THE DEVELOPMENT OF AFTERMARKET parts specialist AirLiance Materials could be compared to that of a child. For the first years, parents watch the child carefully. But as it grows, the more-confident offspring seeks out others to broaden its horizons.

In 1998, AirLiance was formed as a joint venture by Lufthansa Technik, Air Canada and United Airlines, which were looking to offload millions of dollars of surplus parts as a cost-saving and revenue-enhancing move. A year earlier, those carriers had joined together as founding members of Star Alliance. The process early on was relatively simple. Each of the partners would transfer excess or obsolete material to AirLiance, whose responsibility was to sell the parts from its principal facility. Initially, nearly 100% of the entity's business came from the three partners. It wasn't until later that it morphed into a for-profit materials management company in addition to being a clearinghouse for surplus material.

Today the three companies are still closely involved, but majority control resides with LHT, which holds 50.1%. AirLiance operates out of a 200,000-sq.-ft. complex near Chicago O'Hare. It also holds inventory at partner facilities in Hamburg and Montreal and is opening a sales support operation in Florida. Partner-related work has dropped to 60% with the remainder taken up by selling parts to other airlines.

Company officials say AirLiance has been profitable during most of its nine-year history, although as a private concern it does not disclose results. In 2007 it is expected to record revenues of $150-$200 million. Growth has been steady, 8%-9% annually. It now keeps company with the top parts suppliers and managers such as Boeing subsidiary Aviall, The Memphis Group and The AGES Group.

"It has become one of the major parts redistributors," says Kevin Michaels of AeroStrategy Management Consulting, who notes that "the company was formed by airlines, which gives it unique positioning and linkages within the Star Alliance."

KEY IT INVESTMENT

Part of the reason for AirLiance's success was its investment in an enterprise resource planning platform from Baan, a Dutch IT specialist. The system tracks all parts and keeps a history of inventory as well as market value. AirLiance customized it to make it as automated as possible and streamlined it to reduce duplication.

Measuring the worth of such a system can be difficult, but the company has one example it likes to use. Prior to 9/11 it was a $120 million business. Immediately following the terrorist attack, annual revenues dropped to around $80 million and it was forced to reduce staff significantly. Yet it was able to operate as efficiently, and eventually more efficiently, thanks to the ERP system. "[Our recovery] was due mostly to our investment in IT," says CEO David Sisson, adding that both revenues and staff levels have climbed back to pre-2001 levels.

AirLiance's inventory consists of new OEM parts, PMA parts and Designated Engineering Representative-approved repair parts. Custom-made items, such as interior materials, are the only parts it doesn't sell. Most of its business comes from the sale of parts for CFM56, CF6-80 and PW4000 engines. Hot-section parts are a popular item.

In recent years, the company has become more than a reseller. It is also a materials manager but lets the MROs handle the wrench turning. "Before the marketing department got hold of me, I used to say that [MROs] were socket materials managers," Sisson remembers. "Now, I say materials management is not among the MROs' core competencies." Let the maintenance and repair organizations do what they do bestrepair aircraft and install parts. "We say, let us help you with materials management." AirLiance provides this service for airline maintenance divisions as well as independent MROs.

The company is not only a seller but also a buyer of expensive aircraft parts. Every year it has to buy around $120 million worth of material to meet the huge demand for surplus parts. It's an unusual practice. On every sales call, the AirLiance representative also asks potential customers if they have any parts to sell. "It has gotten to the point now where the demand for surplus parts is ten times greater than the surplus we can create or find in the marketplace," says Sisson.

The growing acceptance of PMA and DER-approved rebuilt parts has provided new market opportunities for AirLiance. "PMA parts used to be considered bad and now every MRO wants to be fashionable and use them," says Sisson, whose career included 13 years with Pratt & Whitney as well as with a PMA parts supplier. In those early days, he recalls, airlines and MROs were not willing to take the risk of buying PMA parts. The strategic move by Pratt to make engine parts for the CFM56 under PMA authority is an example of the dramatic change in mindset.

The sale of PMA and DER-approved repaired parts fits into the cost-reduction plans of MRO shops because PMA parts on average are 30%-50% cheaper than new ones. DER-approved parts also fit into the strategy being adopted by airlines and maintenance providers of repairing parts rather than replacing them. DER repairs have become the cause du jour for OEMs and safety advocates, but this has not stopped MROs and airlines from using them.

CHINA PROJECT

"It's an exciting time," notes Sisson, referring specifically to AirLiance's growth, profitability and recent announcement regarding China. It signed a letter of intent in September with China Aviation Supplies Import and Export Group Corp. and China Aviation Industrial Base to evaluate the feasibility of building a new surplus material support facility in Xi'an. If constructed, the center will concentrate on the supply of aftermarket materials with jointly approved traceability and e-distribution of surplus materials from Chinese airlines to customers. An added benefit would be the lowering of overall materials costs for Chinese carriers.

There's a reason why the proposed project might sound familiar. The China facility would be a mirror image of AirLiance's Chicago operation. "One of the potential outcomes of this LOI would be to open up a facility where we would do there what we do here," says Sisson. The company is in active discussions with Chinese and other Asian carriers, he adds. It has had representatives in Beijing for many years, but the recent announcement provides an opportunity for the creation of a new PMA manufacturing and distribution facility in China.

Observers might think that AirLiance's future within the parts supply chain is secure, but that is not necessarily so given the projected arrival of a new generation of aircraft such as the A380, 787 and the A350 XWB and next-generation narrowbodies. These new aircraft "will greatly affect my business," says Sisson. Whether the effect is negative or positive depends mainly on where the older airliners go. It would be positive if they are sold to second- and third-tier carriers, which already represent a significant portion of the company's business. If they go to some desert boneyard, the result could be a noticeable drop in revenue.

The safety net appears to be AirLiance's materials management expertise. Its future also will depend on its ability to read the tea leaves correctly and respond accordingly. Keeping an eye on the MRO business is helpful as well. "The trend in the MRO business is going toward one-stop shopping for supply and repair relationships," says Sisson. "Even though we are not in the repair business, we're getting continued requests to manage the repair process on [the customer's] behalf." And that could be the secret to continued success.