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PHD. MBA. MHS. Type rated on A350, A330, B777, B747-400, B747-200, B757, B767, B737, B727. International Airline Pilot / Author / Speaker. Dedicated to giving the gift of wings to anyone following their dreams. Supporting Aviation Safety through training, writing, and inspiration. Fighting for Aviation Safety and Airline Employee Advocacy. Safety Culture and SMS change agent.

Thursday, April 23, 2020

The Business of Aviation Parts

The Truth in Fiction... 

But when the truth is scarier than fiction, we don't want to believe it to be true. I often receive emails from people with real life events to include in my books. This following post was one of those writings. However, I felt the writing was so well done, and the story interesting... that I wanted to share the entire letter.  I've changed the names to protect those involved.

When people would ask me 
if I’m afraid of flying (as a passenger), 
I would answer:

"I used to be scared of flying, but then I became a pilot and saw all the idiots around me then I became really scared. But then I got into the spare parts business – and now I’m terrified."

Backdrop on Parts Traceability

There is a huge market – in the hundreds of millions or billions – of used spare parts that go into aircraft. Around the 1980’s traceability i.e. where did these parts come from became an issue. This issue remained ambiguous (perhaps to this day) as to the ability to verify paperwork. The parts that became of emphasis early on where the “time limited parts: which in an engine for instance would be the “disks” that hold the compressor and turbine blades in place, and usually the 1st stage turbine blades, and some others. “Back to birth” records would be for instance an engine “disk sheet” that would list all the disks on the engine and each disk would specify what cycles and what hours the disk had remaining. Attached would be all the disk sheets from all the engines this disk had been part of including hours and cycles upon insertion in the engine and hours and cycles upon removal – all the way to the purchase order from the manufacturer. This would be a stack of papers that would prove “back to birth” and they would literarily be in the box on the shelf together with the disk. Without this paperwork the disk is worthless.

Around the late 90’s scanning paperwork came into play which helped a lot, but you still needed the originals with the part. I’ve been out of the business for 15 years so I’m not sure how it works today.

How I got into the Aircraft Parts Business

After leaving the Airforce, I gave private flying lessons while I went to college. I was desperately looking for ideas for a business and I went through a bunch of them from aerial photography to brokering loans. One day my partner and I went to the convention center where there was a display for US companies, and we thought maybe we could engage one of them to represent in Israel. Evidently, the show was for agriculture equipment of which we knew nothing. A nice gentleman came up to us and introduced himself (from the NY department of commerce) and asked if he could help. We told him what our purpose was, and he said – why don’t you advertise in our export opportunities bulletin? I asked him how much it would cost (we were broke) and he said – its free. So of course, we signed up.

2-3 weeks later, we started to get my mail (pre-email era) letters from US companies seeking representation in Israel. There was a bank, a coil winding equipment company, a genetic laboratory, and – aha – and aircraft parts company. They included a printout of their entire inventory. Aircraft parts? I’m a pilot, I know all about aircraft parts (shows you how dumb I was, but hey, I was in my 20’s). So I grabbed the list and started with EL AL, who were very nice and they referred me to BOB (head of accessories at Israel Aircraft Industries) who leafed through the list and said – hey, I can use a 707 landing gear…! And so it began

BA Aircraft Parts

I called BA Aircraft parts (the company that sent me the inventory) and tell them I can sell their shit and would like to come and sign them onto a marketing agreement. I go shopping and buy my first business suit and get on a plan to meet them (Farmingdale Long island). Mary was the CEO and Tom was her husband (she was definitely the one with the pants in the house). They had acquired a junk 707 and broken it down for parts. Dianne, their sales manager showed me a telephone guide (I swear like a small telephone book) advertising only spare parts business. To boast of their large advertisement there. I asked if I can take it with me and she gladly gave me the book.

After signing them onto a representation agreement I go back to Israel and mark in the book any company that advertised over one inch by two inches and I sent them all letters suggesting I represent them in Israel. I ended up adding Bet Air in Florida, National in Dallas and a few others

Early Business

I was a great agent. Within the first year I got the business up from zero to a million dollars. My commission was $100,000 and after I paid rent, the secretary, the bookkeeper, the attorney I remained with nothing - but - I learnt the business.

