AirTex

Aviatio
n

"Hello, Sarah. This is Ted Richards." Ted was on his way to resign from his job. He
and his business partner, Frank Edwards, had just bought AirTex Aviation, a floundering
enterprise on the verge of bankruptcy, and were excited about putting their business
school education to work. The two had scraped together $500,000 so that AirTex would
have at least a little cash to pay some bills. With the amount they had contributed, AirTex
had a total of $515,000 in the bank.

"Oh, Mr. Edwards," Sarah said, "I'm so glad you called. When will you be in? I have a
few checks
for
yo
u
to
sig
n."

"I should be in tomorrow. What are the

checks for?"

"I've written checks for only our most pressing bills," she said. "I tried very hard to
make sure
that only those that are most
important be paid."

"That's fine," Ted replied. "What's the total of the checks you've
written?"

"$510,0
00," she
said.

Ted nearly dropped the phone. "Let's discuss this when I get into
the office."

He drove down to AirTex the next morning to speak with Sarah Arthur, the
company's
accountant. As it turned out, his first day owning his own company would not turn out
exactly as he
h
a
d

p
l
a
n
n
e
d
:
 I had envisioned that when I bought my company, I would walk in the front
door the next morning, and everyone would bow down to me. There would be a
brass band playing, or something. Instead, I walk in through the back door a)
realizing that I have a crisis on my hands, b) hoping no one is going to see me so I
can deal with this crisis, and c) of course, not really knowing how I'm going to deal
with it. What I did was say to Sarah Arthur, 'We are not going to pay these bills.'
Well, she was shocked. 'But you have to pay them!' she said. I looked at this
woman, who had been with the company for 20 years, and said, 'No, I will decide
what bills we are going to pay.' She sat back and said, 'Okay,' convinced that I was
going to make a fool of myself. That was my first day.
800-269

AirTex Aviation

Th
e
Pu
rch
as
e
Ted Richards and Frank Edwards met in 1986 when they were students at Harvard
Business School. Although planning on initially working for large companies, they
eventually wanted to own their own business. Upon graduation in 1988, Frank took a job
in the corporate finance department of a large electronics company in Los Angeles, and
Ted went to the L.A. branch of a well-respected consulting firm.

As they were located in the same city, the two met often for lunch. Whenever they
met, they talked about going into business together. Instead of starting an entirely new
business, Ted and Frank really wanted to find a "fixer-upper" - they wanted to purchase and
"turn around" a failing business that showed a lot of potential. "In good business school
fashion," said Frank, "we established some
criteria,
which
were:

1.
The company couldn't cost much, since we didn't have much
money.
2.
The company had to need what we had to offer - which we thought at that time were
managerial skills.
3.
The industry had to be fragmented and non-oligopolistic. We didn't want to be a small
fish in a big pond.
4.
We needed to be able to see our way clear to have the company grow at a rate of 20% per
year for the first five year-period.

Ted and Frank looked at a number of businesses over the next year and a half and in
early fall of 1989, located a fixed-base operation1 at San Miguel Airport in Texas that was
losing money and
looking for a buyer. After four months of negotiation, on December 29, 1989, Ted, just 26
years old, and Frank, 28, purchased the stock of the company for $100,000, assumed the
lease on the building (and all the assets and liabilities) and were in business.

The lease on the facilities had a purchase option at a price considerably less than the
market value. By exercising the option and then selling and leasing back the building, Ted
and Frank were able to raise the $500,000 for working capital.

Ted and Frank discussed the organizational structure at AirTex, and agreed to
decentralize its operations by making each operating activity a profit center and grouping
them by departments. Each departmental manager would be given authority over his
operations, including granting of credit, purchasing to a predetermined limit, setting
policies, and collecting receivables. He or she
would also be held responsible for its results. Frank was concerned,
however:

I agree with our decision to decentralize this authority, but I am concerned

whether now is the time to do it. We'll have a tough time when we first walk in the
 door, and I don't know if the departmental managers can be taught some of these
management techniques fast enough. After all, some have never finished high
school. Maybe we should begin by making all these decisions ourselves for a month
or two. I realize that we don't know the aviation business yet, but even though
neither of us has been a line manager, maybe we can learn the aviation business
faster than some of our managers can learn formal management skills. Either way,
we're putting the company on the line and the two-minute warning whistle has
already blown.

1 Fixed-base operations are companies located on an airport that service the non-airline aviation market.
They generally sell,
fuel and maintain aircraft as well as provide flight instruction and charter services. These companies can
range from small
family operations to multiple-location companies with sales
exceeding $500 million.

