AAR CORP. OFFERS A SUPPORT OPTION EMBRACING THE ENTIRE SPECTRUM OF ITS VARIOUS SERVICES

THE CONVENTIONAL OBJECTIVE of an airline supply chain is to get the right material to the right place at the right time. The secondary objective has been to manage the parts procurement and supply chain function as efficiently as possible. But in today's highly competitive airline marketand increasingly in the future- efficiency in supply chain operations has reached a new and more critical dimension.

At Wooddale, Ill.-based AAR Corp., awareness of that dimension actually has been emerging for several years. The international airline support services company, in fact, reorganized itself in 2005 by creating a Supply Chain Group in order to offer comprehensive management of the function.

"Well before we actually created that group, we started thinking about our customers' requirements and how we needed to address them in the future," Supply Chain Group VP James Clark tells Airline Procurement. That process spawned what AAR calls an integrated supply chain program that will tie together the various aspects of its traditional services.

Currently the company breaks down its service into seven areas: Parts trading, distribution, surplus remarketing, initial provisioning and sourcing, inventory leasing, repair management, warehouse and logistics. With the integrated supply chain concept, instead of providing these functions on an individual or piecemeal basis, it is offering a support option that embraces the entire spectrum of its various services. It will handle as many functions as an operator requires in a coherent overall plan that is fashioned in collaboration with the airline.

In the fiscal year ended May 31, sales in the Aviation Supply Chain segment rose 18% to $543.7 million. It is AAR's largest activity, accounting for more than 50% of total annual sales of just over $1 billion. The next largest category is maintenance, repair and overhaul, which generated $211.5 million in sales.

PARTNERSHIP EMPHASIS

For aircraft operators, there are two critical factors that go along with AAR's integrated supply chain offering. The first is that an airline does not completely turn over the entire procurement responsibility to an outsourcing party and simply walk away. Rather, it must retain competency and an active presence in the procurement and supply chain function but in a different fashion than in the conventional sense. It retains overall corporate responsibility, sets goals and implements some of the supply chain tasks itself while delegating other aspects to AAR. The airline bears ultimate responsibility for monitoring the procurement and supply chain functions.

The second is that by shifting many of the aspects of these functions, a carrier can turn long-term fixed capital costs into short-term variable costs and reduce the amount of capital tied up in station assets, huge parts inventories and warehouse investments. In that sense, the procurement and supply chain function, instead of being a static cost center, can become an instrument of a dynamic corporate financial strategy. Turning over inventory to AAR, or leasing parts or even entire aircraft from AAR, reduces capital investment and provides airlines with greater financial flexibility.

"This developed as a kind of push-and-pull process," says Clark. In the declining market after 9/11, carriers were looking at ways to save money. At the same time, AAR personnel observing the relationships of various parts of the company's offerings began to see opportunities for leveraging the economies of meshing several of the components into a more comprehensive supply chain approach. "The airlines provided the pull and we provided the push," Clark observes.

He stresses that the success of the program depends largely on a collaborative approach. Instead of working as an "arms-length" vendor, AAR sees itself as a partner with the aircraft operator. "Our personnel will actually work side by side with airline personnel almost to the point where you don't know which one works for us and which for the airline," he says. The idea is not necessarily to replace airline people but to provide on-site, real-time support.

As a result, the integrated supply chain service offered by AAR is highly customized to the particular client rather than using a one-size-fits-all approach. That allows for a "menu driven" aspect for its offerings. Customers can sign up for assistance in a few support areas without being required to subscribe to all of the services.

The collaborative approach ensures that a key element in providing the service is maximized: Feedback and data. "Information in the supply chain is as critical as the equipment and spare parts," Clark notes. AAR's collective experience with many customers enhances the information it can bring to bear for any individual customer. It has data on equipment history and longevity, lifecycle costs, failure rates, tracking of items pulled in error, line station personnel costs and a host of operational information that it can apply to various situations. It also has proprietary IT systems in such areas as inventory control, repairs and scheduling on a "plug-in" basis.

Sometimes AAR's IT experience can be used to upgrade or improve an operator's systems. At the very least, coordinating the operator's IT platforms with AAR's enhances the entire information base.

Once the airline and AAR agree on the plan and objectives, the company provides a guaranteed services package at a guaranteed price so as to take the risk of uncertainty out of the equation for the customer. A typical performance guarantee might be an assurance that necessary parts will be available at line stations 90% of the time. The airline can negotiate the standard and thus maintain its managerial control. Any failure to meet the standard would carry a penalty.

SYSTEM CAN HANDLE MAJOR CARRIERS

To date, the most comprehensive application of AAR's integrated supply chain system has been with US regional Mesa Air Group. In August 2005 the two entered into a 10-year agreement valued at $200 million for support of Mesa's fleet of CRJ700s/900s and ERJ-145s. As part of that deal, AAR purchased certain of Mesa's rotable spare parts. The accord also provided that under certain circumstances AAR would support Mesa's CRJ200 fleet and it purchased Mesa's CRJ200 inventory for the fleet. Total value of the program now is estimated at more than $300 million over the 10-year term.

The custom supply chain management program includes asset planning and support for Mesa's spare parts operational requirements and management of all related component repairs. It gives the airline competitive and predictable costs for the repair and provisioning of the spare parts inventory including guarantees of service reliability. It covers Mesa's existing RJs and has the flexibility to accommodate changes in fleet size. Additionally, AAR provides airframe MRO services for Mesa from its Aircraft Services operation based in Oklahoma City. As a result, all three fleet types are 100% operational; there were no service disruptions during the transition and AAR exceeded the service level guarantees.

In a similar program with Grupo TACA, AAR was able to reduce rotable maintenance costs per flight hr. by more than 20% while exceeding 95% rotable availability. Inventories were slashed by 25% and $4 million was generated from identifying and selling surplus parts.

Clark notes that the Mesa example could be applied elsewhere, even to major carriers. "We built in a scalability function to grow with an airline and to manage larger airlines as well," he says, adding that AAR is capable of managing operations from regional aircraft to fleets of 737s. In fact inquiries have come from some large operators, but he could not go beyond that in disclosing whether a deal with a major carrier was imminent.

In addition to its direct supply chain support service, AAR is making a major move to boost its financial strength so as to improve its ability to purchase both parts and complete aircraft for lease: The ultimate supply chain goal of supplying an entire airplane.