Other considerations also favor the large and strong. Product liability insurance is expensive and increasingly a necessity in part markets. Top customer service also can be costly. It is usually conducted most economically when spread over a large scale of operations.
Depending on definitions, there may be 200-1,000 companies in the commercial supply chain business now. Musselwhite predicts there will soon be five or six “very strong players” and the main question is how many of the smaller ones will survive. Scale is essential for “discriminators” like breadth of service and geographic reach, so “integration is proceeding rapidly,” Musselwhite says. Of the Kellstrom-AirLiance combination he firmly believes, “one plus one equals three.”
That seems to be the view of most experts in this tricky parts distribution business. “Yes, we will see more consolidation, in both new and surplus parts,” predicts Michele Dickstein, president of the Aviation Suppliers Association. Dickstein has been seeing consolidation in new-part markets for a couple of years and says it started to happen in used-part markets about a year ago as several engine manufacturers purchased companies in California and Texas.
Dickstein attributes the pickup in consolidation to two major factors. The first factor is that part vendors are trying to meet customer demands for broader offerings. Second, there is more capital and it can be obtained fairly easily. “Capital distrusted aerospace before. Now they are backing these guys with money.”
So Dickstein expects the current consolidation to continue. But she does not believe there is any minimum scale necessary to be a competitive part dealer. “Small companies can still carve out a profitable niche. But scale is an advantage, and sometimes large companies are more efficient.”
And companies are not just growing larger, they are offering more services. The Aviation Suppliers Association is seeing more part dealers offer repairs and repair management, especially for rotables. “That ties into cost-per-hour contracts, and these are becoming more prevalent,” Dickstein says.
While expecting more consolidation, Dickstein acknowledges that the other major recent merger, Diversified Aero Services' acquisition of Aero Inventory, was a surprise. “DASI was not a big player, and Aero Inventory had very major stocks. That was a surprise for everyone.”
Wayne Mihailov, DASI chief commercial officer and former Aero Inventory executive, was not surprised by the deal. And he is confident it makes perfect sense. “DASI with this acquisition changes the game,” Mihailov argues. “They were very good at consistently finding the right aircraft and right parts to buy. There were no ghost parts, what they listed they had. Now Aero Inventory takes DASI global, into the U.K. and Asia. Aero Inventory brings $400 million worth of inventory and an e-commerce platform second to none.”
Aero Inventory grew fast and flew high until the recession hit in 2007-09, leaving it with surplus parts and stingy capital markets to finance them. The result was bankruptcy and some major restructuring before the company was acquired by DASI. One of DASI's strengths is liquidating surpluses, and capital loosened up considerably. Furthermore, Mihailov says DASI has simply been smart at spotting the parts that will be in short supply and picking them up at the right price and time.