After the first year I started consulting at IAI for their new Jet fighter so I could pay rent. After one more year IAI cancelled the project and they fired everybody on the project including me (but I got a nice certificate). I decided that I am giving the spare parts business everything I’ve got – except, I need to start trading on my own account – not as a representative. I borrowed money and rented a room from a bankrupt attorney and purchased a fax machine. I decided that I’m going to buy an engine, ship it over to IAI, pay to have it dismantled for parts, sell them the disks and cover the cost of the engine, and the rest is gravy.

My First Engine Deal

Amazingly shortly after I was set up in the new office – within 2 weeks a disk sheet comes across my new fax machine from a broker in England “Inter Turbine”. The disk sheet was of a JT8D engine more or less the specs I was looking for. I calculate the worth of the disks and come up with a price of $85,000 I should be willing to pay for the engine. But to negotiate I started at $60K – and we settled on $65K. So, I go to a communications office and send a telex confirming the purchase subject to inspection and 30 days to pay. I have absolutely no idea where I am going to get the money at this point, but I thought to wrap up the deal and figure that out later.

The owner of Inter Turbine, tells me the engine is in Paris and I schedule with his son to meet in Paris together with the engine owner. I put on the suit from the previous story, make sure I have some money on my credit card (I was really broke) and book a flight to Paris. I knew nothing about hotels, so I book the Eifel Tower Hilton because I knew the Hilton brand and I knew the Eifel Tower (moron). I arrive in Paris and grab a cab to the hotel. In the lobby over the reception desk in huge block lettering there was the conversion rate of French francs. I check in and I can’t quite figure out how much I’m paying. I enter the room and sit on the bed and whip out a calculator and find that I’m paying like $400 a night! This was 1988 – Shit! That night the son arrived from London, and since I’m the millionaire buying the engine I pay for dinner. I’m just praying my credit card won’t be rejected.

The next morning the owner of the engine comes to pick us up as the engine is in the Charles de Gaulle bonded area. To my dismay the owner is an Arab, his mother is from Lebanon and father from Egypt. We later became excellent friends. But at that time, I could already see the headlines – Israeli businessman knifed in an alley in Paris. We drive to the airport and enter the bonded area. The engine is huge (yes – this is the point that I figure out that here I am coming to inspect and engine, but I’ve never seen an engine up close before). I hum and mutter and walk around the engine and tell him I’ll give him an answer that night.

Back at the hotel I call ($11 a minute) BB from National in Texas – one of the companies I had represented that specialized in engines. I tell him about the engine I ask about the corrosion in the back, he told me not to worry. He asked if I had an interest in selling the engine, I told him no, I wanted to dismantle it. He asked me to send him the disk sheet because he had someone looking for such an engine and let’s see what he is willing to pay. 

So I have the disk sheets faxed to him from the hotel ($11 a page…) and while I wait I notify the seller that I am approving my inspection and I will get him the money within the 30 days. BB calls me back and says the guy is willing to pay $125,000 for the engine. I tell him for that price I’m selling, and he asks – where should I tell him to wire the money? I stall here for a second as the last thing I want is to do this trade through Israel – I don’t have a corporate bank account yet, and I will be charged all kinds of duties and fees. I tell him I’ll get right back to him. 

I call my cousin in Chicago. He runs a large family business of frozen food imports. I ask him if he could open a vendor account for me and I could have the money wired there, he said absolutely and gave me the wire instructions. Then, without thinking how stupid it sounds, I call BB and tell him that if his buyer wants this JT8D engine – tell him to wire $135,000 (I added $10,000 for the shipping because I had no idea how much it costs) to Penguin Frozen Foods in Chicago. The I go to sleep one more night at $400 a night and once again pray that my bank won’t freak out and leave me stranded in Paris. Next day my cousin called and said that somebody wired $135,000 to the account. I paid $65K for the engine, $10K commission to BB, $3,500 to ship the engine and netted $56,500 profit. My credit card held up and I went back to Israel very full of myself, I am the businessman, and THIS is how it’s done.

