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MRO Forecast & Market TrendsSeptember 23, 2015
Presented by:Jonathan M. BergerVice President ICF [email protected]
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Today’s Agenda:
founded 2001, joined ICF in 2011
founded 1963, joined ICF in 2007May 2010–May 2014
MRO Forecast
Meet the Frackers!
The not‐so‐mighty‐mighty BRIC House
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Today’s Agenda
MRO Forecast
Meet the Frackers!
The not‐so‐mighty‐mighty BRIC House
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North America31%
Asia Pacific26%
Europe25%
South America
8%
Middle East5%
Africa5%
Narrowbody Jet51%
Widebody Jet18%
Turboprop17%
Regional Jet14%
The current civil air transport fleet consists of over 27K aircraftMRO FORECAST
Source: FlightGlobal ACAS September 2014
2014 Global Air Transport Fleet
By Aircraft Type By Global Region
27,531Aircraft
27,531Aircraft
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The combination of strong air travel demand and the need to replace ageing aircraft will drive fleet growth at 3.2% annually
MRO FORECAST
Source: ICF International, ACAS September 2014
ICF Insight
Air travel growth of ~3.8%
Fuel costs in $80/bbl range
~19,000 aircraft deliveries
~8,600 aircraft retirements
10 Year Global Air Transport Fleet Growth
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2014 2024
AfricaMiddle EastSouth AmericaEuropeAsia PacificNorth America
3.8%
2.7%
4.7%
1.4%
5.3%
4.8%
27,500
31% 26%
37,900
CAGR
3.2% Average
26%
25%
8%
30%
24%
9%
# Aircraft
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North America29%
Asia Pacific27%
Europe27%
Middle East7%
South America6%
Africa4%
Engines40%
Components22%
Line17%
Airframe15%
Modifications6%
The current air transport MRO demand is $62.1B; with Asia equivalent to North America and Europe in market size
MRO FORECAST
2014 Global MRO Demand ($USD)
Source: ICF InternationalForecast in 2014 $USD, exclusive of inflation
$62.1B
By MRO Segment By Region
$62.1B
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$60.7B
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
2014 2024
ModificationsHeavy AirframeLineComponentsEngine
The global MRO market is expected to grow by 3.8% per annum to $90B by 2024
MRO FORECAST
10 Year Global MRO Spend Growth ($USD)
15%
17%
22%
40%
13%
17%
24%
38%
6%
8%
ICF Insight
Average growth is forecast to be 3.8% CAGR
The strongest drivers of growth are the engine and componentmarkets
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
2.6%
3.7%
4.5%
3.5%
5.9%
CAGR
3.8% Average
$90B$90B
$62.1B$62.1B
Source: ICF InternationalForecast in 2014 $USD, exclusive of inflation
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Airline industry economics will continue to drive growth in MRO outsourcing
MRO FORECAST
24%
60%
82%
88%
21%
53%
71%
78%
17%
48%
66%
74%
0% 20% 40% 60% 80% 100%
Line
Heavy Airframe
Components
Engine
Percent of Direct Maintenance Spend Outsourced
2008
2015
2020
Global Outsourcing by MRO Segment
Source: ICF Analysis
ICF Insight
Airlines currently outsource nearly 65% of all MRO activity
Capital intensive segments (e.g. engines & components) will drive outsourcing growth
Labor intensive airframe work will continue to “Right‐Shore”; migrate to lower labor cost countries within home region
Start‐up carriers will continue to seek total support solutions
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Engine OEMs have the strongest and most mature position across the primary MRO segments
MRO FORECAST
55%
35%
20%
25%
44%
82%
25%40%
54%
18%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Engine Component Airframe Linemaintenance
Non-OEMMRO
Airline in-house
OEM
Source: ICF Analysis
Air Transport MRO Supplier Market Share
ICF Insight
OEM leverage is strongest in the more material intensive markets
Component OEM’s are catching up to the dominant engine OEMs
Aircraft OEMs have an almost non‐existent position in the airframe‐related aftermarket
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ICF believes there are three key battlegrounds that will shape the future of the MRO aftermarket
MRO FORECAST
Critical to success in reliability and product design improvement (and market participation in general)
Who controls the operational data?
Critical to success in driving material choice, lifecycle cost, and MRO margins
Who controls the workscope?
Critical to success in growing integrated solution services market
Who controls the Assets?