2
AirTex Aviation

800-269

During the four months they were negotiating the deal, Frank and Ted spent virtually
every
weekend together. Of this period, Ted
commented:

We spent something on the order of ten hours a week, of which maybe two or
three hours would be trying to understand Sarah Arthur's accounting system and
accounting statements, and another two or three discussing pro forma financial
projections and the rest on what we would do when we acquired the company.
Frank basically did the financial projections and I designed the accounting system.
Actually, I dreamed it up one afternoon at work. I sat down at my computer and
designed the forms myself. Frank's projections for the next ten years, showed that
things were really tight. Even with the $500,000 from the sale and leaseback of the
facilities, Frank projected that we were going to run out of money near the end of
the first year. We knew this when we were negotiating for the company, and it made
us a bit nervous.

Well, three days before the closing, Frank came to me, white as a sheet, and
confessed that we had made a structural error in the projections. He was computing
accounts payable on the wrong basis, and we were going to run out of money in
three months. We had a little discussion as to whether we should blow the whole
deal right there, knowing that we couldn't survive. We decided to go ahead with the
deal. We knew it would be an impossible job, no matter how we sliced it, but we
were prepared to go through with it.

AirTex Aviation
Prior to Purchase
AirTex was one of eight fixed-base operations at San Miguel Airport, which served
Center County, Texas - one of the most rapidly growing communities in the nation.
AirTex had a loss of $500,000 on sales of $10 million in fiscal year 1989, and this left the
company with a negative net worth (see Exhibit 1). The company conducted activities
through six informal departments (see Exhibit 2).

Fuel line activity The activity employed twelve unskilled fueling people,
with an average tenure with the company of eight months, and three dispatchers who
coordinated their activities via
two-way radio. It was managed by Will Leonard, a man in his mid-30s, who had been
the construction foreman for Bill Dickerson when Bill was a real estate developer. When
Dickerson bought AirTex in 1980, he brought Will Leonard with him to manage the "line
crew." Will was enthusiastic about his job, extremely loyal to Dickerson, and well-liked
by his employees. Although lacking in any theory of management (he had a high school
diploma and some junior college credits), Will was a good first line manager who was
instinctively people-conscious while holding them in line.

The fuel activity encompassed

five operations:

Retail Fueling - A Phillips Petroleum franchise of underground storage of

60,000 gallons of jet fuel, 20,000 gallons of "AV-Gas," and five fuel trucks to
serve locally based and transient aircraft.

Wholesale Fueling - Service of a fuel farm for Texas Air, a regional airline
connecting San Miguel with cities in Texas, Louisiana, Arkansas and Oklahoma.
AirTex bought its own fuel separately.
Fuel Hauling - An over-the-road fuel truck and a Texas Public Utilities
permit to haul fuel on public roads. The truck, in essence, served Phillips, at a
price, by delivering its fuel to AirTex.

3
800-269

AirTex Aviation

Rental Cars - An agency of a local automobile rental company, mainly used as

a service to transient pilots.

Tie-Downs - Storage of transient and San Miguel-based aircraft in six hangars

and fifty open
t
i
e
-
d
o
w
n
s
.
2

The fuel activity was open 18 hours a day, seven days a week,
year-round.

Service and parts The service activity repaired, maintained, and overhauled
aircraft. It
employed six mechanics and a departmental secretary. The parts activity, a separate
accounting
entity, employed one person and was managed by the head of service, as sales went almost
entirely to the service activity.

The manager of these operations was Carl Green, a man in his 60s, who had been chief
mechanic for Dove Aircraft at Love Field in Dallas prior to moving to AirTex. Before
that, he was the mechanic/co-pilot for a Dallas oil executive. Carl had a high school
diploma, aircraft and power plant licenses, and multi-engine and commercial pilot
certificates. He knew airplanes, engines and aircraft mechanics. He was, in Ted's words,
"not a self-starter, had a bit of retirement mentality, and avoided conflict except when it
came to quality. You would never worry about anything he rolled
out
of
his
sho
p."

Flight training The flight training activity was managed by Roy Douglas,
whose pilot's license was signed by one of the Wright Brothers. Roy had held several
world records in aviation's early
days, and was highly respected by the aviation community. He spent a lot of time "hangar
flying" with old cronies and, while he didn't manage the department in any real day-to-day
sense, he hired the seven instructor pilots and three dispatchers, gave check rides to
students prior to their FAA flight exam, and set safety policies. He and his chief
dispatcher, who now had been with him for over ten years, were intensely loyal to both
AirTex Aviation and the flying community. They had, however, "seen everything and were
surprised by nothing," and they were very resistant to change, be it new aircraft technology,
aviation teaching methodology, or accounting systems.

