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MRO Market Update and Industry Trends

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At the 2016 Aviation Week MRO Europe conference on October 18-20 in Amsterdam, Netherlands, ICF's Jonathan Berger presented "MRO Market Update & Industry Trends." Download his presentation to learn about the MRO forecast and aircraft technology trends in Europe.

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MRO Market Update and Industry Trends

  1. 1. 0 MRO Market Update & Industry Trends Presented by: Jonathan M. Berger Vice President  Aerospace & MRO Advisory jberger@icf.com October 18-20, 2016 Amsterdam, Netherlands
  2. 2. 11 Today’s Agenda Bizarro Aviation MRO Forecast Trend Watch:  Aircraft Cabin Interiors  New Technology Aircraft  Virtual Reality
  3. 3. 22 “Bizarro Aviation”
  4. 4. 33 Four external macro-economic forces are having a significant impact on the aviation industry and the MRO supply chain Source: ICF analysis The “CRABS”
  5. 5. 44 The dramatic increase in oil & gas market supply and reduced demand for commodities has led to a strong US Dollar  Partially offsets 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 MROs is cheaper driving up margins for US dollar based contracts  Buying/leasing aircraft becomes more expensive FOREX Impact Source: USForex, ICF analysis The “CRABS”: Countries with economies that are heavily dependent on commodity exports Global Currency Exchange Rates vs USD % Value Change, September 2014 – September 2016 Russian Ruble -37.6% Brazilian Real -24.6% S. African Rand -19.1% Can Dollars -15.3% Aus Dollars -12.5% Euro -11.7% Indian Rupee -7.8% Chinese Yuan -7.8% -50% -40% -30% -20% -10% 0% 10% B R A S C
  6. 6. 55 Commercial aircraft OEM production backlog remains at historical record levels driven by: 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  Low interest rates  Previously high oil and commodity prices  Introduction of new technology aircraft/engines
  7. 7. 66 Low 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 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
  8. 8. 77 Airline return on invested capital (ROIC) is clearly correlated with the drop in fuel costs Source: IATA, ICF Analysis Fuel Price as a % of Airline Operating Expenses 17% 22% 28% 30% 36% 28% 28% 31% 33% 33% 32% 28% 20% 0 20 40 60 80 100 120 0% 10% 20% 30% 40% % of Airline Operating Expenses Crude Oil Price/BBL
  9. 9. 88 Airline return on invested capital (ROIC) is clearly correlated with the drop in fuel costs Source: IATA, ICF Analysis Fuel Price and Global Airline Return On Invested Capital (ROIC) 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% $0 $20 $40 $60 $80 $100 $120 $140 Jet Fuel Price ($/barrel) Airline ROIC (%) Airline ROIC Jet Fuel Price $$$
  10. 10. 99 Driven by low fuel costs and consolidation, airline the industry is on target to achieve record profitability in 2016 of almost $40B USD Source: IATA, ICF analysis These are the “good old days: - for some airlines… Global Airline Profitability, 1996 - 2016F -$30 -$20 -$10 $0 $10 $20 $30 $40 $USD Billions $39.4B Asia Pacific, $7.8B North America, $22.9B Europe, $7.5B Middle East, $1.6B Latin America, $0.1B Africa, ($0.5B)
  11. 11. 1010 However, profit margin improvement has been largely limited to carriers in North America and Europe 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% 15.4% 8.4% 5.6% 2.6% 2.8% -1.1% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 2008 2012 2016F Global Airline EBIT Margin by Region …but not all – many airlines continue to struggle
  12. 12. 1111 Brexit has clearly had an impact on European airline stock performance; specifically UK based carriers Source: Company websites Share Performance of European Airlines Since Brexit 23 June 2016 – 13 October 2016 SAS, -6.3% Lufthansa, -15.2% Ryan Air, -16.2% Norwegian, -16.5% Wizz, -23.2% Air France-KLM, - 24.8% IAG, -28.1% Easy Jet, -41.5% -50% -40% -30% -20% -10% 0%
  13. 13. 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 Sharing 15% Wage Increases 5%Fleet 23% Equity Investments 5% Other capex 10% Debt Repayments 16% Stock Buy- Back & Dividends 26% 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
  14. 14. 1313 After positive signs in 2014, air cargo supply continues to exceed demand Source: IATA, ICF Analysis 0.4% -0.9% 0.6% 5.0% 2.3% 2.1% 6.0% 3.0% 3.7% 5.4% 6.3% 6.3% -2% 0% 2% 4% 6% 8% Traffic (FTK) Capacity (AFTK) Global Freight Traffic (FTK) and Capacity Growth (AFTK) Year-Over-Year Percent Change - $$$
  15. 15. 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
