0

MRO Market Update & Industry Trends

Presented by:

Jonathan M. BergerVice President Aerospace & MRO Advisory

jberger@icf.com

October 18-20, 2016

Amsterdam, Netherlands

11

Today’s Agenda

Bizarro Aviation

MRO Forecast

Trend Watch:

Aircraft Cabin Interiors

New Technology Aircraft

Virtual Reality

22

“Bizarro Aviation”

33

Four external

macro-economic

forces are having a

significant impact

on the aviation

industry and the

MRO supply chain

Source: ICF analysis

The “CRABS”

44

The dramatic increase

in oil & gas market

supply and reduceddemand for

commodities has led

to a strong US Dollar

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

Source: USForex, ICF analysis

The “CRABS”: Countries with economies that are

heavily dependent on commodity exports

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

Russian Ruble-37.6%

Brazilian Real-24.6%

S. African Rand-19.1%

Can Dollars-15.3%

Aus Dollars-12.5%

Euro-11.7%

Indian Rupee-7.8%

Chinese Yuan-7.8%

-50%

-40%

-30%

-20%

-10%

0%

10%

B

R

A

SC

55

Commercial aircraft

OEM production

backlog remains at

historical record

levels driven by:

Source: CAPA, ICF Analysis

Commercial Aircraft OEM Production Backlog

0%

10%

20%

30%

40%

50%

60%

70%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Order

Backlog

Backlog/

% Active Fleet

Emerging market growth

Low interest rates

Previously high oil and

commodity prices

Introduction of new

technology aircraft/engines

66

Low fuel costs

appear to be

reversing aircraft

retirements trends

Source: CAPA, Airline Monitor, ICF analysis

Industry Impact:

MRO Suppliers - Positive:

Increased spend on older

airframes & engines

Surplus Market - Negative:

Reduced part-out “feed

stock”

- OEMs: Improved new

part sales

- Distributors: Improved

used part values /

pricing

- Operators: Increased

material costs

Commercial Air Transport Annual Aircraft Retirements

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

0

200

400

600

800

1,000

1,200

# Retirements

Retirement as % of installed fleet

% Installed

Fleet

1991-1999 Average: 203

2000-2009 Average: 473

77

Airline return on

invested capital

(ROIC) is clearly

correlated with the

drop in fuel costs

Source: IATA, ICF Analysis

Fuel Price as a % of Airline Operating Expenses

17%

22%

28% 30%

36%

28% 28%31%

33% 33% 32%28%

20%

0

20

40

60

80

100

120

0%

10%

20%

30%

40%

% of Airline

Operating

Expenses

Crude Oil

Price/BBL

88

Airline return on

invested capital

(ROIC) is clearly

correlated with the

drop in fuel costs

Source: IATA, ICF Analysis

Fuel Price and Global Airline Return On Invested Capital (ROIC)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

$0

$20

$40

$60

$80

$100

$120

$140

Jet Fuel Price ($/barrel) Airline ROIC (%)

Airline ROIC

Jet Fuel Price

$$$

99

Driven by low fuel

costs and

consolidation,

airline the industry

is on target to

achieve record

profitability in 2016

of almost $40B USD

Source: IATA, ICF analysis

These are the “good old days: - for

some airlines…

Global Airline Profitability, 1996 - 2016F

-$30

-$20

-$10

$0

$10

$20

$30

$40

$USD

Billions$39.4B

Asia Pacific, $7.8B

North America, $22.9B

Europe, $7.5B

Middle East, $1.6B

Latin America, $0.1B

Africa, ($0.5B)

1010

However, profit

margin

improvement has

been largely limited

to carriers in North

America and

Europe

Source: IATA, ICF Analysis

-1.8%

-4.7%

0.1%

2.3%1.0%

-0.9%

3.4%4.7%

0.7%1.5%

3.0%

-0.4%

15.4%

8.4%

5.6%

2.6% 2.8%

-1.1%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

2008

2012

2016F

Global Airline EBIT Margin by Region

…but not all – many airlines continue

to struggle

1111

Brexit has clearly

had an impact on

European airline

stock performance;

specifically UK

based carriers

Source: Company websites

Share Performance of European Airlines Since Brexit

23 June 2016 – 13 October 2016

SAS, -6.3%

Lufthansa, -15.2%

Ryan Air, -16.2%

Norwegian, -16.5%

Wizz, -23.2%

Air France-KLM, -24.8%

IAG, -28.1%

Easy Jet, -41.5%

-50% -40% -30% -20% -10% 0%

1212

Follow the Money:

