Case Study: Erickson Air-Crane Co. : Robert Amter

Case Study: Erickson Air-Crane Co.

Erickson Air-Crane Co.,

Central Point, Oregon

Situation:

An LvA Enterprises and JP Morgan Partners leveraged buy-out, Erickson Air-Crane was an $85 million in sales helicopter company with four product lines:

A helicopter lift and service company functioning in the logging, fire fighting and construction industries.

A manufacturer of helicopter components and attachments.

A builder of Sikorsky Skycrane helicopters from hulks into fully functioning helicopters for use internally and for sale to external users.

A helicopter and fixed wing aircraft repair and service facility.

Retained to evaluate the company and determine how to improve it.

Problems:

Due to sizable economic declines in its markets, Erickson’s sales had declined 15% in 1997 and were expected to drop 40% in 1998.

…………………12 months……………….

Financial Results (000$) 1997 Actual 1998 Estimate

Net Sales $84,935 $51,057

Gross Profit 18,007 6,627

% of Sales 21.2% 13.0%

Operating Profit (Loss) 4,899 (6,809)

% of Sales 5.8% (13.3%)

EBITDA 12,194 nil

% of Sales 14.4% —

Net Loss (6,718) (19,317)

% of Sales (7.9%) (37.8%)

Inventories 48,670 49,379

% of Sales (Goal: 16% – 19%) 57.3% 96.7%

Accounts Payable 2,398 2,314

% of Sales (Goal: not less than 7%) 2.8% 4.5%

To some extent Erickson suffered from bad luck because virtually every market collapsed simultaneously. However, a major cause of the financial distress was management’s failure to recognize the declines in its markets and to make the appropriate operational changes.

Logging was Erickson’s largest product line accounting for almost 90% of sales in 1997. It was also the best managed and most effective operation. Sales had dropped over 70% since 1995.

Fire fighting was the second largest business in which sales had increased almost 1,000% since 1995. But the fire fighting business is cyclical accounting for 2% to 32% of sales.

Operational causes of Erickson’s distress:

» The performance of six top managers.

» Hostile working relationships among several key managers resulting in an absence of teamwork and cross-functional communication. For many employees Erickson is a penal colony.

» No strategic focus. The company is going in too many directions at once. Need 6, well thought out, priorities.

» Many costly mistakes resulted from a rush to judgment without proper due diligence. Critically in need of a marketing plan.

» No fiscal discipline and control resulting in a high cost operation. No cost system. A bureaucratic, slow and costly work order system.

» No sense of urgency. The attitude is business as usual, no changes are needed.

Conclusions & Recommendations:

Hire a Chief Executive Officer with helicopter service business experience. Replace other top management with internal personnel. Do not replace with external candidates as Erickson is a uniquely complicated and technical business in which helicopter experience is important.

To some extent Erickson’s recovery is hampered by the absence of a critical mass of cost to effect an easy reduction in operating costs. Also hampering its recovery are external market factors which are out of its control.

Develop a focused strategic plan.

Install systems and fiscal discipline.

Harvest cash and reduce overhead while patiently waiting for the logging markets to improve.

Erickson has good owners. They are operationally knowledgeable and constructive. They are quite skilled in negotiating with the banks and bondholders to obtain the cash flow and time needed to turnaround the company.

Reason I wrote my book “Learn to Whisper”

Click on this link for a more complete description of “Learn to Whisper”

The reason I wrote “Learn to Whisper”:

My conclusion after operating as a Turnaround Chief Executive Officer for more than twenty-five years is that the majority of this country’s top management is far from first-rate. In fact top management, particularly at the chief executive officer level, is at best average with a large number that can be rated mediocre. This lack of management competence has seen this country’s market leaders lose sizeable market share to foreign manufacturers able to export better quality and lower cost products to the USA. It has seen manufacturing and service operations unnecessarily moved to foreign countries. All of which has negatively affected the economy, severely damaged former blue-chip corporations and seen quality jobs lost.

It is quite common to discover that companies struggling with this inability to compete with foreign companies have been simply mismanaged. The once successful business deteriorated because of an incompetent chief executive officer and weak senior management

Why doesn’t this nation have first-rate management? Inadequate training. Chief executive officers and vice presidents learn “on the job”. A number get promoted based on personality, political connections and drive – not merit. They are not carefully screened for the potential to become successful at managing. For some all that is needed is a well-written resume, the right interviewing style and the inability of a new employer to accurately assess skills, performance and potential.

Compare this to the process doctors go through. From medical school to internship to residency to a senior role after years of education, experience and continuous training their progress and capabilities are constantly monitored even after they become senior in the profession. Generals and Admirals go through a similar protocol. They must prove themselves in low-level assignments before they are judged qualified for senior positions. Unqualified applicants in both professions are culled out. What can be done to improve management competence? Education, on-the-job training and job performance monitoring. My book will educate people on the subject of managing. Its 101 management lessons are separated into the 17 subjects managers need to know.