© Oliver Wyman

AVIATION

Andrew Medland

Principal

WEDNESDAY, FEBRUARY 3, 2016

TURBULENCE AHEAD DISENGAGE THE AUTOPILOT 2015-2025 GLOBAL FLEET & MRO MARKET FORECAST

1 © Oliver Wyman

Oliver Wyman’s aviation practice integrated TeamSAI into CAVOK, our aviation technical consulting and services division

• The largest consulting team dedicated to

aviation and aerospace in the industry

• Deep expertise across all areas of the

aerospace value chain

• Aviation industry insights and publications

including: MRO Survey, Airline Economic

Analysis Report, Industry Insights

• Leading forecasting and benchmarking tools

available at www.PlaneStats.com

Aviation, Aerospace & Defense Practice

• Due diligence

• Post-acquisition implementation

• New business design

• Operational improvements

• Materials strategies

• Operational strategy and transformation

• Facility design

• Market strategy

• Maintenance programs, engineering,

reliability

• Regulatory approvals

OEM Strategy

MRO Strategy

Transaction Support

Maintenance and Operations

Global Fleet &

MRO Market Outlook

3 © Oliver Wyman

13,124 16,949

21,089

4,686

5,753

7,181

3,396

3,222

2,906

2,721

3,079

3,232

23,927

29,003

34,408

5.2%

4.2%

-1.0%

2.5%

4.5%

4.5%

-2.0%

1.0%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2015 '15-'20CAGRS

2020 '20-'25CAGRS

2025

Narrowbody Widebody Regional Jet Turboprop

• Global fleet will grow on

average 3.7% annually

over the full forecast

period

• Passenger fleet expected

to grow at 3.8% annually

• Cargo fleet forecast to

grow by 2.3% annually

• Narrowbody aircraft will

lead the growth

• Regional jets will actually

decline in the mix

Key Fleet Forecast

Growth Rates

2015-2025 Global Fleet Forecast

by Aircraft Class

The global air transport jet and turboprop fleet will grow by more than 10,000 net new aircraft by 2025

Nu

mb

er

of

Air

cra

ft

The growth outlook, however, varies widely from region to region

3.9%

3.5%

4 © Oliver Wyman

A 5 pt spread in regional growth rates leads to a significant share shift over the decade ahead

The mature North American and Western European markets will continue to

undergo significant refleeting efforts during the next 10 years

2015

Fleet Size

722 North America

Europe

Latin America

& the Caribbean

Africa / Middle East

Asia Pacific / China / India

0.9%

2.8%

4.7%

5.5%

6.1%

6,131

1,720

1,965

997

1,562

5,235

10YR

CAGR

2015- 2025

Absolute Growth

2,204

7,420

6,452

5 © Oliver Wyman

A 5 pt spread in regional growth rates leads to a significant share shift over the decade ahead

The mature North American and Western European markets will continue to

undergo significant refleeting efforts during the next 10 years

2025

Fleet Size

North America

Europe

Latin America

& the Caribbean

Africa / Middle East

Asia Pacific / China / India 6.1%

7,420

6,131

1,720

2,204

6,452

8,096

2,717

3,766

11,687

8,142

6 © Oliver Wyman

New Cargo Deliveries

423

New Passenger Deliveries

18,068

664

Cargo Retirements

7,346

Passenger Retirements

Passenger Fleet

716

P2F Conversions

Cargo Fleet

43% of all new aircraft deliveries will replace old technology aircraft over the forecast period

The systematic elimination and replacement of older aircraft with new technology

aircraft will drive significant change is the business for airlines and maintainers

7 © Oliver Wyman

New Cargo Deliveries

423

New Passenger Deliveries

18,068

664

Cargo Retirements

7,346

Passenger Retirements

Passenger Fleet

716

P2F Conversions

Cargo Fleet

43% of all new aircraft deliveries will replace old technology aircraft over the forecast period

The systematic elimination and replacement of older aircraft with new technology

aircraft will drive significant change is the business for airlines and maintainers

10,481 Net Growth

8 © Oliver Wyman

2025 Global Air Transport Fleet

by Vintage

2015 Global Air Transport Fleet

by Vintage

The significant move towards late generation aircraft, in addition to improving airline

costs, will undoubtedly impact MRO dynamics

The result is a staggering change in fleet mix by 2025

1970's 2%

1980's 26%

1990's 63%

2000's 9%

1970's 0.1%

1980's 9%

1990's 46%

2000's 16%

2010's 29%

9 © Oliver Wyman

22% 19% 17%

42% 45% 47%

19% 18% 19%

18% 18% 18%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2020 2025

Airframe Engine Component Line

$14.5 $15.9 $16.7

$27.9 $37.1

$46.8 $12.4

$15.2

$19.2

$12.3

$15.0

$17.8

$67.1

$83.2

$100.4

1.9%

5.9%

4.1%

4.0%

1.0%

4.8%

4.7%

3.5%

$0

$20

$40

$60

$80

$100

$120

2015 '15-'20CAGRS

2020 '20-'25CAGRS

2025

Bil

lio

ns

Airframe Engine Component Line

Global MRO Market Share Forecast

by MRO Segment

Global MRO Market Size Forecast

by MRO Segment

The fleet dynamics of the period result in a forecast that tops $100 billion by 2025, a 4.1% average annual growth rate

