FlightSafety International, Inc. History

Address:

Marine Air Terminal
LaGuardia Airport
Flushing, New York 11371
U.S.A.

Telephone: (718) 565-4100
Fax: (718) 565-4134

Wholly Owned Subsidiary of Berkshire Hathaway Inc.
Incorporated: 1951 as Flight Safety, Inc.
Employees: 3,125
Sales: $410.9 million (1997)
NAIC: 611512 Flight Training

Company Perspectives:

Since the very beginning, the corporate mission of FlightSafety International has been kept clearly in focus. We are a training company, which means that training is our service, our area of specialization, our reason for being. Training is our business. A commitment to high-tech, high quality training has made FlightSafety a leader in the effective preparation of individuals who must accept the responsibility of uncompromised proficiency. With our roots firmly planted in aviation, FlightSafety is known around the world for the training of pilots in all categories&mdash′ivate, commercial, airline and military. The training of aircraft maintenance technicians, dispatchers and additional aircraft support teams has added to FlightSafety's reputation as an all-encompassing aviation training company.

Company History:

FlightSafety International, Inc. (FSI) is the largest provider of pilot training services to the general aviation, corporate, military, and commercial airline markets. The company operates simulation centers worldwide and manufactures flight simulators. It has few major competitors. FSI trains military personnel through its FlightSafety Services Corp. subsidiary. FlightSafety Academy in Vero Beach, Florida, provides primarily flight training to potential airline pilots. MarineSafety International trains ships' crews.

Origins

The need for the kinds of services that FSI provides can be traced to the fact that an estimated 65 percent of airline accidents may be attributed to human error. Independent providers of pilot training emerged because of cost considerations as well; simulator training was far less expensive and, of course, less risky than doing the training in the aircraft itself. FSI founder Albert Ueltschi tells a story of teaching an army pilot, in 1939, how to do snap rolls in an open cockpit plane. Apparently, when the plane rolled, Ueltschi's seat broke free from the plane, and he was unable to get his parachute open. Nevertheless, he was able to walk away from the accident. The flight training his company would offer would be far less risky. Flight simulators would enable pilot trainees to practice both normal and emergency procedures under controlled conditions.

FSI got in on the ground floor of an emerging airline industry in the 1940s and 1950s. In 1942 Albert Ueltschi hired on with Pan American Airlines, operating "flying boats" that flew out of Flushing Bay. Four years later he began working as the personal pilot for Pan Am founder Juan Trippe. At that time, corporations were buying up military planes left over from World War II and converting them for their own private uses. Many of the pilots, however, did not have any specific training on the planes they were being hired to fly. Sensing the opening of a profitable business specializing in flight training, Ueltschi started Flight Safety, Inc. in 1951.

Initially, Ueltschi was strictly a service provider, hiring moonlighting pilots from the major commercial airlines to train pilots flying private planes for corporate executives. Training was generally done in the clients' aircraft, along with some instrument trainers rented from United Airlines. Operating out of Pan Am's LaGuardia Terminal, some early clients included Eastman Kodak, Burlington Industries, National Distillers, and other companies that required training for the pilots of their corporate fleets--the dominant segment of airline traffic at the time. Perceiving that a demand might later exist for updated training services, Ueltschi mortgaged his house for capital.

The company grew by stops and starts, and, with the firm's future uncertain, Ueltschi kept his job at Pan Am. He would fly as Trippe's personal pilot for 17 years. Using his salary at Pan Am for living expenses, Ueltschi plowed all of FSI's profits back into the company. This high rate of reinvestment strategy was vital to keeping the company afloat in its early years and eventually led to large profits and strong sales growth.

Nevertheless, Ueltschi took some big risks to get the company off the ground. For instance, he raised $69,750 in investment capital by convincing some of his early clients to put up the money as prepayment for five years of training services for the crews of their corporate fleets. This gave Ueltschi the cash, without the debt load, to buy his first Link Trainer. The Link Trainer, a flight simulation machine used by the army in the 1930s and later to train pilots during World War II, was a mechanically controlled flight trainer designed to teach mail-carrying pilots how to "fly blind" on an instrument panel.