1
2
3
Source: ICF Analysis
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The role of traditional aviation stakeholders in the “data value chain” is still to be determined…
MRO FORECAST
Inventory Management
Inventory Management
Airport TerminalAirport TerminalAirline
Operations CenterAirline
Operations CenterPassengersPassengers
AircraftAircraft
RegulatorsRegulatorsMRO & OEMMRO & OEM
Source: ICF Analysis
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…and a key challenge for aviation stakeholders is how best to realize value from the disparate terabytes of data
MRO FORECAST
Source: ICF Analysis
Number of AHM Parameters
767: 10,000
A320: 15,000
787: 100,000
777 787
~ 28MB
< 1MB
Transmittable Data(MB/Flt)
Aircraft Data Generation(TB/Year)
2012 2022
~ 137TB
~11TB
~1,100% increase
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Today’s Agenda
MRO Forecast
Meet the Frackers!
The not‐so‐mighty‐mighty BRIC House
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U.S. crude oil and natural gas production have soared in recent years…
MEET THE FRACKERS!
3,500
4,500
5,500
6,500
7,500
8,500
9,500
1,250
1,450
1,650
1,850
2,050
2,250
2,450
Source: EIA, ICF Analysis
10 year growth = 71%(5.5% CAGR)
10 year growth = 47%(3.96% CAGR)
Thousands
U.S. Crude Oil Production(Barrels / day)
U.S. Natural Gas Production(Monthly marketed production)
Billion cu. ft.
Breakthrough technologies in horizontal drilling and hydraulic fracturing (aka fracking) resulted in a US‐led energy revolution
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…making the U.S. a global powerhouse in energy production MEET THE FRACKERS!
728
579
177 173 162135
109 108 83 73
0
100
200
300
400
500
600
700
800
Source: BP Statistical Review of World Energy June 2015, ICF Analysis
11.6 11.510.8
4.3 4.23.7 3.6 3.3 3.1 2.8
0
2
4
6
8
10
12
14
Global Oil Production(Million Barrels per Day as of June 2015)
Global Natural Gas Production (Billions of Cubic Meters as of June 2015)
The US energy revolution has disrupted the global economic and geopolitical balance of power
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Source: Economist, EIA, ICF Analysis
Brent Crude Oil Price, $ per barrel
$40
$60
$80
$100
$120
$140
$160 VenezuelaIran
NigeriaEcuadorIraqLibya
Saudi Arabia
AngolaUAE
Qatar
Russia
Deficit
Surplus
National Government Fiscal Budgets’ Break‐Even Oil Price (2014)
Brent Crude Oil Price, USD$ per barrel
Low oil prices are exerting tremendous stress on economies dependent on energy exports
MEET THE FRACKERS!
The potential for sustained reduction in oil revenues could further destabilize many already fragile economies
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MEET THE FRACKERS!
Aviation fuel costs have dropped over 45% during the past 12 months
$1.4
$1.6
$1.8
$2.0
$2.2
$2.4
$2.6
$2.8
$3.0
U.S. Gulf Coast Jet Fuel Price per Gallon
Source: EIA, ICF Analysis
$ USD
Should these low fuel costs continue, there will be repercussions throughout the aviation & MRO supply chain
~45%
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‐$30
‐$20
‐$10
$0
$10
$20
$30
With up to 40% of an airline’s operating costs driven by fuel, the airline industry has successfully returned to profitability
MEET THE FRACKERS!
Global Airline Profitability
Source: IATA Central Forecast Jun 2015, ICF Analysis
$USD Billions $29B
North America$16B
Rest of World$13B
However, recent airline profit windfalls are not a global phenomena; more than half the profits are enjoyed by North American Carriers
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MEET THE FRACKERS!
Current industry forecasts are based on $65/bbl – given today’s price, tremendous short‐term upside exists…
$(40)
$(20)
$‐
$20
$40
$60
$80
$100
$120
$30 $35 $40 $45 $50 $55 $60 $65 $70 $75 $80 $85 $90
Arli
ne In
dust
ry P
rofit
($B
illio
ns)
Crude Oil Cost per Barrel
2015 IATA Forecast:$29B industry profit based on $65/bbl
Caution: Low fuel costs may lead to increased capacity and new market entrants ….ultimately eroding hard fought profitability…
Source: IATA Airline Industry Economic Report, Jun 2015; ICF Analysis
?
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The U.S. energy boom has provided a significant energy cost advantage vs. traditional manufacturing competitors
MEET THE FRACKERS!
Source: EIA
Natural Gas Price Index(January 2006 = 100)
Japan
Germany
USA
Globalization 2.0: Is Cheap Energy the New Cheap Labor?
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And its not just corporations that are benefitting from cheap energy; American’s household electricity bills are some of the lowest in the world
MEET THE FRACKERS!
393.3 387.6
242.1 228.9196.3 193.4 190.0
172.3
121.2101.4 90.9
0
50
100
150
200
250
300
350
400
450
Electricity For Households
Source: IEA, Key World Energy Statistics 2014
$USD / MWh
Globalization 2.0: Is Cheap Energy the New Cheap Labor?
