MRO Market Update & Industry Trends

0

MRO Market Update & Industry Trends

Presented by:

Jonathan M. BergerVice President ICF International

[email protected]

May 15-18, 2016

Puerto Rico

11

Today’s Agenda

MRO Forecast

Latin American Aviation Outlook

Trend Watch:

The Mod Squad

New Technology Aircraft

MRO Investment in Latin America

22

MRO Forecast

33

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

44

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 AmericaEurope

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

Continued low fuel

costs could reverse

aircraft retirements

trends

Source: CAPA, Airline Monitor, ICF analysis

Potential Impact:

MRO Suppliers: Increased

spend on older airframes &

engines

Surplus Market: 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

1990-99 Average: 191

2000-09 Average: 473

66

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

77

The global MRO

market is expected

to grow by 4.1% per

annum to $96B by

2025


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

88

The current Latin

American fleet

consists of over

2,100 aircraft; with

more than 50%

narrowbody

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

99

The Latin American

MRO market is

expected to grow

to approx. $6.3B

by 2025, at 5.7% per

annum


Modifications is the fastest

growing MRO segment in

Latin America

MRO spend on widebodies

in Latin America will nearly

double by 2025 as the fleet

increases by 56%

$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

$USD

Billions

1010

Latin American

Aviation Outlook

1111

Four external

macro-economic

forces are having a

significant impact

on Latin American

operators and the

broader MRO

supply chain

The “CRABS”

Currency Exchange Rates Global Commodity Prices

China’s Economic SlowdownFuel Costs

Source: ICF analysis

1212

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: Oanda historical exchange rates, ICF analysis

The “CRABS”: Countries with economies that are

heavily dependent on commodity exports

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

Russian Ruble-87.1%

Brazilian Real-62.2%

S. African Rand-35.8%

Can Dollars-23.6%

Aus Dollars-20.4%

Euro-16.9%

British Pound-15.5%

Indian Rupee-10.3%

Japanese Yen-9.0%

Chinese Yuan-4.8%

-100%

-90%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

B

R

C

S

A

1313

Despite ongoing

challenges in Brazil,

the majority of Latin

American economies

continue to show

positive growth

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

Source: IMF Economic Outlook April 2016, ICF analysis

United States

Brazil

0.0%

2.0%

4.0%

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%

-2.0%

0.0%

2.0%

4.0%

-5.0%

0.0%

5.0%

1414

Driven by the

significant drop in

fuel costs and

consolidation, the

airline industry is

achieving record

profitability

Source: EIA; ICF analysis

These are the good ol’ days; for some…

Global Airline Profitability, 1996 - 2016F

-$30

-$20

-$10

$0

$10

$20

$30

$40

$USD

Billions$36.3B

Asia Pacific, $6.6B

North America, $19.2B

Europe, $8.5B

Middle East, $1.7B

Latin Am. / Africa = $0.3B

1515

Despite significant

headwinds, Latin

American carriers

have demonstrated

impressive

management skills

Source: Company websites, IATA (Dec 2015), ICF analysis

United States

Brazil

$ Billions

-$0.5

$0.0

$0.5

$1.0

$1.5 Latin America

Airline Net Profit

7%

3%

0%

5%

10%

Operating Net

4%

-2%-5%

0%

5%

Operating Net

2015 Latin American Carrier

Operating and Net Income

Positive operating income

demonstrates that airlines

are doing a good job in

managing what is in their

control

However, net income has

clearly been negatively

impacted by currency

exchange rates (out of their

control)

5%

-5%-10%

-5%

0%

5%

10%

Operating Net

-2%

-44%-60%

-40%

-20%

0%

Operating Net

12%

-10%-15%

-5%

5%

15%

Operating Net

1616

Trend Watch:

The Mod Squad

1717

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:

Latest 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

1818

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

1919

Trend Watch:

New Technology Aircraft

2020

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


Latin America

+531%

-70%

-17%

257

854

1,064

1,043

2015 2025

+232%

-2%

-76%

2121

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%

2222

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


2323

Challenge: How best

to realize value from

the disparate

terabytes of data

generated by new

technology aircraft


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

2424

Trend Watch:

MRO Investment in

Latin America

2525

The Latin American

MRO Supplier

Landscape largely

consists of airframe

MRO suppliers, with

limited component

capabilities


United States

Brazil

26

For questions regarding this

presentation, please contact:

Jonathan M. BergerVice President Aerospace & MRO

[email protected] +1 404.819.7669

THANK YOU!

May 15-18, 2016

Puerto Rico

2727

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

2828

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

http://www.ghkint.com/Home.aspx

http://www.ghkint.com/Home.aspx

2929

Acronyms

A/C = aircraft

AD/SB = airworthiness directives/service bulletins

AHM = aircraft health management

ASM = available seat-mile

CAGR = compound annual growth rate

CRABS = Canada, Russia, Australia, Brazil, and South Africa

Gen = generation

IFE = in flight entertainment

IP = intellectual property

M&A = mergers and acquisitions

Mod = modification

MRO = maintenance, repair, and overhaul

OEM = original equipment manufacturer

USD = United States dollar

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