Soaring Safely Through the 1970s

After nearly 20 years, FSI achieved stable growth rates, and Ueltschi's growth prospects and markets hinged in large part on his success at training pilots. Essentially, he had to convince aircraft manufacturers that he could do a better job of training pilots for their own aircraft than they could themselves, and for less money. Prior to the development of the "training industry," the aircraft manufacturers generally had included the cost of initial flight training in the price of a new plane. Gradually, the manufacturers looked toward specialization on production and opportunities arose for companies like FSI to develop and specialize in the training business. For example, companies like Learjet realized, after a couple of bad accidents, that they should specialize in production and design and leave the training to experts. Learjet, in fact, became the first corporate jet manufacturer to sign up with FSI, which set up a training center with a Learjet flight simulator at the company's factory, providing initial and updating of training of pilots for new models.

This success led to other contracts with the airline manufacturers, and by the late 1970s Ueltschi's company had signed similar deals with 12 other plane makers, including Airbus Industrie in France. The business arrangement was the same for all clients: Flight Safety provided the initial training for the buyers of the new planes and trained their pilots at both a company training center and using simulators near the manufacturing facilities. Furthermore, pilots returned periodically for refresher courses, thereby creating more revenue and new markets for the company.

Flight Safety had become very successful, allowing Ueltschi to take the company public in 1968, although he maintained control of 34 percent of its outstanding common stock. From 1973 to 1977 the company's revenues rose by an average annual compound rate of 22 percent and earnings by 35 percent. Return on equity was 23.2 percent in 1978, and its stock price nearly doubled that year.

Markets also were expanding rapidly for Flight Safety. Even the commercial and commuter airlines, which, in large part, trained their own pilots, began to give some of their spillover business to the company. In addition, to ensure a steady supply of simulators, with demand growing for training services, Flight Safety purchased its own simulation systems division out of Tulsa, Oklahoma. The division built simulators for use by Flight Safety as well as for sale to the airlines.

With the large growth in new business in the 1970s Ueltschi changed the name of his company, adding "International" to create FlightSafety International, Inc. The company grew continuously from the late 1970s, virtually unimpeded. Continuing his high reinvestment policy, Ueltschi invested in a marine simulator at LaGuardia Airport to train operators of supertankers, or natural gas carriers. Ueltschi then launched agreements with 16 companies, including Texaco, to train ship crews.

With the company in solid competitive position at the onset of the 1980s, Ueltschi was poised to take further risks. Moreover, the aviation industry was expanding rapidly, pulling much of the airline services industry up with it. FSI branched out into military pilot training and, later, began to challenge commercial airlines for a portion of their pilot training market.

In 1984 the company successfully competed for an Air Force contract. The Air Force had begun to contract out flight training at Fort Rucker in Daleville, Alabama. To get a jump on the competition, Ueltschi bought land next to the base and installed a flight simulator. With this move Ueltschi usurped the contract bidding process and immediately won business from the nearby base. By the time the official contract competition was under way, FSI easily won the contract.

During this time, FSI had virtually monopolized the corporate pilot training market, prompting its main competitor, Singer Company (whose SimuFlite division ran a training center in Dallas, Texas), to sue FSI in 1984 for anticompetitive practices. Singer's suit claimed that FSI maintained too close a relationship with airplane manufacturers, allowing FSI to overtake the industry and exclude others from entering the market. Singer eventually dropped the suit, however.

Competition in the 1980s came mainly from the airline companies as FSI focused on the commercial airlines market. To penetrate the passenger airlines market, FSI needed to convince the commercial carriers that it would be cost-effective to purchase training services rather than to train pilots in-house. One of FSI's first moves into commercial industry pilot training was launched in 1989 through an agreement with Trans World Airlines (TWA). This new venture would make FSI the main source of trained pilots for TWA. Working out of a St. Louis-based training center, FSI began its Advanced Flight Crew Training Program. This project was part of a major capital spending program aimed mainly at the commuter aircraft training market. Furthermore, as government and the military further privatized, FSI won more contracts. The MarineSafety International and PowerSafety International divisions also expanded. Record earnings in 1989 reflected the boom: revenues were up $168.15 million, and net income grew 29 percent to $46.7 million.

Outsourcing in Vogue in the 1990s

As FSI entered the 1990s, it maintained its hold over the flight training industry with more than 100 simulators around the world and close connections with virtually all airplane manufacturers to train their customers. The company had a healthy cash flow and annual earnings growth of more than 15 percent from 1986 through 1990. Its closest competitor, SimuFlite, fell victim to a corporate raider, a casualty of the 1980s.

