The Dot-Coms Are Here!
A new force in the aviation business
By Bill de Decker
It had to happen sooner or later and it affects all of us. How it affects each of us will depend greatly on how we react to this new force in the aviation business. Those that make the effort to understand the Internet and apply the new ways of doing business can benefit greatly - those that do not, will be overrun by those that do.
Breaking the cycle
So what's it all about? The aviation business is very fragmented and is stifled by tradition, regulation, and a very limited number of suppliers. This in turn results in little competition and high prices - particularly on the maintenance side. To break through this cycle requires more and better information.
The Internet is many things, but first and foremost, it is an incredible channel for receiving and disseminating information. And, it does so at little or no cost. That allows it to be the basis for some significant cost reductions, improvements in efficiencies, and better marketing. The serious thinkers in the Internet business believe that cost savings of 5 to 35 percent can be obtained, with those that embrace the new Internet business model most skillfully reaping the greatest rewards. They also think that this year about $15 billion (yes, that's a "B") in aviation business-to-business (B2B) sales will take place on the Internet with a rise to $35 billion by 2004!
The aviation e-commerce businesses that have sprung up cover the gamut from aircraft classified ads, airline ticket sales, charter aircraft marketing, and technical information to a number that focus on the maintenance side of the house.
Categories of involvement
The general and business aviation e-commerce ventures tend to fall into four categories:
2. Existing aviation parts brokers
3. Existing Internet businesses that have added aviation offerings
4. Independent entrepreneurs
The first represents the OEMs, such as Honeywell/UTC's myAircraft.com. The second involves existing aviation parts brokers who have added an Internet outlet. An example of this type is aerospan.com. Then, there are the folks that were already heavily into the Internet, such as mySAP.com, who have added aviation parts and services to their repertoire because they have heard that aircraft parts are expensive.
Lastly, there are the independent entrepreneurs, such as Skyfish.com, PartsBase .com, and AviationBid.com who see an opportunity to provide a valuable, much needed service and believe they will profit by this. This is not a commercial for any of these organizations, since I'm sure there are and will be others, but I don't know their names. I should also say that I have been involved with AviationBid.com since mid-1999 as an unpaid advisor and our company is looking at providing certain services to them.
Why use dot-coms?
So, what do these organizations have to offer? If you maintain aircraft, you need both parts and services. Getting parts is a perpetual problem since the suppliers are often far away, they may not have the required parts in stock, and the delivery delays can be exasperating. Getting services can be an even greater headache. It's tough to know who all the organizations are that provide each service as they are often at a considerable distance and they seldom provide directly comparable quotes. This consumes a lot of time, results in significant expense, and also causes most operators to carry a substantial stock of spare parts, which further adds to the cost.
Benefits of e-commerce
One of the major problems in our business is simply finding the required parts and services when needed. Typically, an operator will rely on a small group of suppliers and vendors, since frankly, there isn't enough time to expand beyond that. This is aggravated by the fact that for many parts, there appears to be only one vendor - the OEM. What the Internet does in this area is to expand the operator's ability to find suppliers and vendors by several orders of magnitude. First, the dot-com companies make it their business to gather as many suppliers and as much information as they can to provide the level of service that will set them apart from their competitors. Second, there are many operators who would like to sell airworthy, documented surplus spare parts but don't know how or don't have the time. The dot-com companies provide a ready forum to do this. In effect, this also expands the number of suppliers for parts that are made solely by the OEM. Third, more suppliers and vendors often also means quicker delivery, which in turn, cuts down on the number of parts that need to be kept in inventory.
Aviation parts and services are expensive. Some of the expense is caused by the need for high quality materials, skilled labor, and certification. Much of the cost is caused by the lack of competition and availability of alternate sources. The Internet gives more vendors and suppliers a shot at your business. One way they do this, is to allow an operator to post its requirement on the dot-com's web site. The dot-com then notifies all of the participating vendors that you have made a posting. This in turn allows all the interested vendors to respond to your request. Another way is through auctions. This is particularly useful for operators wishing to sell surplus parts. One operator commented in a recent interview that by using this feature of the dot-coms, he had bought for $4,000 from an operator with excess inventory, an airworthy, documented component that the sole supplier had priced at $12,000. In short, a larger number of suppliers means lower prices.
Transaction and inventory costs
The average director of maintenance spends a lot of time on the phone and the fax chasing down parts, getting quotes, and issuing purchase orders. Since time is money, that process is expensive. Our economist friends call this the "transaction cost" and they figure that it costs between $75 and $175 just to issue a purchase order. Parts carried in inventory also cost money for storage, insurance, and the cost of the money tied up in the product. Analysis shows that the annual cost to carry inventory is between 20 and 30 percent of the value of the inventory. The dot-coms, by enlarging the supply base and exponentially expanding communication, have the potential to cut down on all these expenses by significant margins.
Getting "real smart, real fast"
This column just scratches the surface of one of the most important developments in our business in years and it will be well worth your time to get "real smart, real fast" on this subject.
And, if you doubt the benefits, consider the following. IBM, who has made a major commitment to e-business, estimates that it has cut its logistics costs by 24 percent, improved its delivery times by 55 percent, and improved its inventory turnover by 44 percent.