0

MRO Forecast and Market Trends

Presented by:

Jonathan M. BergerVice President ICF International

jberger@icfi.com

January 21-22, 2016

Lima, Peru

11

Today’s Agenda

MRO Forecast

Meet the Frackers!

The not-so-mighty-mighty

BRIC House

The Next Big Thing!

22

MRO Forecast

33

The current

commercial

air transport fleet

consists of over

27K aircraft

Source: CAPA 2015

NarrowbodyJet

WidebodyJet

Turboprop

Regional Jet

27,114

Aircraft

14%

53%14%

19%

By Aircraft Type By Global Region

North America

Asia Pacific

Europe

Latin America

Middle East

31%

27%

25%

8%5% 5%

27,114

Aircraft

2015 Global Commercial Air Transport Fleet

44

The combination of

strong air travel

demand and the

need to replace

ageing aircraft will

drive fleet growth at

3.4% annually

Source: ICF International, CAPA 2015

Air traffic growth of ~4.1%

Fuel costs in $55/bbl range

~19,600 aircraft deliveries

~8,800 aircraft retirements

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2015 2025

Africa

Middle East

Latin America

Europe

Asia Pacific

North America

27,100

31% 26%

37,900

27%

25%

8%

32%

23%

8%

# Aircraft

3.8%

2.5%

1.6%

5.2%

5.3%

5.1%

CAGR

3.4% Avg.

5%

6%

10 Year Global Air Transport Fleet Growth

55

Current air transport

MRO demand is

$64.3B; with Asia

equivalent to North

America and Europe

in market size

Source: ICF International; Forecast in 2015 $USD, exclusive of inflation

Engines

Components

Line

Airframe

Modifications

14%

17%

22%

40%

7%North

America

Asia Pacific

Europe

Middle East

Latin America

Africa

29%

28%

26%

8%

6% 4%

$64.3B$64.3B

By MRO Segment By Global Region

2015 Global MRO Demand

66

The global MRO

market is expected

to grow by 4.1%

per annum to $96B

by 2025

Source: ICF International; Forecast in 2015 $USD, exclusive of inflation

The strongest drivers of growth are the engine and component markets

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 $0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

2015 2025

Modifications

Airframe

Line

Component

Engine

40%

22%

14%

17%

$64.3B

$96.0B

2.8%

3.6%

4.3%

4.4%

CAGR

4.1% Avg.

5.3%

41%

22%

16%

13%

10 Year Global MRO Demand Growth

77

The current Latin

American

commercial

air transport fleet

consists of over

2,100 aircraft

Source: CAPA 2015

NarrowbodyJet

WidebodyJet

Turboprop

Regional Jet

2,123

Aircraft

8%

51%

16%

25%

By Aircraft Type By Country

Brazil

Mexico

ColombiaChile

Venezuela

Panama

Other

2,123

Aircraft

28%

17%7%

21%

11%

6%

6%

5%

2015 Latin American Commercial Air Transport Fleet

88

The Latin American

MRO market is

expected to grow

to approx. $6.3B

by 2025, at 5.7% per

annum

Source: ICF International; Forecast in 2015 $USD, exclusive of inflation

Latin American MRO growth is driven by continued narrowbody aircraft deliveries

MRO spend on widebodies in Latin America will also nearly double by 2025 as the fleet increases by 56%

With the anticipated fleet growth, the strongest MRO spend areas will be for engines and components $0

$1

$2

$3

$4

$5

$6

$7

2015 2025

Modifications

Airframe

Line

Component

Engine

36%

25%

13%

20%

$3.6B

$6.3B

5.1%

4.0%

5.2%

6.6%

CAGR

5.7% Avg.

8.2%

40%

24%

17%

12%

7%

10-Year Global Latin American MRO Demand Growth

99

Meet the Frackers!

1010

Breakthrough

technologies in

horizontal drilling

and hydraulic

fracturing (aka

fracking) resulted

in a US-led energy

revolution

Source: ICF International analysis

North American crude oil and natural gas

production have soared in recent years…

3,500

4,500

5,500

6,500

7,500

8,500

9,500

10 year growth = 105%(7.45% CAGR)

Thousands

1,250

1,450

1,650

1,850

2,050

2,250

2,45010 year growth = 66%

(5.22% CAGR)

Billion cu. ft.

