17_03_2015_MRO_LECTURE_For_L

MRO Business Context Nicolas OSORIO LORA – Aircraft Lifecycle Solutions P3 Group

The Big picture Agenda

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AIRLINES

REDUCE MAINTENANCE COST

MRO OEM

ONE STOP SHOP FLY BY THE HOUR SERVICES

MRO NETWORKS MRO CONSOLIDATION

MRO NETWORKS

BETTER MAINTENANCE PROGNOSIS

BETTER USE OF DATA

INDUSTRIAL INTERNET

Nicolas OSORIO LORA – Aircraft Lifecycle Solutions P3 Group

The big picture . . . We live in the world of more for less

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Things that all of us know Passengers has the power to push down the airfares . . .

Data Source: IATA Profitability and the air transport value chain


The big picture . . . … and the airlines are the first victims . . .

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AIRLINES


Things that all of us know Return on invested capital in the airlines and their WACC

"If you want to be a Millionaire, start with a billion dollars and launch a new airline."



Things that all of us know Evolution of aircraft utilization



Some things that some of us didn’t know . .. ROIC services vs airlines



Some things that some of us didn’t know . . . Return on capital varies throughout the air transport value chain



Things that all of us know Airlines struggle with high and volatile fuel prices

0

20

40

60

80

100

120

140

160

180

Jet Fuel Spot Price WTI $/bbl Brent $/bbl

JET FUEL 77.5 WTI 50.57 BRENT 60.29 WTI & BRENT Data March 4th 2015: Source: Bloomberg JET FUEL: February 2015 IATA

2015


Some things that some of us didn’t know . . In 2005 fuel overpass labour as most important source of cost

Soucre: Air Transport Association of America 2012


The big picture… The airlines are always looking how to reduce cost

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AIRLINES



Typical airline cost structure

33%

1%

4% 4%

5% 5% 11%

7%

7%

7%

7%

9% Fuel and Oil

Other**

Air Navigation Charges

Passenger Service

Cabin Attendants

Airport Charges

Aircraft Ownership

Station and Ground

Reservation , ticheting, Sales and Promotion

Flight Deck Crew

General and Administrative

Maintenance and Overhaul

IATA Airline Cost Management Group (ACMG) 2014


How can airline Management influence cost?

External factors

- Fuel prices

- Salaries

- Over flight and Landing fees

Limited control

Aircraft Selection

Fuel consumption

Maintenance programme

Insurance

Aircraft Operation

Fuel consumption

Maintenance programme

Crew costs

Handling/Catering

Total control

Administration

Commercial policy (Lease or buy?)


Saving 1% of fuel consumption will have a higher impact than saving 1% on maintenance cost.

How can airline Management influence cost Not all savings have the same impact

33%

1%

4% 4%

5% 5% 11%

7%

7%

7%

7%

9%

IATA Airline Cost Management Group (ACMG) 2014


Maintenance cost Context of direct and indirect maintenance cost

Total Operating Cost Disposal Cost

Direct Operating Cost Indirect Operating Cost

Financial Operation Maintenance Cost Delays/Cancellations Others

Direct Operating Cost Indirect Operating Cost

End of life

•Build/Facilities fees •Administration •Marketing

Purchase of: •Aircraft •Engines •Spares •Specific tools •Interest •Depreciation

•Crew Expenses •Fuel •Landing •Nav Fees

•On a/c Labour & Material (Maintenance Checks) •Off a/c Labour & Material (Engine overhaul, Component repair)

•Service Fees (e.g spares) •Energy, IT services •GSE Maintenance •Engineering work •Training

Insurance

Life Cycle Cost

Data Source: Air Business Academy 2013


Maintenance cost Direct vs Indirect

Maintenance Cost

Direct Maintenance Cost Indirect Maintenance Cost

•Maintenance Costs (labour & material) associated directly with operation the aircraft •Basic costs for maintenance of airframe components and powerplants •Cost is a function of aircraft size, design, age and its operating environment, etc, etc, etc ------

•Maintenance Costs associated indirectly with supporting the fleet •Additional costs for establishing and supporting maintenance of the fleet •Cost is a function of the level of support required by the operator: its maintenance capability, inventory and staff levels

Data Source: Air Business Academy 2013


Direct Maintenance Cost Sources

• The need to verify full system functionality on a regular basis

• Airframe & system checks and inspections

• The need to restore full performance by replacing worn parts

• Engines, Components removed for overhaul

• The need to comply with unscheduled component failure

• Components replaced and repaired

• On-condition maintenance


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Some slides removed due to confidentiality . . .

