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© OLIVER WYMAN

TURBULENCE AHEAD DISENGAGE THE AUTOPILOT

2015-2025 GLOBAL FLEET & MRO MARKET FORECAST

2015 MRO AMERICAS CONFERENCE

David A. Marcontell

Vice President

1 © OLIVER WYMAN 1 © OLIVER WYMAN

The respected TeamSAI Global Fleet & MRO Market Forecast, and related

betterinsightTM market intelligence data, remains available at

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

2015-2025 Global Fleet Forecast

by Aircraft Class

Key Fleet Forecast

Growth Rates

• Global fleet will grow on

average 3.7% annually over

the full forecast period

• Passenger fleet is expected

to grow at 3.8% annually

• Cargo fleet is forecast to

grow by 2.3% annually

• Narrowbody aircraft will lead

the growth

• Regional jets will actually

decline in the mix

13,124 16,949

21,089

4,686

5,753

7,181

3,396

3,222

2,906

2,721

3,079

3,232

5.2%

4.2%

-1.0%

2.5% 23,927

29,003

34,408

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 2015-2020CAGRS

2020 2020-2025CAGRS

2025

Nu

mb

er

of

Air

cra

ft

Forecast Year and Forecast CAGR

Narrowbody Widebody Regional Jet Turboprop

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

3.9%

3.5%


2015

Fleet Size

722

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

North America

Europe

Latin America

& the Caribbean

Africa / Middle East

Asia Pacific / China / India

0.9%

2.8%

4.7%

5.5%

6.1%

7,420

6,131

1,720

2,204

6,452

1,965

997

1,562

5,235

10YR

CAGR

2015- 2025

Absolute Growth


2025

Fleet Size

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

North America

Europe

Latin America

& the Caribbean


Asia Pacific / China / India 6.1%

7,420

6,131

1,720

2,204

6,452

8,142

8,096

2,717

3,766

11,687


The systematic elimination and replacement of older aircraft with new technology

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

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


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%

2015 Global Air Transport Fleet

by Vintage

2025 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


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

Forecast Year

Airframe Engine Component Line

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

2015-2025 Global MRO Market Size Forecast

by MRO Segment

2015-2025 Global MRO Market Share Forecast

by MRO Segment

MR

O S

pe

nd

in

2015 D

oll

ars

($

US

B)

Mark

et

Sh

are

$14.5 $15.9 $16.7

$27.9 $37.1

$46.8

$12.4

$15.2

$19.2

$12.3

$15.0

$17.8

1.9%

5.9%

4.1%

4.0% $67.1

$83.2

$100.4

1.0%

4.8%

4.7%

3.5%

$0

$20

$40

$60

$80

$100

$120

2015 2015-2020CAGRS

2020 2020-2025CAGRS

2025

Bill

ions



Airframe Heavy Maintenance costs improve with the new technology while both

Engine and Component sectors will take a larger share

4.4%

3.8%


$1.3

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

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

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

North America

Europe

Latin America

& the Caribbean


Asia Pacific / China / India

0.6%

3.3%

7.3%

5.5%

6.6%

$20.0

$17.9

$3.2

$7.5

$18.3

$7.0

$3.3

$5.3

$16.5

2015

MRO Spend ($USB)

10YR

CAGR

2015- 2025

Absolute Growth


2025

MRO Spend ($USB)

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

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

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

North America

Europe

Latin America

& the Caribbean


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

North American MRO Market

Outlook


2015 PASSENGER TRAFFIC (RPK) GROWTH

7.0%

2015 CURRENT FLEET

7,420

4,100+

2015-2025 AIRCRAFT DELIVERIES

3,100+

2015-2025 AIRCRAFT RETIREMENTS

+0.9%

2015-2025

FLEET CAGR

Passenger traffic is picking up; however, the fleet growth will be limited over the next 10 years as most deliveries are slated to replace aging aircraft


$4.6B in MRO from ’70s and ’80s vintage aircraft will be lost over the next 10 years; however, ’90s, ’00s and ’10s vintage aircraft will see a $5.9B increase

A320C/NEO

737NG/MAX

757

CRJ

777

767

ERJ

EJET

MD-80

747

737NG/MAX

A320C/NEO

777

787

CRJ

767

EJET

A330C/NEO

A350

MRJ

Top 10 North American Aircraft Families in 2015 Top 10 North American Aircraft Families in 2025


$1.00

$2.00

$3.00

2,000 2,400 2,800 3,200 3,600 4,000 4,400 4,800

$1.00

$2.00

$3.00

2014 2015

WTI Brent Jet A

Oil prices have plummeted over the past year and could remain low over the short term. Many are concluding that this will cause airlines to alter fleet plans and drive an increase in MRO.