The flight training activity, which had lost money each year, had two types of
operations:
 Flight School - Flight training in 18 single-engine light aircraft from eight
flight instructors coordinated by three dispatchers. Flight ratings were offered
from private pilot through air transport ratings.

Pilot Shop - Sales of flight supplies, such as logbooks, navigational charts, and
personal and training flight supplies. Sales were made from three display counters
by the flight school dispatchers.
Avionics Avionics was a single-person activity conducted by Leon Praxis. Leon
was a college-
trained electronics technician whose responsibilities included repairing radios and
electronic
navigational equipment. He started at eight every morning and left promptly at five, so that
he could spend time working on other interests at home.

Aircraft sales AirTex had been a Piper Aircraft dealer until two months before
its sale. The
owner, Bill Dickerson, was unable to finance the number of aircraft Piper required to be
carried in
inventory, so he lost the franchise, fired his two salespeople, and closed down the
department.

2 A tie-down is an area of asphalt or concrete with ropes, where an aircraft is parked by tying it down to
prevent it from rolling
away or from
sustaining wind
damage.

4
AirTex Aviation

800-269

Accounting The Accounting Department was central to the company in two

ways. First, it was located in a glass-enclosed office in the center of the building, where it
could be seen by everyone
and everyone could be seen from it (see Exhibit 3). The second part of its centrality was the
role that its manager, Sarah Arthur, played in AirTex. Sarah had worked for Bill
Dickerson for more than twenty years. In his absence, which was frequent, Sarah managed
the company. While her title was accountant, she had no accounting training of any kind,
and her idea of running the company was to be the central repository of all information.
She received and opened all the mail - not just mail for her department - and she would
distribute it to the department heads as she saw fit. What she distributed, in Ted's words,
"was typically nothing - bills would come and she would keep them. Checks would come
and she would keep them. And, at the end of the day, she would collect cash from all the
departments and keep it." Sarah managed all the receivables and payables.

All accounting information was Sarah's, and nothing left her office. The department
managers knew nothing about the profitability of their operations. All they knew was that
airplanes would fly and that Sarah Arthur would come around at the end of each day and
collect their money. Then, occasionally, she would berate the department managers for
their high receivables. Of course, they had no idea how big their receivables were, or who
they represented. They would just "be beaten
ov
er
th
e
he
ad
."

As
Ted
described
it:

The management system that was in place when we bought the company was
one woman who magically kept everything in her head. There was a limited and
almost incomprehensible formal system. There were basic financial statements and
a set of reports that were produced for and according to Piper Aircraft's
specifications each month, but they helped Piper, not the management. We may
have negotiated with Bill Dickerson, but we were going to take over the
management of the company from Sarah Arthur.

Assuming Management
Responsibilities

The Roles
of Ted and
Frank
Frank and Ted took over the business not only as full and equal partners, but as best
friends who understood each other very well. Frank assumed the chairmanship, and
turned his attention to specific and critical projects, the first being the reestablishment of
aircraft sales - potentially a major profit area. Ted took the title of president and chief
operating officer, and began to manage the rest
of the business. As
Ted said later:

I knew Frank wouldn't be right at my side at every decision, but I made sure that
four times a day I could walk into his office and say, "Frank, I don't really know what
I'm doing," and he would give me a pat on the back and put my head in order.

Frank, in turn, depended on Ted for operational inputs and intellectual support. They
both
worked 12-hour days, five days a week, with Ted, not married, putting in 10-12 hours
each day on weekends as well. Frank, who had a family, tried to put in three or four
hours a day on the weekends.

5
800-269

AirTex Aviation

Managem
ent and
Control
Beyond the immediate cash crisis, Ted viewed his three most
important tasks as:

1. Revamping the
management of AirTex.

2. Installing a control system that would both support the management and provide
information
needed in order to
make decisions.

3. Wresting de facto control of the company from Sarah

Arthur promptly.

Frank and Ted believed that it was very important to provide an environment where
the departmental managers could make correct decisions on their own, since they had
decided they could not make all the decisions themselves. They had neither the time nor the
technical knowledge.
A
s
T
e
d
p
u
t
it
:

One of the things I was very concerned about was how to manage by
providing an environment that encouraged the managers to make decisions the
way I would want them made. That was very, very important to me. I wanted to
provide a framework that didn't limit their actions but certainly provided very fast
feedback as to how they were doing and made it personally worthwhile for them to
do the right things. I spent a lot of time thinking about how to do that, and it
occurred to me that there were really two ways to do that. I recognize that there has
to be the black hat and the white hat in any of these situations, and so I decided to
make the control system represent reality and my personal role would then be that
of an emotional leader as opposed to a task leader. I would let the control system be
the task leader, and then I could exert more avuncular personal leadership.

