Fixing old helicopter engines is close to being recession proof. Air Technology Group expects 10% growth next year.
Suppose your car's warranty has expired. It's unlikely you would take it to an expensive dealership to get a tune-up or a repair. Instead, you might take your car to a less expensive but independently owned repair shop that has qualified mechanics.
That's exactly what Air Technology Group does for helicopter owners. There are thousands of these old birds flying around, spraying mosquitoes, chasing down bad guys and shuttling around executives.
The Naples-based company says it is the only major repair and maintenance facility approved by the Federal Aviation Administration in the Southeast, mainly because it's an arduous process to be approved by such demanding regulators.
How Air Technology became such a big player in this field is a good lesson in how strict government regulation can actually benefit some companies. It guarantees a big economic moat for those such as Air Technology, who can figure out the system.
But government regulation keeping competitors at bay is only a part of the story. Air Technology has managed to grow by investing significant sums of money in testing equipment and well-trained mechanics, cementing its reputation among helicopter owners.
The company also leveraged its spare-parts business when it expanded into repair and maintenance. Unlike the car-repair business, labor only represents one third of the expenses of helicopter engine maintenance and repair. Spare parts represent the bulk of those expenses. That's meant that Naples' high cost of living and lack of trained labor hasn't held the company back.
Can you spare a part?
The key to Air Technology's success has been the huge inventory of spare parts it has built since Turner started the company in 1974. The company has 20,000 different parts, from engines to gaskets, tucked away inside a cavernous facility near the municipal airport in Naples.
Turner, 55, began overhauling engines in 1996 when he realized he could leverage the spare-parts advantage. Besides hard-to-find parts for Vietnam War-era helicopters, Turner has built a relationship with parts manufacturers over the years that gives him favorable pricing.
This is a huge advantage over competitors, even foreign ones with lower labor costs. That's because labor isn't the biggest expense in repair and maintenance of helicopters. Spare parts are the biggest expense because they require precision machining and they're made of expensive materials such as titanium. As an example, Turner points to a compressor in his boardroom that spins at 50,000 revolutions per minute.
That's not to say that labor isn't an issue. Turner has had to hire from outside the region to attract qualified mechanics. However, Air Technology has worked to train students at Lorenzo Walker Institute of Technology in Naples and has hired a few of its graduates. The company now has 25 employees.
And the high cost of living in Naples has been an acceptable tradeoff because the upscale area is attractive for customers who visit. What's more, Collier County in 2001 helped Air Technology sell $2 million in industrial revenue bonds to fund its expansion.
Turner says he got into the repair business because he found competitors mispriced their services. Frequently, the repair job would cost thousands of dollars more than had been estimated.
Now, when he quotes a repair job for a customer, Turner won't sock him with surprise charges later. And in most cases, Turner says parts can be repaired rather than replaced. That's important because repairing a part may shave as much as 60% of the cost of replacement. “Give the customer the best value,” Turner says. He adds: “Reputation is everything.”
To bring costs down even further, Turner is winning FAA approval to manufacture some parts, such as gaskets and gears. “It's taken us years to get these approvals,” Turner says. “We still have parts that haven't been approved in over four years.”
Despite the slow and difficult approval process, federal regulators have created an economic wall for companies such as Air Technology that have the patience, money and expertise to make it through the application process. In some ways, it's much like the drug industry. Companies with the experience and deep pockets to take medicines through the lengthy, arduous drug-approval process can be hugely profitable.
But just because the federal government gives Air Technology an edge, it doesn't guarantee it customers. Turner says highly trained U.S. mechanics are one key to success. Another is expensive testing equipment to make sure that a repaired engine is airworthy. “Over the years, we've invested millions of dollars,” Turner says.
Air Technology has built what's called a “test cell.” It's a bunker of a room where technicians behind bulletproof glass put repaired engines through the most severe testing. “We needed a test cell to earn credibility,” says Turner, whose company farmed out the work before building the first test cell in 1998. “It's a large engineering project. It took almost a year to get it in,” he says.
But the test cell, which cost as much as $1 million to build, helped boost Air Technology's engine-overhaul business to 55% of revenues. The company reported about $8 million in 2007 and expects about the same in 2008.
As the global economy slows, Turner reasons that governments and private industry will want to keep their older helicopters flying longer. After all, a new helicopter can cost $6 million and there's a backlog. Maintaining helicopter engines can save costly fuel, too.
When a helicopter is in need of repair, local mechanics where the chopper is based remove the engine and ship it to Air Technology's Naples facility. Air Technology mechanics then repair the engine and ship it back to the owners for re-installation.
Government represents 70% of the maintenance and repair work. There are about 10,000 Bell 206 helicopters flying and Air Technology recently expanded to overhaul that helicopter's major components, including the main transmission.
Nearly 80% of the company's revenues come from overseas and Turner is headed to the Dubai Helishow Nov. 11. “It's a strategic location,” Turner says. “They have money,” he adds. It's important to visit personally with customers, Turner says. These personal relationships create new business. Latin America is also growing fast, he notes.
But perhaps the biggest opportunity to grow is in the U.S., Turner says. With all those aging helicopters needing maintenance and repair and a recession in full swing, he expects revenues will grow 10% in 2009. Says Turner: “We're having so much fun now.”