FAA Finds Landing Gear Not Properly Maintained

One of the cogent risk factors when dealing with a company like AAR is the very fact that they are intimately intertwined with many important aspects of airline maintenance and repair, and as such, are responsible for the work they perform on these planes and anything that may go wrong with the work they do.

Along those lines, on March 25th, the FAA issued a Unapproved Parts Notification (UPN) letter that stated that during a multi-year investigation, which lasted from the start of 2001 through Nov. 26, 2007, the FAA found that the AAR landing gear service center in Miami “improperly maintained and approved for return to service” parts used in Boeing (NYSE: BA) 707, 747, 757 and 767 planes.

The part in question is called a landing-gear truck beam.

The truck beam is the main component of the landing gear. It goes across the entire component from axle to axle, and looks like an upside-down T.

This vertical bar acts as a shock absorber and is very important in terms of landing stability and strength of the entire mechanism.

What Happened

The FAA’s notice refers to an enamel paint applied to the inside, or “bore,” of the horizontal bar, and the potential for that paint to obstruct a drainage hole in the beam, thus masking potential corrosion and preventing proper drainage.

It wasn’t until a report in today’s Wall Street Journal that AAR’s stock reacted to the news, since this report was filed on March 25th.

The report stated that: “Evidence indicates AAR landing gear services approved truck beams for return to service that were not maintained in accordance with the manufacturer’s maintenance manuals.”

The FAA said problems with the parts included, but were not limited to, the inappropriate application of gloss enamel on the inside of the beams. The probe involved more than 300 parts.

The agency urged aircraft operators and contractors to inspect landing gear, hold off on installing spare truck beams affected by the alert or “take appropriate action” on parts already in place.

AAR Responds

Company Says Not At Fault; Compliant With Regulations

In a statement, AAR said that the FAA notice does not require taking corrective action, change the time a landing gear with painted interior surfaces can remain in service or require the removal of any landing gear from service.

The statement further said that:

“Painting the internal bore of landing gear beams has been an industry standard practice for years. The paint is applied as an additional layer of protection against the environment, thereby inhibiting corrosion from forming. While, the requirement to paint the internal bore, previously contained in the Boeing manual has been dropped as a requirement, painting of the internal bore continued to be a standard industry practice.

The FAA referenced an airworthiness directive in the UPN, which it appears is not applicable to the application of paint to the inside surfaces of MLG truck beams.

Rather, the airworthiness directive applies to operators of 757-200s and -300s with respect to periodic in-service landing gear inspections designed to ensure that the aft drain hole of the main landing gear truck beam is clear.

The enamel paint applied to the inner surface of the truck beam, is not the subject of the airworthiness directive and the paint does not extend to the area where the drain hole is located.

When performing MLG overhauls pursuant to the maintenance manual, AAR complies with the airworthiness directive and related alert service bulletins on behalf of the operator and ensures that the drain hole, which is the subject of the referenced airworthiness directive, is open.”

The FAA issued a safety notice about the lapses last week as a number of high-profile reports regarding aircraft maintenance concerns were becoming known.

The FAA also urged aircraft operators and contractors to inspect the landing gear in question, and to hold off installing spare truck beams affected by the safety alert or “take appropriate action” on parts already in place.

In addition, the agency requested “any information concerning the discovery of the Boeing series (main landing gear) truck beams from any source,” suggesting a possible widening of the investigation.

AAR said in a prepared statement that Boeing stated that it “finds that although we prefer the finish application as currently called out, the alternate finish application … should be considered equivalent.”

Unapproved parts notifications are issued much less frequently — about 10 to 15 times per year — than other types of FAA alerts, agency spokeswoman Alison Duquette said.

“Any time there’s a potentially unsafe part in the system, we take that very seriously,” she said.

Duquette said she didn’t know what the safety implications of the alert would be as the FAA is continuing to examine the issue.

Last week, AMR Corp.’s American Airlines (NYSE: AMR) and Delta Air Lines Inc. (NYSE: DAL) canceled hundreds of flights to inspect wiring bundles on some of their planes. That round of checks came after the FAA ordered maintenance records at all domestic airlines examined after the agency came under fire its handling of missed safety inspections at Southwest Airlines (NYSE: LUV).

The issue involving AAR is unrelated to that round of inspections, Duquette said.

More to the Story

TheStreet.com Weighs In

This is where it gets interesting as far as I am concerned.

According to an article by TheStreet.com (NASDAQ: TSCM), a US Airways (NYSE: LCC) plane that was apparently serviced by AAR Corp., collapsed under the weight of refueling on October 28th, 2007 as the left landing gear beam failed.

