Source: http://worldcityweb.com/home/MIA/publications/magazine/47/856/

(8-a) Who’s Here Profiles: HEICO Corp – Copy-cat Success Story

by Doreen Hemlock

2007 may finally be the year when little-known Heico Corp. of Hollywood, Florida, gets it due.

For nearly two decades, the company has been revolutionizing the aviation industry by making generic parts for jets and offering them at deep discounts to brand-name parts.

Heico copies the unpatented parts from engine makers General Electric and Pratt & Whitney. It obtains certification from the Federal Aviation Administration (FAA). And it supplies airlines and repair center at prices often 25 percent off the engine-makers.

Airlines drool over the savings, but some have kept their distance. They fear rankling the engine-makers, who still control the market. The venerable British Airways, for one, long eschewed Heico.

Until 2007, that is.

The cautious British carrier this year forged an alliance with Heico to buy its existing parts and cooperate to develop new parts, especially the most expensive ones. Six other big carriers already have similar accords, including American, Delta and Japan Airlines.

The Air Transport Association, dominated by airlines, also gave Heico an unprecedented nod. It bestowed its top annual award for a manufacturer to Heicos aerospace chief Eric Mendelson, marking the first time a generic products manufacturer had been honored.

Wall Street is raving too.

The FAA requires airlines replace many engine parts at specific intervals. So, even if carriers buy fewer new jets, theyll still need parts. And more could turn to Heicos discounts amid a slowdown to boost savings, said analyst J.B. Groh of D.A. Davidson & Co.

Last year, Heico posted a record $392 million in sales and $32 million in profit. The company is poised for new records again in fiscal 2007, with growth in the 20 percent range and enviable profit margins. Sales should top $450 million this year and $500 million next.

Theyve got a fantastic business model and a long-term opportunity for growth, said analyst Chris Quilty at Raymond James & Co. in St. Petersburg, FL. The Mendelson family, who run the company and whove held a controlling stake in Heico since 1989, didnt set out to pioneer generic parts. That grew, literally, out of an accident.

The FAA probed a 1987 jet crash in Manchester, England and traced the problem to inadequate repair on an engine part known as a combustor. The U.S. agency ordered the part fixed or replaced at certain intervals. Engine-maker Pratt & Whitney couldnt meet sudden demand, so airlines turned to tiny Heico, which just happened to produce that item.

The Mendelsons figured if they could supply a complex combustor, they could make and sell other jet-engine parts too. So, the family took a chance and invested an initial $320,000 to copy unpatented parts and get them FAA-certified.

The engine-makers bristled, rejecting an upstart edging in on their huge profit margins. The manufacturing giants long used the razor and blades business model, selling their machines at slim gains but socking it to clients on parts sold at enormous profits.

Germanys Lufthansa wouldnt buckle. Lufthansas Technik aircraft repair division invested $50 million in Heico a decade ago to help expand the generic business.

Today, Heico spends more than $10 million to research and develop about 400 new parts a year, each with reams of paperwork for FAA certification. Its biggest limit on growth may be the FAAs capacity to handle more certifications, analysts said.

But opportunities abound. While its portfolio now tops 4,000 parts, it still has tens of thousands more parts to copy.

And potential rivals are few because of high research costs and Heicos early lead. Airlines prefer to buy from bigger vendors, analysts said.

The challenge now is managing global growth, said chairman Laurans Mendelson. Heico has acquired dozens of companies with sales in the $10 million to $20 million range, including one in Essex, England. Its also expanding across Asia. Its payroll now spans about 2,000 employees, including 650 in South Florida alone.

But like comic Rodney Dangerfield, Heico also wants respect. This year, as Heico celebrates 50 years since its founding, the company may finally get its due.