AAR Corp.

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AAR Corp.

One AAR Place
1100 N. Wood Dale Road
Wood Dale, Illinois 60191
U.S.A.
(630) 227-2000
Fax: (630) 227-2019
Web site: http://www.aarcorp.com

Public Company
Incorporated : 1955 as Allen Aircraft Radio Inc.
Employees : 2,700
Sales : $782.12 million (1998)
Stock Exchanges : New York
Ticker Symbol : AIR
NAIC : 42186 Transportation Equipment & Supplies (Except Motor Vehicles) Wholesalers; 421860 Aircraft Wholesaling; 336411 Aircraft Overhauling

A leading aftermarket support company to the aviation industry, AAR Corp. trades aircraft parts and whole planes, overhauls engines and airframes, and manufactures certain components. It has maintenance facilities in New York, London, The Netherlands, Oklahoma, Connecticut, and Miami. Containers and cases and mobile military shelters are a few of the company’s newer product lines.

Origins

Ira Allen Eichner, born during the Depression, started his career dealing used electrical parts in Chicago. The end of World War II and the Korean War produced a glut of used aircraft that formed the basis for many an airline; it also produced a cheap supply of airplane parts. Trade in military surplus radios introduced Eichner to aviation; he went into business while an undergraduate at Roosevelt University in 1951 with a few hundred dollars borrowed from his fiancée. In 1955 Eichner formed Allen Aircraft Radio Inc., naming himself CEO. He became chairman in 1973.

In 1970 the name was changed to AAR Corp. AAR by this time was distributing Cessna aircraft. The general aviation market collapsed in the late 1970s, however. AAR dropped its general aviation business altogether by 1986.

AAR organized its Aircraft Turbine Center, Inc. in 1979 after future CEO David P. Storch, Eichner’s son-in-law, joined the company. The unit maintained a broad variety of Pratt & Whitney and GE engines. By this time, its Allen Aircraft airframe parts subsidiary had become a leader in its field.

Deregulation and Its Aftermath: 1980s-90s

In 1981 AAR acquired the assets of Brooks and Perkins Corp., which would form the basis of its manufacturing group. Brooks and Perkins, founded in 1950, specialized in cargo handling systems.

AAR bought Circament Coating Technology Inc., a New York firm repairing turbine engine parts, in 1984. Fiscal year 1985 saw revenues of $219 million.

The 1980s and deregulation were good to AAR. New airplane purchases demanded enormous amounts of capital, as did parts inventories. Many carriers still possessed them and did their own maintenance, a service AAR had begun supplying. Still, as air traffic increased at a clip of eight percent per year in the last half of the decade, AAR’s earnings increased even faster.

AAR was still dwarfed by Ryder System’s $1 billion aviation services business. Eichner characterized AAR as a niche-oriented operation involved in a variety of unique projects.

Storch was named president in 1989, shortly before earnings began to falter, deflating AAR’s long-expanding stock price. Among the causes were turnover problems at facilities in Oklahoma and Florida. Some of the Oklahoma staff subsequently received a raise. It lost customers such as Braniff Airways, which broke up in the chaotic atmosphere of deregulation. Still, the company managed a profit of $25.6 million on sales of $444.8 million for fiscal year 1989-90. Employees now numbered 2,500 at 25 facilities worldwide.

AAR prided itself on anticipating customers’ needs. It upgraded its computer system in 1990, allowing it to track parts going through its shops. One of AAR’s new businesses proved highly lucrative. It leased four Boeing 737s and had bought eight Boeing 727s from Air France, leasing six of them to cargo giant DHL.

A worldwide recession in the early 1990s constricted the civil aviation market. High fuel prices and stiff fare competition furthered the damage. A war in the Middle East did not foster air travel. AAR’s sales and profits declined accordingly; it only earned $283,000 in fiscal 1993.

The airlines’ competitive situation resulted in keeping older planes working longer, which kept up demand for maintenance and parts. It also encouraged the outsourcing of maintenance operations, as the airlines sought to concentrate on their profit-making core activities. A flood of new budget carriers gave AAR potential new customers across the world. Some of these start-ups were not the best credit risks, however.

Competition for airframe maintenance resulted in more short-term contracts, a trend AAR resisted. Ten percent of its sales were from long-term agreements. It also faced serious price competition.

Under deregulation, purchasing had become more professional, and more professionalized, as more MB As joined procurement departments. Parts supply became more competitive. Buyers demanded not just low prices, even if combined with fast, reliable service. They sought a process of constant refinement within the vendors to ensure consistent efficiency in the future. They also sought to reduce the numbers of vendors they used, sowing the seeds of eventual consolidation in the industry.

AAR still was able to make big deals. Sabena World Airlines hired AAR to manage its inventory in 1990. AAR had already been stocking the carrier’s maintenance center in Brussels. When Eastern Airlines, a former client, went out of business, AAR was able to acquire its inventory of 45,000 parts for Boeing 757 and 727 aircraft. In 1993 AAR landed a $20 million-per-year inventory management contract at General Electric Co.’s engine maintenance facility in Wales, which it had taken over from British Airways. AAR staffed 18 employees there.

