2014 MRO Market Overview & Trends

41
ICF International | icfi.com © ICF SH&E 2013 MRO Market Overview & Trends January 15, 2014 Jonathan M. Berger Vice President ICF SH&E [email protected] Presented by:

Transcript of 2014 MRO Market Overview & Trends

ICF International | icfi.com © ICF SH&E 2013

MRO Market Overview & Trends

January 15, 2014

Jonathan M. BergerVice President ICF SH&[email protected]

Presented by:

ICF International | icfi.com © ICF SH&E 2013 1

Today’s Agenda:

1. MRO Market Overview

2. MRO Industry Trends to Watch

joined ICF in 2011 joined ICF in 2012joined ICF in 2007

2014 Annual Transportation Review Board

Meeting

Washington, DC

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MRO Market Overview

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Maintenance costs typically range between 15%-18% of an

airline’s operating cost structure

MRO MARKET OVERVIEW

Typical Airline Cost Breakdown

Source: Form 41 & ICF SH&E Analysis

Typical Airline’s MRO Cost Breakdown

Annual airline maintenance spend as a % of total cost will fluctuate year-to-year based on timing of major visits (e.g. airframe heavy checks & engine

overhauls), fleet age, size, mix and perhaps most importantly the price of fuel

Engines

Components

Line

Airframe

Modifications

Airline’s MRO Cost

16%

17%

21%

40%

6%

Maintenance

Fuel

Labor & Benefits

DepreciationAircraft Rent

Other

16%

14%

35%

28%

5%

5%

3%

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NarrowbodyJet

WidebodyJet

Turboprop

Regional Jet

The current civil air transport fleet consists of over 26K aircraft

MRO MARKET FORECAST

Source: FlightGlobal ACAS September 2013

North America

Asia Pacific

Europe

South America

Africa

2013 Global Air Transport Fleet

26,772Aircraft

17%

50%15%

18%

32%

26%

25%

8%

5% 5%

By Aircraft Type By Global Region

26,772Aircraft

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The air transport fleet will grow at a 3.1% rate over the coming decade

MRO MARKET FORECAST

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2013 2023

Africa

Middle East

South America

Europe

Asia Pacific

North America

Commercial Fleet Growth 2013–2023

Source: ICF SH&E, ACAS September 2013

4.2%

2.4%

4.3%

1.6%

5.6%

4.6%

26,800

31% 27%

36,400

CAGR

3.1% Average

Key Assumptions

Air travel growth of 3.9%

Fuel costs in $80-100/bbl range

17,720 aircraft deliveries

8,128 aircraft retirements

26%

25%

8%

28%

24%

9%

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Engines

Components

Line

Airframe

Modifications

15%

17%

22%

40%

6%

The current civil air transport MRO market is valued at $60.7 billion USD

MRO MARKET FORECAST

North America

Asia Pacific

Europe

Middle East

South America

Africa

31%

27%

26%

7%5% 4%

2013 Global MRO Demand

$60.7B$60.7B

By MRO Segment By Global Region

Source: ICF SH&E analysisForecast in 2013 $USD, exclusive of inflation

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$60.7B

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

2013 2023

Modifications

Heavy Airframe

Line

Components

Engine

The global MRO market is expected to grow to $89B by 2023, at 3.9% per annum

MRO MARKET FORECAST

Global MRO Spend 2013–2023

2.8%

3.4%

4.3%

3.7%

15%

17%

22%

40%

13%

16%

23%

40%

6.4%

6%

7%

CAGR

3.9% Average

Key Assumptions

Average growth is forecast to be 3.9% CAGR

The strongest driver of growth is expected to be the engine market

Reduced labor intensity of airframe heavy checks as the fleet renews and increased intervals...offset in emerging markets by increasing labor rates

Aircraft upgrades (e.g. interiors, winglets) drive high modifications growth

Source: ICF SH&E analysisForecast in 2013 $USD, exclusive of inflation

$89B

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Over the next decade, Asia Pacific and Middle East will drive $15.5B in absolute MRO spend growth

