Global Military Aircraft MRO Forecast

ICF International | icfi.com

Military Aircraft MRO ForecastA BRIDGE OVER TROUBLED WATERSA BRIDGE OVER TROUBLED WATERS

Presented by:

Michael Howard Principal, ICF SH&E

ICF International | icfi.com 1

Today’s Agenda

MRO MILITARY~ April 7-10 ~

2014Phoenix, AZ

MRO MILITARY~ April 7-10 ~

2014Phoenix, AZ

Key Market Trends

US Defense Budget Outlook

Global Market Forecast


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

50 years in business (founded 1963) 85 professional staff

− Dedicated exclusively to aerospace and aviation − Recruited from the industry

Specialized, focused expertise and proprietary knowledge Broad functional capabilities More than 8,000 private sector and public sector assignments Backed by parent company ICF International ($937M revenue) Global presence – seven major offices

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

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

joined ICF in 2012

joined ICF in 2011

joined ICF in 2007


Key Market Trends


Field

Airframe

Component

North America

Europe

Asia PacificMiddle East

Africa

Latin America

48%

22%

16%

3%4%

8%

2013 MRO By Region 2013 MRO By Activity

Source: ICF Analysis

KEY MARKET TRENDS

Total $60.7B

Worldwide military MRO spend was nearly $61B in 2013

18%

52%

16%

14%Engine


There are three key trends impacting military MRO todayKEY MARKET TRENDS

Fleet Renewal

Global Military MRO

Global Military MRO

Shifting Buying Behavior

Political uncertainty


11,000 deliveries are expected over the next decade and 75% will be for replacement

KEY MARKET TRENDS

75% of all new deliveries will be to replace retiring aircraft such as the JSF for the F-16

Another 800 potential deliveries exist for programs not currently identified

0

200

400

600

800

1000

1200

1400

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Military Aircraft Deliveries2013-2022

Replacement

Growth

Potential New Programs



Over half of the retirements will come from large existing fleets such as the F‐16 and S‐70

KEY MARKET TRENDS

Aircraft Family2013

Installed Fleet

Total Retirements (2013-2022)

% of Installed

Base

F-16 2968 683 23%S-70 3306 480 15%UH-1 1524 461 30%F-4 330 330 100%F-5 720 380 53%F-18 1509 373 25%AH-64 1121 331 30%OH-58 819 259 32%CH-47 933 258 28%MIG-21 766 239 31%

Top 10 Retirements2013-2022

Majority of retirements are focused on large installed base fleets such as F-16 and S-70

This creates the potential for surplus material to cannibalize sales of new material

Also, reduces the MRO activity by retiring more maintenance-intensive aircraft



Fleet renewal has three major implications for industry

KEY MARKET TRENDS

• Countries can change their sustainment strategy with new platforms

• Likely to create opportunities for industry

New Maintenance

Strategies

New Maintenance

Strategies

• Retirements of aircraft with large installed bases means more excess material on the market

• Could impact spare parts sales

More Surplus Material

More Surplus Material

• Retirements of F-16s and S-70s opens up possibility of new markets for non-JSF customers

• Creates opportunities for industry to support

Potential Tertiary Market

Potential Tertiary Market



KEY MARKET TRENDS

In 2009 and 2013, ICF SH&E conducted an extensive survey of military sustainment practices

Secondary Research Primary Research Report Synthesis

Use of publicly available databases

Company websites and Investor Filings

Major defense‐related periodicals and Newsletters

Extensive interview program which included almost 300 interviews– Nearly 100 sustainment

suppliers– Over 100 Government /

Military Representatives– Nearly 50 OEMs– 40 local experts

Forty of the fifty‐seven countries were visited

Additional informational interviews were conducted by phone to close information gaps

A team of 10 consultants was utilized to develop the country profiles

Each profile summarizes:– Country Geopolitical Issues– Current Military Fleet– Major Sustainment

Installations– Detailed sustainment strategy

for each aircraft type

– Analysis of new procurements and sustainment opportunities

Six final reports totaling 1500 pages and fifty‐seven country profiles were produced



The military operator has accelerated outsourcing over the past 4 years

KEY MARKET TRENDS

2009 Sustainment Supply

Organic, 65%

Outsourced, 35%

A 10% increase in outsourced activity for airframe, component, and engine depot maintenance; an almost $3B change in industry revenue

Reflects the dynamic shift that occurred in the market as a result of the financial crisis