  16. 16. 1515 March of the Middle East Titans: Middle East carriers have been very effective in capturing valuable business passenger traffic from European secondary airports Source: OAG Data, ICF Analysis European Secondary Airports Average Number of Seats per Departure in 2016 “…Lufthansa’s Frankfurt hub has lost nearly a 3rd of its market share on routes between Europe and Asia since 2005, with more than three million people now flying annually via Gulf hubs” – The Economist 363 408 400 400 394 370 343 400 400 306 180 148 128 146 121 163 149 117 135 149 100 150 200 250 300 350 400 450 500 Gulf Carriers Non-Gulf Carriers
  17. 17. 1616 MRO Forecast
  18. 18. 1717 The current commercial air transport fleet consists of over 27K aircraft; over half are narrowbody aircraft Source: CAPA 2015 Narrowbody Jet Widebody Jet Turboprop Regional Jet 27,114 Aircraft 14% 53%14% 19% By Aircraft Type By Global Region North America Asia Pacific Europe Latin America Middle East 31% 27% 25% 8% 5% 5% 27,114 Aircraft 2015 Global Commercial Air Transport Fleet
  19. 19. 1818 The combination of strong air travel demand and the need to replace ageing aircraft will drive fleet growth at a healthy 3.4% annually Source: ICF analysis: CAPA 2015 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 2015 2025 Africa Middle East Latin America Europe Asia Pacific North America 27,100 31% 26% 37,900 27% 25% 8% 32% 23% 8% # Aircraft 3.8% 2.5% 1.6% 5.2% 5.3% 5.1% CAGR 3.4% Avg. 5% 6% 10 Year Global Air Transport Fleet Growth
  20. 20. 1919 Current commercial air transport MRO demand is $64.3B; with Asia equivalent to North America and Europe in market size Source: ICF analysis; Forecast in 2015 $USD, exclusive of inflation Engines Components Line Airframe Modifications 14% 17% 22% 40% 7% North America Asia Pacific Europe Middle East Latin America Africa 29% 28% 26% 8% 6%4% $64.3B$64.3B By MRO Segment By Global Region 2015 Commercial Air Transport Global MRO Demand
  21. 21. 2020 The global MRO market is expected to grow by 4.1% per annum to $96B by 2025 Source: ICF analysis; Forecast in 2015 $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 2015 2025 Modifications Airframe Line Component Engine 40% 22% 14% 17% $64.3B $96.0B 2.8% 3.6% 4.3% 4.4% CAGR 4.1% Avg. 5.3% 41% 22% 16% 13% 10 Year Global Commercial Air Transport MRO Demand Growth $USD Billions
  22. 22. 2121 The current European fleet consists of over 6,700 aircraft; with almost 60% consisting of narrowbody Source: CAPA 2015 Narrowbody Jet Widebody Jet Turboprop Regional Jet 6,746 Aircraft 11% 59% 12% 18% By Aircraft Type By Country United Kingdom Russia Germany Turkey FranceIreland Spain Others 6,746 Aircraft 28% 17% 7% 21% 11% 6%6% 5% 2015 European Commercial Air Transport Fleet
  23. 23. 2222 The European MRO market is expected to grow to approx. $21.3B by 2025, at 2.3% per annum Source: ICF analysis; Forecast in 2015 $USD, exclusive of inflation  Modifications is the fastest growing MRO segment in Europe  MRO spend on engines will experience the largest absolute growth $0 $5 $10 $15 $20 $25 2015 2025 Modifications Airframe Line Component Engine 39% 22% 15% 16% $17.0B $21.3B 1.0% 2.5% 2.7% 2.3% CAGR 2.3% Avg. 3.0% 39% 23% 17% 13% 8% 10-Year Global European MRO Demand Growth $USD Billions 7%
  24. 24. 2323 Trend Watch: A New Golden Age of Aircraft Cabin Interiors
  25. 25. 2424 Modifications growth is driven by airlines seeking differentiation in the cabin and customer experience Modifications demand includes labor and material spend *Passenger-To-Freighter Conversions **Airworthiness Directives / Service Bulletins Source: ICF analysis, constant 2015 US$ MRO modification market growth drivers include:  Premium lie-flat seats are now the minimum standard  Premium economy  Wi-fi, on-board connectivity  Coming soon: ADS-B Mod program  Capacity (ASM/K) increase Commercial Air Transport Modifications Forecast $2.7 $4.9 $0.6 $1.1 $0.4 $0.5 $0.4 $0.4 $0.3 $0.5 $0 $1 $2 $3 $4 $5 $6 $7 $8 2015 2025 AD/SB** PTF Conversions* Painting Avionics Upgrades Interiors $4.4B $7.4B 0.0% 3.7% 6.9% 5.9% CAGR 5.3% Avg. 3.6% $USD Billions
  26. 26. 2525 Cabin “densification” has emerged as cost effective strategy for airlines to increase capacity and drive bottom line growth 2015 - 2025 Capacity Bridge 0 2 4 6 8 10 2025 ASMs Increased Seat Density Longer Stage Lengths Fleet Growth 2015 ASMs Available Seat-Miles (ASMs), Trillions 6.2T 8.8T 84% 8% 8% 12 Seats 16 Seats 130 Seats120 Seats Total = 150 Seats Total = 164 Seats Example: Delta A320 Interior Modification Program New seats, outlets, IFE, overhead bins Space-saving galleys to add a row of seats Source: ICF analysis, delta.com 18 Seats18 Seats Cabin Upgrades:  Slim seats  Slim lavatories  Slim galleys  Slim coat closets
