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Key Battlegrounds in the Aftermarket

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This presentation was originally shared at the SpeedNews Aviation Industry Suppliers Conference in Toulouse, France on September 16, 2015 by David Stewart. Over the last thirty years, the global air transport Aftermarket has evolved from a cost centre to a highly competitive market. In this presentation, ICF explores the three key battlegrounds that will determine the future of Aftermarket. You can find an appendix of acronyms on Slide 28 of the presentation.

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Key Battlegrounds in the Aftermarket

  1. 1. ICF International | icfi.com © ICF 2015 00 Key Battlegrounds in the Aftermarket AISCT – 16 September 2015 – Toulouse, France Presented by: David Stewart Global Lead, Aerospace & MRO Practice  ICF International
  2. 2. ICF International | icfi.com © ICF 2015 1 Agenda Key Battlegrounds in the Aftermarket Context Takeaways The Battlegrounds
  3. 3. ICF International | icfi.com © ICF 2015 2 Agenda Key Battlegrounds in the Aftermarket Context
  4. 4. ICF International | icfi.com © ICF 2015 3 The global air transport industry has been completely transformed in the last thirty years CONTEXT Pre-1980s 1980 – 2000 Post-2000s Airlines  Largely state-owned (except US)  Regulated fares & routes  Point-to-point routes  Restrictive route rights  Mix of state & privately owned  Increasing liberalization of fares & routes  Hub-and-spoke model  First-generation LCCs  Code-sharing leading to launch of global alliances  Private ownership  Pricing transparency (Internet)  Global spread of LCC’s  Business model convergence between LCC’s & legacies  Alliances & immunized JV’s are majority of global capacity  More recently, significantly increased focus on ROIC Airlines have evolved from a regulated industry towards greater liberalization
  5. 5. ICF International | icfi.com © ICF 2015 4 The aftermarket evolved from being an afterthought to a market of significant importance CONTEXT 1980 – 2000 Post-2000s Airlines  Maintenance mainly a cost centre  LCC’s drive new approach to managing maintenance  Increased outsourcing  US airline bankruptcies and restructuring  Limited focus on aftermarket; Rolls-Royce ahead of the game  Significant growth of point-of- aircraft sale MRO contracts by engine OEMs  Increasing economic imperative for Component OEMs given design investment on new programmes OEMs MROs  Supply mostly in-house – few large airline MRO suppliers and hugely fragmented independent sector  Growth of integrated services  Globalization of demand The aftermarket has evolved from a cost centre to a highly competitive market
  6. 6. ICF International | icfi.com © ICF 2015 5 Aftermarket is significant at $135B, equivalent to 75% of the value of current production CONTEXT Source: ICF International Air Transport, 61% Business & General Aviation, 14% Civil Rotary Wing, 3% Military, 12% Military Rotary Wing, 10% Production: $180.3B Air Transport, 48% Business & General Aviation, 9% Civil Rotary Wing, 3% Military, 27% Military Rotary Wing, 13% Aftermarket: $135.1B Aftermarket and Production Market Size (2015 $B)
  7. 7. ICF International | icfi.com © ICF 2015 6 Across the air transport MRO supply chain, engine and component parts drive almost 60% of total margin CONTEXT Engine & APU Maintenance 26% Engine Parts 17% Component Maintenance 14% Line Maintenance 11% Airframe Heavy Maintenance 10% Component Parts 8% Others 14% % of Total Revenue Engine Parts 42% Component Parts 16% Component Maintenance 11% Engine & APU Maintenance 11% Line Maintenance 4% Airframe Parts 4% Other 12% % of Total Margin 2014 Air Transport MRO Revenue by Segment Total = $97.3B 2014 Margin By Main Activity Total = $23.9B Source: ICF International
  8. 8. ICF International | icfi.com © ICF 2015 7 Engine OEMs have the most mature and strongest OEM position across the main air transport aftermarket segments CONTEXT 55% 35% 2% 0% 20% 25% 44% 82% 25% 40% 54% 18% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Engine overhaul Component O&R Airframe Heavy Line maintenance Non-OEM MRO Airline in- house OEM Source: ICF International Highlights  OEMs strongest share in the more material intensive markets  Component OEM market share lower than engine OEMs  Aircraft OEMs have an almost non-existent position in the airframe-related aftermarket Air Transport Supply (2015)