The commercial airlines also seemed to realized the cost-cutting potential of specialization by tapping FSI to conduct flight crew training. Furthermore, insurance companies writing policies for the airlines began to reduce premiums on those pilots who attended refresher courses to keep in top form on the latest equipment. All these factors pointed toward an increasing demand for flight training.

FSI not only sold its services to carriers in the United States but also to airlines in Europe and Asia. By early 1992 the company prepared to tap into the Latin American airline carriers markets. According to James Waugh, FSI's vice-president of marketing, the company was able to support Latin American carriers that had not achieved the critical mass necessary to support in-house training facilities. To support this move, FSI began relocating several transport category full-flight simulators to a newly acquired Miami site to serve the Latin American airlines that were upgrading their fleets. In addition, FSI continued its practice of opening up simulators near manufacturing plants. For example, the company opened a training center, equipped with Boeing simulators, near a Boeing plant in Seattle.

The increasing trend toward contracting out of airlines' technical services boded well for FSI's future commercial carrier business as more airlines sought services such as crew training from outside contractors. Furthermore, while most labor union agreements previously kept such services in-house, the airlines successfully applied leverage over new agreements to slash costs by contracting out. FSI evolved along with this trend, seizing an increasing share of the crew training business. In fact, the share of FSI's revenues from commercial and commuter airlines customers rose steadily throughout the early 1990s. With this shift in focus, the company looked to build new facilities close to airline markets, mostly near airports.

FSI expanded its business worldwide and rapidly increased its share of the commercial airline training business. In fact, 20 percent of FSI's revenues was derived from contracts with U.S., European, and Asian airlines. At its Vero Beach, Florida facility, FSI trained pilots for Air Afrique, All Nippon Airways, Asiana Airlines of Korea, Swissair, Australia's Tyrolean Airways, Air France affiliates Air Inter and UTA, and others. FSI also signed a contract with Taiwan's China Airlines to develop a cockpit resources management training system. Further solidifying FSI's competitive position was the purchase of the visual systems division of McDonnell Douglas. This allowed FSI more direct control over the production of visual systems as well. Pointing to its capital expansion plan (which called for development of not only the Miami training center but also centers in Texas, Arizona, and Hong Kong), its solid cash flow position, and its large orders from government agencies, analysts considered FSI well positioned to continue its lead in the industry.

FSI also manufactured simulators, which accounted for $52 million of its $297 million in revenues in 1993. By the mid-1990s, consolidation transformed the simulator market as it had the aircraft manufacturing industry. CAE Electronics and Thomson Training and Simulation both sold more airliner simulators than FSI, which manufactured more business jet and regional aircraft simulators. It delivered about a dozen full-motion simulators a year, only three of which were for airliners.

Revenues were about $326 million in 1995. At the time, about 1,000 FlightSafety instructors were training 50,000 pilots and maintenance technicians on 100 simulators for 50 different aircraft types. FSI continued to expand, planning a training center at Kunming Airport in southern China.

Life Under Berkshire Hathaway in the Late 1990s

As the airline's rising fortunes promised more aircraft orders, FlightSafety became an attractive target for Warren Buffet's Berkshire Hathaway Inc. holding company. FSI became part of the $8 billion a year conglomerate in 1997. The sale was worth $1.5 billion in cash and stock.

Boeing also had considered buying FSI, as the aircraft manufacturer had long provided introductory training for its customers. The two did enter into a joint venture, firmly establishing FSI in the training market for large airliners. FlightSafety Boeing Training International focused on aircraft with 100 seats and more. Like FSI itself, the joint venture saw training of maintenance personnel as an important growth area.

FlightSafety exploited new PC capabilities by delivering additional training materials in the form of its LearnLinc software. The program had the capacity to link to the Internet. FSI also delivered simulator training at Florida's Embry-Riddle Aeronautical University.

FlightSafety Boeing planned to open an $85 million facility in London in 2000. In March 1999, FlightSafety Boeing broke ground on a $100 training center in Miami expected to attract 7,000 pilots and 3,000 maintenance a year, many from Latin American airlines. FSI also opened facilities in Houston, Fort Worth, Cincinnati, and Memphis in the United States and in Manchester, England. MarineSafety International had grown as well, training crews for 100 different types of vessels in Newport, San Diego, and Rotterdam.

Principal Subsidiaries: FlightSafety Services Corp.; MarineSafety International, Inc.; FlightSafety Boeing Training International (51%).

Principal Divisions: Simulation Systems Division.

FlightSafety International, Inc. History

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