First Aviation Services Inc. Comments to Shareholders at Annual Meeting.

WESTPORT, Conn.--(BUSINESS WIRE)--Oct. 7, 1998--Shareholders of First Aviation Services, Inc., (NASDAQ: FAVS) appointed Michael C. Culver and Robert L. Kirk as company directors at the firm's annual meeting, which was conducted September 23 at the Harvard Club in New York City. Shareholders also ratified the appointment of Ernst & Young LLP as the Company's independent auditors for the fiscal year ending January 31, 1999.

First Aviation is a leader in providing services to aircraft operators worldwide, including repair and overhaul of gas turbine engines and accessories, and distribution of new and remanufactured parts.

Mr. Culver, who also is First Aviation's President and CEO, and Mr. Kirk will serve on the Board of Directors until the company's Annual Meeting of Shareholders in 2001, and until successors are duly elected and qualified. First Aviation's other board members are Joshua S. Friedman, Aaron P. Hollander (Chairman), John A. Marsalisi (Vice President and CFO) and Charles B. Ryan.

Following the appointments, Mr. Culver and Mr. Hollander outlined trends in First Aviation's markets and the company's position in those markets, as well as elements of management's strategy to increase annual sales to between $700 million and $1 billion over the next five years. Net sales in 1998 were $153.6 million.

Mr. Culver opened, "I would like to take some time to talk about three subjects: trends in the aviation services business, an update on NAC and API, and acquisitions.

Firstly, trends in the business:

The market is migrating away from a hardware orientation to totally integrated solutions. What the market is telling us is that they want suppliers to wrap value-added services around products. Original Equipment Manufacturers ("OEM") are moving away from "razors and blades" to total lifecycle programs, such as aircraft by the hour, power by the hour, and landing gear and brake maintenance by landing cycle.

The flight to value rather than just cost is gaining momentum. Customers are starting to move away from purely cost-based competition toward value-based competition.

Outsourcing continues to accelerate. Operators are analyzing their cost structure on an activity basis and are identifying and outsourcing non-core tasks. We can sell value-added services to customers that understand their "all inclusive" costs.

Technology, in the form of software, is optimizing every aspect of the industry. An example is National Airmotive's CARS shop floor and MRP systems. These systems help make NAC one of the most productive engine repair and overhaul companies in the world. At API, Electronic Data Interchange is reducing our customers' costs of transacting business.

The barriers to competition created by national boundaries are eroding. This allows API to expand into Europe and Asia without locating branches in each country in those regions.

The industry continues to consolidate. Large technology investments are required to offer the market value-added services at reduced costs. Volume provides the ability to pay for these investments, while at the same time reducing unit costs. Scale is driving consolidation."

First Aviation is well positioned to benefit from these market changes.

Secondly, operations:

At NAC, four initiatives are helping to improve margins, increase levels of productivity and renew our focus. Those include a 20% reduction in force, which took place at the end of March; the movement to a product-line organization which took place about 24 months ago; a thorough reengineering of our management practices; and a decision we made fifteen months ago to aggressively pursue U.S. Government business.

The results of these initiatives are that gross margins are running at approximately 15% this year versus 13.2% last year; our sales per employee, already high for our industry, are up 8% over last year; and we have recently won approximately $200 million of U.S. government contracts in the T56 market.

"These recent wins have solidified our leadership position in the T56 market and validated our decision to aggressively pursue the U.S. Government business," Mr. Culver said. "The U.S. Government owns 50 percent of the installed base of T56 engines, the government is a good customer in a low-growth economy, and we project defense spending for readiness will increase in the coming years."

The Industrial market is a very attractive business for NAC. Customers do not consider the internal capability to overhaul gas turbine engines as a necessary, core competency and are willing to use competent third-party suppliers. Further, the customer is willing to pay for value. For instance, we have been able to sell maintenance and overhaul programs on a "fired hour" basis, which is much like power by the hour in the aero market. This gives us the opportunity to use serviceable material and to schedule a consistent workflow, again improving margins. The customer also benefits because NAC has a financial incentive to keep their engines running as long as possible, giving the customer cost savings and smoothing cash flows.

The Light Turbine Group has not performed up to expectations, Mr. Culver advised, but noted that NAC President, Raj Sharma, recently began implementing the same reengineering processes that were successful for both the Large Turbine and Industrial groups.

"We expect to see improved margins in this group as these reengineering projects are effected," Mr. Culver said. "On a positive note for this group, the PT6 product line is growing and ahead of budget."

Mr. Culver said API has surpassed expectations in terms of growth and in developing opportunities that allow the company to move away from pure-price based competition; enter new market segments, such as inventory management and logistics support; and enter new regions of the world. He noted that in the last six months, API CEO, Jerry Schlesinger, has worked to create new services for customers who have indicated they want to outsource non-core tasks.

"As an example," Mr. Culver explained, "we recently won a contract to provide logistics support to a major cargo airline where we are managing certain consumables requirements system-wide. We provide petroleum-based products to over 150 stations around the world. Instead of the airline managing the distribution process and making multiple purchases of oil and hydraulic fluid, thus incurring high soft costs, API provides the airline with one invoice per month and a series of management reports. Our relationship with this airline continues to grow."

"When we bought API," he continued, "we wondered if we could change the traditional role of suppliers. We focused our efforts on developing and marketing API as a service provider to OEMs. As part of this process, we changed our definition of the OEM from one of being purely a supplier of parts to being a customer of services. We believe we are starting to see positive results. Sophisticated suppliers, OEMs, operators, and customers understand total supply chain costs and are redefining their product offerings. Activity-based costing is accelerating the move to outsourcing non-core tasks and has given First Aviation an opportunity to wrap services around products. We hope to make more announcements along these lines in the next six months."

"Acquisitions are very much a key element in our strategy to grow First Aviation Services to between $700 million and $1 billion over the next five years," added Chairman Aaron Hollander. "In the last eighteen months, we have pursued all logical acquisitions, both for the engine business and the parts distribution and logistics business. While Michael and I have always been disciplined, the public market experience has further increased our resolve not to forsake long-term opportunity for short-term gain. We are unwilling to pay high prices only to be left with punishing leverage. Our balance sheet continues to be strong and we believe this will be helpful in executing strategic acquisitions."

"First Aviation is committed to offering solutions that make money for our customers," Mr. Culver said in his concluding remarks. "A significant portion of our management's incentive compensation is based on economic value-added, or EVA. We believe this aligns their objectives with the objectives of shareholders. As most of you know, a significant portion of Aaron's and my net worth are tied to the success of First Aviation Services. The whole organization is committed to creating shareholder value."

First Aviation is a worldwide leader in providing services to aircraft operators of some of the most widely used military, commercial and general aviation aircraft, as well as to operators of industrial engines. Its operations include National Airmotive Corporation located in Oakland and Long Beach, California, as well as Houston, Texas, which specializes in the repair and overhaul of gas turbine engines, and Aircraft Parts International, the fastest growing supplier of aircraft parts and services to the general aviation and commercial airline market in the United States, headquartered in Memphis, Tennessee. First Aviation Services continues to pursue growth opportunities through acquisition and product line expansion.

Forward-Looking Statements

The Company from time to time may discuss forward-looking information. Except for the historical information contained in this release, all forward looking information are estimates of the Company's management and are subject to the various risks and uncertainties including the Company's ability to obtain parts from its principal supplier on a timely basis, the ability to consummate suitable acquisitions, the ability to expand its remanufacturing capabilities and other items that are beyond the Company's control and may cause results to differ from management expectations.