MRO MARKET OVERVIEW

Difference in $ MRO Spend, 2022 vs. 2013 – By Global RegionUS$ Billions

Source: ICF SH&E analysisForecast in 2013 $USD, exclusive of inflation

$7.1

$4.5$3.9

$2.9 $2.9 $2.8$2.0 $1.9

$0.0

$1.0

$2.0

$3.0

$4.0

$5.0

$6.0

$7.0

$8.0

Asia/Pacific(excl China)

Middle East China NorthAmerica

EasternEurope (incl

CIS)

Latin America WesternEurope

Africa

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The MRO outsourcing trend is expected to continue into the future

MRO MARKET OVERVIEW

24%

60%

82%

88%

21%

53%

71%

78%

17%

48%

66%

74%

0% 20% 40% 60% 80% 100%

Line

Heavy Airframe

Components

Engine

Percent of Direct Maintenance Spend Outsourced

2008

2013

2020

Source: ICF SH&E Analysis

Global Outsourcing by MRO Segment

Airlines currently outsource nearly 65% of all MRO activity

Airline industry economics will continue to drive growth in outsourcing

Capital intensive segments (e.g. engines & components) will drive outsourcing growth

Labor intensive airframe work will continue to “Right-Shore”; migrate to lower labor cost countries near the home region

Start-up operators will continue to seek “total fleet support” solutions

ICF SH&E Insight

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MRO Industry Trends to Watch

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FLEET DYNAMICS

Source: ICF SH&E Analysis; Flightglobal ACAS 2013, ATA, US Federal Reserve

Fleet Demographics––the 1990 Bulge Historically Low Interest Rates (%)

New Technology & OEM Production Rates Exacerbate Retirements

Historically High Jet A Fuel Prices ($/BBL)

0

500

1,000

1,500

2,000

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

Air transport deliveries

0

2

4

6

8

10

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

10-Year US Treasury Bond Yield –though cost of capital is now trending up

0

20

40

60

80

100

120

140

1991 1994 1997 2000 2003 2006 2009 2012

Four factors are reshaping aircraft economics and MRO…

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…and ICF projects more than 8,100 retirements through 2023, which will drive nearly 50% of deliveries

FLEET DYNAMICS

Source: ICF SH&E AnalysisNote: includes turboprops and regional jets

Air Transport Retirements 2014 – 2023

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Composition of Demand 2014 – 2023

17,700 Deliveries…

…of which 8,100 to offset retirements

..and 9,600 for

new growth

Retirements historically drive 20% of deliveries

46%

54%

B737-NG

~ 8,100

A320

B737-345

B767

MD80

CRJ

OTHERS

B747-400

DHC6ERJ-135

B737-NG

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Aircraft retirements will average between 600 – 1,000 per year over the forecast period

FLEET DYNAMICS

Air Transport Annual Aircraft Retirements

Includes TurbopropsSource: Airline Monitor Jun 2013, ACAS Sept 2013, ICF SH&E

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

0

200

400

600

800

1,000

1,200

# Retirements

Retirement as % of installed fleet

% Installed Fleet

ICF SH&Eforecast

1990-99 Average 171

2000-09 Average 410

2010-23 Average 751

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After decades of a virtual OEM duopoly in the regional jet market, the RJ market is now very competitive

FLEET DYNAMICS

‘G2’ E-Jet Family

Order Book:• Net Orders: 150• Options: 50

• Capacity: 78-122 seat range with common wing

• EIS: 2018

C-Series

• Order Book:Net Orders: 177Options: 101

MRJ 70/90

Order Book:• Net Orders: 165• Options: 160

• US’ SkyWest with game- changing order for 100 aircraft and 100 options

Sales Figures: ACAS, September 2013

SuperJet 100

Order Book:• Net Orders: 180• Options: 52

• Mexico’s Interjet took delivery of first aircraft in Oct 2012 making it the first western customer to receive the aircraft

ARJ21

Order Book:• Net Orders: 122• Options: 70

Who will be the winners and losers in the 70-110 aircraft market battleground?