I also realized that I didn't have the time to train everyone in the management
approach we wanted to use at AirTex. Nor did I have the guts to fire everyone and
bring in new talent, and that wouldn't have been a good idea anyway. I also realized
that unless I changed the basic attitudes in the company, we would never survive. In
order to do that, we needed to do a lot of education, and that would be my personal
role. But, if I was going to do that successfully, I couldn't at the same time be
berating them about the receivables, so it was necessary to take the nitty-gritty daily
tasks of banging people over the head and put them somewhere else. I didn't really
feel that Frank should do that, and so to provide this environment for
decentralized decision making was very, very important.

Ted began to implement a management control structure, incorporating the

following policies:
 Profit centers would be established for each major activity. These profit centers would
1.
be combined where appropriate into departments.

Revenues and expenses would be identified by profit center and communicated to the
2.
profit center manager.

Departmental managers would be responsible for their profit centers, and would receive
3.
a bonus of 10% of their profit center profits after administrative allocation.

The profit center managers would have pricing authority for their products or services,
4.
both internally and externally. The fuel department manager could, and did, charge the
Flight School retail price for the fuel they used, whereas he charged the Service
Department his cost for its oil.

6
AirTex Aviation

800-269

The profit center managers could buy products externally rather than internally, if it was
5.
in their best interests to do so. The Flight School manager could, and did, have his
aircraft repaired outside AirTex's shop when it was unable to fulfill his service needs.

The profit center managers could buy needed capital equipment and operating supplies
6.
on their own authority within established purchase order limits. Ted recalled one of the
first
times this decentralized authority was
tested:

When we bought the company, it had an old, rotten, obsolete copier. It was under
the control of Sarah Arthur, and everyone who wanted a copy of anything had to go to
Sarah, the Witch of the North, and plead - which was really an awful thing to do. I
remember one day, Will Leonard, the manager of the Fuel Department, said, "Can't I
get a copier?" I said, "Will, you can do anything you want within the limitations of
the PO." So, he bought the smallest copier he could find, and he let everyone in the
company make copies, charging them ten cents a copy. At the end of the month, he
would present bills to every department for the copies they used. He made money on
his copier because everyone else was scared to death to walk into the Accounting
Department and face the Witch of the North. Here was a classic entrepreneurial
example, and it became almost a cause celebre. People were saying, "How did he get
a copier? What right does he have to charge me for the copier?" I would say, "If you
want a copier, go get one." But with one here at ten cents a copy, they realized they
7.couldn't really afford one themselves, so they grumbled and went about their
business.

The profit center managers had the authority to hire, fire, and administer the salary
schedule in their departments quite independent of the rest of the company.

Cash
Manag
ement

Cash and
Accounts
Payable
When Ted arrived at AirTex on the first day of his ownership, he gathered up the
checks Sarah had written and pulled up the accounts payable file on the computer, called
in his departmental managers one by one and said, "Who are your most important
suppliers?" He looked at the individual accounts to see how old the balances were and
called up each of the suppliers, saying, "I'm the new owner of AirTex Aviation, and I
would like to come down and talk to you about our
credit arrangements."
He later said:

Over the next six months, I got on good terms with the suppliers. I talked to
them, took them out to lunch, and let them take me out to lunch. We paid them a
little bit here and a little bit there, and we stayed out of serious trouble.

A direct result of Ted's assumption of the accounts payable decision was that Sarah
Arthur began
to view her stay at AirTex as being limited to the four months agreed upon. As it became
clear that Ted was not going to let her make the management decisions anymore, she
limited her work for the company strictly to the four-month transition period agreed upon
in the purchase agreement. As Ted
p
u
t

i
t
:

She effectively said, "I will work from 11:00 a.m. to 2:00 p.m. every day. I will
answer your
questions and that is all." That was fine with me. I hired a new accounting clerk to
be Sarah's

7
800-269

AirTex Aviation

assistant. She worked from 8 in the morning until 7 at night. I hired her; she worked
for me. And when Sarah Arthur quietly packed up and left, the departure was easy.

Cash and
Accounts
Receivable
With the accounts payable crisis on the road to a solution, Ted turned his attention to
cash inflow.
I
n

h
i
s

w
o
r
d
s
:

My biggest worry was how we were going to control cash, or rather, how I was
going to provide a system that would motivate the departments to manage cash. The
solution I came up with was to take the receivables and give them back to the
departments. That was very controversial. Everybody in the whole company fought
me on that. Frank didn't like it - I was totally alone. First of all, the managers didn't
understand it. They had never seen receivables, they didn't know what they were.
They felt as though they were playing with dynamite. "Here they are, but what do I
do with them?" Frank, on the other hand, was concerned that things would get
totally out of control because our most important asset - our incoming cash flow -
had suddenly been handed out to amateurs. Sarah Arthur may not have been perfect,
but she had a lot of experience.

