CEO Interview: Aviall's Paul Fulchino
Fulchino also warns that rationalization of the aerospace supply chain is not yet finished and will leave room for only "a few major survivors" in aerospace parts distribution. Aviall, he predicts, will be one of, "if not the biggest" of those survivors.
Fulchino, who joined Aviall in January, was interviewed by The Wall Street Transcript (TWST), an excerpt of which is presented here.
Before Aviall, Fulchino was president and CEO of B/E Aerospace, a supplier of aircraft cabin interior products and services and, much earlier, was an engineer at Raytheon Company in the manufacturing, testing, and inspection of missile systems.
He attended the U.S. Military Academy, received an AB in mathematics with distinction from Boston College and earned an MBA from Columbia University Graduate School of Business with a concentration in finance and operations research.
TWST: Would you provide our readers with an overview of Aviall?
Fulchino:
Aviall is involved in two principal businesses, Aviall Distribution and Inventory Locator Service, Inc. (ILS). The first, Aviall Distribution, serves as the largest worldwide independent distributor of aerospace parts and related services, covering the global marketplace for aviation and aerospace participants.In total, Aviall Distribution has over 13,000 end-customers, ranging from the various major and, for that matter, minor market airlines to aerospace industry suppliers; the general aviation community (including fixed-based operators, general aviation private operators, and corporations that use private aircraft); engine and component overhaul shops; and a variety of other entities that comprise the whole end-user group for the aerospace industry.
For all aircraft, Aviall Distribution is able to provide - from any one of its 180 contracted suppliers - thousands of parts, which are authorized for distribution. Although we list in excess of 350,000 part numbers, about 100,000 are active at any point in time. About 80,000 part numbers are fully stocked and available through a network of over 40 distribution centers around the world.
We are able to support the needs of these suppliers through an established global sales network; sophisticated inventory management systems; advanced order management technologies; value-added information management services, enabling a tremendous amount of information flow-back to suppliers and end-customers; efficient physical distribution of parts from any Aviall location to over 13,000 end-customers; and finally, consistently reliable service performance in the form of industry-leading turnaround times to end-customers.
The technology that supports global selling, logistics and inventory management is the key dimension that brings Aviall Distribution into the forefront and distinguishes it from its competitors. We have advanced information technology that will allow customers to order either on a dial-up mode or through the Web (aviall.com) at any point in time. Our dual access platform - dial-up and Web technologies - is the most active in the business and certainly serves the most comprehensive sets of product lines covering aircraft of all types.
Our global sales reach is five times our nearest competitor, and our product sales scope and geographic coverage is unique in that we represent the only organization that offers product line breadth and full-world coverage.
The second part of Aviall - Inventory Locator Service - is the electronic marketplace that, unlike the Aviall Distribution centered in Dallas, focuses on what I would consider to be principally the reselling or remarketing of parts available in inventories out in the marketplace. The principal asset of Inventory Locator Service (ILS) is that they have successfully aggregated an industry with their advanced electronic marketplace and, as such, ILS provides the forum that links buyers and sellers of re-marketed parts.
Having reached an end-customer, these parts are now available to be re-sold in the marketplace and to move around from one to the other based on the tremendous ebb and flow of parts needed in the business and the various points in time when inventories are managed and determined to be either excess or obsolete.
ILS is the open forum that allows users to buy or sell parts and operate over the exchange. Anybody who's involved in buying and selling of parts, be they distributors, airlines, FBO operators, parts re-sellers, brokers, or wholesalers can sign up on the ILS listings and can then access information to make transactions.
Today, ILS has over 7,000 users and records well over 27,000 hits a day. Just last month, ILS experienced a record for the number of accesses by these end users. It should also be pointed out that ILS has the largest database of commercial and government part numbers, which, in total, aggregate at any point in time to a listing of well over five billion parts available for sale.
TWST: What do you see as the most significant trends or developments in your industry over the next few years?
Fulchino:
There are three driving trends affecting our business. First, I would say that a driving force will be the continued steady growth in the market for aerospace parts. Airlines and cargo operations continue to expand the worldwide fleet, driven primarily by the growth in passenger travel (expected to average 4.5% per year for the next 15 years); cargo lift; the level of fleet retirements; and fleet utilization. Moreover, the growing number of newer aircraft and component models coming onstream has introduced a proliferating list of new part numbers. The increased variety presents a more complex parts logistics requirement in support of growing fleets that range between zero and 36 years of age.Factor number two is technology. There will be an emergence of supply chain efficiencies from the point of an aerospace parts need through the part ordering and fulfillment processes. This includes the requirement to secure availability; pull it from inventory, or have it manufactured on a custom-engineered basis; perform the physical distribution to the end-customer; and complete in an organized, efficient fashion each parts-management administrative task. The entire information chain and amount of technology used to link these functions will be made much more efficient. The emergence of the dot-com world will make ordering over the Net a way of doing business.
Other new economy advancements will allow for the parts exchanges to be aggregated in such a way as to have inventory and pricing updated and reviewed by users with much less complication than today. In this regard, Aviall does not intend to be uninvolved: it is very obvious that we are placing a heavy bet on technology. Being the superior technology provider with the superior coverage in terms of having (1) information to both suppliers and end- customers, and (2) the physical distribution system that ties them together will represent Aviall's competitive advantage in the marketplace. We strongly believe competitive advantage will be better served if we use information technology to provide unique information all along the supply chain.
