U.S. Military MRO Outlook Smoke On The Horizon? · Military MRO April 2010 Sikorsky Aircraft Show...

U.S. Military MRO OutlookU.S. Military MRO OutlookSmoke On The Horizon?Smoke On The Horizon?

Presented byPresented by

Hal Chrisman, PrincipalHal Chrisman, PrincipalAeroStrategy LLCAeroStrategy LLC

Military MRO ConferencePhoenix, AZ21 April 2010

Ann Arbor, Michigan • Amersham, U.K. • Singaporewww.AeroStrategy.com

Military MRO April 2010

Agenda

Military MRO in Perspective

Military MRO – U.S. Details – Winners & Losers

Military Aircraft Sustainment – A Broader View

Key Sustainment Trends & Implications For Industry


There Are Four Main, And Different, “User” Or Aircraft Market Segments

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AIR TRANSPORT• Airlines and freight carriers

• Turboprop and jet aircraft

• Fleet of about 25,000

• 60 million flying hours a year or ~ 2,400 per aircraft

MILITARY• Attack, transport, trainers

• Fixed- and rotary wing


• 11 million flying hours a year or ~ 300 per aircraft

BUSINESS AVIATION• Corporate, charter,

fractional

• Jet and turboprop aircraft


• 10 million flying hours a year or ~340 per aircraft

CIVIL HELICOPTER• Corporate, government,

resource development


• 5 million flying hours a year or ~ 300 per aircraft

Putting Military MRO In

Perspective


Maintenance Suppliers Today Support Over 110,000 Active Aircraft That Generate $120B In MRO Spend


Perspective

4Source: AeroStrategy / OAG Aviation

Current Global Aircraft Fleet Current Global Aircraft MRO Spend

110,200Aircraft $120B


In North America, Which Accounts For 44% Of MRO Spend, Military Is The Largest Segment; In Europe And Asia, Air Transport Is The Largest

Global Total MRO Market ($120B)


N. America(44%)

Europe(25%)

Asia (17%)

ROW (13%)

Air Transport

Military

Bus. AviationCivil Helicopter


Perspective


Military MRO Is Driven By Field Maintenance; Engine Overhaul Is The Driver Of Spend In Air Transport

2009 Global Total MRO Market ($120B)


Military (50%) Air Transport (39%)

Bus. Aviation

(6%)

Civil Helicopter

(4%)

Airframe

Components

Engine

Field/Line

Modifications

Note: modifications is excluded as in military, these tend to be under program / capital budgets rather than support/MRO


Perspective


Military MRO Spend Has Been And Will Continue To Be Relatively Stable

7

Military Aviation MRO Spend 2009-2019 $B

Source: AeroStrategy / OAG Aviation


Perspective


Agenda






U.S. Air Force Has The Largest Fleet At Almost 5700 Aircraft

9

US Military MRO

Market


2009 U.S. Military Aircraft Fleet By Service And Mission14,107 Aircraft


Fighter / Attack Aircraft Account For Over 30% Of MRO Spending

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Field

Airframe

Component

Engine

Reset

Figh

ter /

Atta

ck

Tran

spor

t H

elic

opte

r

Tran

spor

t /

Tank

er

Spec

ial

Mis

sion

Atta

ckH

elic

opte

r

Trai

ner

Oth

er

$10.8 $7.1 $6.2 $3.8 $2.6 $0.9 $0.3

2009 U.S. Military Aircraft MRO Spend By Mission And Service Type$32.0 Billion USD


US Military MRO

Market


As Reset Goes Away, US MRO Spending Could Decline Slightly In The Near Term

11

2009 – 2019 US Military MRO Forecast

All Values In 2009 U.S. Dollars


US Military MRO

Market

Some Key Trends To Consider

•The impact of the economy on the defense budget and the market

•The increasing importance of rotary wing lift

•Moves by the US Military to in-source more work that has previously been outsourced


JSF And V-22 Will Have The Greatest MRO Growth Through 2019 … The F-16 Market Drops By $1.7B

12

The Winners ….

