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2013 MRO Market Forecast Industry Dynamics October 15

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  • ICF International | icfi.com ICF SH&E 2013

    MRO Market Forecast & Industry Dynamics

    October 15, 2013

    Jonathan M. Berger Vice President ICF SH&E [email protected]

    Presented by:

  • ICF International | icfi.com ICF SH&E 2013 1

    Todays Agenda:

    1. MRO Market Forecast

    2. MRO Industry Trends to Watch

    joined ICF in 2011 joined ICF in 2012 joined ICF in 2007

    2013 Airline E&M

    North America

    Montreal, Canada

  • ICF International | icfi.com ICF SH&E 2013 2

    MRO Market Forecast

  • ICF International | icfi.com ICF SH&E 2013 3

    North America

    Europe

    Asia Pacific

    Latin America

    Africa Middle East

    NarrowbodyJet

    Widebody Jet

    Regional Jet

    Turboprop

    The current civil air transport fleet is in excess of 26K aircraft MRO MARKET FORECAST

    Source: Flightglobal ACAS, ICF Analysis

    2012 Global Air Transport Fleet

    26,156 Aircraft

    17%

    50% 15%

    18%

    ~8,300 32%

    26%

    24%

    8%

    5% 5%

    26,156 Aircraft

  • ICF International | icfi.com ICF SH&E 2013 4

    0

    5,000

    10,000

    15,000

    20,000

    25,000

    30,000

    35,000

    40,000

    2012 2022

    AfricaMiddle EastLatin AmericaAsia / PacificEuropeNorth America

    The air transport fleet will grow at a 3.1% rate to 2022 MRO MARKET FORECAST

    Commercial Fleet Growth 20122022 (by Global Region)

    Source: Flightglobal ACAS, ICF Analysis

    4.3%

    4.9%

    2.0%

    1.3%

    5.8%

    4.9%

    26,200

    35,600 CAGR

    3.1% Average

    Air travel growth of 3.9%

    Fuel costs in $80100/bbl range

    15,960 aircraft deliveries

    6,560 aircraft retirements

    Key Assumptions

    ~8,300 (32%) ~9,500 (27%)

    North America

    Europe

    Asia

  • ICF International | icfi.com ICF SH&E 2013 5

    The North American MRO market size in 2012 was $17.9 billion MRO MARKET FORECAST

    2012 North American MRO Spend

    $17.9B $17.9B

    Source: ICF SH&E forecast Forecast in 2012 USD, exclusive of inflation. Includes turboprops

    Engines

    Components

    Airframe

    Line

    Modifications

    16%

    17%

    21%

    41%

    5% Narrowbody Jet

    Widebody Jet

    Regional Jet

    Turboprop

    50% 31%

    15% 5%

  • ICF International | icfi.com ICF SH&E 2013 6

    $6.6

    $4.6 $4.6

    $2.9 $2.8 $2.2 $2.1 $2.0

    $0.0

    $1.0

    $2.0

    $3.0

    $4.0

    $5.0

    $6.0

    $7.0

    Asia/Pacific(excl China)

    China Middle East EasternEurope (incl

    CIS)

    Latin America NorthAmerica

    WesternEurope

    Africa

    Over the next decade, North American MRO absolute growth will be the lowest of all major global regions

    MRO MARKET FORECAST

    Difference in $ MRO Spend, 2022 vs. 2012By Region $ Billions

    Source: ICF SH&E analysis Forecast in 2012 $USD, exclusive of inflation, Includes Turboprops

    Latin America

  • ICF International | icfi.com ICF SH&E 2013 7

    $0

    $5

    $10

    $15

    $20

    $25

    2012 2022

    TurbopropRegional JetWidebody JetNarrowbody Jet

    The North American MRO market is expected to grow to approx. $20B by 2022, at 1.2% per annum

    MRO MARKET FORECAST

    North American MRO Spend 20122022 ($B)