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ICF SH&E estimates that commercial MRO industry spending on surplus parts is approximately $3.0 billion

SURPLUS PARTS MARKET

Engine Parts

Component

Airframe

5%65%

30%

Air Transport Surplus Parts Market*

Source: ICF SH&E analysis*Sales to end customers; excludes intra-dealer sales

$3.0B

More innovative surplus parts supplier base

Vertical integration of Lessors, Parts Traders & Repair Vendors

Increased aircraft part-outs

Increased engine teardowns

ICF SH&E Insight

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Surplus dealers now obtain over 80% of their inventory from parting-out aircraft…

SURPLUS PARTS MARKET

54%

82%

26%

8%20%10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2012

Aircraft Part-Out

Direct Purchase From Airline

Purchase From Surplus Dealer

2007 & 2012 Supplier Channels for Obtaining Surplus Materials

Source: ICFI SH&E Analysis

Leaner airline inventories

Improved material planning (and MRO IT capabilities)

Increased component pooling agreements

OEM after-market material control strategies

ICF SH&E Insight

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The aircraft part-out and recycling business will continue to grow as a result of a confluence of several key factors

Source: ICF SH&E Analysis

1. Continued increase in aircraft retirements

2. Strong global demand for surplus material

3. Growth and expertise of global parts distribution firms

4. Low cost of capital (low interest rates)

5. Increased demand for raw material (recycled metal)

(former Memphis Group)

Major Part-Out Players

Major Part-Out MROs

Indianapolis

Arizona

France

U.K. Florida

Victorville

SURPLUS PARTS MARKET

Oklahoma

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ROLE OF OEMS IN MRO

Independent MROsEvaluating strategic options Seek partnerships? Niche competitor? PMA/DER usage? Access to new aircraft IP?

Integrators Scale Engine/

Component JV opportunities?

Evaluation of core vs. non-core

Engine & Component OEMs Focus on

controlling IP Continue

successful capture of market share (especially for new gen equipment)

Increased support in growth regions via licensed service centers

Airframe OEMs Grow aftermarket services revenue FHS, GoldCare, MRO Network Part consignment programs

Relationships between the various MRO suppliers continue to evolve

Source: ICF SH&E

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Aircraft OEMs are fast becoming major MRO players…

Sources: ICF SH&E Analysis, EADS Vision 2020

The EADS Vision 2020 goal is 25% services revenue by 2020

Two major acquisitions in 2011: Satair and Vector Aerospace

Numerous FHS contracts

Launched EDGE in 2012 to create coordinated services brand

Major player in flight training, distribution, and consumables management

Two new GoldCare contracts

ROLE OF OEM IN MRO

~50%~40%

~10%

50%60%

90%

0%

20%

40%

60%

80%

100%

Engine OEMs ComponentOEMs

Aircraft OEMs

Typical OEM Revenue Mix

Manufacturing

Services

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Tier 1 supply chain model continues to evolve as OEMs consolidate their aircraft manufacturing programs…

Source: ICF SH&E Analysis, Airframer, Teal Group

B777 B787

AlliedSignal

Honeywell

Goodrich

Smiths

Sundstrand

Moog

Menasco

Vickers

Messier

Collins

SAFRAN

Goodrich

Hamilton Sundstrand

Panasonic

B/E Aero

Other

Component MRO Spending DistributionB777 versus B787

Supplier Consolidation

Tier I supply chain model; redefined system

architectures

ROLE OF OEM IN MRO

• B/E Aero• C&D• Hamilton• Hispana Suiza• Parker• Jamco• Liton• Woodward Gov• Contour• Recaro,• Driessen• Sell, 1%• Boeing Wichita • Avox• Carleton• NordMicro• BAE• Peco• Techspace• Cox• Crane• CMC• Meggitt• Pacific Scientific• Eaton• Hughes Trietler

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In-House

Independent

Airline Third Party

OEM

Airframe MRO is very fragmented; no supplier has more than a 6% market share

Airframe Heavy Maintenance Market Share

AIRFRAME MRO

HAECO*

ST Aerospace

LHT

AFI KLM E&M

AARAmecoEGATTAECO

AA-MRO

SIAECOthers

By Supplier Type

2%

44%

18%

36%

6%6%

4%

4%3%2%2%$9.0B

Source: ICF SH&E analysisIncludes Turboprops

Supplier Market Share

$9.0B

* Includes TIMCO’s share

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Three of the top four airframe MRO are Asian owned; Haeco’s acquisition of Timco makes it a solid #2