In the Fuel Department, I handed the receivables to the dispatcher, a 20-year-old

surfer who had dropped out of college after two years. In the Flight School, I also
gave them to the dispatcher, a 55-year-old, loyal employee. These were the only
two departments with significant accounts receivable. In Service and Avionics, I
gave them to the managers, but these were not significant.

One Saturday morning, I sat down at the computer and printed up all of the
balances, and physically presented them to these two women - the de facto
department heads. Then I sat down and showed them how to input the correct
information using the current week's transactions. So, we started to collect data on
the accounts receivable.

To motivate the department heads to manage their accounts receivable, Ted gave them
the credit-
granting authority and the responsibility for collections. He also established the following
monthly
charges against their
departmental profits:

bles Receivables Receivables

Receiva
 Receiva
bles 60 days old or less 1% of the
60-90 days old balance 3% of
Cash and 90-120 days the balance 6%
the Banks old of the balance
over 120 days old charged the balance to the profit center

When Frank and Ted acquired AirTex, they also acquired short-term bank notes
payable of $300,000 from the Center National Bank. The notes had been outstanding for
several years, and Ted was concerned, since if the bank called the notes, it would put the
company into bankruptcy. As Ted
r
e
c
a
l
l
e
d
:

One of the people I called just before we bought the company was Hal
Lattimer, the manager of the branch we did business with. I took him out to dinner,
and over dinner, I told him about the company and how it was doing, as well as
some of my plans for the future. I said, "But we have this problem of the $300,000 I
owe you. I would love to convert that to a 24- month note to get it out of the short-
term category, so as to increase our working capital to

8
AirTex Aviation

800-269

make us more attractive to our suppliers. That way, we can get better terms from
them." He
looked at me and, without thinking it over, said, "Fine,
I'll do it."

He had made a gut decision based upon some good vibes, and I was shocked,
since I was prepared to negotiate with him. I thought to myself, "The basis upon
which business is done, at least with this man, is total candor and honesty." So, I
started this program of giving the bank our internal financial reports every month,
along with a cover letter summarizing what I was doing. Hal's reaction was great.
He thought it was the best thing he'd ever seen. No customer had ever done that to
him before. The result was that whenever I went to him - we paid off the loan ahead
of time - and said, "Hal, it looks as if I'm going to need $500,000 for 60 days," he
would say, "Yes, I've been following it. I've been watching your receivables
growing because of your extra business. I know a growing business needs money
from time to
time. It's no problem - I'll put the money in your account this
afternoon."

The
Accountin
g System
By the end of the second month, AirTex was producing a profit and loss statement
on the activities of each department. Each department kept account of its own sales,
receivables, inventories, expenses and, through the PO system, expenses initiated by the
department.

In order to provide a predictable and simple method of cost allocation which still
would be understood and "managed" by the department heads, Ted established an
Administration Profit Center which paid taxes, borrowed money, paid interest, utilities,
bills, and other general administrative expenses. The Administrative Department in turn
levied a series of monthly charges
to each
department as
follows:

• Social Security taxes, health insurance and other fringe benefits were charged to
departments
as a predetermined percent of wages. Thus, when a manager took on a new
employee, he or
she knew that it would cost the department, say, 125%
of the wage.

• Accounts receivable - a monthly charge based on the amount and age of the
receivables.

• Operating assets - including the Parts Department inventory and the Service
Department's
shop equipment - were charged to the departments using them on a predetermined
percent of
t
h
e
a
 s
s
e
t'
s
c
o
st
.

• Rent, fire and occupancy insurance, building maintenance and depreciation, and
other
occupancy costs were charged as predetermined rental per square foot of floor or
ramp space
o
c
c
u
p
i
e
d
.

• A predetermined percentage of sales which represented the cost of Ted's office

and the
Accounting Department was
also charged.

As all the charges were predetermined, calculated and announced twice a year, the
managers would control their expenses by managing their receivable balances,
conserving on equipment purchases, and varying the square footage they occupied. There
were never any unanticipated
expenses, and the charging rates were set for breakeven. As
Ted put it:

There was an interesting example of the effects of this system. AirTex had a
total of 5.2 acres of land, of which approximately 3 were for tie-downs that
accommodated approximately 60 aircraft. The fuel Department always wanted
more space because it meant that they could

9
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AirTex Aviation

accommodate more transient aircraft. The Flight School always wanted more space
to make it easier to manage their comings and goings. The Shop always wanted
more space as a service and convenience to customers leaving or dropping off
aircraft to be serviced.