Nicolas OSORIO LORA – Aircraft Lifecycle solutions P3 Group

DMC Definitions

DMC = Check Component Repair Engine Shop Visit

+ + Check Interval Comp. Repair Interval Eng. S.V Interval

DMC = Check Component Repair Engine Shop Visit + +

Total number of flight hours during the period

IN THEORY

AS REPORTED

Source: Air Business Academy 2013


Typical DMC Breakdown Components


DIAGNOSTIC AND MAINTENANCE SYSTEM

NACELLES/PYLONS

INFORMATION SYSTEMS

LIGHTS

ICE AND RAIN PROTECTION

HARDWARE

FIRE PROTECTION

OXYGEN

FUEL

AUTOFLIGHT

VACUUM

WATER/WASTE

HYDRAULIC POWER

PNEUMATIC

COMMUNICATIONS

IN FLIGHT FUEL DISPENSING

INDICATING / RECORDING SYSTEM

FLIGHT CONTROLS

NAVIGATION

AIR CONDITIONING AND PRESSURIZATION

LANDING GEAR

EQUIPMENT/FURNISHINGS

Key parameters: • MTBUR* / MTBR** • Repair & Overhaul costs

Costs split at: • Component level • Part number level to identify drivers

Line 20%

Engine 42%

Component 23%

Base 15%

*Mean Time Between Unscheduled Removal **Mean Time Between Removal


Aspects that can influence aircraft maintenance cost Newness and Ageing Factors

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Mai

nte

nan

ce c

ost

per

yea

r

Years from entry into service

Newness factors ►Warranties ►Lower LRU removal rate ►Engines have long (first run) life

Ageing factors ►Corrosion ►Fatigue ►Engines costs increase, LLP need replacement

Newness Maturity Ageing



Maintenance cost in summary

After 25 years

A/C Value = Maintenance Cost (MC))


The big picture Inside the MRO industry

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AIRLINES


MRO OEM


MRO The Ecosystem – actors

- The MRO its part of the airline and takes care of its own aircrafts -It doesn’t provide services to other airlines -It might have or not all the competences to perform the whole aircraft maintenance

AIRLINE MRO

- The MRO is owned by the airline but managed as an independent business

- It can provide services to other airlines

- The big MROs of this group try to develop MRO networks

AIRLINE THIRD PARTY

- Their main business is aircraft maintenance.

- They are not owned by an airline or OEM.

- They can have single or multiple capabilities

INDEPENDENT MRO

- Supply spares is the most important source of incomes for them.

- They want to enhance they participation in the MRO services to increase revenues

OEMS

Parts Manufacturer Approval

-It’s business is to produce and sell approved spares that could replace the ones from the OEMs

PMA

Objectives - Develop new capabilities and

ensure market coverage - Phase consolidation - Provide one stop shop solutions - Propose new services

JOINT VENTURES

- Supply the market with spares either from OEMs or PMAs

DISTRIBUTORS


MRO Market Forecast

Data Source: TEAM SAI. Data analysis P3 Group

11.5 13.2 17.2 22.1 29.9 33.2 12.2

15.3 18.7

11.9 14.8

17.7

2014 2019 2024

Airframe Engine Component Line

57.5 73.2

86.8

Compound Annual Growth Rate = 4%


MRO Suppliers participation in the market Services and Materials

1%

56%

30% 23% 34%

14% 29%

9%

78% 8% 23%

9%

5%

10%

12%

20% 30%

20%

30%

31%

10%

40% 40% 30% 48%

6% 4% 5% 2% 3% 3% 22%

Airframe Engine Line Cabin Systems Landing Gear Avionics Flight Control

OEM Airline Airline third party in house Airline third party outsourced Independent Joint Venture Contracted

8% 1% 1% 2%

20% 64% 58% 78%

10% 9% 42%

11% 8% 8%

8% 18%

Airframe Engine Line Component

Parts repair

Surplus

Distributors

OEM

PMA

Services Providers

Material Suppliers



VERY FRAGMENTED MARKET

MRO Suppliers participation in the market Base maintenance suppliers


MRO COST STRUCTURE Labor vs Material

60%

9%

77%

35% 50% 35% 62%

14%

40% 77%

23%

65% 50% 65% 38%

Airframe Engine Line Cabin Systems Landing Gear Avionics Flight Control

Labor Parts repair Material



MRO Outsourcing trends

Source: IATA Airline Maintenance Cost Executive Commentary . Nov 2014

51 43 47 38

57

44 33

32

76 105 89 88

24 24 23 29

46 52 48 47

151 156 165 168

22 9 23 18

81 73 70 65

337 331 366 379

110 108 116 112

32 46

55 54

45 58 44 39

2010 2011 2012 2013 2010 2011 2012 2013 2010 2011 2012 2013 2010 2011 2012 2013

Base Component Engine Line

OUTSOURCED MATERIAL LABOR


MRO Outsourcing considerations

1. Ferry costs

2. MRO capabilities

3. Turn-around-time

4. Quality of work

5. Customer service

6. Maintenance cost

?