AIRFRAME MRO

11.5

7.4

4.6

4.2

4.1

3.9

3.2

2.8

2.5

2.3

0 2 4 6 8 10 12 14

ST Aero

Haeco Group

AAR

SIAEC

Lufthansa Technik

AFI KLM E&M

Timco

Ameco Beijing

ADAT / SRT

Iberia

2012 Top Airframe MROs by Performed Man-Hours (millions)

Source: Aviation Week Overhaul and Maintenance June 2013Note: Subsidiaries are included if they are majority owned/operated

October 2013Haeco acquires Timco

10.6

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$10

$20

$30

$40

$50

$60

$70

1990 1995 2000 2005 2010 2015 2020

North America

Mature Asian MROs

Emerging Asian MROs

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

The cost advantage enjoyed by Asian MRO suppliers will continue to erode due to the shortage of skilled labor and wage inflation

The convergence of global labor rates will require airlines to reconsider their airframe sourcing strategies and create new opportunities for MRO suppliers

Labor Rate Convergence

Source: ICF SH&E analysis

AIRFRAME MRO

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Widebody airframe heavy check migration from North America to Asia will peak…

Source: ICFI SH&E

Shifting Heavy Airframe MRO Migration Patterns

AIRFRAME MRO

Average labor hours per heavy maintenance check is declining

High fuel prices increase maintenance ferry flight costs

Skilled labor shortages in Asia driving up labor rates

South-eastern US labor rates now comparable to leading emerging market MRO rates

Excess facility supply in North America increasing local competitiveness

ICF SH&E Insight

Less Trans-PacificHeavy Check

Migration

More Heavy Maintenance

Stays in Americas

“Right-shoring is the new Outsourcing”

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Additive manufacturing, also known as 3-D printing, has the potential the be the next disruptive technology in aviation

3-D PRINTING

Source: ICF SH&E Research & analysis

The GE Aviation-Parker Aerospace joint venture will 3-D print more than 30,000 LEAP-X fuel nozzles per year by 2017

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Additive manufacturing, also known as 3-D printing, has the potential the be the next disruptive technology in aviation

3-D PRINTING

Source: ICF SH&E Research & analysis

Boeing is using 3-D printing to fabricate plastic interior parts for prototypes and test evaluation units

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Additive manufacturing, also known as 3-D printing, has the potential the be the next disruptive technology in aviation

3-D PRINTING

Source: ICF SH&E Research & analysis

China’s AVIC heavy machinery is using large 3-D printed titanium parts for landing gear and other structural related parts.

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Additive manufacturing, also known as 3-D printing, has the potential the be the next disruptive technology in aviation

3-D PRINTING

Source: ICF SH&E Research & analysis

Pratt & Whitney will feature 25 different 3-D printed parts in its next generation GTF engine family

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Additive manufacturing, also known as 3-D printing, has the potential the be the next disruptive technology in aviation

3-D PRINTING

Source: ICF SH&E Research & analysis

Industry “experts” predict that 3-D printing technology could lower the cost of structural parts by up to 90%

Not surprisingly, GE plans to invest $3.5B in 3-D printing technology… within the next 5 years!

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Thank you!

MRO Market Research & Analysis

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Aviation Asset Valuations & Appraisals

MRO Cost & Performance Benchmarking

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Supply Chain Management

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ICF SH&E’s MRO advisory services include the following:

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ICF SH&E is one of the most experienced global aviation and aerospace consultancies

50 years in business (founded 1963)

100+ professional staff

− Dedicated exclusively to aviation and aerospace

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Specialized, focused expertise and proprietary knowledge

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Global presence –– seven major offices

New York • Boston • Ann Arbor • London • Singapore • Beijing • Hong Kong

Airports • Airlines • Aerospace & MRO • Asset Advisory • Safety & Security

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ICF International delivers professional services and technology solutions in three focus areas, which ICF SH&E draws upon, further expanding its service offerings and technology solutions

One of ICF's founders and its first president was a Tuskegee Airman. C.D. "Lucky" Lester flew more than 90 missions and earned the Distinguished Flying Cross. In 1969, "Lucky" and 3 DoD analysts founded the organization that is now ICF International.

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Jonathan M. BergerVice President

[email protected]

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