Crude Oil Spot Price

per Gallon

Aircraft Profitability Curve

Current Generation vs New Generation

Sp

ot

Pri

ce p

er

Ga

llo

n (

$U

SD

)

Jet-

A S

po

t P

rice p

er

Gallo

n (

$U

SD

)

Utilization in Hours

Our view: Long term, oil prices will likely recover, OEM order books will remain

largely unaffected, and net fleet growth will progress as forecasted

1 YEAR

PRICE DROP

New gen aircraft are more

profitable than current gen

New gen aircraft are less

profitable than current gen

April 2014

April 2015


There are currently 140 commercial operators based in North America. The top 20 operators comprise over 80% of the North American fleet.

Top 20 North American Airlines

by Fleet Size

969

777

700

677

403

340

332

237

224

199

168

162

136

131

127

107

85

71

70

66

0 200 400 600 800 1,000 1,200

American/US Airways

Delta Air Lines

United Airlines

Southwest Airlines

ExpressJet Airlines

SkyWest Airlines

FedEx

UPS Airlines

Envoy

JetBlue Airways

Endeavor Air

Air Canada

Alaska Airlines

Republic Airlines

Jazz

WestJet

Mesa Airlines

Air Wisconsin

Allegiant Air

Shuttle America

Fleet Size

Op

era

tor

Nam

e

The top 4 operators carry over 50% of the North American Traffic


2015-2025 North American MRO Market Forecast

by MRO Segment

With 78% of the new deliveries forecast to replace older aircraft, the MRO forecast is virtually flat

North American MRO will be impacted by less maintenance intensive HMV work

and honeymoon periods of engines and components

$20.0

$18.1 $17.4

$18.6 $18.3 $19.2 $19.0

$18.0 $19.0 $19.2

$21.3

$0

$5

$10

$15

$20

$25

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Bill

ions



MR

O S

pe

nd

in

2015 D

oll

ars

($

US

B)


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

Market participants will need aggressive and innovative plans for growth

• 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

MRO Survey Results

© OLIVER WYMAN © OLIVER WYMAN 20

The collection, storage, aggregation and analysis of data will be key factors in aircraft health monitoring and predicative maintenance.

0%

7%

9%

19%

65%

PMA Manufacturers

MROs

Too early to predict

OEMs

Airlines

Who is best positioned within the industry to benefit

from predictive maintenance?

Source: Oliver Wyman’s 2015 MRO Survey


Oliver Wyman’s 2015 MRO Survey identified a slew of new technologies that are poised to come to market

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%

Most prominent new technologies by 2020 (All respondents)



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



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

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

Positive survey responses

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



6%

21%

21%

32%

35%

44%

44%

50%

So what’s really inhibiting change in MROs?

Note: Responses to the question: “The primary inhibitors of innovation at my organization are:”, Percent of MRO responses per inhibitor (multiple selections

possible per category). Not shown “Other” responses from a total of 9% of respondents; Source: Oliver Wyman’s 2015 MRO Survey

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?

The primary inhibitors of innovation at my organization are:


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.


• Expected to be a significant driver

of innovation over the next five

years

• Boeing recently invested $100M

into expanding AHM

• A 787 flight can generate 500GB

of data

Aircraft Health Monitoring

(AHM) and Big Data

Additive Manufacturing

(3D Printing)

• Quickly gaining traction

– A350 will feature 3D-printed

plastic and metal brackets

– GE will introduce 3D-printed

fuel nozzles in its CFP LEAP

engine

– Out-of-production parts can be

printed “on-demand”

Augmented Reality and

Automated Inspection Tech

• Augment reality allows for live

audio and visual communication

with OCC

• Robots used for visual

inspections and non-destructive

testing

– Highly efficient

– Highly accurate

Take the controls and make strategic investments now: Technologies will likely come online faster than anticipated


Time to disengage the Autopilot

Is your corporate Auto Pilot engaged?

• 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


The future is now