U.S. Crude Oil Production(Barrels / day)

U.S. Natural Gas Production(Monthly marketed production)

1111

The US energy

revolution has

completely upset

the global economic

and geopolitical

balance of power

Source: BP Statistical Review of World Energy June 2015, ICF International Analysis

…making the U.S. a global powerhouse in

energy production

728

579

177 173 162135

109 10883 73

0

100

200

300

400

500

600

700

800

11.6 11.5

10.8

4.3 4.23.7 3.6

3.3 3.12.8

0

2

4

6

8

10

12

14

Global Oil Production(Million barrels / day as of June 2015)

Global Natural Gas Production(Billions of cubic meters as of June 2015)

1212

The potential for

sustained

reduction in oil

revenues could

further destabilize

many already

fragile economies

Source: BP Statistical Review of World Energy June 2015, ICF International Analysis

Low oil prices are exerting tremendous stress

on economies dependent on energy exports

Brent Crude Oil Price, $ per barrel

$40

$60

$80

$100

$120

$140

$160 Venezuela

Iran

Nigeria

Ecuador

Iraq

Libya

Saudi Arabia

Angola

UAE

Qatar

Russia

Deficit

Surplus

Brent Crude Oil Price,

USD$ per barrel

National Government Fiscal Budgets’ Break-Even Oil Price (2014)

1313

Continued low fuel

costs will have

significant

repercussions

throughout the

aviation & MRO

supply chain

Source: EIA; ICF International analysis

Aviation fuel costs have dropped over 55%

during the past 24 months

U.S. Gulf Coast Jet Fuel Price per Gallon

$1.2

$1.4

$1.6

$1.8

$2.0

$2.2

$2.4

$2.6

$2.8

$3.0

$ USD

~55%Decline

1414

Continued low fuel

costs will have

significant

repercussions

throughout the

aviation & MRO

supply chain

Source: EIA; ICF International analysis

Aviation fuel costs have dropped over 55%

during the past 24 months

Global Airline Profitability

-$30

-$20

-$10

$0

$10

$20

$30

$40

$USD

Billions$36B

North America

$19B

Rest of World

$17B

1515

The Not-So-Mighty-

Mighty BRIC House

1616

China’s seemingly

insatiable demand

for global

commodities was a

key driver of the

BRICS economic

growth

Source: IMF, World Economic Outlook Database October 2015, ICF International Analysis

After years of staggering GDP growth,

China’s economy has been steadily slowing

5%

7%

9%

11%

13%

15%

2007 2008 2009 2010 2011 2012 2013 2014 2015F 2016F2015F 2016F

China GDP Year-on-Year Growth (%)

1717

Latin American

economies must

continue to diversify

away from

commodities in order

to minimize the

adverse economic

impact of plunging

commodity prices

Source: ICF analysis

Over the past 5 years, commodity prices

have plummeted more than 55%

Dow Jones Commodity Indices (DJCI)(January 2011 Indexed to 100)

40

50

60

70

80

90

100

110

- 56.0%

Indexed

Values

1818

Russian Ruble-55.1%

Brazilian Real-41.1%

S. African Rand-34.1%

Mexican Peso-25.9%

Can Dollars-23.1%

Aus Dollars-20.8%

Euro-20.0%

British Pound-12.8%

Japanese Yen-11.9%

Indian Rupee-7.8%

Chinese Yuan-7.2%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

The dramatic increase

in oil & gas market

supply and reduceddemand for

commodities has led

to a stronger US Dollar

Source: Oanda historical exchange rates, ICF International Analysis

Partially offsets the positive impact of low fuel costs for operators

Increases the cost of dollar based flight hour agreements (and parts/material in general)

Cost of labor for in-country MROs is cheaper driving up margins for US dollar based contracts