The article further states that the plane was parked at a gate at Charlotte/Douglas International Airport with 195 passengers aboard when it collapsed. Fortunately, no one was injured, but had the failure occurred at a far more vulnerable time, say upon landing, the consequences could have been far more grave.

Further, according to the article, AAR said its maintenance did not cause the US Airways incident and stated:

“It is our understanding that the NTSB (National Transportation Safety Board) believes the cause of the US Air incident that apparently gave rise to this notice was stress corrosion unrelated to paint on the landing gear truck beam.”

But the allegations get worse.

According to the author, a person familiar with the procedure questioned that explanation.

The article states:

“Within the horizontal bar of the truck beam is a drain hole, which allows water to leak out. When AAR applied the enamel coating, “they put the coating in so heavily that it blocked the drain hole,” said the person, who asked that his name not be used. Blocking the drain would allow moisture to build, which would lead to corrosion, which could cause the gear to collapse, the person said.”

AAR said, however, that “the paint that is applied to the internal bore of the truck beam does not even extend to the area where the drain hole is located.”

Meanwhile, John Goglia, a maintenance safety consultant who is a former member of the National Transportation Safety Board and a former US Airways mechanic, said the Boeing ruling does not excuse the company.

“They failed to follow published procedures to repair the part, so it was not legal to install the part on an airplane,” he said. “If they get approval to do alternate means, that’s fine, but they are supposed to get it before they do the work.”

What Does This Mean for Us?

Quite frankly, we’ll have to see.

Currently, it doesn’t mean much since this aspect of AAR’s business is pretty small in the grand scheme of things, and since the FAA did not order a recall, or for AAR to fix the problem, there is no immediate impact to their business and bottom line.

That being said, AAR’s business is based on reputation. If it comes about that AAR is not properly adhering to FAA standards, or just simply “messed up” in this case, their reputation as a solid and trustworthy Maintenance, Repair and Overhaul (MRO) provider could suffer immensely.

This cost cannot be measured in dollar or absolute terms, as it extends far into the future, and potential business that might or might not come their way as a result of that perception.

AAR services hundreds and thousands of airplanes and parts every single year. A slight mishap like this is unfortunate, but not totally unexpected when you deal with so many divisions, parts, MRO facilities and staff.

Because AAR is well respected and known within the industry, and has had very few of these incidents over the years, it is more than likely that this will blow over, AAR will fix the problem, and make sure that they are more stringent and adhere more closely to widely held industry norms and practices and not deviate from them when applicable.

Bottom Line

The be quite honest, if it weren’t for this report coming out last night in the Wall Street Journal, none of us would have probably ever heard of this FAA mandate.

But because airline maintenance has come under more scrutiny in the last few months starting with Southwest airlines grounding planes that weren’t maintained properly, this is now becoming a larger and more “press relevant” issue.

That being said, I don’t want to jump to any conclusions on AAR, and because of their past track record, will give them the benefit of the doubt.

I’ll be keeping a close watch on any new developments with AAR concerning this or other possible lapses and adjust my original investment thesis accordingly.

As it stands now, I’ll be taking a wait-and-see approach, and maintain my current BUY recommendation on AAR’s shares, and advise you to buy on any weakness as we saw today by the market’s overreaction to a story that happened to get some widespread publicity.

• Click here to read the complete AAR Corp. research report and buy recommendation | PDF (516 KB)

*Variables You Should Know About AAR Corp. (NYSE: AIR)
Current Recommendation:	BUY
The Company:	AAR Corp. provides products and services to the aviation, aerospace, and defense industries worldwide. It operates in four segments: Aviation Supply Chain; Maintenance, Repair, and Overhaul (MRO); Structures and Systems; and Aircraft Sales and Leasing.
Why Buy Now:	Excellent risk/reward profile at current price Margins are improving US military and defense spending will continue and could possibly increase in the foreseeable future Diversified company, operating in 4 primary segments with no segment representing more than 50% of total revenue and each one showing double digit growth The beauty of their operations lies in the synergies that exist between all their business segments There are no direct competitors that do exactly what AAR does Seasoned management
Market Cap:	$1,010.0
Revenue (TTM):	$1,299.6
Cash/Debt:	$40.1/ $368.6
Current Price:	$26.00
Risk Rating (?):	5 (Average)
Position Size (?):	1/2 (10-22-07), 1/4 (1-8-08), 1/4 (1-9-08), 1/4 (3-3-08)
Buy Around Price (?):	$30.00 (10-22-07), $34.00 (1-8-08), $31.25 (1-9-08), $26.00 (3-3-08)

*As of 4-1-08. Except share price, all values in millions.