1 AeroStrategy © 2008 AeroStrategy Outlook For The Global Aerospace Maintenance, Repair, And...

1AeroStrategy

© 2008 AeroStrategy

Outlook For The Global Aerospace Maintenance, Repair, And Overhaul Market

Implications For Wichita

Presented by

Kevin Michaels

Ann Arbor, Michigan • Amersham, United Kingdomwww.AeroStrategy.com

2AeroStrategy


Why MRO Matters

Agenda

The Global Aerospace MRO Market


3AeroStrategy


Most Capital Goods Industries Are Shifting To A Greater Emphasis Of Service Revenues

• American businesses and American businesses and consumers spend more than $1 consumers spend more than $1 trillion on aftermarket servicestrillion on aftermarket services

• Businesses earn 45% of gross Businesses earn 45% of gross profits from the aftermarket, profits from the aftermarket, although it accounts for just 24% of although it accounts for just 24% of revenuesrevenues

Source: Cohen, Agrawal, Agrawal (HBR, May 2006)

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The IBM Journey Is An Excellent Example Of The Shift To Services

IBM Revenue ($B)

• In 1991, services In 1991, services accounted for 20% of accounted for 20% of IBM’s revenueIBM’s revenue

• In 1993, Lou Gerstner In 1993, Lou Gerstner became CEO and became CEO and emphasized services as a emphasized services as a growth vehiclegrowth vehicle

• By 2004, services By 2004, services comprised $42.6B in comprised $42.6B in revenue – 44% of IBM’s revenue – 44% of IBM’s revenuerevenue

LouGerstner

ServicesServices

$13 B$13 B$42 B$42 B

Sources: CNET News.com, IBM

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Spending On Aerospace Maintenance, Repair & Overhaul (MRO) Is Equivalent To Manufacturing

2007 Aircraft Production And MRO Markets ($B)

Sources: OAGback/AeroStrategy, Teal Group

$117 B$117 B$116 B$116 B

6AeroStrategy


Spending On Aerospace Maintenance, Repair & Overhaul (MRO) Is Equivalent To Manufacturing

2007 Aerospace MRO Market$117 $B

Sources: OAGback/AeroStrategy

ServiceServicePartsParts

• Service parts account for Service parts account for more than 25% of more more than 25% of more spending – in excess of $30 Bspending – in excess of $30 B

• Service parts profitability is Service parts profitability is extremely high, which extremely high, which margins in excess of 100%margins in excess of 100%

• For many OEMs, service For many OEMs, service parts profits are the source of parts profits are the source of profitability – and investment profitability – and investment in new productsin new products

7AeroStrategy


MRO Is Crucial To Safety And An Important Determinant Of Customer Satisfaction

• Safety is the underpinning of the aerospace Safety is the underpinning of the aerospace industry , where standards are industry , where standards are uncompromisinguncompromising

• MRO has a direct bearing on aviation safetyMRO has a direct bearing on aviation safety

• Product support and MRO services are Product support and MRO services are important determinants of customer important determinants of customer satisfaction for aerospace OEMssatisfaction for aerospace OEMs

• Customers want outstanding support and Customers want outstanding support and choice; OEMs must avoid the temptation of choice; OEMs must avoid the temptation of aftermarket monopolizationaftermarket monopolization

Customer Satisfaction

Safety

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Why MRO Matters

Agenda



9AeroStrategy


The Global Aerospace MRO Market Is $117 B

Business & General Business & General Aviation $12 BAviation $12 B

2007 Global Aerospace MRO Market ($B)

Air Transport $45 BAir Transport $45 B

Military $60BMilitary $60B10%

39%51%

Source: OAGback/AeroStrategy

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The Business And General Aviation Fleet Includes More Than 42,000 Aircraft

Fixed WingFixed Wing26,40026,400

Civil Rotary Civil Rotary WingWing16,00016,000

2007 Business & General Aviation FleetTotal ~ 42,400 Aircraft

Sources: AeroStrategy analysis

Fixed Fixed WingWing63%63%

Rotary Rotary WingWing37%37%

2007 Business & General AviationMRO Market - $11B

BusinessBusiness

11AeroStrategy


Global Fixed Wing MRO Expenditures Are $7B; North America Accounts For 70%

2007 Fixed Wing Business Aviation MRO Market Total = $7B

Engine26%

Component30%

Modifications22%

North America70%

Europe13%

Rest of World9%

Airframe22%

Latin America8%

By Type of MRO By Operator Region

Source: AeroStrategy/OAGback

BusinessBusiness

12AeroStrategy


One Key Trend Is Significant Growth In The Non-Warranty Fleet….And Aging Aircraft