Airlines are

spending their hard

earned profits in

three primary areas

Source: Company Reports, ICF Analysis

Airline Profit Spend Analysis

Labor, 20%

Capex,38%

Investors, 42%

Profit Sharing15%

Wage Increases

5%Fleet23%

Equity Investments

5%

Other capex10%

Debt Repayments

16%

Stock Buy-Back &

Dividends26%

1. Labor ~ 20%:

Profit sharing

Wage increases

2. Capex ~ 38%:

Fleet renewal & cabin

upgrades

Facilities, offices, lounges

Equity partner investments

3. Investors ~ 42%:

Stock buy-backs

Dividends

Debt repayment

1313

After positive signs

in 2014, air cargo

supply continues to

exceed demand

Source: IATA, ICF Analysis

0.4%

-0.9%

0.6%

5.0%

2.3%2.1%

6.0%

3.0%

3.7%

5.4%6.3%

6.3%

-2%

0%

2%

4%

6%

8% Traffic (FTK)

Capacity (AFTK)

Global Freight Traffic (FTK) and Capacity Growth (AFTK)

Year-Over-Year Percent Change

- $$$

1414

$0

$5

$10

$15

$20

$25

$30

$35

$40

Amazon Quarterly Revenue

Amazon is very well

positioned to lead a

major disruption of

the air cargo industry

Source: Amazon SEC Filings

Amazon’s Growing Revenue & Shipping Costs

0%

2%

4%

6%

8%

10%

12%

14%

Shipping Costs as a Percentage of Revenue

$B

USD

1515

March of the Middle

East Titans:

Middle East carriers

have been very

effective in

capturing valuable

business passenger

traffic from

European secondary

airports

Source: OAG Data, ICF Analysis

European Secondary AirportsAverage Number of Seats per Departure in 2016

“…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 via Gulf

hubs” – The Economist

363

408 400 400 394

370

343

400 400

306

180

148128

146

121

163149

117135

149

100

150

200

250

300

350

400

450

500

Gulf Carriers Non-Gulf Carriers

1616

MRO Forecast

1717

The current

commercial

air transport fleet

consists of over

27K aircraft; over

half are narrowbody

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

1818

The combination of

strong air travel

demand and the

need to replace

ageing aircraft will

drive fleet growth at

a healthy 3.4%

annually

Source: ICF analysis: CAPA 2015

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2015 2025

Africa

Middle East

Latin America

EuropeAsia 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

1919

Current commercial

air transport MRO

demand is $64.3B;

with Asia equivalent

to North America

and Europe in

market size

Source: ICF analysis; 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 Commercial Air Transport Global MRO Demand

2020

The global MRO

market is expected

to grow by 4.1% per

annum to $96B by

2025

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

Engine and component MRO markets remain the largest segments

Modifications market will see the strongest growth (e.g. interiors, connectivity)

Airframe market slows due to reduced man-hour intensity and increased check intervals as new fleets are introduced

$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 Commercial Air Transport MRO Demand Growth

$USD

Billions

2121

The current

European fleet

consists of over

6,700 aircraft; with

almost 60%

consisting of

narrowbody

Source: CAPA 2015

NarrowbodyJet

WidebodyJet

Turboprop

Regional Jet

6,746

Aircraft

11%

59%

12%

18%

By Aircraft Type By Country

United Kingdom

Russia

Germany

Turkey

FranceIreland

Spain

Others

6,746

Aircraft

28%

17%

7%

21%

11%

6%6%5%

2015 European Commercial Air Transport Fleet

2222

The European MRO

market is expected

to grow

to approx. $21.3B

by 2025, at 2.3% per

annum

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

Modifications is the fastest

growing MRO segment in

Europe

MRO spend on engines will

experience the largest

absolute growth

$0

$5

$10

$15

$20

$25

2015 2025

Modifications

Airframe

Line

Component

Engine

39%

22%

15%

16%

$17.0B

$21.3B

1.0%

2.5%

2.7%

2.3%

CAGR

2.3% Avg.

3.0%

39%

23%

17%

13%

8%

10-Year Global European MRO Demand Growth

$USD

Billions

7%

2323

Trend Watch:

A New Golden Age of Aircraft

Cabin Interiors

2424

Modifications growth

is driven by airlines

seeking differentiation

in the cabin and

customer experience

Modifications demand includes labor and material spend

*Passenger-To-Freighter Conversions

**Airworthiness Directives / Service Bulletins

Source: ICF analysis, constant 2015 US$

MRO modification market

growth drivers include:

Premium lie-flat seats are

now the minimum standard

Premium economy

Wi-fi, on-board connectivity

Coming soon: ADS-B Mod

program

Capacity (ASM/K) increase

Commercial Air Transport Modifications Forecast

$2.7

$4.9

$0.6

$1.1

$0.4

$0.5

$0.4

$0.4

$0.3

$0.5

$0

$1

$2

$3

$4

$5

$6

$7

$8

2015 2025

AD/SB**

PTF Conversions*

Painting

Avionics Upgrades

Interiors

$4.4B

$7.4B

0.0%

3.7%

6.9%

5.9%

CAGR

5.3% Avg.