    -2.9%

    -3.4%

    3.4%

    1.1%

    Source: ICF SH&E forecast Forecast in 2012 USD, exclusive of inflation. Includes turboprops

    4%

    15%

    31%

    50%

    3%

    9%

    38%

    50%

    CAGR

    1.2% Average

    The limited North American MRO growth will be driven by widebody aircraft

    Turboprops and regional jets will see a decrease MRO spend

    Narrowbody MRO spend will hold steady

    ICF SH&E Insight

    $17.9B

    $20.1B

  • ICF International | icfi.com ICF SH&E 2013 8

    MRO Industry Trends to Watch

  • ICF International | icfi.com ICF SH&E 2013 9

    Five key MRO industry trends to watch

    Source: ICF SH&E

    MRO INDUSTRY TRENDS

    Industry Trends

    M&A in MRO

    Surplus Parts

    3-D Printing

    Airframe MRO

    Energy & Aviation

    Convergence

  • ICF International | icfi.com ICF SH&E 2013 10

    ICF SH&E estimates that commercial MRO industry spending on surplus parts is approximately $3.0 billion

    SURPLUS PARTS MARKET

    Engine Parts

    Component

    Airframe

    5% 65%

    30%

    Air Transport Surplus Parts Market*

    Source: ICF SH&E analysis *Sales to end customers; excludes intra-dealer sales

    $3.0B

    More innovative surplus parts supplier base

    Vertical integration of Lessors, Parts Traders & Repair Vendors

    Increased aircraft part-outs

    Increased engine teardowns

    ICF SH&E Insight

  • ICF International | icfi.com ICF SH&E 2013 11

    Aircraft retirements will average between 600 700 per year over the forecast period

    SURPLUS PARTS MARKET

    0.0%

    0.5%

    1.0%

    1.5%

    2.0%

    2.5%

    3.0%

    0

    100

    200

    300

    400

    500

    600

    700

    800

    Air Transport Annual Aircraft Retirements # Retirements

    Retirement as % of installed fleet

    % Installed Fleet

    ICF SH&E forecast

    Source: ICF SH&E Analysis, Airline Monitor Feb 2013, ACAS Jan 2013,

    1990-99 Average 171

    2000-09 Average 410

    2010-22 Average 629

  • ICF International | icfi.com ICF SH&E 2013 12

    Surplus dealers now obtain over 80% of their inventory from parting-out aircraft

    SURPLUS PARTS MARKET

    54% 82%

    26%

    8% 20% 10%

    0%10%20%30%40%50%60%70%80%90%

    100%

    2007 2012

    Aircraft Part-Out

    Direct Purchase From Airline

    Purchase From Surplus Dealer

    2007 & 2012 Supplier Channels for Obtaining Surplus Materials

    Source: ICFI SH&E Analysis

    Leaner airline inventories

    Improved material planning (and MRO IT capabilities)

    Increased component pooling agreements

    OEM after-market material control strategies

    ICF SH&E Insight

  • ICF International | icfi.com ICF SH&E 2013 13

    Industry Trends

    M&A in MRO

    Energy & Aviation

    Convergence

    Airframe MRO

    3-D Printing

    Surplus Parts

    Five key MRO industry trends to watch

    Source: ICF SH&E

    MRO INDUSTRY TRENDS

  • ICF International | icfi.com ICF SH&E 2013 14

    Growing interdependencies between Aviation, Energy, and the Oil & Gas industries will continue to impact the MRO industry

    Source: ICF SH&E analysis

    ENERGY & AVIATION CONVERGENCE

    AVIATION OIL & GAS

    ENERGY

    Existing linkage aviation engines (aero-derivatives) and industrial gas turbines (IGTs)

    Cutting edge aviation engine technologies transferable to energy

    Energy sector growth creates new opportunities for MRO suppliers

    Aviation MRO safety, quality, and reliability best practices are transferable to O&G Cutting edge aerospace technologies are applicable (e.g. blow out preventers - BOPs) Major O&G growth creates new market opportunities for aerospace & MRO suppliers

