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MRO Forecast and Market Trends

Presented by: Jonathan M. Berger Vice President ICF International jberger@icfi.com

January 21-22, 2016 Lima, Peru

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Today’s Agenda

MRO Forecast

Meet the Frackers!

The not-so-mighty-mighty BRIC House

The Next Big Thing!

2 2

MRO Forecast

3 3

The current commercial air transport fleet consists of over 27K aircraft

Source: CAPA 2015

2015 Global Commercial Air Transport Fleet

NarrowbodyJet

Widebody Jet

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

4 4

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

10 Year Global Air Transport Fleet Growth

Air travel 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

AfricaMiddle EastSouth AmericaEuropeAsia PacificNorth America

27,114

27% 32%

37,932

31%

25%

8%

26%

23%

8%

# Aircraft

3.8%

2.5%

1.6%

5.2%

5.3%

5.1%

CAGR

3.4% Avg.

5 5

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

2015 Global MRO Demand

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

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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

10 Year Global MRO Demand Growth

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

ModificationsAirframeLineComponentEngine

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%

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The current Latin American commercial air transport fleet consists of over 2,100 aircraft

Source: CAPA 2015

2015 Latin American Commercial Air Transport Fleet

NarrowbodyJet

Widebody Jet

Turboprop

Regional Jet

2,123 Aircraft

8%

51%

16%

25%

By Aircraft Type By Country

Brazil

Mexico

Colombia Chile

Venezuela

Panama

Other

2,123 Aircraft

28%

17% 7%

21%

11%

6% 6% 5%

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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

10 Year Latin American MRO Demand Growth

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

ModificationsAirframeLineComponentEngine

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%

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Meet the Frackers!

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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)

11 11

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

177 173 162 135

109 108 83 73

0

100

200

300

400

500

600

700

800

[VALUE] 11.5 10.8

4.3 4.2 3.7 3.6 3.3 3.1 2.8

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)

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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)

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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%

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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

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The Not-So-Mighty-Mighty BRIC House

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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 (%)

17 17

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

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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 reduced demand for commodities has led to a stronger US Dollar

Source: Oanda historical exchange rates, ICF International Analysis

Global Currency Exchange Rates vs USD

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

FOREX Impact

% Value Change Jan. 2014 – Jan. 2016

B

R

C

S

I

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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%

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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

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March of the Middle East Titans; coming soon to an airport near you!

Source: OAG Data, ICF International Analysis

European Secondary Airports Average 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

339 354 354

264

174

141 121

140

111

153 150

109 121

148

100

150

200

250

300

350

400 Gulf Carriers Non-Gulf Carriers

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The Next Big Thing…

23 23

ICF believes that virtual reality (VR) technology will be as disruptive to MRO training as 3D-printing is to parts manufacturing

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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…

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For questions regarding this presentation, please contact:

Jonathan M. Berger Vice President Aerospace & MRO jberger@icfi.com +1 404.819.7669

January 21-22, 2016 Lima, Peru

THANK YOU!

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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

27 27

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

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