0

MRO Market Update & Industry Trends

Presented by:

Jonathan M. BergerVice President ICF

jberger@icf.com

January 25-26, 2017

Cancun, Mexico

11

Today’s Agenda

Fleet & MRO Forecast

2016: What a long strange trip

year it’s been…

2017: The year aviation &

aerospace blinked…

22

MRO Forecast

33

The current

commercial

air transport fleet

consists of under

28K aircraft; over

half are narrowbody

aircraft

Source: CAPA 2016

NarrowbodyJet

WidebodyJet

Turboprop

Regional Jet

27,957

Aircraft

13%

54%14%

19%

By Aircraft Type By Global Region

27,957

Aircraft

2016 Global Commercial Air Transport Fleet

5%

28%

25%5%

30%

7%

Latin

AmericaAfrica

North

America

Asia

Pacific

EuropeMiddle East

44

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2016 2026

Africa

Middle East

Latin AmericaEurope

Asia Pacific

North America

The combination of

strong air travel

demand and the

need to replace

ageing aircraft will

drive fleet growth at

a healthy 3.2%

annually

Source: ICF analysis: CAPA 2016

28,000

30% 25%

38,100

28%

25%

8%

33%

23%

8%

# Aircraft

3.4%

2.4%

1.3%

4.8%

5.0%

4.1%

CAGR

3.2% Avg.

5%

6%

10 Year Global Air Transport Fleet Growth

55

Current commercial

air transport MRO

demand is $67.6B;

Asia is now larger

than North America

and Europe in

market size

Source: ICF analysis; Forecast in 2016 $USD, exclusive of inflation

Engines

Components

Line

Airframe

Modifications

14%

17%

22%

40%

8%

North America

Asia Pacific

Europe

Middle East

Latin America

Africa

27%

30%

26%

8%

6% 4%

$67.6B$67.6B

By MRO Segment By Global Region

2016 Commercial Air Transport Global MRO Demand

66

The global MRO

market is expected

to grow by 4.1% per

annum to over

$100B by 2026

Source: ICF analysis; Forecast in 2016 $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

2016 2026

Modifications

Airframe

Line

Component

Engine

40%

22%

14%

17%

$67.6B

$100.6B

2.8%

3.2%

4.2%

4.5%

CAGR

4.1% Avg.

5.2%

41%

22%

16%

12%

10 Year Global Commercial Air Transport MRO Demand Growth

$USD

Billions

77

The current Latin

American fleet

consists of over

2,100 aircraft; with

narrowbody aircraft

making up more than

50% of the installed

base

Source: CAPA 2016

NarrowbodyJet

WidebodyJet

Turboprop

Regional Jet

2,099

Aircraft

15%

52%23%

9%

By Aircraft Type By Country

Brazil

Mexico

ColombiaChile

Venezuela

Panama

Other

2,099

Aircraft

25%

19%8%

20%

11%

6%

6%

5%

2016 Latin American Commercial Air Transport Fleet

88

The Latin American

MRO market is

expected to grow

to approx. $6.4B

by 2026, at 5.5% per

annum

Source: ICF analysis; Forecast in 2016 $USD, exclusive of inflation

Modifications is the fastest

growing MRO segment in

Latin America

MRO spend on widebodies

in Latin America will nearly

double by 2026 as the fleet

increases by 56%

$0

$1

$2

$3

$4

$5

$6

$7

2016 2026

Modifications

Airframe

Line

Component

Engine

37%

25%

13%

19%

$3.8B

$6.4B

4.0%

3.7%

4.7%

7.0%

CAGR

5.5% Avg.

