas/Fort Worth International Airport.
The real surprise about the company’s rapid growth is that it happened in spite of the uncertain economic times that occurred in the aftermath of 9/11.
“The strategy to diversify Aviall’s business had been set out before 9/11,” Fulchino explained. “We determined that we needed to try and get away from dependency on only two sectors of the business–general aviation and airlines. Each had been about half of our sales, so we made a conscientious effort to pursue military contracts, and they were just going into place when the attacks happened.”
While GA and airlines were subsequently restricted, military demand heightened, and Aviall’s share made a swing in short order to become about half military, with the remainder split 30/20 between private and commercial customers, a ratio that remains today.
No small contribution to the strengthening of Aviall’s capability was the successful consummation of contracts with nine major OEMs to act as their parts supplier and distributor.
“One of the ways you expand through a downturn is to add new products,” Fulchino said, “and we were able to get big contracts from big suppliers that were looking at Aviall as a possible strategic partner.”
Aviall signed exclusive parts sales and distribution agreements with Honeywell Engines and Systems in 2000 and with Rolls-Royce in 2002 to support both the 250 and T56 turboprop engines. The company recently made arrangements with Raytheon Aircraft so it could integrate Aviall’s inventory into the aircraft maker’s own parts system. In addition, Aviall is a major distributor for Goodrich, Teledyne Continental, Trans Digm, Parker, Scott Aviation, Saft, ABSC and Lord Corp. In all, the company represents more than 200 manufacturers.
And despite the nearly threefold leap in sales, the Aviall workforce grew from 751 people at the end of 1999 to 901 employees today, an increase of only 20 percent.
“The Rolls-Royce Model 250 market has experienced significant spares and logistics improvements with Aviall,” said Tim McGrath, director of civil aftermarket sales for Rolls-Royce. “They continue to invest in the Model 250 program to ensure their mission of right part, right place, right time is achieved.”
In selecting an exclusive distributor, McGrath explained, Rolls-Royce established objectives that included the availability of spares, reduction of the network’s inventory holding investment and delivery of e-commerce solutions for their customers. “We are delighted to say–mission accomplished.”
Fulchino explained that Aviall has two types of competitors–the standard full-service distributors and a host of smaller individual parts suppliers. But in this $20 billion market, the OEMs themselves sell about 70 percent of the total.
“I spend more energy convincing an OEM that Aviall’s value proposition is more worthwhile than worrying about what our competition is doing. We’re a solution [for these OEMs]–their back room is our front room. If they look strategically at their business and determine that engineering and manufacturing is their core competency, they can see that putting people around the world to watch the product, get the right logistics and meet on-time service conditions is our core competency.
“What we try to tell them is that it’s a profitable and important part of their business, and we also tell them that they have the critical resources and deployment, and we have core expertise and critical resources. [Parts] is not their core business, but we can bring improvements more economically and efficiently.”
He explained that oftentimes an OEM’s focus on its core business precludes being accountable for its aftermarket costs, and Aviall’s advantage is the ability to show them the costs they really have. “It’s an important part of their business,” he said, “but it’s the tail end of that business.”
“Raytheon is a good example,” said Aviall Services president and CEO Dan Komnenovich. “Here’s an organization with an incredibly large installed base. Under the arrangement we have with them, if a customer comes to them and says, ‘I want to buy a tail assembly, and while I’m here a tire and a couple of other things,’ all of the 60,000 parts we warehouse are listed in their catalog. They have their own warehouse about five miles from here, so when the customer orders from Rapid/Raytheon, we get a demand signal for the nonproprietary items, they send the proprietary items to us, we add our parts and ship. The customer has to deal with only one person.”
“When people come to us and tell us they have to carry only half the inventory they had two years ago, and can get it when they want it, that is a price consideration, and the utility curve between price and service is in the favor of service,” Fulchino said. “If you can tell someone you can get 100 parts out on time 99 percent of the time, he’s going to pay a 1- or 2-percent premium; if you tell him that he will get those parts on time only 50 percent of the time, I’ll tell you which way he’ll go.”
Another business unit in Aviall is Inventory Locator Service (ILS), and last year it added $30 million in sales to the balance sheet. Aviall said the Memphis, Tenn.-based operation is the largest electronic marketplace in the aviation business, and it also operates in the marine and power utility markets. A subscription service, ILS gets parts buyers and sellers together in an Internet information exchange.
“The electronic marketplace [ILS] is the largest reseller of parts from one operator to another,” Fulchino said, “although it is not in the new-parts business exclusively.”
Fulchino believes that there is a synergism that is generated because of its technology. Customers can look into Aviall’s inventory in real time, the company can do things to prompt customers to buy and it becomes a customer’s record-keeping system. And, on the supplier side, Aviall can basically set up production order boards for a company’s production planning.
Repair services are also part of the company’s business, although a small part of that is in place to help its customers, which as an adjunct helps move parts.
Dealing with the Airlines
When dealing with the airlines, Fulchino asks them to go through their inventory and see how much of it can be ordered with 24- to 48-hour delivery versus how much they would really have to stock if Aviall were given the contract to supply them on inventory that is far in excess of 2 percent of their price.
“I want to have those conversations with the airlines,” he said with a smile. “We are a solution to the airlines, but remember what they focus on–their billion-dollar inventory is big-ticket engines and avionics. Component parts is only 20 or 25 percent of it. They are, by definition, purchasing-management people.”
He believes Aviall’s value to them is in its ability to decrease an airline’s in-stock inventory by warehousing and supplying items quickly and helping manage their asset base.
“Over the last three to five years, some of our competitors have retrenched in the marketplace,” explained Komnenovich. “They’ve used the FedEx example of servicing the market from one location. They did have a presence near their customers, but now they’ve pretty much moved back to headquarters. We chose the complete opposite tactic–when one of our competitors closes a location, we go in there and open one. In general aviation, you need to be there. The customers like to go in and talk to the Aviall guy. By nature, there’s a more personal relationship in that segment of the business. The beauty of it is that we can have a decentralized infrastructure but still keep 85 to 90 percent of the inventory and cost structure in Dallas.”
So this revolutionary plan boils down to three basic elements: good sales coverage, good product offering and end-to-end technology. Based on its success over the last four years, Aviall is planning for even more growth in the next four. Fulchino could predict the numbers, but he would rather forecast his vision: “What I’m really hoping for some day is when people wake up in the morning, and think of Boeing and Airbus and Raytheon and they also think of Aviall.”