  9. 9. ICF International | icfi.com © ICF 2015 8 CONTEXT The net result – aircraft OEMs are seeking to follow the engine and component OEMs -Source: ICF International Relative Air Transport Market Margin and Leverage EBIT % Leverage (ND/EBITDA) 0.0x OEMs: Components & Structures - OEMs: Engines OEMs: Aircraft MROs MRO with mixed signals from Integrators to Independents Airlines (Size scaled down)
  10. 10. ICF International | icfi.com © ICF 2015 9 The ramp up and introduction of new generation aircraft creates the opportunity to change the aftermarket supply chain CONTEXT Source: ICF International - 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Aircraft deliveries (units) Highlights  New aircraft with higher reliability, lower manhours and complex technology change the business case for establishing MRO capability  …especially with greater airline focus on ROCE  This is a catalyst to change the MRO supply model….  Creating new opportunity for OEMs and aftermarket providers Mature Aircraft New Generation Aircraft
  11. 11. ICF International | icfi.com © ICF 2015 10 For 2015 onwards, the aftermarket will move to a new era based on new battlegrounds CONTEXT 2015 Onwards Airlines  Chance to change business model – outsource cost, assets and risk to aftermarket suppliers  Airframe OEMs enter the fray - will they succeed?  Component OEMs increasing control of data, manuals and parts choice  More sole source engines on new wide body platforms OEMs MROs Evolving from a cost centre to a highly competitive market
  12. 12. ICF International | icfi.com © ICF 2015 11 Agenda Key Battlegrounds in the Aftermarket The Battlegrounds
  13. 13. ICF International | icfi.com © ICF 2015 12 ICF believes there are three key battlegrounds that will determine the future of the Aftermarket THE BATTLEGROUNDS Who controls the operational data? Who controls the workscope? Who controls the assets? • Critical to success in market participation and in gaining operational feedback for design and reliability improvement • Critical to success in driving parts choice and aftermarket margins • Critical to success in growing integrated service market
  14. 14. ICF International | icfi.com © ICF 2015 13 The role of traditional aviation players in the data value chain is still to be determined THE BATTLEGROUNDS Data ownership versus data access and use are of great concern to operators, and data processing business models are unproven (except at engine OEMs?) DATA Aircraft Generate Data… Airlines owns them Airline Operations Control Centers … Which Can be Processed in Many Locations Aircraft / Engine OEM Networks Component OEM MRO DATA Data Service Companies OEM Direct Access
  15. 15. ICF International | icfi.com © ICF 2015 14 All stand to gain significantly from improved access to and control of operational data, which today is owned by the airlines THE BATTLEGROUNDS DATA Airlines OEMs * Airline MRO Eng. OEMs Who controls the operational data? HOW MUCH DOES EACH PARTY GAIN? (example benefits) * Airframe and component OEMs  Higher reliability (e.g., predictive maintenance)  Lower costs (fuel, maintenance, inventory)  Operational data to feedback into design loop  Higher performance products  Operational data to feedback into design loop  Higher performance products  Reduce costs and improve competitiveness  Market access Source: ICF International
  16. 16. ICF International | icfi.com © ICF 2015 15 Aircraft OEMs are vying to use their leverage to become the arbiters of data for the connected airline… THE BATTLEGROUNDS • Boeing EDGE: “Information Services” , the Digital Airline and Gold Care brands • Notable Aircraft Health Management (AHM) successes • “Services by Airbus”: training/flight operations, material management, E&M e- solutions, upgrades, and FHS/TSP support packages • “Airbus Smarter Fleet” partnership with IBM - integration of e-solutions Boeing View of AHM System Architecture Aircraft OEMs believe that their scale and position in the market make them a natural middleman for data aggregation and analysis DATA
