Read the full interview HERE
We interviewed the former Chief Customer Officer at Telair, the cargo handling system business that TransDigm acquired for $750m in 2015.
- 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 Avioll (Boeing)
- Potential pressures on TransDigm's model
If we see the OEM's continue to move into the aftermarket, how will this change the supply chain?
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.
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?
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?
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.
Why wouldn’t they do that?
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.
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.
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.
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?
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.
What can the distributor give to Transdigm, apart from letting them do what they do?
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.
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.
So you think we’re going to see a large decline in organic growth, in aftermarket, across the board, which would impact Transdigm?
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.
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?
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?
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.
Read the full interview HERE