7.2%

42%

23%

16%

11%

8%

10-Year Global Latin American MRO Demand Growth

$USD

Billions

7%

99

2016: What a long strong trip

year it’s been…

1010

Driven by low fuel

costs and

consolidation, the

global airline

industry achieved

record profitability

of over $35B USD in

2016

Source: IATA, ICF analysis

2016 was a historic year for airline

profitability…

Global Airline Profitability, 1997 - 2017F

-$30

-$20

-$10

$0

$10

$20

$30

$40

$USD

Billions

Asia Pacific, $6.3B

North America, $18.1B

Europe, $5.6B

Middle East, $0.3B

Latin America, $0.2B

Africa, ($0.8B)$35.6B

1111

However, record

profitability has

been largely limited

to carriers in North

America

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%

12.9%

5.2%4.5%

2.9%

0.7%

-3.6%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2008

2012

2017F

Global Airline EBIT Margin by Region

…but many airlines continue to struggle

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

Aviation is

experiencing a

new golden age

of aircraft cabin

interiors

Modifications demand includes labor and material spend

*Passenger-To-Freighter Conversions

**Airworthiness Directives / Service Bulletins

Source: ICF analysis, constant 2016 US$

MRO modification market

growth drivers include:

Latest lie-flat seats are now

the minimum standard

Premium economy

Wi-fi, on-board connectivity

Capacity (ASM/K) increase

(“Cabin Densification”)

Coming soon: ADS-B Mod

program

Commercial Air Transport Modifications Forecast

$2.8

$4.8

$0.8

$1.4

$0.6

$0.9

$0.3

$0.5

$0.3

$0.4

$0.2

$0.4

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

2016 2026

Cabin Connectivity

AD/SB**

PTF Conversions*

Painting

Avionics Upgrades

Interiors

$5.1B

$8.5B

3.6%

4.2%

5.9%

5.6%

CAGR

5.2% Avg.

2.9%

$USD

Billions

5.1%

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

Latin American

Aviation Outlook

1616

The good news…

After a half decade

of economic decline,

Latin America is

once again poised

for growth in 2017

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

Source: IMF Economic Outlook April 2016, ICF analysis

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Latin American GDP Growth

1717

In 2017, while most

countries in Latin

America will see

modest, but steady

economic growth,

the big increases will

come from Brazil

and Argentina

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%

-4.0%

-2.0%

0.0%

2.0%

4.0%

2013 2014 2015 2016F 2017F

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

1818

Latin America is in

the midst of an

“LCC Renaissance”

Source: OAG, Airbus, ICF Analysis

LCC Market Share (seats offered) by Global Region

38%

21%24%

30%

40%

49%

20% 20%

13%

6%9%

4%7% 6%

3%

0%

10%

20%

30%

40%

50%

60%

Domestic

Intra-regional

International Copa restructuring Copa Colombia into new ultra-LCC called Wingo

VivaColombia launches subsidiary Viva Air in Peru

Flybondi plans to launch ultra-LCC in Argentina in 2017

Chilean based Sky Airline switching its business model to ultra-LCC

Mexican LCC Volarisannounces new subsidiary in San Jose, Cost Rica

1919

There continues to be

significant interest

and external financial

investment in Latin

American carriers

Source: ICF analysis

United States

Brazil

2020

2017: The year aviation &

aerospace blinked…

2121

Commercial aircraft

OEM production

backlog remains at

historical highs

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

Very low interest rates

Previously high oil and

commodity prices

Introduction of new

technology aircraft/engines

2222

Lower 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

- PMA Suppliers: Very

Positive

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

2323

Four external macro-

economic forces are

creating headwinds

for global airlines

and the broader

aerospace & MRO

supply chain

Source: ICF analysis

Strengthening US Dollar

Growth of Populism/Nationalism

& Impact to Global Trade

Increased airline costs:- Aircraft financing

- Fuel

- Labor

- MRO flight hour agreements

Downward pressure on global GDP

growth

Downward pressure on aircraft

valuations

Potential for increase in aircraft

delivery deferrals (backlog risk)

Middle East airline titans stressed

Advantage = Airbus

24

For questions regarding this

presentation, please contact:

Jonathan M. BergerVice President Aerospace & MRO Advisory

jberger@icf.com +1 404.819.7669

THANK YOU!

January 25-26, 2017

Cancun, Mexico

2525

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