20

15

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$U

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Ma

rket

Sh

are

Airframe Heavy Maintenance costs improve with the new technology while both

Engine and Component sectors will take a larger share

4.4%

3.8%

10 © Oliver Wyman

Shadowing the fleet trends, large differences in regional growth rates will lead to a significant shift in MRO demand

Asia/Pacific, China, & India will be challenged to build the necessary infrastructure

capable of handling the volume of MRO the combined region will demand

2015

MRO Spend ($USB)

$1.3 North America

Europe

Latin America

& the Caribbean

Africa / Middle East

Asia Pacific / China / India

0.6%

3.3%

7.3%

5.5%

6.6%

$17.9

$3.2

$7.0

$3.3

$5.3

$16.5

10YR

CAGR

2015- 2025

Absolute Growth ($USB)

$7.5

$18.3

$20.0

11 © Oliver Wyman

Shadowing the fleet trends, large differences in regional growth rates will lead to a significant shift in MRO demand

Asia/Pacific, China, & India will be challenged to build the necessary infrastructure

capable of handling the volume of MRO the combined region will demand

2025

MRO Spend ($USB)

North America

Europe

Latin America

& the Caribbean

Africa / Middle East

Asia Pacific / China / India 6.6%

$20.0

$17.9

$3.2

$7.5

$18.3

$21.3

$24.9

$6.5

$12.8

$34.8

Middle East and Africa Fleet &

MRO Market Outlook

13 © Oliver Wyman

Passenger traffic is soaring in the Middle East surpassing 11% growth in the last year. Traffic growth in Africa has remained mostly flat

2015 PASSENGER TRAFFIC (RPK)

GROWTH

11.1%

2015 CURRENT FLEET

2,204

2,100+

2015-2025 AIRCRAFT DELIVERIES

800+

2015-2025 AIRCRAFT RETIREMENTS

+5.5%

2015-2025

FLEET CAGR

14 © Oliver Wyman

In 10 years, over 42% of the Middle East and Africa fleet will be new technology aircraft requiring new technical skills and capabilities

777

737NG/MAX

A320C/NEO

737CL

A330

767

747

A340

A300

A380

777

A320C/NEO

737NG/MAX

A330

A340

747

A380

Top 10 Middle East and Africa Aircraft Families - 2025

Top 10 Middle East and Africa Aircraft Families - 2015

787

A350

ATR

15 © Oliver Wyman

$7.6 $7.6 $7.5 $8.4 $8.8

$10.3 $10.2 $10.6 $11.6 $11.5

$12.9

$0

$2

$4

$6

$8

$10

$12

$14

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Airframe Engine Component Line

2015-2025 Middle East and Africa MRO Market Forecast

by MRO Segment

A sharp increase in the rate of deliveries drives a 5.5% growth rate in MRO spend over the next ten years

MR

O S

pe

nd

in

20

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US

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$U

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)

Despite the solid growth, aftermarket participants will still need to have an

aggressive and innovative plan to maintain or grow market share.

16 © Oliver Wyman

$0.0

$0.2

$0.4

$0.6

$0.8

$1.0

$1.2

$1.4

$1.6

$1.8

$2.0

Middle East Africa

2015 Middle East and Africa MRO Market Forecast

by Operator Country

Many different dynamics are at play in a region comprised of 62 countries and states; differences in individual economies and resource availability will produce uneven growth in the region

20

15

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Do

lla

rs (

$U

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)

$2.7

Saudi Peninsula

• Fleet Size: 284

• MRO Market: $1.1B

With so many options around it and current

MRO options already in place, we do not

anticipate above average investment in this

region.

Sub-Saharan Africa

• Fleet Size: 723

• MRO Market: $1.4B

Declining commodities prices and lower

demand from the sub region’s largest

importer China greatly hamper the economic

outlook of the region. This paired with

constant geopolitical strife limits the

opportunities for MRO in the region.

United Arab Emirates/Qatar

• Fleet Size: 555

• MRO Market: $3.5B

The largest opportunities exist in Dubai, Abu

Dhabi and Doha. leading to future joint

ventures and increased OEM presence.

North Africa

• Fleet Size: 307

• MRO Market: $0.6B

The fleet consists of mostly aging

turboprops and regional jets adds up to a

relative small maintenance cost base,

leaving little opportunity in this sub region..