    Rigs powered by industrial gas turbines (IGTs)

    Demand for skilled technicians

    Exotic alloys and materials required in demanding environments

  • ICF International | icfi.com ICF SH&E 2013

    Hydraulic fracturing (i.e. fracking) is leading to a significant shift away from coal to natural gas power generation

    012345678

    $/M

    MBt

    u

    Commodity Fuel Prices

    Illinois 4lb Pennsylvania 4lbNYMEX Spec Henry Hub Gas

    43% 35%

    22% 30%

    34% 34%

    0

    500

    1,000

    1,500

    2,000

    2,500

    2011 Jan-Jun 2012 Jan-Jun

    TWh

    US Coal versus Gas Generation

    Coal Generation Gas Generation Other Generation

    -20% Coal

    +34% Gas

    -2% Other

    -2% Total

    Sources: ICF analysis, Bloomberg, EIA

    ENERGY & AVIATION CONVERGENCE

    Tumbling natural gas prices due to fracking have erased coals cost advantage

    As a result, U.S. gas-powered power generation increased its market share from 22% to 30% in one year

    The result: Greater industrial gas turbine (IGT) demand and utilization

    ICF SH&E Insight

  • ICF International | icfi.com ICF SH&E 2013 16

    and should underpin expansion of the industrial gas turbine (IGT) market, currently valued at approx. $20B

    Source: ICF SH&E analysis, Forecast International

    $0

    $5

    $10

    $15

    $20

    $25

    $30

    Aeroengine IGT

    2011 Global Gas Turbine Engine Production ($B)

    Military

    Aeroderivative

    Used for Power Generation

    Used for O&G and peak power generation

    ENERGY & AVIATION CONVERGENCE

    Lower natural gas prices are increasing demand IGT generationand should underpin production market growth over the next decade

    IGTs increasingly leverage leading aviation engine technologies developed for the aeroengine segment

    ICF SH&E Insight

    Civil Frame

  • ICF International | icfi.com ICF SH&E 2013 17

    Five key MRO industry trends to watch

    Source: ICF SH&E

    Industry Trends

    MRO INDUSTRY TRENDS

    Airframe MRO

    M&A in MRO

    3-D Printing

    Surplus Parts

    Energy & Aviation

    Convergence

  • ICF International | icfi.com ICF SH&E 2013 18

    Positive market forces are driving continued investment interest in the MRO industry

    M&A TRENDS IN THE MRO INDUSTRY

    GROWTH INDUSTRY favorable market dynamics

    D-E-F-E-N-S-E Avoid competitor from

    acquiring first

    MARKET SHARE Spread fixed costs over a large base

    COST REDUCTION Leverage emerging market labor rates

    DIVERSIFICATION Mitigate risk of industry

    cyclicality

    HORIZONTAL OR VERTICAL INTEGRATION Create synergies within

    existing portfolio of products, services, and

    customers

    OFF-SET REQUIREMENT

    Certain countries require reciprocal investment

    GEOGRAPHIC EXPANSION increase global footprint &

    customer base

  • ICF International | icfi.com ICF SH&E 2013 19

    M&A TRENDS IN THE MRO INDUSTRY

    While peaking in 2007, MRO-related M&A transactions have shown steady growth

    Source: Jefferies Research

    61

    84 87

    123

    153

    133

    70 76 84

    93

    70

    0

    20

    40

    60

    80

    100

    120

    140

    160

    180

    2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013YTD

    MRO-Related M&A Activity Cumulative Annual Total Transactions

  • ICF International | icfi.com ICF SH&E 2013 20

    M&A TRENDS IN THE MRO INDUSTRY

    also peaking in 2007, MRO related M&A EBITDA multiples appear to have stabilized

    Source: Jefferies Research

    9.0x 8.5x

    12.5x

    10.6x

    13.1x

    10.0x

    8.0x

    10.0x 9.2x

    8.5x 9.0x

    0x

    2x

    4x

    6x

    8x

    10x

    12x

    14x

    2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013YTD

    MRO-Related M&A Activity Average Transaction EBITDA Multiple

  • ICF International | icfi.com ICF SH&E 2013 21

    ICF SH&E anticipates strong growth in MRO related M&A activity to continue over the next few years