Buying/leasing aircraft becomes more expensive

FOREX Impact

B

R

C

S

I

Global Currency Exchange Rates vs USD% Value Change, Jan. 2014 – Jan. 2016

1919

Latin America GDP

growth continues

to be negatively

impacted by the

global economic

slowdown (more

specifically China

and commodities)

Note: All GDP Growth are calculated based on constant price (nation currency)

Source: IMF Economic Outlook Oct 15

United States

Brazil

0.0%

2.0%

4.0%

6.0%

0.0%

5.0%

10.0%

0.0%

5.0%

10.0%

0.0%

5.0%

10.0%

0.0%

2.0%

4.0%

0.0%

2.0%

4.0%

-2.0%

0.0%

2.0%

4.0%

-5.0%

0.0%

5.0%

2020

While North

American carriers

are enjoying

historic profitability,

Latin American

carriers continue to

struggle

Source: Company websites, IATA, ICF International Analysis

Copa

Q3 2015 Net Profit: $6.2M

Q3 2015 Net Margin: 1.1%

AeroMexico

Q1-3 2015 Net Profit: $737M

Q1-3 2015 Net Margin: 5.9%

GOL

Q1-3 2015 Net Profits: ($788.7M)

Q1-3 2015 Net Margin: -44.3%

Avianca

Q1-3 2015 Net Profit: $112.M

Q1-3 2015 Net Margin: 3.4%

LAN & TAM (LATAM)

Q1-3 2015 Net Profits: ($203M)

Q1-3 2015 Net Margin: -2.7%

$ Billions

-$0.5

$0.0

$0.5

$1.0

$1.5 Latin America

Airline Profitability

Aerolinas Argentinas

Jan-Aug 2015 Net Profits: ($85.8M)

Jan-Aug Net Margin: -6.4%

United States

Brazil

2121

March of the

Middle East Titans;

coming soon to an

airport near you!

Source: OAG Data, ICF International Analysis

European Secondary AirportsAverage Number of Seats per Departure in 2015

Lufthansa’s Frankfurt hub has lost nearly a 3rd of its market share

on routes between Europe and Asia since 2005, with more than

three million people now flying annually from Germany to

other destinations via Gulf hubs – The Economist

333 328

354 354

324

370

339354 354

264

174

141

121

140

111

153 150

109121

148

100

150

200

250

300

350

400 Gulf Carriers Non-Gulf Carriers

2222

The Next Big Thing…

2323

ICF believes that

virtual reality (VR)

technology will be

as disruptive to

MRO training as 3D-

printing is to parts

manufacturing

2424

The US energy revolution has disrupted global

economics and geopolitics

The economic slowdown in China has dramatically

impacted commodity export dependent BRICS

Latin America’s exposure to commodity prices and

impact of currency exchange rates will continue to

drive economic headwinds in the region

Virtual reality has the ability to transform the way

technicians are trained

In Summary…

25

For questions regarding this

presentation, please contact:

Jonathan M. BergerVice President Aerospace & MRO

jberger@icfi.com +1 404.819.7669

January 21-22, 2016

Lima, Peru

THANK YOU!

2626

Market Research & Analysis

Airline Maintenance Benchmarking

M&A Commercial Due Diligence

OEM Aftermarket Strategy

Aviation Asset Valuations & Appraisals

MRO Information Technology (IT) Advisory

Strategic Sourcing & Supply Chain Mgt.

LEAN Continuous Process Improvement

Military Aircraft Sustainment

ICF provides a full range of MRO

advisory services

2727

ICF is one of the world’s largest and

most experienced aviation & aerospace

consulting firms

53 years in business (founded 1963)

100+ professional staff

− Dedicated exclusively to aviation and aerospace

− Blend of consulting professionals and experienced

aviation executives

Specialized, focused expertise and

proprietary knowledge

Broad functional capabilities

More than 10,000 private and public sector

assignments

Backed by parent company ICF International

(2014 revenue - $1.05B)

Global presence –– offices around the world

joined ICF in 2011

joined ICF in 2007

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

Aerospace

& MRO

Aircraft Asset

Advisory

Airline Advisory

Airports