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0 icfi.com/aviation | MRO Forecast & Market Trends September 23, 2015 Presented by: Jonathan M. Berger Vice President ICF International [email protected]

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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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MRO Market Research & Analysis

Airline Maintenance Benchmarking

M&A Commercial Due Diligence

Aerospace Manufacturing Strategy

Aviation Asset Valuations & Appraisals

MRO Information Technology (IT) Assessment

MRO Strategic Sourcing Support

Supply Chain Management

LEAN Continuous Process Improvement

Military Aircraft Sustainment

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

New York  • Boston • Ann Arbor  • London • Singapore • Beijing • Hong Kong