Sources: AeroStrategy analysis; JetnetAge is not identified for 600 aircraft

0

100

200

300

400

500

600

700

800

900

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39

2006 Business Jet Fleet2006 Business Jet Fleet13,94013,940

Aircraft Age

InWarranty

AircraftIn Sunset

Phase

BusinessBusiness

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Growth In The Non-North American Fleet WillAlso Shape The MRO Environment

• Historically 75% of business jet Historically 75% of business jet deliveries are to North American deliveries are to North American operatorsoperators

• International demand is accelerating; International demand is accelerating; up to half of deliveries over the next up to half of deliveries over the next decade will be to non-North decade will be to non-North American customersAmerican customers

• MRO networks, which are heavily MRO networks, which are heavily concentrated in North America and concentrated in North America and Europe, will need to expand and Europe, will need to expand and adapt to marketplace realitiesadapt to marketplace realities

~ 50% Of~ 50% OfFutureFutureDeliveriesDeliveries

BusinessBusiness

14AeroStrategy


The Business Aviation Fleet Grows From 26,400 Aircraft To 38,000 By 2015; A 4.6% CAGR

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2007 2015

Hawker BeechcraftHawker Beechcraft

CessnaCessna

BombardierBombardier

GulfstreamGulfstream

DassaultDassault

OtherOther

2007 & 2015 Business Aviation Fixed Wing Fleet By Aircraft OEM

4.6% CAGR

BusinessBusiness


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The International MRO Market Will Grow Rapidly

0

2

4

6

8

10

2007 2015

EuropeEurope

North North AmericaAmerica

Rest of WorldRest of World

Latin Latin AmericaAmerica

70%

13%

8%9%

64%

16%

9%

11%

2007 & 2015 Business Aviation MRO Market By Operator Region ($B)


BusinessBusiness

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OEMs And Large Independents Will Increase Their Share Of The Market…

• OEMs and large OEMs and large independents are independents are expected to take a expected to take a growing share of the MRO growing share of the MRO marketmarket

• Smaller independents will Smaller independents will need to target niches need to target niches where they have where they have competitive advantagecompetitive advantage– Mature aircraftMature aircraft

– Niche aircraftNiche aircraft

– Underserved Underserved regions/customer regions/customer segmentssegments

– VLJsVLJs

OEM NetworksOEM NetworksLarge IndependentLarge Independent NetworksNetworks

Opportunities for Opportunities for smaller independentssmaller independents

nichesniches

nichesniches

BusinessBusiness

17AeroStrategy


… Driven, In Part, By Supplier Consolidation…

The aim: develop global networks with MRO, FBO, The aim: develop global networks with MRO, FBO, charter and aircraft management servicescharter and aircraft management services

Source: Secondary research

BusinessBusiness

Recent MRO Supplier Consolidation Activity

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…And Significant Investment By OEMs And Large Independent Suppliers

• OEMs are making significant in OEMs are making significant in maintenance infrastructure , maintenance infrastructure , service parts logistics, and service parts logistics, and information technologyinformation technology

• Cessna’s new Citation Service Cessna’s new Citation Service Center in Wichita is a good Center in Wichita is a good exampleexample

• Large independents are also Large independents are also investing heavy – particularly in investing heavy – particularly in Europe, Asia and The Middle EastEurope, Asia and The Middle East

Source: Jet Aviation

BusinessBusiness

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Global Airline MRO Expenditures Are A Whopping $45 Billion

2007 Air Transport MRO Market $45B

N. America

36%

Europe27%

Asia Pacific17%

L. America 4%

China 4%

Africa 3%E. Europe 2%

Middle East5%

India 1%


Air Air TransportTransport

• North America comprises 36% North America comprises 36% of air transport MRO spendingof air transport MRO spending

• Airlines are increasing Airlines are increasing maintenance outsourcing as maintenance outsourcing as they focus on core they focus on core transportation activitytransportation activity

• Like business aviation, OEMs Like business aviation, OEMs and large independents are and large independents are developing broad networks as developing broad networks as the market globalizesthe market globalizes

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MRO Work Increasingly Flows To Locations With Comparative Advantage

Source: AeroStrategy

7.0M7.0M

1.7M1.7M0.3M0.3M

0.7M0.7M50M50M

International Suppliers Capture 17% Of North American Airframe Maintenance labor hours

2007 North American Heavy Maintenance Labor Hours


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Military MRO Spending Exceeds $60 Billion; More Than 50% Is In North America

Reset

Figures are for western aircraft onlySource: AeroStrategy/OAGback

2007 Military MRO Market ($B)MilitaryMilitary

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Global MRO Spending Will Exceed $140B By 2017