Organic, 55%

Outsourced, 45%



And are increasingly using PBL contracts as the method for outsourcing

KEY MARKET TRENDS


Transactional, 75%

Performance Based, 25%

Of the outsourced activity, only 25% was under a PBL in 2009

In 2013 that has shifted to about 35% of the outsourced activity

However, the majority of these PBLs tend to be material or supply chain PBLs which focus on inventory management and availability as opposed to labor


Transactional, 65%

Performance Based, 35%


Militaries are looking for way to ensure best value for their sustainment dollar

KEY MARKET TRENDS

• Countries are looking to industry to provide “best-in-class capability”

• Limited outsourcing of labor-intensive workOutsourcingOutsourcing

• Long term contracts incentivize suppliers to improve reliability

• Predictable costs allow militaries to best plan operations

Use Of Performance

Based Contracts

Use Of Performance

Based Contracts


KEY MARKET TRENDS

Changing politics and declining budgets are driving militaries to rationalize their force

Political Unrest

Russia, N. Korea, Iran, and Syria all have the potential to quickly become hotspots that require intervention from the U.S. and NATO partners

At a minimum, tension in these regions will require an active force in region as a deterrent

Budget Dichotomy

Budgets in N. America and Europe continue to be in free fall

Budgets in emerging economies appear to growing, particularly in Asia and Russia

Bottom line: NATO partners face a challenge between supporting current weapons systems and fielding new ones


U.S. budget has stabilized, but growth is slowKEY MARKET TRENDS

Spain devotes less than 1% of GDP to military spending in 2012

Given the general cuts in spending in Europe, militaries will have to converge requirements to maintain capability readiness

Russia to boost defense spending 59% by 2015

Country Defense Budget ∆

Russia 25.8%

Poland 20.4%

Germany 2.1%

France 0.0%

UK -1.0%

c

Sou

rce:

Nat

iona

l Def

ense

Bud

gets

Budget growth is rapid in Asia with a major emphasis on new weapons systems

Japan passed law to allow export of defense items

Indian Air Force inked deal with Dassault for $30B for Rafale

Country DefenseBudget ∆

India +15.8%

China +13.2%

S. Korea +7.8%PB is now in line with BCA “Over the next 10 years, the growth in the defense budget will slow, but the fact of the matter is this: It will still grow, because we have global responsibilities that demand our leadership. In fact, the defense budget will still be larger than it was toward the end of the Bush administration.”

- US President Barack Obama

Country Defense Budget ∆

USA ~ 2.0%


US Defense Budget


U.S. Defense Budget as been reduced significantly as a result of the Budget Control Act of 2011

Forecast CAGR 2012-2017 = 0.1%

Defense Budget Forecast

2015 Defense Budget Breakdown

All Values In Real U.S. Dollars

US DEFENSE BUDGET

Source: ICF SH&E, Market Interviews

$0

$100

$200

$300

$400

$500

$600

DefenseBudget 2012

O&M Sustainment AircraftSustainment

Bill

ions

$0$100$200$300$400$500$600$700

2012a 2013a 2014a 2015f 2016f 2017f

Bill

ions

Base Budget OCO Budget Sequester

Base budget reflects the FY2015 Presidential Budget request

OCO spending assumes an approved request of ~$45B for 2015 and then an annual reduction of ~$20B to a 2017 budget of 0

Sequester budget is based on the annual spending limit and $54.7B spending reduction as determined by the Budget Control Act of 2011

Key Assumptions:


President’s FY2015 Budget Request is flat with 2014, but adds $6B for O&M

US DEFENSE BUDGET

Category FY 201Enacted

FY 2015 (PB Request) % Diff

Military Personnel $135.9 $135.1 -$0.8

Operations and Maintenance $192.3 $198.7 $6.4

Procurement $92.4 $90.4 -$2.0

Research, Development, Test and Evaluation $62.8 $65.5 $3.7

Military Construction $8.4 $5.4 -$3.0

Family Housing $1.4 $1.2 -$0.2

Revolving Funds $2.2 $1.2 -$1.0

Total $496.0 $495.6 -$0.4

2014-2015 Base Budget

Source: ICF SH&E, Market Interviews

Procurement drops by about $2B

O&M increases by about $6B

Budget request will not trigger sequestration cut as it is in line the BCA

Key Budget Points:

Bottom line: Budget is still

challenging for the U.S.