In spite of this entrée to the European market, the company’s prospects in Asia remained dim. AAR did expand its Singapore plant and discussed a joint venture with Japan Airlines and Cathay Pacific to be based in Xiamen, China.

The company earned a profit of $9.5 million in fiscal 1993-94 on revenues of $407.8 million. It employed about 1,900 at the time. The federal government accounted for about a sixth of AAR’s revenues. The U.S. military needed AAR to maintain its forces in the Persian Gulf and Bosnia.

About 70 percent of airlines performed their own maintenance in the mid-1990s. Aircraft orders also were down, which hurt AAR’s fastener business. In addition, Delta, Singapore Airlines, and Swissair formed the DDS World Sourcing buying consortium in August 1995. Consolidation among airlines, however, was expected to reduce world fleet size, produce a supply of used parts, and induce a demand for outside inventory management, following the example of wildly successful Southwest Airlines.

AAR sought to develop its inventory management business as carriers became less involved in this function. It bought the spare parts inventory from carriers such as Lufthansa and Northwest, which freed their capital. Global spare parts inventories were valued at $25 billion, with 80 percent owned by the carriers. The top six airlines accounted for 40 percent of the engine maintenance market. They accounted for 80 percent in certain engine types.

Late 1990s Recovery

The airline industry recovered in the late 1990s, producing a great demand for new aircraft. By this time, outsourcing was a firmly established cost-cutting concept in both civil and military circles. Storch, who was named president and CEO in 1996, predicted 15 percent sales growth.

Long-term contracts now accounted for 30 percent of sales. AAR supplied GE’s engine unit in Brazil, as well as those for such carriers as Northwest Airlines, Sabena, Lufthansa, and KLM. United and Delta were two of AAR’s biggest clients for aircraft and engine leases, but it also served the military, regional airlines, and business operators.

Trading of parts and leasing aircraft and engines accounted for more than half of AAR’s revenues. Overhaul work accounted for a quarter, and manufacturing cargo equipment and other products added the remaining fifth.

In February 1997 AAR resold some stock it had bought during the dark days of the recession, garnering $50 million. Revenues reached $589.3 million in 1996-97, while profits soared 44 percent to $23 million.

Company Perspectives

AAR is the premier supplier of products and services to the worldwide aviation/aerospace industry. Founded in 1951, the Company has grown by anticipating and preparing for this dynamic environment, developing innovative products and programs, and delivering on a commitment to do things right for our customers. Today, comprised of more than 2,600 employees at 40 facilities strategically located in 12 countries, AAR is one of the world’s largest and most diverse aviation aftermarket support companies.

AAR picked up contracts left and right in the late 1990s. It began servicing planes for U.S. marshals. FedEx hired it to install cargo handling systems in its new Airbus aircraft. Grupo TACA, an alliance of Central American airlines, chose AAR for inventory management services valued at $10 million per year. It also won a new $25 million Department of Defense contract.

In the summer of 1997 AAR bought 14 747s from British Airways for $22 million. In general, the planes it bought did not have much service life left. After they had been leased for a year or two, AAR could disassemble them for parts, or lease them again depending on the market. AAR also leased DC-10s and Boeing 737s. AAR began building a new hangar in Oklahoma City in 1997.

While streamlining its own operations, it sought other companies to acquire. In June 1997 AAR bought Cooper Aviation Industries, a $45 million supplier of aviation components. In 1998 AAR bought Tempco Hydraulics, AVSCO Aviation Service Corporation (previously a division of Aerospatiale), and composites structure manufacturer ATR International Inc., aided in part by a weak stock market. AAR also entered into joint ventures, including one with General Electric known as Turbine Engine Asset Management LLC. Another joint venture with GE Capital Aviation Services formed Aviation Inventory Management Co. Meanwhile, AAR had diversified into industrial products such as floor cleaners, which it marketed under the PowerBoss brand. It sold this unit in November 1998.

With air traffic rising, sales boomed in fiscal 1997–98, up 30 percent. Foreign sales accounted for about a third of sales, down a little from the early 1990s.

Troubles at Boeing frightened AAR investors, although it accounted for less than one percent of the company’s business, as Storch pointed out. Boeing also had announced in 1997 that it was entering the aircraft maintenance business. On a related note, the uncertain Asian market accounted for only three percent of AAR revenues. There remained concerns that certain Asian airlines might collapse, flooding the market with parts.

Revenues and profits continued to rise impressively in late 1998. Earlier in the decade, AAR had set a target of $1 billion in revenues by 2000. At the close of 1998, that goal seemed well within reach.

Principal Subsidiaries

AAR Aircraft Group, Inc.; AAR Allen Group, Inc.; AAR Allen Services, Inc.; AAR Engine Group, Inc.; AAR Engine Services, Inc.; AAR Financial Services Corp.; AAR International, Inc.; AAR Manufacturing Group, Inc.