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ICF International | icfi.com © ICF 2015 00
Key Battlegrounds in the Aftermarket
AISCT – 16 September 2015 – Toulouse, France
Presented by:
David StewartGlobal Lead, Aerospace & MRO Practice ICF International
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Agenda Key Battlegrounds in the Aftermarket
Context
Takeaways
The Battlegrounds
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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
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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
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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)
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Across the air transport MRO supply chain, engine and component parts drive almost 60% of total margin
CONTEXT
Engine & APU Maintenance
26%
Engine Parts17%
Component Maintenance
14%
Line Maintenance11%
Airframe Heavy Maintenance
10%
Component Parts8%
Others14%
% of Total Revenue
Engine Parts42%
Component Parts16%
Component Maintenance
11%
Engine & APU Maintenance
11%
Line Maintenance
4%
Airframe Parts4%
Other12%
% of Total Margin
2014 Air Transport MRO Revenue by SegmentTotal = $97.3B
2014 Margin By Main ActivityTotal = $23.9B
Source: ICF International
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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%
Engineoverhaul
ComponentO&R
AirframeHeavy
Linemaintenance
Non-OEMMRO
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)
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CONTEXT
The net result – aircraft OEMs are seeking to follow the engine and component OEMs
-Source: ICF International
Relative Air Transport Market Margin and LeverageEBIT %
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)
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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
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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
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Agenda Key Battlegrounds in the Aftermarket
The Battlegrounds
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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
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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
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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
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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
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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
Materials80%
Labour20%
Airframe
Materials20%
Labour80%
Components
Materials55%
Labour45%
Line
Materials15%
Labour85%
Typ
ical
MR
O C
ost
Bre
akd
ow
n
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
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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
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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%
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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
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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
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Today, airlines have strong ownership/control of their destiny but do they make the most of it?
TAKEAWAYS
CategoryWho Owns The
Workscope?Who Owns The
Assets?
Airlines
Airframe OEMs
Engine OEMs
ComponentOEMs
Airline MROs
Independent MROs
StrongKey Weak 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
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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
KeyWeak
/
• 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
ICF International | icfi.com © ICF 2015 24
Airlines
OEMs *
Airline MRO
Eng. OEMs
Who controls the operational data?
WHO HAS THE MOST TO 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 MOST TO 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 MOST TO 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
ICF International | icfi.com © ICF 2015 25
Large airline MROs are well positioned in contrast to independent MROs
TAKEAWAYS
CategoryWho Owns The
Data?Who Owns The
Workscope?Who Owns The
Assets?
Airline MROs
Independent MROs
StrongKey Weak 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
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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
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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?
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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