Program Delays And Life Extensions Could Significantly Change This Picture…

Source: AeroStrategy / OAG Avation

US Military MRO

Market

And The Losers …


Sikorsky Aircraft Show The Greatest Growth In MRO Spend Through 2019

13

OEM, CAGR

Total CAGR = 0.9%

2009 – 2019 US Military Aircraft MRO Forecast By OEM



US Military MRO

Market


Agenda






Sustainment Includes Four Additional Non-MRO Services

15

Military Aircraft

Sustainment – A Broader

View

AirframeDepot

PilotTraining

Field Maintenance

Engine Overhaul

Component Repair

Sustaining Eingineering

Supply Chain Management

MaintenanceTraining

MROServices

Non-MROServices


Six Regional Studies Are Planned For 2009 / 2010Military Aircraft


View

Region Planned Start Planned Completion Countries For Detailed Profiling*

Europe A Feb 2009 May 2009

UKFRANCEGERMANYITALYSPAINPORTUGALNORWAY

SWEDEN NETHERLANDS SWITZERLAND BELGIUM FINLANDDENMARK

Middle East & Africa

July 2009 November2009

SAUDI ARABIAISRAELUNITED ARAB EMIRATESJORDANKUWAITEGYPT

OMANBAHRAINQATARMOROCCOSOUTH AFRICA

North America July 2009 November 2009 UNITED STATES CANADA

Europe B December 2009 April2010

AUSTRIATURKEYGREECEPOLANDHUNGARYSLOVENIA

CROATIACZECH REPUBLICROMANIABULGARIASLOVAKIA

Asia Pacific January 2009 May 2010

JAPANS.KOREATAIWANPAKISTANAUSTRALIAINDIA

THAILANDSINGAPOREMALAYSIAINDONESIAPHILIPPINES

Latin America February 2010 May 2010BRAZILCHILEARGENTINACOLOMBIA

MEXICOPERUECUADORURUGUAYEL SALVADOR

Complete

Complete

Complete

Source: AeroStrategy Regional Military Aircraft Sustainment Studies


Addition Sustainment Services Increase The Market By $11B

2009 U.S. Military Aircraft Sustainment Market

$43B

Military Aircraft


View



Total Sustainment Market Will Remain Flat Through 2014

18

Service Type, CAGR

Total CAGR = 0%

2009 – 2014 U.S. Military Aircraft Sustainment Forecast


Military Aircraft


View



The Approach To Sustainment Is Captured For Each Platform …

19Source: AeroStrategy Regional Military Aircraft

Sustainment Studies

Sustainment Services By Aircraft Type

Platform Beechjet C-130 C-135 C-17 C-5

Airframe Depot Outsourced to L-3 VertexOrganic at WRALC and outsourced to AAII and LMALC

Organic at OCALCOutsourced to Boeing IDS – performed at WRALC

Organic at WRALC

Engine Maintenance Outsourced to Pratt & Whitney

Outsourced to Kelly Aviation Center Organic at OCALC Outsourced to Pratt &

WhitneyOutsourced to Kelly Aviation Center

Component Overhaul Outsourced to L-3 Vertex Organic at WRALC with multiple suppliers

Organic at OCALC with multiple suppliers

Outsourced to Boeing IDS

Organic at WRALC with multiple suppliers

Field Maintenance Outsourced to L-3 Vertex Organic at Squadron Organic at Squadron Organic at Squadron Organic at Squadron

Supply Chain and Inventory Management Outsourced to L-3 Vertex Organic at WRALC Organic at OCALC Outsourced to Boeing

IDS Organic at WRALC

Engineering and Technical Services Outsourced to L-3 Vertex Organic at WRALC Organic at OCALC Outsourced to Boeing

IDS Organic at WRALC

Training Outsourced to L-3 Vertex Organic Organic Organic except type training

Pilot training organic with maintenance training outsourced

Completely Outsourced Partially Outsourced Organic Information unavailable

Military Aircraft


View


Organic

Outsourced

Fiel

d

Airfr

ame

Com

pone

nt

Engi

ne

Supp

ly C

hain

M

anag

emen

t

Engi

neer

ing

Serv

ices

Pilo

t Tra

inin

g

Mai

nten

ance

Tr

aini

ng

$13.1 $7.0 $5.2 $4.3 $3.7 $2.9 $2.7 $2.1

… Overall, Component And Engine Overhaul Are The Most Heavily Outsourced Services

20

2009 U.S. Military Aircraft Sustainment MarketUS$43 Billion

Military Aircraft


View



Agenda






Three Key Military MRO Trends …

22

Key Military MRO Trends

The Economy’s Impact On The Industry

Shifting Mission Mix

US Government Move To Insource

Key Military MRO Trends and Issues

33

22

11U.S. Military MRO Outlook

Smoke On The Horizon?

Presented by

Hal Chrisman, PrincipalAeroStrategy LLC

Military MRO ConferencePhoenix, AZ

22 April 2010

Ann Arbor, Michigan • Amersham, U.K. • Singaporewww.AeroStrategy.com


The Economic Crisis Combined With OEF And OIF Has Pushed The Deficit To More Than $1.2 Trillion In 2009

23


Source: US Department of CommerceBureau of Economic Analysis

The Economy’s Impact On The Industry11


The Resulting Budget Pressures Have Halted A Significant Growth In Military Spending

24


Source: DoD FY 2010 Budget Request Summary Justification


• Base budget grows 4.1% to $534 billion

• OCO / Supplemental drops from $142B to $130B (-8.5%) as efforts begin to move OCO into baseline budget

• Overall, defense budget is flat, Underlying details are telling …


Increases In Military Personnel And O&M Budgets Are Offset By Declines In Other Budgets

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Source: DoD FY 2010 Budget Request Summary Justification


2009 2010 Change PercentMilpers 142,719 149,602 6,883 4.8%O&M 268,498 274,783 6,285 2.3%Procurement 130,086 128,835 (1,251) -1.0%RDT&E 79,939 78,873 (1,066) -1.3%Mil Const 24,004 22,385 (1,619) -6.7%Family Housing 3,158 1,959 (1,199) -38.0%Revolving Funds 4,003 3,517 (486) -12.1%Stimulus 7,000 0 (7,000) -100.0%Misc 2,687 3,887 1,200 44.7%Total 662,094 663,841 1,747 0.3%