3.6%

$USD

Billions

2525

Cabin “densification”

has emerged as cost

effective strategy for

airlines to increase

capacity and drive

bottom line growth

2015 - 2025 Capacity Bridge

0 2 4 6 8 10

2025 ASMs

IncreasedSeat Density

Longer StageLengths

Fleet Growth

2015 ASMs

Available Seat-Miles (ASMs), Trillions

6.2T

8.8T

84%

8%

8%

12 Seats 16 Seats

130 Seats120 Seats

Total = 150 Seats

Total = 164 Seats

Example: Delta A320 Interior

Modification Program

New seats, outlets, IFE, overhead bins

Space-saving galleys to add a row of seats

Source: ICF analysis, delta.com

18 Seats18 Seats

Cabin Upgrades:

Slim seats

Slim lavatories

Slim galleys

Slim coat closets

2626

Trend Watch:

New Technology Aircraft

2727

Over the next

decade, the global

fleet of new

generation aircraft

fleet will grow by

approx. 531% to

nearly 19,000

aircraft

10-Year Fleet Forecast by Aircraft Generation

2,993

18,896

22,212

18,487

2015 2025

Global

New Gen

Mid Gen

Old Gen

Old Gen: 727, 737 Classic, 747 Classic, DC10, L1011, A300

Mid Gen: 757, 767, 747-400, A320 Family, A330/A340, 737NG, 777, ERJ, CRJ

New Gen:, 777X, 787, A350, A330neo, A380, E170/175/190/195, CRJ-7/9/1000, 737MAX

Source: ICF analysis

Europe

+531%

-70%

-17%

612

4,045

5,689

4,487

2015 2025

+561%

-21%

-74%

2828

Over the next

decade, MRO spend

on new technology

Airbus A350 &

Boeing 787 aircraft

will double every

three years

Source: ICF analysis; Forecast in 2015 $USD, exclusive of inflation, includes Boeing 787 and Airbus A350

10-Year MRO Spend for New Technology A350 and 787 Aircraft

$ USD Billions

$0.35

$0.46

$0.47

$0.52

$0.53

$0.62

$0.5$1.0

$1.6

$2.3

$3.3

$4.4

$5.8

$7.1

$8.4

$9.7

$11.1

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Africa

Latin America

Middle East

North America

Europe

Asia Pacific

+2000%

2929

New technology

aircraft challenge

traditional MRO

sourcing strategies

= Heavy C-Check= Light C-Check

767

A/C Age 1 2 3 4 5 6 7 8 9 10 11 12

787

Volume(C-checks)

Intensity(man-hours)

Days(Hangar)

767 8 95,000 136

787 4 33,000 47

Impact

Cost Savings: ~65% fewer routine airframe heavy maintenance

man-hours drives an estimated savings of ~$3.5M

Asset Utilization: ~90 additional available flying days enables

increased revenue generation potential

12 Year Heavy Maintenance Schedule

*Based on 4,000 FH/yr utilization

767 C-check = 18mo, 4C = 72mo; 787 C-check = 36mo, 4C = 144mo

Assumed industry standard labor man-hour rate

Aircraft out of Service (AooS) calculated for C/4C/8C checks assuming industry standard MRO hangar productivity

Return on investment

challenges:

Facilities

Tooling & Equipment

Training

IT Systems

Source: ICF analysis

3030

Challenge: How best

to realize value from

the disparate

terabytes of data

generated by new

technology aircraft

Source: ICF analysis

Number of AHM

Parameters

A320: 15,000

B787: 100,000

Stakeholder Battle:

Who will control and

benefit most from the

operating data IP?

Operators

Lessors

OEMs

MRO Suppliers

767: 10,000

Yr 1 Yr 10

~ 137TB

~11TB

777 787

~ 28MB

< 1MB

Transmittable Data(MB/Flt)

A/C Data Generated(TB/Year)

~1,100%

Aircraft Health Monitoring and Data Generation Outlook

3131

ICF believes that

virtual reality (VR)

technology will be

as disruptive to

MRO training as 3D-

printing is to parts

manufacturing

Training 2.0: Virtual Reality

32

For questions regarding this

presentation, please contact:

Jonathan M. BergerVice President Aerospace & MRO Advisory

jberger@icf.com +1 404.819.7669

THANK YOU!

October 18-20, 2016

Amsterdam, Netherlands

3333

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 Aerospace &

MRO advisory services

3434

ICF is one of the

world’s largest and

most experienced

aviation and

aerospace

consulting firms

Airports • Airlines • Aerospace & MRO • Aircraft

53 years in business (founded 1963)

80+ 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 sector and public sector assignments

Backed by parent ICF International (2015 revenue: 1.13 billion USD)

Global presence –– offices around the world

joined in 2011joined in 2007 joined in 2012 joined in 2014

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

3535

Acronyms AD/SB = airworthiness directives / service bulletins AFTK = Capacity Growth ASMs = Available Seat-Miles BBL = oil barrel CAGR = compound annual growth rate CRABS = Canada, Russia, Australia, Brazil, and South Africa EBIT = Earnings Before Interest and Taxes FTK = Global Freight Traffic IP = intellectual property MRO = maintenance, repair, and overhaul OEM = original equipment manufacturer PTF = Passenger-To-Freighter ROIC = return on invested capital VR – virtual reality