This article is published in Aviation Week & Space Technology and is free to read until Aug 18, 2024. If you want to read more articles from this publication, please click the link to subscribe.
Setna iO CEO On Opportunistic Strategy, Doubling Revenue This Year
During a visit to Setna iO’s new headquarters in the Chicago suburbs, Founder and CEO David Chaimovitz spoke with Inside MRO about how the company has grown significantly since its founding in 2016 and how it plans to nearly double its business this year.
Setna iO has grown a lot since it was started in 2016. Could you walk us through the last eight years?
I started the company with not a tremendous amount of experience. I understood the basics on how to trade airframe components and what questions to ask, but I didn't have a huge Rolodex of people who I could call on and I had no data, obviously. Our first deal was buying a fire extinguisher for $400 and selling it for $800. There were a lot of other deals like that in the first couple of years and that’s been super beneficial because it allowed us to learn the true value of every line item on every mid-life, current generation aircraft. A lot of other companies that are now sizable started out buying engines and doing multimillion-dollar major deals; we started out much smaller. That's been to our benefit because we really understand how to find every last dollar on everything that we're buying. [When] buying an airframe, we're probably going to sell 300 parts more than the average person who's tearing down the same aircraft. The same goes for engines.
Prior to 2020, we owned a lot of inventory, but we hadn't bought a full aircraft or full engine for disassembly. And then 2020 came around, and everything got severely shaken up. Many established companies stopped buying and went through challenging times. It allowed the assets to be significantly repriced to market, which is when we started getting really aggressive and buying. We bought our first aircraft for teardown in July 2020 [a Boeing 777] for probably 10% of what it would have traded for in 2019. Then we went on from there, growing the business pretty aggressively.
Last year, we did a bit more than $260 million of sales, and this year we think we'll get close to $500 million of sales, so there’s no reason that the growth is going to slow anytime soon. We're now getting into aircraft and engine leasing. We're doing this with our own equity and the bank debt that we’ve built with our banking relationships. We've never sold any equity to anybody and we don't plan to.
Is there an ideal margin that you’re targeting for growth?
No. We're opportunistic, so if the opportunities dry up, our growth will also dry up. But we think that we can harvest more value out of assets than most people. We're very comfortable with the deals we’re making. It's not like, ‘We have $185 million dollars and we have to deploy it this year, no matter what.’
We’ve built a great reputation with the people who own aircraft. We know how to close, we know what paperwork to ask for and what paperwork we don't need. We understand how to put deals together quickly. And when we're financing these deals, we send a wire—there's not like 18 banks involved and hundreds of lawyers. We try to keep things reasonably simple.
Being platform agnostic has been really beneficial. If we’re only buying [CFM International] CFM56-7B engines, obviously we wouldn’t be able to grow at this pace because that’s a very competitive market. We like to trade in CFM56-7Bs and [Boeing] 737s, but we’ll also buy [Airbus] A330s, A380s, [Pratt & Whitney] PW400s and PW200s, ATR72s and [Embraer] E190s, and whatever else we think we can find value in, we will buy.
How big is the inventory you’ve built in recent years, and what are you targeting for the near future?
In the last year, if you include every aircraft and engine as an asset, it’s been over 100. But more than that, we're also trading single line items extraordinarily actively. If we don't have them in stock, we have a team of people who are out hunting, looking and buying stuff constantly. We’re also brokering parts, so that's a significant portion of our business, as well. If we don't have it, we're definitely looking for it on the market. The assets are a big piece of it, but that's really only 30-40% of the business, and then the other 60-70% is everything else—buying packages, surpluses, single line items or whatever.
What are the biggest supply chain challenges or bottlenecks you’re seeing?
I would say that the repair of aviation parts is an inherently challenging business, even in 2018 before the [737] MAXs and lockdowns. I started this business because I wanted to preempt that and have in stock, ready-to-go inventory at the right price. That being said, I do sort of feel that the supply chains today are not significantly worse than they were in 2018. Are they getting better? Maybe a little, but this is a generational problem.
The real driver of the generational issue that we're seeing here is that, starting in 2019, Boeing had massive production issues and they persist until today. That means thousands of aircraft that operators planned for have not been made.
Everybody knows about the [issues with Pratt & Whitney] geared turbofan engines, but we've been talking to [CFM] Leap operators who expect those engines to last about 20,000 cycles on wing, and [some] Leaps are failing at about 15,000 cycles. If that trend remains, how many more shop visits will be needed over the life of this asset? How many more spares are you going to need? How much longer are you going to have to extend the life of the current fleet? How much of the aftermarket is going to have to change because of these missing aircraft and less engine durability?
Who are your biggest competitors?
There isn't a single company that we directly compete with every time because somebody that we might be competing with to buy an airplane or to sell a part will be selling us packages or using our repair shop, or we’ll be using their repair shops. We really have more ‘coopetition.’ If you look at our repair shop, Setnix, it’s a good example. Senta iO generates 35% of the business of that shop and the other 65% is from other parties. And of that, 55-65% is part trader and brokers, and only 10% of that is airlines today. We have a really good relationship with the majority of the other trading people in the industry. We are unique, though, where I don't think there's a single company in the world that is doing leasing, and now in a real way has a major parts trading operation that's running [power-by-the-hour] programs and supporting airlines, that is also doing MRO work in-house, all under one roof on one balance sheet. There's nobody doing that on their own equity. There are large conglomerates that have all these things at the same company, but there are equity partners on leasing or the shops are different.
Setna iO has facilities in the U.S. and the UK. Are you considering global expansion?
We have people in eight or nine different countries, because we found really talented people who can work on their own and add a lot of value to the business. I started with Tom [Boulcott, managing director and partner], based in London, almost eight years ago. We have the same thing in Vilnius, Lithuania; India; Dubai; Copenhagen; Istanbul, France and Singapore.
As you grow the business, how are you approaching workforce growth and recruitment?
We don't set as many long-term goals as you might expect. We focus on making the best decision that we can at the time and have a long-term view on it. I have no idea how many people we’re going to employee in 10 years, but it’s probably more than today.
We’re trying to recruit talented commercial people who can add a lot of value to the company. We’ve had almost zero attrition—one person has quit on their own accord. Nobody ever really leaves because of how we've aligned incentives and how we let people operate.