My first stab-in the-back Partner

Following this excellent deal, BB and I get together and decide to open a business in Duncanville Texas (which is where he was located). We rent a warehouse raise some credit, and start buying whatever we can afford. I buy my first house in Duncanville – new house from a developer. The house costs $70,000, I pay $5,000 down and the rest I get a FHA US veterans loan (??...) I spent 3 weeks in the US and 3 in Israel which I found very difficult. 

When I moved into the house I hired a landscaper who was married to my partner's wife's best friend. The guy tried to rip me off and I fired him (another lesson learned…). One day after landing in Dallas after the flight from Israel connecting in JFK, I come to the car rental company and my company credit card was refused. The guy cut it up just like in the movies. I went to the payphone and tried to use the company calling card, but it was deactivated. I understood something was very wrong and when I came into the office and asked BB what the hell, he gave me a speech about him doing all the work and that I shouldn’t be working in the US because I didn’t have a green card. 

I threatened to sue him (which would never have happened as I had no money) but because he had once filed for bankruptcy it scared him enough and he bought my shares for $125,000. Since he had no money either he paid me $5,000 a month and I had his wife guarantee the agreement. I figured he couldn’t afford to screw up her credit.

The epilogue to this story – first, he paid me to the last penny, which was extremely helpful in my move to the US later. After many years when I was running a several hundred-million-dollar company, he came to visit me in Florida. He told me he had gone bankrupt again and had suffered several heart attacks.

[ I am moving to FAST FORWARD because I thought it would add just a bit of color and show how easy it was to deal in parts, but is ending up writing endless stories]

I go back to Israel and trade parts from my living room for two years until my wife finishes her master’s degree. I move with my wife, a 9-month baby and no money to the US to continue the business from there. I decide on LA because I had friends from a kibbutz who have moved there that could arrange a credit card with a $5,000 limit. I set up the business first in Culver City then in Chatsworth – then in 1992 I move to Florida because I wanted to be on East Coast time. 

I sell the business in 1992 for $1MM plus an earn-out to an Israeli public company. I continue to run it and in 1995 I buy it back because the parent is going bankrupt by means of a reverse merger into a public shell. 1995 thru 2000 I could do no wrong – several public offerings both equity and debt, I acquired 9 companies and grew the business to a $400 million annual run-rate. 2001 we almost ceased to exist because of September 11 and I had to arranged a private equity buy-out. I turned the company around and left in 2005 so my kids could go to the military in Israel. The company was later split to two – military and commercial and sold to two different buyers. Kellstrom Aerospace is the surviving commercial entity.

My first introduction to any type of regulation was after I moved the company to Florida and other than trading I was also selling BET AIR’s materials (remember – one of the companies I represented in Israel). BET AIR had huge consignments form British Airways and I was helping them sell. One day an unannounced guest shows up at my office. She was wearing a snappy business suit and introduced herself as a DOT special agent. I kid you not – she was hot. She was pursuing a sale of consignment parts to a dealer that later seemed to have forged the paperwork and sold the parts as newer. No wrongdoing on our part but it was interesting to see somebody was doing something.

G fucking V

I first became aware of  GV when I was in California. He was a source for extremely hard to get engine disks with full traceability. I used him a source for several years and around 1997 I acquired his company. As a person he was a real charmer. As I mentioned above I had done nine acquisitions – all of them really good – except one shitty one – which was GV's company. I was captivated by the cash earnings and persuaded myself that worst that could happen the inventory was worth mote than the purchase price. After the acquisition the EBITDA withered away and on top of it GV who was working for me started dealing on the side. I tried to investigate but he was very sneaky. I couldn’t get him out of the company fast enough.

Two years ago, a DOT Special Agent contacted me in Israel and said that the NY prosecutor was asking for my help in prosecuting GV. I gladly helped and we had several video sessions. In the end they ended up settling (I couldn’t believe he got zero jail time). There is no question in my mind that those hard to get disks prior to buying him were all forged and that’s the reason the profits went away after the acquisition because he couldn’t get anything done with our quality control."

Enjoy the Journey!
XO Karlene 

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