  17. 17. ICF International | icfi.com © ICF 2015 16 Control of workscope is key to input decisions – hence the historic focus on this by engine OEMs and the former PMA “War” THE BATTLEGROUNDS WORKSCOPE 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Engine Materials 80% Labour 20% Airframe Materials 20% Labour 80% Components Materials 55% Labour 45% Line Materials 15% Labour 85% TypicalMROCostBreakdown Typical Aftermarket Cost Breakdown Insight  For engine and component activity “Whoever controls the workscope controls the parts decision” – this is a key driver behind related OEM aftermarket strategies  Use of PMA, repairs and surplus are important alternatives to OEM new parts  For airframe activity, labour unit cost (rates & productivity) drive the economics, hence the market is more open Source: ICF International
  18. 18. ICF International | icfi.com © ICF 2015 17 Workscope control is most important for material intensive activity i.e., control over the parts decision THE BATTLEGROUNDS Airlines OEMs * Airline MRO Eng. OEMs Who controls the workscope ? HOW MUCH DOES EACH PARTY GAIN? (example benefits) * Airframe and component OEMs  Cost control  Increased revenue and margin  Increased revenue and margin  Cost control, shorter turn- times and improved competitiveness Source: ICF International WORKSCOPE Airframe Component
  19. 19. ICF International | icfi.com © ICF 2015 18 The share of integrated programmes in component support is set to increase THE BATTLEGROUNDS: ASSETS Component Support Buying Behaviour Growth Drivers  Small fleet size • Perceived technology risk • Improved ROIC • Maintenance no longer core activity • Predictable outgoings • Attractive value propositions • Lower investment, less infrastructure Source: ICF International 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2004 2014 2024 Integrated* Traditional Integrated Component Programs Penetration 777 787/A350 ~20% 55%-70% 9% 30% 45%
  20. 20. ICF International | icfi.com © ICF 2015 19 Control of assets enables aftermarket players to support integrated programmes more effectively THE BATTLEGROUNDS: ASSETS Insight  Component aftermarket support programmes are a driver of growth and of margin  Central to the economics of this offer is control and access to the inventory  The more inventory held by a supplier, the lower the inventory cost per aircraft supported  The “battle” for 787 / A350 component support has already been joined, with e.g., AFI/KLM E&M winning multiple 787-related contracts Source: ICF International Relative Inventory Requirements
  21. 21. ICF International | icfi.com © ICF 2015 20 Control of the rotable assets is a core feature driving the “winning business model” in integrated packages THE BATTLEGROUNDS Airlines OEMs * Airline MRO Eng. OEMs Who controls the assets ? HOW MUCH DOES EACH PARTY GAIN? (example benefits) * Airframe and component OEMs  Inventory cost reduction and parts availability (if scale sufficient)  Parts pool critical to (profitable) component aftermarket packages  Spare engine pool already part of total support programmes  Vital to competitiveness and profitability of integrated aftermarket packages Source: ICF International Airframe Component ASSETS
  22. 22. ICF International | icfi.com © ICF 2015 21 Agenda Key Battlegrounds in the Aftermarket Takeaways
  23. 23. ICF International | icfi.com © ICF 2015 22 Today, airlines have strong ownership/control of their destiny but do they make the most of it? TAKEAWAYS Category Who Owns The Workscope? Who Owns The Assets? Airlines Airframe OEMs Engine OEMs Component OEMs Airline MROs Independent MROs StrongKeyWeak ImprovingWorsening Eng Comp Airframe Who controls the operational data? Who controls the workscope? Who controls the assets? Source: ICF International Airlines, as a buyer of aircraft and the owner of the operational data, should push the aftermarket supply chain....to benefit from better, more cost efficient solutions
  24. 24. ICF International | icfi.com © ICF 2015 23 Expect strong focus on these battlegrounds – achieving a winning position is key to the aftermarket participants meeting their goals TAKEAWAYS • Safe and reliable operation of aircraft • Operational feedback • Increased revenue, margin and RONA • Delivery of promised cost and performance Airframe & Component OEM Goals Importance To Achieving Goals Data Workscope Assets Strong Key Weak / • Safe and reliable operation of aircraft • Operational feedback • Increased revenue and margin • Delivery of low/competitive (total) cost to customers Airline and Independent MRO Goals Importance To Achieving Goals Data Workscope Assets Source: ICF International
