High Risk

REVIEW SUMMARY
Businesses. Aero Sol Aviation Solutions, North Port
Industry. Aerospace, Airline parts
Key. Company seeks to grow during the downturn by buying discounted inventory.

An airplane part, be it a cockpit seat cushion or a dime-size bolt that holds a wing part in place, isn't just an airplane part to Ralph Gross.

It's the commodity behind a unique, fast-moving, high-risk business littered with regulatory hurdles. It's also a highly profitable business, with margins on some sales that exceed 10,000% on inventory that moves in less than a week.

The business is North Port-based Aero Sol Aviation Solutions, one of about 40 companies nationwide that buy and sell used airplane parts for commercial and cargo aviation. Aero Sol has a global list of airline clients, from United and Frontier domestically to TAP Portugal internationally. It sells hundreds of parts, most of which are used in Airbus A300 cargo planes or Boeing 757s and 737s.

Gross founded the company in 2007 after a decade-long career in aviation maintenance. It has four full-time employees and three part-time contractors.

“Airline [executives] can be picky in who they buy parts from,” says Gross. “Having someone understand the gravity of 'I need this part now' is essential.”

Aero Sol's revenues were down 58% in 2009, from $4 million in 2008 to $1.7 million. The company was a victim of the recession that crushed the global airline industry.
“It was a tough year for everyone,” says Gross.

The recession, however, didn't stop Gross from using Aero Sol's crafty and calculated approach to the business of buying and selling airplane parts. “We don't just buy and sell parts,” says Gross. “We know what the parts do and how to fix them.”

Take this deal: The company spent about $8,000 last year to buy seven fuel control parts called MECs. The parts were once worth $17,000 a piece, but a Federal Aviation Administration directive cut the value to about $1,000 each. The FAA cited safety issues in its directive.

But Gross knew something many of his competitors didn't know about that particular fuel control part, which is about the size of a toaster. That part also contained a solenoid valve — about the size of a triple-A battery — worth at least $6,000 when pulled out and put to another use.

So Aero Sol bought the fuel control parts and stripped each one for the solenoid valve. It quickly turned around and sold those valves to FedEx. Aero Sol made at least a 500% profit on that sale.

Then Aero Sol worked out a deal with the original manufacturer of the MEC fuel controls to sell the parts back, excluding the solenoid valves it sold to FedEx. Aero Sol made another $450 per part on that transaction.

To be sure, that type of frantic buying and selling doesn't happen everyday at Aero Sol. Not every sale produces such a huge return.

Nonetheless, the company's business plan revolves around an old business axiom: Buy low and sell high.

“We make our money on the purchase, not the sale,” says Gross. “That's how we protect ourselves from market fluctuations.”

Inventory explosion
The recession that still permeates the airline industry has presented Gross with another job title, in addition to CEO and chief commoditizer.

He's now an opportunist. He wants to use the recession to find rock-bottom deals where he can replenish Aero Sol's inventory at 10 to 20 cents on the dollar. “Now's the time to increase inventory,” says Gross. “My market will explode” when the airline industry makes a comeback.

Aero Sol currently has a few deals in the works that Gross says could add $2 million worth of inventory to the company's portfolio, which is currently worth about $3 million on any given day.

One of those potential purchases is for a batch of 1,100 Boeing 747 airplane parts. Gross hopes to buy the lot, being sold by Thai Airways, for about $80,000 — which would be less than 10 cents on the dollar.

In fact, Gross says the batch could fetch from $1.2 million to $1.4 million when analyzed and resold. “That's not a flip,” says Gross. “That could take three to four years.”

Access to capital for those kinds of purchases is a constant challenge for Gross. Most of the lot buys Gross has made so far for Aero Sol have been self-funded, with the help of a few limited outside investors.

Gross would like to hook up with more outside investors or even some banks in 2010, so he could pursue more opportunities like the ones in Thailand. There are hurdles to that plan, however, especially with banks.

But it's not the high-risk nature of the business that has caused bankers to worry, says Gross. “It's the lack of aviation industry knowledge,” he says. “They don't understand the business.”

If Gross can find the right partners and investors, he says the growth potential for Aero Sol is sky-high. He projects the company can hit at least $8 million in annual revenues by 2013 if it can get about $2 million to buy parts.

In the Navy
One challenge that hangs over every potential deal Gross considers is the quality of the parts. The used airline parts business is heavily regulated by the FAA, which certifies every part before it is bought and sold.

Gross and his employees make certain each part has certification papers before doing any deal. After that, each part gets analyzed, tagged and stored, either in the company's 5,000-square-foot flex office/warehouse space in North Port or a 3,000-square-foot warehouse Gross co-owns in Miami.

Gross runs Aero Sol with his wife, Renae, who also has an extensive background in aviation repair. The couple met in the mid-1990s, while both were stationed in California for the U.S. Navy.

After the Navy, the couple worked for several small airline companies in Ohio, North Carolina and eventually Florida. At one stop, the couple both held contractor jobs with Lockheed Martin, where they installed GPS systems in some U.S. Air Force planes.

Another stop was notable for its wow factor: Both Ralph and Renae Gross worked for Sunworld Airlines, a now defunct company that flew specialized charter flights for professional sports teams out of Cincinnati.

Ralph Gross held a few supervisory positions in different departments for the airline. Renae Gross, meanwhile, was assigned to be the personal plane mechanic for the custom-fitted aircraft that carried the Boston Celtics NBA basketball team.

Renae Gross was responsible for doing daily checks on the plane, essentially like a hub in the sky. “It was my most favorite job ever,” she says.

Going solo
But while the work at times was exciting, it wasn't stable. The constant flux in the airline industry became a strain on the Grosses. Says Ralph Gross: “It made it difficult to maintain continuity.”

An opportunity for continuity presented itself when Ralph Gross' last employer, Naples-based Express Net Airlines, went out of business in 2007.

Gross gambled that his six-figure severance package would be better if it came in the form of airplane parts the company could no longer use. Express Net had a portfolio of about $1.7 million in parts, but it was raw and unorganized.

The Express Net owners bit on the offer and Aero Sol was born.

Gross initially was going to sell the lot in full, for a onetime gain. But he ultimately decided it would be more lucrative to sell the lot piece by piece once he could sort it all out, like it was a supersize jigsaw puzzle.

One integral piece to the puzzle, Gross discovered, is the Inventory Locator Service, which is like an MLS for airline parts. The ILS, a subsidiary of Boeing, runs an online marketplace of airplane parts that is also an advertising hub for the industry.

The ILS has 20,000 subscribers and 60,000 potential customers. Says Gross: “It's our voice to the airline world.”

The ILS handles most of Aero Sol's customer-finding business. But Gross has learned that the other parts of the business, mainly the buying of the parts, has a wide learning curve.

“You don't just decide one day 'I'm going to sell airplane parts,'” says Gross. “There aren't a lot of people that can do this.”

Mark Gordon covers the Sarasota-Manatee region. He can be reached at [email protected], or 941-362-4848.