Before the departments were charged for the area they occupied, there was no
way to intelligently resolve this conflict. Bill Dickerson, the former owner, or Sarah
would have to make what was essentially an arbitrary decision. With our system,
however, there was a definite price to be paid for demanding more space. And with
the manager's bonus system, 10% of that price came right out of the manager's
pocket.

The result was that we had very few of these discussions that did not reach a
natural compromise. And when, over time, each department truly needed more
space and was more and more willing to pay the rent, we raised the rent until
demand equaled supply. It was great
to see a free
market in action!

The Task
Guidance
System
As an aid towards educating departmental managers in the management of their
operations and
for keeping them aware of their activities, responsibilities and results, Frank and Ted
instituted a Daily Department Report (DDR), which required the departments to
submit internally consistent
operating and accounting information. Each department kept the customer account
information, and central accounting kept only receivables control accounts, which would
balance to each department's detail. The managers would account for their daily activity in
units and in dollars.

For example, the Flight School's DDR was prepared each morning by 11:00 a.m. and
reported the activity of the preceding day. The first set of entries on the report (see
Exhibit 4) detailed the sales made by the Flight Department by each type of sales. The
total represented all the revenue that was credited to Sales (indicated by (1) on the DDR).

The second set of numbers categorized the flow of funds into the Flight Department by
type - cash, credit card slips, or reductions in the block accounts3 or leaseback payments
due. The total of
these funds (indicated by (2) on the DDR) are the charges (debits), to cash, accounts
receivable or the block accounts payable.

The final group of items details the direct costs incurred in the production of revenue.
These
w
e
r
e
:

• The expenses incurred in utilizing leased training aircraft. These were, by contract,
a fixed
 amount per actual hour of
aircraft use.

• The wages due the flight instructors. These instructors were paid a contractual
amount for
each hour of instruction given. If the flight student was charged $60.00 per
instructional hour
by AirTex, AirTex would then owe the instructor $40.00
for that hour

• Cost of supplies - the direct cost of the items sold in the

Pilot Shop.

3 A block account represented prepaid flying lessons or aircraft rental. Cash was received in advance and
recorded as an
accounts payable by AirTex. The customer's flying activities were then charged (debited) to this account as
they occurred.
AirTex leased most of its instructional aircraft from private owners. AirTex contracted to pay them so much
per hour for use of the aircraft. Some leases were "wet," meaning that the aircraft owner furnished the fuel.
Others were "dry," meaning that AirTex paid for the fuel used.

1
0
AirTex Aviation

800-269

The total, (3) on the DDR represented the direct costs of the Flight Department
for that day.

Cash received in the mail and cash collected by the departments was deposited daily.
Photocopies of the checks were given to the departments for identification of source and
inclusion on
their DDRs. Ted
commented:

We would deposit the check and send the photocopies around to the
departments. Sometimes a check would come into AirTex from someone and no
one would know who it was. Sometimes it would take two or three weeks to find
out what it was for. It was passed around the various departments, but in the
meantime, we had the money. We couldn't account for it, so we put it in a little
suspense account. And, interestingly enough, sometimes no one accounted for it,
and it became administrative profit.

The detail of charge slips, photocopies of checks, and physical currency would be
attached to the
DDR and by 11:00 a.m. each department would turn them in to Accounting - with sales
balanced against receipts, inventory against fuel flows, and receivables proven-out. There
were still errors but they got corrected at the departmental level, although at least one
department had to hire an additional person to do the DDR.

The system left the Accounting Department with a simple task. They had DDRs from
each department, but only one sales figure from each. Thus, their postings were trivial. All
they had to do was post the DDRs and then worry about other corporate issues, like taxes.
Now, only one person was needed in accounting, and the detail was where it should be - in
the departments where it could be used.

Similar systems were put in place for the Flight School, Service Department and
Parts Department. For example, in Parts, a physical card was maintained for each
inventory item. To purchase, the Parts Department would issue a purchase order. When
the parts and invoice arrived, the total inventory balance was increased by the invoice
amount, and a copy of the invoice was sent to the Parts Department. They would update
their card balances for sales made. At the end of each month, Accounting would balance
its control account against the sums shown on the parts cards.

Another control was the requirement for each department to submit aging of their
accounts receivables to Accounting. Accounting would compare these amounts against
their control totals. As Ted put it, "We balanced the aging provided by the departments
against the books in central
accounting down to the penny. That gave us our
basic control."