Fertile Crescent

• Fleet Size: 335

• MRO Market: $0.9B

While, economic development continues in

parts of the region, the current refugee

crises and current strife within this region will

limit any promise of growth for the

foreseeable future.

18 © Oliver Wyman

• Decisions necessary enter new markets for each of airframe,

engine and component repairs

New repair capabilities

required

• Health monitoring and predictive maintenance will reduce overall

time-on-tool requirements for individual checks with fewer repairs Less maintenance

• Increased aftermarket market share for the newest generation of

aircraft

OEM’s increased

aftermarket presence

• Critical new source of value to the aftermarket driven by those who

design the best algorithms and most rigorous data management

Increased use of data

analytics

Market participants will need aggressive and innovative plans for growth

Fleet changes and technological advances will create turbulence for the MRO business

2015 MRO Survey Results

20 © Oliver Wyman

Oliver Wyman’s 2015 MRO Survey identified a slew of new technologies that are poised to come to market Most prominent new technologies by 2020 (All respondents)

Aircraft Health Monitoring Systems

Predictive Maintenance

“Live” maintenance through

wearable and mobile technology

Composite repair capabilities

New repair technology

Additive manufacturing

Artificial intelligence

Drone-supported maintenance 4%

6%

25%

26%

35%

57%

66%

66%

21 © Oliver Wyman

The collection, storage, aggregation and analysis of data will be key factors in aircraft health monitoring and predicative maintenance Who is best positioned within the industry to benefit from predictive maintenance?

0%

7%

9%

19%

65%

PMA Manufacturers

MROs

Too early to predict

OEMs

Airlines

22 © Oliver Wyman

However, digesting innovative change is not standard fare for the MRO industry…

Survey respondents completed this sentence: “The MRO industry innovates...”

• Historically, little need to build internal

organizations devoted to R&D,

corporate strategy and product

development

• Lack of regular disruptions decrease

relative:

– Devoted resources

– Tried and tested review processes

– Time and attention of executives

– Clarity of ownership / leadership

– Assessment infrastructure

• Internal ability to recognize, assess

and prepare for change is not a core

capability for the industry

… frequently 13%

21% … primarily as a

response to OEM innovation

27% … sporadically

39% … periodically

23 © Oliver Wyman

…and though they have a vision, many organizations struggle with how to rapidly evaluate and bring innovative ideas to market Positive survey responses

We can quickly translate the identified opportunities into pilot projects and fast-to-market roll-out programs

Our innovation process allows us to quickly translate identified opportunities into plans and get sign-off from top management

We use a strategic planning method to visualize areas of opportunity and identify the most promising prospects

Top management has a clear, shared vision and strategy for growth in new business areas

Use a strategic planning method to visualize areas of opportunity and identify the most promising prospects

Our innovation process allows us to quickly translate identified opportunities into plans and get sign-off

We quickly pilot ideas and roll out fast-to-market programs

Decreasing

impact;

More

difficulty

bringing vision

to market

76%

68%

43%

33%

Top management has a clear, shared vision and strategy for growth in new business areas

24 © Oliver Wyman

So what’s really inhibiting change in MROs?

• The primary inhibitors of innovation at my organization are:

Budget / capital availability

Total cost / lack of clear payback

Inability to prove innovative process

/ product / service will offer margin

benefits over current techniques

Organization resistance

Implementation difficulties

Review and approval process

Lack of personal capability

Lack of need for change

How can you eradicate

these barriers within your

own organization?

6%

21%

21%

32%

35%

44%

44%

50%

25 © Oliver Wyman

New technologies will reshape our perception of MRO aftermarket commercial offers. Advances could cut or redistribute 15 to 20 percent of MRO spend, but also spawn new business models and revenue streams.

26 © Oliver Wyman

Time to disengage the Autopilot

• Focusing solely on business as usual is a risky strategy in

the coming years

• Relying on current commercial offers, sales practices,

resources, will challenge an MRO’s future business

• Advances could cut 15-20% of MRO spending from the

aftermarket

• But also spawn new business models and revenue

streams

• Amounts to a reduction or redistribution of $10-15B

among current industry players & new competitors

• MROs and operators must actively choose technologies

to develop and exploit

• Those that fail will end up as innovation takers, ceding

further aftermarket control to competitors

Is your corporate Auto Pilot engaged?

27 © Oliver Wyman

The future is now

28 © Oliver Wyman

Our Survey insights come directly from the industry, and we want to hear from you.

Our 2016 MRO survey is closing

Friday, February 5th

To share your opinion send an email to:

MROsurvey@oliverwyman.com

Include a subject line with the phrase “Count me in” and you’ll receive the survey later today.

Thank you!