00

2020

4040

6060

8080

100100

120120

140140

20072007 20172017

Business Business & GA& GA


MilitaryMilitary

Global Aerospace MRO Market ($B)

Source: AeroStrategy/OAGbackFigures are in 2007 USD

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Why MRO Matters

Agenda



24AeroStrategy


Aerospace Manufacturing Is A Critical Element Of The Wichita Economy…

13.1%

By Number Of Employees By Payroll

Kansas Department Of LaborIncludes Butler, Harvey, Sedgwick and Sumner Counties)

26.5%

Aerospace Product & Parts Manufacturing – Greater Wichita Area

25AeroStrategy


…However, The Aftermarket Supply Chain Is Fundamentally Different From Manufacturing

PARAMETER MANUFACTURING SUPPLY CHAIN

AFTER-SALES SERVICESSUPPLY CHAIN

Nature of demandNature of demand Predictable, can be Predictable, can be forecastforecast

Always unpredictable, Always unpredictable, sporadicsporadic

Required responseRequired response Standard, can be Standard, can be scheduledscheduled

ASAPASAP

Product portfolioProduct portfolio Largely homogeneousLargely homogeneous Always heterogeneousAlways heterogeneous

Delivery networkDelivery network Multiple networksMultiple networks Single networkSingle network

Inventory Inventory management aimmanagement aim

Maximize velocity of Maximize velocity of resourcesresources

Pre-position resourcesPre-position resources

Reverse logisticsReverse logistics Doesn’t handleDoesn’t handle Handles return, repair, and Handles return, repair, and disposaldisposal

Performance metricPerformance metric Fill rateFill rate Product availability Product availability (uptime)(uptime)

Inventory turnsInventory turns 6 – 50 / year6 – 50 / year 1 – 4 / year1 – 4 / year

Source: Cohen, Agrawal, Agrawal (HBR, May 2006)

26AeroStrategy


Wichita Participates In The Central US Aerospace MRO Hub…However Many New Hubs Are Emerging

CENTRAL US

MIAMI

SINGAPORE

EASTERN CHINA

UNITED KINGDOM GERMANY

FRANCE

Established HubsEstablished Hubs

Emerging HubsEmerging Hubs

MEXICO

EASTERN EUROPE

DUBAI

Global Aerospace MRO Hubs

CENTRALAMERICA

Source: AeroStrategy

27AeroStrategy


The Competitiveness Of An MRO Hub Is A Function Of Three Key Factors

MRO Hub Competitiveness

Business Environment• Factor conditions that

drive attractiveness for inward investment and create comparative advantage

• E.g. advantageous tax and tariff rates

Firm Competitiveness• The quantity and

quality of firms in the MRO cluster

• Includes related and supporting industries

Advantage By Segment• Factors unique to the

business segment that create the opportunity to build comparative advantage

• E.g., labor cost is a source of advantage in airframe heavy maintenance

28AeroStrategy


By Focusing On These Factors, Wichita Can Participate In Significant MRO Growth

• MRO spending will continue to grow – particularly in civil aviation – to nearly $140b by 2017

• The state and its suppliers must continually improve Wichita’s competitiveness

– Improving the business environment – a key role for state government

– Strengthening firm competitiveness in light of growing global competition

– Reinforcing segment specific factors – particularly human resources

00

2020

4040

6060

8080

100100

120120

140140

20072007 20172017

Business Business & GA& GA


MilitaryMilitary

Global Aerospace MRO Market ($B)

Source: AeroStrategy/OAGbackFigures are in 2007 USD

29AeroStrategy


Key Messages

• Capital goods industries, including aerospace, are shifting to a greater emphasis on service revenues

• Aerospace MRO is worth $117B – the same as aerospace manufacturing

• Wichita is part of an MRO hub in the central US…however new hubs are emerging as the industry globalizes

30AeroStrategy


Thanks For Your Attention!

• AeroStrategy is a specialist management consulting firm devoted to aviation and aerospace sectors with offices in Ann Arbor and Amersham, U.K.

• To learn more about AeroStrategy please contact:

David Stewart, Principal

Ph: + 44 1494 431 600

[email protected]

Kevin Michaels, Principal

Ph: +1 734 821 0220

[email protected]

Hal Chrisman, Principal

Ph: +1 734 821 0227

[email protected]

1 AeroStrategy © 2008 AeroStrategy Outlook For The Global Aerospace Maintenance, Repair, And...

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Transcript of 1 AeroStrategy © 2008 AeroStrategy Outlook For The Global Aerospace Maintenance, Repair, And...