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Today’s Agenda
MRO Forecast
Meet the Frackers!
The not‐so‐mighty‐mighty BRIC House
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THE NOT‐SO‐MIGHTY‐MIGHTY BRIC HOUSE
Source: ICF SH&E Analysis; Flightglobal ACAS 2013, ATA, US Federal ReserveSource: ICF SH&E Analysis; Flightglobal ACAS 2013, ATA, US Federal Reserve
Economic Growth in Emerging Markets Historically Low Interest Rates (%)
New Technology Aircraft / EnginesHistorically High Jet A Fuel Prices ($/BBL)
0
2
4
6
8
10
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
10‐Year US Treasury Bond Yield –though cost of capital is now trending up
020406080100120140
1991 1994 1997 2000 2003 2006 2009 2012
Over the past decade, four factors reshaped the global aviation and aerospace industry…
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…Result: Aircraft OEM production backlog are at historic record high levels
THE NOT‐SO‐MIGHTY‐MIGHTY BRIC HOUSE
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
Note: includes narrowbody, widebody, and regional jets in commercial service. Excludes Russian‐manufactured aircraft. Only includes passenger, freighter, quick change and combi operational rolesSource: Flightglobal ACAS, April 2015
Order Backlog
Backlog/Active Fleet
Commercial Aircraft OEM Production Backlog
High oil prices Low interest rates Emerging market growth New Technology aircraft/engines
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Accordingly, the Aerospace and MRO industry center of gravity is shifting east
THE NOT‐SO‐MIGHTY‐MIGHTY BRIC HOUSE
US$ Billions
$6.9$5.4
$4.2$2.6 $2.5 $2.3 $2.3 $1.8
$0.0
$1.0
$2.0
$3.0
$4.0
$5.0
$6.0
$7.0
$8.0
Asia/Pacific(excl China)
China Middle East EasternEurope (incl
CIS)
WesternEurope
Latin America NorthAmerica
AfricaAsia/Pacific(excl. China)
China Middle East
Source: ICF InternationalForecast in 2014 $USD, exclusive of inflation
Difference in $ MRO Spend, 2024 vs. 2014 – By Global Region $B
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However, after years of staggering GDP growth, China’s economy has been steadily slowing
THE NOT‐SO‐MIGHTY‐MIGHTY BRIC HOUSE
% of YOY Growth China GDP Year‐on‐Year Growth (%)
5%
7%
9%
11%
13%
15%
Source: ICF analysis, IMF, World Economic Outlook Database April 2015
China’s seemingly insatiable demand for global commodities was the primary driver of the BRICS economic growth
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Following China’s economic slowdown, global commodity prices have decreased by over 40% during the last 3 years
THE NOT‐SO‐MIGHTY‐MIGHTY BRIC HOUSE
50
60
70
80
90
100
110
Indexed ValuesDow Jones Commodity Indices (DJCI)
(September 2012 Indexed to 100)
‐ 41.0%
Source: ICF analysis
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The dramatic increase in oil & gas market supply and reduced demand for commodities has led to a strengthened US Dollar
THE NOT‐SO‐MIGHTY‐MIGHTY BRIC HOUSE
Source: Oanda historical exchange rates, ICF analysis
Russian Ruble‐45.6%
Brazilian Real‐37.1%
Aus Dollars‐23.0%
Mexican Peso‐22.9%
S. African Rand‐18.5%
Can Dollars‐17.8%
Japanese Yen‐13.3%
Euro‐13.1%
Indian Rupee‐8.8%
British Pound‐5.4%
Chinese Yuan‐3.8%
‐60%
‐50%
‐40%
‐30%
‐20%
‐10%
0%
10%
% Change in Major Global Currency Exchange Rates vs USD(Sept. 2014 – Sept. 2015)
S
I
BR
C
FOREX Impact Off‐sets 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 MRO’s is cheaper driving up
margins for US dollar based contracts
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In Summary…
Operational data control = destiny control
The US energy revolution has disrupted global economics and geopolitics (increased supply)
Compounding this, the economic slowdown in China has dramatically impacted commodity dependent BRICS (decreased demand)
These are the “good ol' days” for aircraft operators and OEMs (MRO aftermarket remains a battlefield)
Globalization 2.0: Cheap energy may indeed be the new cheap labor
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Thank you!For questions regarding this presentation, please contact:
Jonathan M. BergerVice President – Aerospace & MRO+1 (404) 819‐[email protected]
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ICF’s MRO advisory services include the following:
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ICF is one of the world’s largest and most experienced aviation and aerospace consulting firms
52 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
Airports • Airlines • Aerospace & MRO • Aircraft Asset AdvisoryAirports • Airlines • Aerospace & MRO • Aircraft Asset Advisory
joined ICF in 2011
joined ICF in 2007
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