The third emerging trend of the aviation marketplace will be continued consolidation, if you will, by both the users of parts (customers) and the providers of parts (aerospace suppliers and distributors). That rationalization of the supply chain will make for a few major survivors in aerospace parts distribution. The winners will be organizations that (1) have the most comprehensive constituency in terms of customer base; (2) offer the best coverage in terms of parts applications and global geographic scope; and (3) support these efforts with leading supply-chain technology to provide the most secure and broadened services.
The winners will essentially become the stickiest sites for users, those that offer maximum information to help them make decisions. These organizations will prove their systems alleviate/eliminate much of the inside costs experienced within a part buying or selling organization. In short, the winners will organize the supply chain to significantly reduce and eliminate costs.
TWST: What do you see as the rate of gains in sales and earnings for Aviall over the next few years?
Fulchino:
I think we have two advantages. Advantage number one is we have critical mass, thus enabling scale economies with respect to sales coverage, inventory management and deployment, and advanced technology. We have a large share of the tier-two and tier-three suppliers of aerospace products. (Tier one being, GE, Boeing, Honeywell, Airbus, Raytheon, Lockheed/ Northrop, and UTC). Basically, tier-one suppliers have their own large infrastructures and technologies. Although we do business with them, it is not a big part of our business.We pretty much are the standard for tier-two and tier-three suppliers, which are the OEMs that account for the balance of an aircraft's part content. We see our value proposition as building for both current Aviall-supported OEMs (that will add product lines) and new suppliers that can take advantage of our supply chain highway. So I would expect that Aviall's growth, not unlike this year alone, would probably beat the average for the industry.
TWST: Did you say that only major players could really compete in your industry, in your sector of the market?
Fulchino:
There are a lot of small players who distribute parts locally. As e-commerce applications become more the norm rather than the exception, I believe this sector will be challenged significantly. When I say there will be more industry consolidation, I mean eventually you are going to have (and I'm really talking the major technology players that drive parts distribution and B2B infrastructure exchanges) a few companies emerging and surviving as dominant players in the business. Aviall will be one of them, if not the major one. Nevertheless, there will still be local niche players - albeit many fewer, I suspect.TWST: What should long-term investors focus on in reading your financial reports?
Fulchino:
I think you have to be mindful of the powerful way in which Aviall - both ILS's electronic marketplace and Aviall Distribution's new parts distribution operations in Dallas - has aggregated an industry so that customers look to us to try to perform a physical distribution activity or to satisfy and make available a transaction. That aggregation/critical mass has enabled substantial competitive advantages toward leveraging size, logistics infrastructure, and technology. Each of these assets are critical success factors and leverage points into the future.ILS's operating model represents a unique value to customers when one fully understands the amount of substance that is required to complete a transaction in the electronic marketplace. Aviall Distribution brings enormous leverage to suppliers when one recognizes the amount of precision required to take a part number and then to deliver to a customer within 24 hours anywhere in the world.
People underestimate the systems controls and the technologies you have to have in place to allow customers to do business either on dial-up technology, or over the Web, and to do that in a failsafe manner. If done properly, service is excellent and supplier costs are reduced. I think that investors have to be mindful that some others out there promote themselves to be a physical distribution empire, or to be the world's greatest electronic marketplace. One must look very closely at their offering; attempt to understand the value of the intervention provided; the constituency drawn from; and the supply chain costs that are really - no kidding - reduced. Aviall wants to be with the customers every step of the way, and we know we're going to try to make electronically feasible every aspect of the inquiry, analysis, documentation and fulfillment process.
TWST: Could you give an example that illustrates why you think ILS's or Aviall Distribution's technology and infrastructure present unique competitive advantages?
Fulchino:
To order an engine today requires up to 50 steps to complete the transaction. If you do not have a wide constituency with available engines out there in the marketplace, buyers are not going to have that much to choose from.Two, if you don't have the technology that's going to drive every aspect of that transaction, including inspection review, maintenance review, documentation support, a chat room that allows bidding and quoting, an online format for technical specifications review, all aspects of the requirements to fulfill financial and logistical (physical shipment) support, and, finally, present the ability to go to the OEM website, you are not performing the service that buyers and sellers do offline manually.
At Aviall, our operating model will support the entire process online. Customers will be sadly disappointed if they find out that when they sign up for some of these competitive services, they will not have the robust offering. So I have purposely spent the money and asked our investors to take this year as the critical investment year in which we'll put up the most comprehensive operating model for which we think we'll get enormous returns.
We think the stickier we make our site, the more information provided, the more use it is to your average purchasing officer. If we can make that offering extremely easy and comprehensive for him, then he will find value in us, and we can grow rapidly because of that support. He would gladly transition some of his expensive inside costs for a spec of additional fees to us to provide that kind of information.
We also think the value proposition works at a second level for Aviall. Not only have we created supply chain efficiencies that will let us take the existing customer base that we have, which is the largest of anybody, and deliver the best cost/service value possible, we'll also be able to offer these people a dual approach - that is to be able to dial-up and get into this system, or be able to come in through the Web. Nobody else is able to do that. We think that's going to be a requirement. Not everybody is going to transfer to the Web tomorrow morning.
Today there are only 12%-15% of aerospace users who are facile on the Web. It's going to require ILS and Aviall Distribution, like we've done before, training and helping the industry and its users graduate over to a new technology by working with them. And we are going to do that. So I think we can grow enormously by the value we provide, not by slick marketing.
Each executive who is the featured subject of a TWST Interview is offered the opportunity to include an investors brief or other highlight material to be provided and sponsored by and for the company.
Copyright 2000 The Wall Street Transcript Corporation
All Rights Reserved. Originally published 07/17/2000.