MRO Outsourcing considerations – Ferry cost

Boeing 777–200 LR

ATR

E-190

B737


MRO Outsourcing considerations – Logistics, customer support and TAT

Irkutsk

Moscow

Sao Paulo

Mexico

Miami

Aeroflot: 2 freq/day Paris Frankfurt

Madrid

Lufthansa: 4 freq/day Air-France KLM: 7 freq/day Iberia: 2 freq/day

Lufthansa: 14 freq/week Air-France KLM: 12 freq/week Iberia: 14 freq/week



Source: P3 Group & AeMBA MCTP 2010


MRO Outsourcing considerations – Logistics, customer support and TAT


10

20

30

40

50

60

70

1990 1995 2000 2005 2010 2015 2020 2025

US$

do

llars

North America Mature Asian MRO Emerging Asian MRO

MRO Outsourcing considerations – Maintenance cost

ALL THAT MESS FOR ~4 BUCKS?

59US$

55US$

45US$

Average Widebody Airframe Heavy Maintenance 3rd Party Labor Rates In North America vs. Asia (USD per Man-Hour)


Big Picture Welcome to the future . . .

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AIRLINES


MRO OEM



MRO NETWORKS


The evolution of the MRO after The 90’s

1990 1995 2000 2005 2010

Early 1990s Late 1990s Early 2000s Late 2000s Present

Aftermarket Afterthought

Increased Engine OEM Awareness

Emergence of MRO Integrators

Airline Bankruptcy

Airframe/ Component OEM

Response

Source: Business Model Innovation In The Commercial Aftermarket; KATE SCHAEFER; MOOG 2014.


Aftermarket was an afterthought in the Early 1990s

1990 1995 2000 2005 2010

Ecosystem 1990-1995

Airlines • Mostly captive

maintenance • Maintenance cost center

OEMs • Aftermarket afterthought • Rolls-Royce ahead of game

Independents • Large independents

• Most airlines performed maintenance inhouse

• Rolls-Royce first to introduce flying hour support via TotalCare® contract with Cathay Pacific A330 EIS in 1995

• GE purchased British Airways engine MRO shop (GE Wales)

• Emergence of profit focused airline MROs e.g. Lufthansa Technik, Swiss Air, TEAM Aer Lingus, SIAEC



Airlines Began Seeking Maintenance Cost Savings in the Late 1990s

• Economic pressure forcing airlines to seek cost savings whenever possible

• Emergence of low cost carriers with total outsource maintenance e.g. easyjet

• FLS Aerospace and LHT innovate with component management solutions

• PMA parts gain traction as airlines face escalating OEM spare parts pricing

• Lufthansa Technik acquired a 20 percent stake in HEICO in 1997

1990 1995 2000 2005 2010

Ecosystem 1995-2000

Airlines

• Airlines scrutinizing maintenance investment Increasing outsourcing

OEMs • Increase awareness with

some OEMs

Independents • Boom times • Emergence of PMA



Several Large MRO Integrators Established in the Early 2000s

• Structural change in the market as major US carriers spun off maintenance arms

• Swiss Air and Sabena bankruptcies create two new independent integrators: SR Technics and Sabena Technics

• Beginning of broad component support era - Lufthansa Technik launched Total Component Support® with Spirit Airlines

Ecosystem 2000-2005

Airlines • Maintenance not viewed as

core anymore

OEMs

• Some OEMs develop dedicated aftermarket organization

• Isolated innovation

Independents

• Some encroachment by OEMs

• Emergence of large Integrators

• PMA heyday

1990 1995 2000 2005 2010



Late 2000’s were Characterized by Airline Bankruptcies and Maintenance Arm Spin Outs

• Several airline bankruptcies in North America: US Airways, United, Air Canada, Northwest etc.

• Airlines maintenance arm spin outs: Air Canada Technical Services

• GE launched TRUEngine® program in 2008 as defensive measure against PMA usage

• Rapid growth of Middle East carriers; Goodrich opened Dubai campus in 2006

1990 1995 2000 2005 2010

Ecosystem 2006-2010

Airlines • Spin out or slim down • Bankruptcy

OEMs • More OEM aftermarket

Organization • Some service innovation

Independents • Independents losing

market share • PMA growth slows down



The Focus is Now on Airframe and Component OEM Response in the Aftermarket

• Aircraft OEMs establishes aftermarket support programs: Airbus FHS / Boeing GoldCare

• Component OEMs grows flying hour offering and introduces licensed service center model