Combined Base and OCO / Supplemental Budgets - US$ (Millions)

With Declining Procurement Budgets, Many OEMs Must Turn To Sustainment For Growth


Operational Need For Vertical Lift Will Drive A Shift In MRO Spend

26


Source: AeroStrategy

Shifting Mission Mix33

Current Warfighter Requirements Are Driving Increased Use Of Vertical Lift

MRO Forecast By Mission HelicopterFleet

Growth09-19

V-22 323

UH-60/SH-60 274

UH-72 88

AH-64 44


In-Sourcing Is Also A Hot Topic With Direction Coming From The Top

27


Source: May 28, 2009 Lynne Memo

US Government Move To In-source33Three General Categories Of “In-Sourcing”

1: Authorization for 33,400 new civilian DoD Employees

• April 6, 2009 – Secretary Gates announced that the DoD would scale back the use of contractors in support services

• April 8, 2009 – the Comptroller signed Resource Management Decision (RMD) 802 realigning resources for the 2010 – 2014 increasing funding for 33,400 new civilian employees, 10,000 of which are for the Defense Acquisition Workforce

• Commonly perceived to be focused on the acquisition workforce …

• … However, specifically tells DoD Components that they should “not construe the RMD as limiting or mandating in-sourcing to specific object classes or to the acquisition workforce.”

General Perception – Focused on White Collar, Acquisition Positions / Control


Changing The Responsibility For PSIs Is Also A Part Of In-Sourcing

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Source: National Defense Authorization Act for Fiscal Year 2010


2: Change in Product Support Integrator Role

• October 27, 2009 – President Obama signed the National Defense Authorization Act of 2010

• Section 805 requires that the product support manager role “be performed by a properly qualified member of the armed forces or full-time employee of the Department of Defense (DOD).”

• Driven by major perceived failures of contractors filling the PSI role in programs such as Deepwater and FCS

• Effectively a move to regain ultimate decision making authority in the product support area

General Perception – Focused on Decision Making Authority / Control


Bringing MRO Programs In House Is The Third Element

29



3: In-sourcing of MRO activities

• In the past several years, there have been a notable number of announcements of in-sourcing engine, component and airframe work. For example …

• Recent announcement that OCALC is establishing capability for the F117 engine for the C-17, currently performed by Pratt & Whitney and United Services

• Similarly, OCALC is making plans to bring the T56 (C-130) and the TF39 engines in house. Both have been maintained at Kelly Aviation in San Antonio

General Perception – Focused on touch labor jobs



The In-Sourcing Issue Raises A Number Of Important Questions

30


US Government Move To In-source33

Need Constructive Discussion Between OSD, Depots, OEMs and Independents

• What does available financial data say about the relative cost of organic versus outsourced work, especially PBL?

• How does mission readiness compare under organic and outsourced situations?

• If PBL success stories are accurate, how can this reversal deliver cost savings as well?

• What are the potential impacts of in-sourcing on the industrial base? Could in-souring have measurable impacts on other parts of the economy?

• Could in-sourcing have an impact on the aerospace trade balance?

• What does available financial data say about the relative cost of organic versus outsourced work, especially PBL?

• How does mission readiness compare under organic and outsourced situations?

• If PBL success stories are accurate, how can this reversal deliver cost savings as well?

• What are the potential impacts of in-sourcing on the industrial base? Could in-souring have measurable impacts on other parts of the economy?

• Could in-sourcing have an impact on the aerospace trade balance?



• The global military fleet of 38,500 aircraft is part of a total fleet of over 110,000 turbine powered aircraft across all segments

• This fleet generates over half of the $120B global MRO market

• Military MRO is the largest segment in North America … in Europe and Asia, it is Air Transport MRO

• Globally, the military MRO market grows slowly at 1.2% CAGR

• The US Military flies over 14,000 aircraft which generate more than $32B in MRO demand

• Decline in Reset could result in a near-term dip in the market

• The F-35 and V-22 both show $1.4B in MRO growth by 2019; The F-16 market declines by $1.7B

• Additional sustainment services increase the US market to $43B

• Component repair and engine overhaul are the most outsourced

• The economy is impacting government budgets and the fiscal environment of suppliers

• Vertical lift is increasing in importance

• In-sourcing raises important questions and constructive dialogue is needed

Key Messages

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Thank You For Your Attention!

32

• AeroStrategy is a specialist management consulting firm devoted to aviation and aerospace sectors with offices in Ann Arbor, Michigan, Amersham, U.K., and Singapore

• To learn more about AeroStrategy please contact:

David Stewart, PartnerPh: + 44 1494 431 [email protected]

Kevin Michaels, PartnerPh: +1 734 821 [email protected]

Hal Chrisman, PrincipalPh: +1 734 821 [email protected]

U.S. Military MRO Outlook Smoke On The Horizon? · Military MRO April 2010 Sikorsky Aircraft Show...

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