  25. 25. ICF International | icfi.com © ICF 2015 24 Airlines OEMs * Airline MRO Eng.OEMs Whocontrols the operational data? WHO HAS THE MOSTTO GAIN? (example benefits)  Higher reliability (e.g., predictive maintenance)  Lower costs (fuel, maintenance, inventory)  Operational data to feedback into design loop  Higher performance products  Operational data to feedback into design loop  Higher performance products  Reduce costs and improve competitiveness  Market access Especially from the Airframe and Component OEMs who have the most to gain… TAKEAWAYS Airlines OEMs * Airline MRO Eng.OEMs Who controls the workscope ? WHO HAS THE MOSTTO GAIN? (example benefits)  Cost control  Increased revenue and margin  Increased revenue and margin  Cost control, shorter turn- times and improved competitiveness Airframe Component Airlines OEMs * Airline MRO Eng.OEMs Who controls the assets ? WHO HAS THE MOSTTO GAIN? (example benefits)  Inventory cost reduction and parts availability (if scale sufficient)  Parts pool critical to (profitable) component aftermarket packages  Spare engine pool already part of total support programmes  Vital to competitiveness and profitability of integrated aftermarket packages Airframe Component …and therefore expect to see more investments from these OEMs in these aspects of the aftermarket
  26. 26. ICF International | icfi.com © ICF 2015 25 Large airline MROs are well positioned in contrast to independent MROs TAKEAWAYS Category Who Owns The Data? Who Owns The Workscope? Who Owns The Assets? Airline MROs Independent MROs StrongKeyWeak ImprovingWorsening Who controls the operational data? Who controls the workscope? Who controls the assets? Takeaways  For Airline MROs, significant scale is a must for engine and component markets– to leverage their fleet and inventory under management, and build the scope of data and intelligence captured  The business case for small airline MROs will erode significantly moving forward  Independent MROs have to become the lowest cost producer and/or align with the large airlines or OEMs
  27. 27. ICF International | icfi.com © ICF 2015 26 Control of assets facilitates data access - so supplier scale and scope of product will drive the winning business model TAKEAWAYS DATA Takeaways  Those managing the component and engine assets have the access to the operational (reliability and cost) data  Some large airlines may elect to keep this driver of performance in-house  Others will not because of the negative impact of inventory on ROIC / RONA  Large airline MROs or OEMs with broad packages to offer have a competitive advantage via scale and scope  But do they want the inventory on their books? ASSETS
  28. 28. ICF International | icfi.com © ICF 2015 27 In summary... TAKEAWAYS Engine OEM aftermarket business model a harbinger for the future Airframe and Component OEMs will invest more and increase their focus on aftermarket especially on integrated component packages (Large) Airline MROs can and need to protect their market position versus the OEMs Airlines have the opportunity to drive efficient solutions and competition into the aftermarket Scale and scope of assets under management is vital – growing need for financial community?
  29. 29. ICF International | icfi.com © ICF 2015 28 Appendix  LCCs – Low Cost Carriers  ROIC – Return on Invested Capital  MRO – Maintenance, Repair and Operations  OEMs – Original Equipment Manufacturers  ND/EBITDA – Net Debt to EBITDA Ratio  ROCE – Return on Capital Employed  E&M e-solutions – Engineering and Maintenance e-solutions  FHS/TSP support packages – Flight Hour Services/Tailored Support Packages  PMA – Parts Manufacturer Approval  AFI/KLM E&M – Air France Industries/KLM Engineering & Maintenance  ROIC / RONA – Return on Invested Capital/ Return on Net Assets
  30. 30. ICF International | icfi.com © ICF 2015 29 David Stewart Head of Aerospace and MRO Watling House 33 Cannon Street London EC4M 5SB United Kingdom +44 (0)20 3096 4931 david.stewart@icfi.com Thank You!

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