• Era of surplus parts and aircraft cannibalization

• Emergence of AJ Walter

1990 1995 2000 2005 2010

Ecosystem 2010

Airlines • ROIC focus • Consolidation

OEMs • Aircraft and component

OEMs get aggressive

Independents

• Independents struggling • PMA market flat • Asset management giants

(AJ Walter) • Decision to compete or

partner • Aircraft recycling



MRO The Ecosystem – part 2

Narrow Output

Oriented

Broad transactional

Broad Output

Oriented

Narrow Transactional

Most of ATA Chapters

Breadth Few ATA Chapters

Transactional Solutions

Service Integration

Output Oriented Solutions

Broad Output Oriented

Key Selection Criteria

• Access to inventory • Total cost

Key Success Factors

• Asset management • Large rotable pool • Logistics • Customer support • Account support

Key Suppliers

• Global Integrators • Aircraft OEMs

Broad Transactional


• Price • Breadth of offering

Key Success Factors

• Low overhead • Supplier

management

Key Suppliers

• Component brokers • Larger

independents



• Cost • TAT

Key Success Factors

• Low overhead • Product Focus • Execution

Key Suppliers

• Small • Independents

Narrow Output Oriented


• Total cost guarantees

• Engineering

Key Success Factors

• Technical support • organization

Key Suppliers

• Tier 1 Component OEMs



New and ageing fleets requires different kind of services



The Big Picture The rise of the machines

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AIRLINES


MRO OEM



MRO NETWORKS


BETTER USE OF DATA

INDUSTRIAL INTERNET

Optimize parts utilization to reduce cost, increase revenue and maintain safety


Aircraft Data Value Chain

Data

generation

Data

Transmission

Data

hosting

Data

processing

conversion

Data

analysis (2) :

experts

Sensors & Embedded computers

Experts Software

Applications(5) Middleware (4)

ACARS

Gatelink

Data

analysis (1):

tools

Software

applications

Data

acquisition

Val

ue

chai

n

Em

bedded

FDAU / ACMS

Source: P3 Group.


The Big picture Conclusion

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AIRLINES


MRO OEM



MRO NETWORKS


BETTER USE OF DATA

INDUSTRIAL INTERNET

Stay close to the customer

• Braking silos - the middleware • Information sharing • Ingest data, analyse it , use it

• What is an airline? • What is the product of the airline?

• What is the role of Airbus? • Who do Airbus support?

• FHS coverage

• Consolidation (Civil and Defense – Austerity) SIMMAD

• Outsourcing is a trend in civil and defense


Exercise – 1 Pick up an airline from your country and place it in one of the four boxes and give your reasons

Narrow Output

Oriented

Broad transactional

Broad Output

Oriented


Most of ATA Chapters

Breadth Few ATA Chapters

Transactional Solutions

Service Integration

Output Oriented Solutions

Broad Output Oriented


• Access to inventory • Total cost

Key Success Factors

• Asset management • Large rotable pool • Logistics • Customer support • Account support

Key Suppliers

• Global Integrators • Aircraft OEMs

Broad Transactional


• Price • Breadth of offering

Key Success Factors

• Low overhead • Supplier

management

Key Suppliers

• Component brokers • Larger

independents



• Cost • TAT

Key Success Factors

• Low overhead • Product Focus • Execution

Key Suppliers

• Small • Independents

Narrow Output Oriented


• Total cost guarantees

• Engineering

Key Success Factors

• Technical support • organization

Key Suppliers

• Tier 1 Component OEMs




MRO 5 FORCES ANALYSIS

Suppliers bargaining power: medium/low

+ Fragmented market of spare parts allowing MRO to often look/ask for best deal, except for specific complex parts (eg. Engine)

Customer bargaining power: medium

- In general, airlines (especially large carriers) able to shop around/ask for favorable conditions

+ However several exceptions constraining airline power

+ Geographical areas with limited MRO coverage

+ Complex/customized parts with limited providers

+ Urgent/emergency maintenance forcing a price taker scenario

Intensity of competition: medium

- Fairly fragmented market with many players (except geographical or component niches)

- Increasing competition from new low-cost entrants especially in Asia

+ Multi-year contracts with airlines allowing for competition reduction

Barriers to entry: medium/high

+ Brand/reputation asset very crucial as safety/security is at stake

+ Technological know-how very relevant and not so easy to replicate

+ MRO certification required by authority

+ Need for intense capital/investment to provide proper assets

Threat from substitutes: medium

+ Airlines not likely to insource maintenance as the trend has been more and more oriented towards the outsouring of those activities

- OEM trying to capture the engine-maintenance market (not for the remaining less complex parts) throug vertical integration


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5/25/2015

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+33 (0)6 67 22 01 15

[email protected]

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