A
i
r
c
r
a
f
t
S
a
l
e
s
While Ted was implementing the control system, educating the managers, dealing
with the creditors, and establishing a better relationship with the bank, Frank was dealing
with aircraft sales. Frank began by reestablishing AirTex's relationship with the Piper
Aircraft Corporation. He convinced them that AirTex was on its way to financial stability
and could not only sell but be able to inventory the requisite number of aircraft to maintain
dealer status. Frank negotiated the terms with Piper, involving Ted only with Piper's
reporting requirements.

A few years before, AirTex had been the largest Piper dealer in the territory, so Piper
was interested in the potential of the new management. Things went well until Piper
brought up the subject of their standard accounting reports. Frank and Ted were willing to
commit to purchase five aircraft in the first six months, but they balked at the standardized
reporting requirements which Ted
characterized as "factory-
oriented." He stated:

1
1
800-269

AirTex Aviation

I wanted to be basically independent. The reports weren't all that onerous. It

might have been childish, but it was partly, "I own this place and no one is going to
tell me what to do." It was also partly a feeling that I wanted to establish an equal
relationship with Piper. I did not want to come to them as a supplicant. For the past
several years, AirTex had always been begging Daddy Piper for handouts. I wanted
to establish a relationship with them that was one of equals. It was psychological,
but I also didn't want to waste the time of my people on something that I didn't
think would be productive. I told them they could have access to any of our reports
that they wanted, but that we wouldn't use their forms. They didn't like it, but they
bought it.

After obtaining the Piper franchise, Frank rehired the old salesmen, but personally
shepherded
the first aircraft sales through. The first one was, in Frank's word, "memorable." He
continued:

Our first sale was to a local car dealer. He wanted to buy the aircraft, but he
wouldn't pay for it until it arrived at San Miguel, saying, "In my business, you don't
pay for a car until you see it." Now we had to pay for it when we picked it up at the
factory, so I asked Ted how we stood. He said, "We have enough money although if
he doesn't pay for it, we won't make the next payroll, and we'll be out $200,000 for
however long it takes to get the airplane from Vero Beach to here. But I'm willing to
do it. Go do whatever you have to do." So we did. I engaged the son of the aircraft
salesman to fly the airplane. Unfortunately, there was horrible weather that
grounded him in Tuscaloosa, Alabama for a week. I nearly lost my mind. I had
committed every last cent the company had, and it was sitting in Tuscaloosa. That's
how tight things were.

Profitability of the aircraft sales activity proved to be highly variable between months.
For
example, while losses were shown in May and August 1990, several very high-margin
sales,
accounting for nearly $500,000 in operating profit, were made in the June-July
1990 period.

Manag
ement
Style
In running the company, Ted took an active role both through long hours of planning
and managing, and also through learning and doing. He learned to fly and got a multi-
engine
commercial license, changed the oil in the shop, and worked on the engines. It was, as
Ted said:

. . . a part of the process of being an avuncular, emotional leader. In the first

couple of years, I deliberately set out to make my role a teacher. The first thing I did
in my office was to put up a blackboard, and arrange the furniture so that there was
a sofa facing the blackboard and a chair turned towards it as well. My desk was at
right angles to the blackboard --all of us could see it. When departmental managers
would come to me with a problem, rather than focusing on the problem, we would
talk about the process. I would say, "Where is your accounting data? Where are
your profit center reports? What do your profit center reports tell you about this
problem? What thought processes did you go through to extract information from
the profit center reports that would help you solve this problem? What alternatives
 did you consider?" And I did this in a typical Socratic teaching process. Through
Frank's and my personal involvement in the company, and through this teaching
approach, we could not only obviate Frank's forecast of bankruptcy in three months,
but we could rely on our managers and build for the future.

1
2
 -13-

Exhibit 1 Balance Sheet for AirTex Aviation (in thousands)

800-269

Assets 8/26/ 1/1/90 Liabilities and Net Worth 8/26/8 1/1/90

Cash and Marketable Securities 89 $440 Accounts Payable - Trade 9 $250 580
Accounts Receivable $4 245 Accounts Payable - Phillips oil $310 165
Contracts Receivable -- current 0 75 Contracts Payable -- current 560
Financing Commissions Due 12 100 Customer Deposits 155
Receivables from Officers and Employees 5 -- Notes Payable
Other Receivables 25 Accrued Expenses
Inventory: 5 Deferred Block Time
10
0
34
0
7
0

Aircraft 165 Other

Curre
nt
Liabili
ties
0

1
5
5

1
7
5

2
0

1
0
 Parts and Flight Supplies 250 225 Total Current Liabilities 1660 1365
Fuel 65 125 Contracts Payable - long term 205 450
Work in Progress 35 10 Long-term debt 2120 170
Prepaid expenses 35 150 Total Liabilities 3985 1985
Total current assets 1480 1885 Net Worth (85) 310
Fixed Assets (net) 2185 135 Total Liabilities and Net Worth $3900 $2295