US DEFENSE BUDGET

FY2014 O&M budget had a major impact on the U.S. Navy

$0B

$50B

$100B

$150B

$200B

$250B

2013 2014

$ Billions

O&M Budget FY2013–2014 & HAC Defense Appropriations Bill Highlights

Source: FY2013 Budget Request / HAC 2013 Defense Appropriations Bill

DoD‐wide

Air Force

Army

Navy

DoD‐Wide O&M Decrease in spares and repair parts for Special Operations Command Additional ISR support to operation observant compass

Army O&M Cut in Army OCO O&M to protect Base Operations and Depot Maintenance

Air Force O&M Insured Airlift Operations and Depot Maintenance against sequester Cuts in spares inventory, civilian personnel compensation and certain combat operations support

Navy O&M Navy ships seeing less activity Majority of USMC O&M request were funded with additional funding in OCO Depot Maintenance

1.8%1.8%

5.5%5.5%

‐7.4%‐7.4%

‐1.1%‐1.1%


US DEFENSE BUDGET

Overall the O&M budget grows slightly between the FY2014 and FY2015 requests

$0B

$50B

$100B

$150B

$200B

$250B

2014 2015

$ BillionsO&M Base Budget FY2014–2015

DoD-Wide -1.0%

Air Force 5.0%

Navy 3.9%

Army 0.5%

*OCO budget yet to be determinedSource: FY 2014 Budget Request

FY13-14 % Change

1.8% Overall


Aircraft acquisition remains flat at ~$45B FY2014; A‐10 retirements will accelerate

US DEFENSE BUDGET

Aircraft Program Highlights

Source: FY2013 Budget Request / Defense Industry Daily

Program Details

F-35 26 units at $4.6B (Air Force)

EA-18G 18 units at $2.0B

C-130J MYP for 79 aircraft over five years

V-22 On course under current MYP with 21 units at $1.9B

A-10 Retirements begin in 2015

KC-46A 55 aircraft fielded by 2019


Global Market Forecast


Field37%

Airframe13%

Component11%

Engine10%

Supply Chain9%

Pilot Training8%

Engineering Services

6%

Mechanic Training

6%

North America43%

Europe22%

Asia Pacific20% Middle East

10%

Latin America3%

Africa2%

2013 Sustainment By Region 2013 Sustainment By Activity


GLOBAL MARKET FORECAST

Total $92.9B

Global military sustainment spend was nearly $93B in 2013


$64.1 $64.7

$65.4 $66.0

$62.5

$60.7 $61.0

2008 2009 2010 2011 2012 2013 2014

ICF SH&E forecasts the military MRO market will be flat in 2014

GLOBAL MARKET FORECAST

2008–2013 Worldwide Military MRO Total


$ Billions


The global military MRO market to grow slightly through 2018GLOBAL MARKET FORECAST

$0B

$10B

$20B

$30B

$40B

$50B

$60B

$70B

2013 2014 2015 2016 2017 2018

2008–2013 Worldwide Military MRO By Region


$ Billions

Latin America +2.1%

Africa +0.5%

Middle East +2.3%

Asia/Pacific +1.7%

Europe +1.1%

North America +0.9%


The JSF, A400M, and CH‐53K will drive sustainment growthGLOBAL MARKET FORECAST

Platform 2013 MRO ($) 2022 MRO ($) CAGR (%)

Win

ners

CH-53K $ 3,197,754 $ 361,273,894 38%

A400M $ 8,854,460 $ 333,441,274 30%

PAK FA T-50 $ 2,810,751 $ 58,169,301 26%

F-35 $ 122,142,179 $ 1,945,146,487 24%

K-8 $ 9,403,302 $ 109,813,866 22%

TEJAS $ 6,268,565 $ 71,629,511 22%

Lose

rs

PROWLER $ 233,251,931 $ 4,550,042 -48%

CH-46 $ 114,853,063 $ 13,680,621 -24%

MIRAGE 3 $ 95,565,434 $ 21,267,924 -16%

ETENDARD $ 71,049,897 $ 16,805,678 -16%



Aerospace Manufacturing Strategy

Aviation Asset Valuations & Appraisals

MRO Market Research & Analysis

MRO Cost & Performance Benchmarking

MRO Information Technology (IT) Assessment

M&A Commercial Due Diligence

MRO Strategic Sourcing Support

Supply Chain Management

LEAN Continuous Process Improvement

Military Aircraft Sustainment

ICF SH&E’s MRO advisory services include:


Michael HowardPrincipal, ICF SH&E

[email protected]/aviation

Thank You

Global Military Aircraft MRO Forecast

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