  27. 27. 2626 Trend Watch: New Technology Aircraft
  28. 28. 2727 Over the next decade, the global fleet of new generation aircraft fleet will grow by approx. 531% to nearly 19,000 aircraft 10-Year Fleet Forecast by Aircraft Generation 2,993 18,896 22,212 18,487 2015 2025 Global New Gen Mid Gen Old Gen Old Gen: 727, 737 Classic, 747 Classic, DC10, L1011, A300 Mid Gen: 757, 767, 747-400, A320 Family, A330/A340, 737NG, 777, ERJ, CRJ New Gen:, 777X, 787, A350, A330neo, A380, E170/175/190/195, CRJ-7/9/1000, 737MAX Source: ICF analysis Europe +531% -70% -17% 612 4,045 5,689 4,487 2015 2025 +561% -21% -74%
  29. 29. 2828 Over the next decade, MRO spend on new technology Airbus A350 & Boeing 787 aircraft will double every three years Source: ICF analysis; Forecast in 2015 $USD, exclusive of inflation, includes Boeing 787 and Airbus A350 10-Year MRO Spend for New Technology A350 and 787 Aircraft $ USD Billions $0.35 $0.46 $0.47 $0.52 $0.53 $0.62 $0.5 $1.0 $1.6 $2.3 $3.3 $4.4 $5.8 $7.1 $8.4 $9.7 $11.1 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Africa Latin America Middle East North America Europe Asia Pacific +2000%
  30. 30. 2929 New technology aircraft challenge traditional MRO sourcing strategies = Heavy C-Check= Light C-Check 767 A/C Age 1 2 3 4 5 6 7 8 9 10 11 12 787 Volume (C-checks) Intensity (man-hours) Days (Hangar) 767 8 95,000 136 787 4 33,000 47 Impact  Cost Savings: ~65% fewer routine airframe heavy maintenance man-hours drives an estimated savings of ~$3.5M  Asset Utilization: ~90 additional available flying days enables increased revenue generation potential 12 Year Heavy Maintenance Schedule *Based on 4,000 FH/yr utilization 767 C-check = 18mo, 4C = 72mo; 787 C-check = 36mo, 4C = 144mo Assumed industry standard labor man-hour rate Aircraft out of Service (AooS) calculated for C/4C/8C checks assuming industry standard MRO hangar productivity Return on investment challenges:  Facilities  Tooling & Equipment  Training  IT Systems Source: ICF analysis
  31. 31. 3030 Challenge: How best to realize value from the disparate terabytes of data generated by new technology aircraft Source: ICF analysis Number of AHM Parameters A320: 15,000 B787: 100,000  Stakeholder Battle: Who will control and benefit most from the operating data IP?  Operators  Lessors  OEMs  MRO Suppliers 767: 10,000 Yr 1 Yr 10 ~ 137TB ~11TB 777 787 ~ 28MB < 1MB Transmittable Data (MB/Flt) A/C Data Generated (TB/Year) ~1,100% Aircraft Health Monitoring and Data Generation Outlook
  32. 32. 3131 ICF believes that virtual reality (VR) technology will be as disruptive to MRO training as 3D- printing is to parts manufacturing Training 2.0: Virtual Reality
  33. 33. 32 For questions regarding this presentation, please contact: Jonathan M. Berger Vice President  Aerospace & MRO Advisory jberger@icf.com  +1 404.819.7669 THANK YOU! October 18-20, 2016 Amsterdam, Netherlands
  34. 34. 3333  Market Research & Analysis  Airline Maintenance Benchmarking  M&A Commercial Due Diligence  OEM Aftermarket Strategy  Aviation Asset Valuations & Appraisals  MRO Information Technology (IT) Advisory  Strategic Sourcing & Supply Chain Mgt.  LEAN Continuous Process Improvement  Military Aircraft Sustainment ICF provides a full range of Aerospace & MRO advisory services
  35. 35. 3434 ICF is one of the world’s largest and most experienced aviation and aerospace consulting firms Airports • Airlines • Aerospace & MRO • Aircraft  53 years in business (founded 1963)  80+ 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 sector and public sector assignments  Backed by parent ICF International (2015 revenue: 1.13 billion USD)  Global presence –– offices around the world joined in 2011joined in 2007 joined in 2012 joined in 2014 New York • Boston • Ann Arbor • London • Singapore • Beijing • Hong Kong
  36. 36. 3535 Acronyms  AD/SB = airworthiness directives / service bulletins  AFTK = Capacity Growth  ASMs = Available Seat-Miles  BBL = oil barrel  CAGR = compound annual growth rate  CRABS = Canada, Russia, Australia, Brazil, and South Africa  EBIT = Earnings Before Interest and Taxes  FTK = Global Freight Traffic  IP = intellectual property  MRO = maintenance, repair, and overhaul  OEM = original equipment manufacturer  PTF = Passenger-To-Freighter  ROIC = return on invested capital  VR – virtual reality

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