Contracts Receivable - long term - 1

Investments 145 3
-
Other 90

Total Assets $390 $2295

0

Exhibit 2 Pre-Purchase Organizational

Chart

c c o u n tin g
A
 P ent
B ill D ick ers on
r
F u e l L in e
e
s
i
d
S a ra h A rt h u r Pa rts F lig h t Avion ic s Airc ra ft S a le s
C arl G reen R o y D o u g la s L eon P raxis ( d is c o n t in u e d )

W ill L eon a rd S e rv ic e C arl G

reen

Sales -- $118,540 Sales -- $69,435 Sales -- Sales -- Sales -- $114,500

G ross -- $47,625 G ross -- $20,595 $585,815 $8,065 G ross -- $6,585
Net -- ($67,310) Net -- ($12,125) G ross -- G ross -- Net -- ($53,490)
$329,830 $4,360
Net -- Net --
($25,470) ($5,100)

Exp en ses -- $392,350 Sales -- $1,051,565 G ross --

$539,465

Net -- $130,880
Sales, Gross Profit Margin, and Net Income were for the four months preceding purchase - September-December, 1989. Profit was calculated from the extant accounting system, which fully allocated

administrative costs.

617.783.7860.
800-269

AirTex Aviation

Exhibit 3 Floor plan of

AirTex Aviation

1
4
AirTex Aviation

800-269

Exhibit 4 Flight Department

Daily Report

S
a
l
e
s

Primary
Ground
School
Flig
ht
Instr
ucti
on
Leaseback
Owner's
Rental
R
e
n
t
a
l

(
S
o
l
o
)

Flight Supplies and Over Counter Sale -

Retail Sales
Sales
Tax
Collec
ted
C
h
e
c
k

R
i
d
e
s

W
a
i
v
e
r

Car Wash and Aircraft Wash,

and Tie-downs
Student
Tuition Refund
Fee
E
nr
ol
l
m
en
t
Fe
e
Interest
Service
Charges

Cost of TOTAL
Sales
Leaseback
Expenses
R
e Instructor Wages
c Cost of Supplies
ei Sold Today
p
ts
Cash or
Checks
Credit Card TOTAL
Payment
Block Accounts and Block Account
Supplies AirTex Charges and AirTex
Charge Supplies
Master Charge
and Visa TOTAL
Leaseback
Refunds

Direct
$_________ (1) (2)

$
_
_
_
_
_
_ $___
_ ____
_ __(3)
_

1
5
800-269

AirTex Aviation

Exhibit 5 Summary Income Statements by Activity: January-February

1990 (in $000s)

Parts and Avionics Flight

Fuel Aircraft
Service Training
Activity
Sales
Sales 78.5 0 125.5
313 439.5
Cost of Product 28.5 7 52
204.5 382

Salaries & Commissions 17.5 - 30

39 2.5
Payroll-related Expenses 3.5 - 5.5
5 -
49.5 7 87.5
248.5 384.5
Gross Margin 29 (7) 38
64.5 55
Other Expenses 34 .5 22.5
55 39.5
Operating Profit (5.0) (7.5) 15.5
9.5 15.5

Exhibit 6 Summary Income Statements by Activity: May

1990 (in $000s)

Parts and Flight Fuel

Aircraft Charter*
Service Training
Activity
Sales
Sales 65 207 315.5
225.5 8
Cost of Product 19.5 109.5 166.5
214.5 7
Direct Payroll 25 46.5 41.5
- -
Commissions - - 5
- -
Payroll-related Expenses 4 5.5 9.5
- -
48.5 161.5 222.5
214.5 7
Gross Margin 16.5 45.5 93
11 1
Other Expenses 32.5 33 49
31 .5
Operating Profit (16) 12.5 44
(20) .5
* Charter activity
started in May.
Exhibit 7 Summary Income Statements by Activity: August
1990 (in $000s)

Parts and Flight Fuel

Aircraft Charter
Service Training
Activity
Sales
Sales 132.5 177 327.5
111.5 61.5
Cost of Product 46.5 93 168.5
99.5 34
Direct Payroll 23 39 7.7
- 3
Payroll-related Expenses 4.5 4.5 13.5
- -
74 136.5 220.5
99.5 37
Gross Margin 58.5 40.5 107
12 24.5
Other Expenses 33.5 30 14
43 12.5
Operating Profit 25 10.5 93
(31) 12

1
6