    M&A TRENDS IN THE MRO INDUSTRY

    acquired SAS Components

    acquired Vought Aircraft Industries and cabin repair specialist Aviation Network Services

    acquired Aviall

    acquired The Memphis Group

    acquired DeCranes bizjet interior production

    and completes Microtecnica acquisition

    acquired M&M Hardware

    acquired German galley

    manufacturer Sell and finalizes Contour

    Acquisition

    acquired aircraft component

    manufacturer South Bend Controls

    acquired Aero Technology

    acquired Goodrich

    acquired UK-based Airinmar

    acquired Aersospace Coatings

    International (ACI), AMSafe acquired Satair

    acquired safety equipment supplier

    AmSafe acquired

    Vector Aerospace

    acquired Dansk Fly Elektronik acquired Aero

    Maintenance Group (AMG)

    acquired Finnair Engine shop

    acquired Mechanical Enterprises (MEI)

    acquired Connector Maker Switchcraft

    Summary of active participants in MRO M&A

    acquired Aveos Components

  • ICF International | icfi.com ICF SH&E 2013 22

    Five key MRO industry trends to watch

    Source: ICF SH&E

    Industry Trends

    MRO INDUSTRY TRENDS

    Surplus Parts

    Airframe MRO

    3-D Printing

    Energy & Aviation

    Convergence

    M&A in MRO

  • ICF International | icfi.com ICF SH&E 2013 23

    In-House

    Independent

    Airline Third Party

    OEM

    Airframe MRO is very fragmented; no supplier has more than a 6% market share

    Airframe Heavy Maintenance Market Share

    AIRFRAME MRO TRENDS

    ST Aerospace LHT

    AFI KLM E&M TIMCO

    HAECO AAR Ameco EGAT TAECO

    AA-MRO

    Others

    By Supplier Type

    2%

    44%

    18%

    36%

    6% 4%

    4% 3%

    3% 3% 2% $9.1B

    Source: ICF SH&E analysis Includes Turboprops

    Supplier Market Share

    $9.1B

  • ICF International | icfi.com ICF SH&E 2013 24

    Three of the top four airframe MRO by man-hours are Asian owned

    AIRFRAME MRO TRENDS

    11.5

    7.4

    4.6

    4.2

    4.1

    3.9

    3.2

    2.8

    2.5

    2.3

    0 2 4 6 8 10 12 14

    ST Aero

    Haeco Group

    AAR

    SIAEC

    Lufthansa Technik

    AFI KLM E&M

    Timco

    Ameco Beijing

    ADAT / SRT

    Iberia

    2012 Top Airframe MROs by Performed Man-Hours (millions)

    Source: Aviation Week Overhaul and Maintenance June 2013 Note: Subsidiaries are included if they are majority owned/operated

  • ICF International | icfi.com ICF SH&E 2013 25

    $10

    $20

    $30

    $40

    $50

    $60

    $70

    1990 1995 2000 2005 2010 2015 2020

    North America

    Mature Asian MROs

    Emerging Asian MROs

    Average Widebody Airframe Heavy Maintenance 3rd Party Labor Rates In North America vs. Asia (USD per Man-Hour)

    The cost advantage enjoyed by Asian MRO suppliers will continue to erode due to the shortage of skilled labor and wage inflation

    The convergence of global labor rates will require airlines to reconsider their airframe sourcing strategies and create new opportunities for MRO suppliers

    Labor Rate Convergence

    Source: ICF SH&E analysis

    AIRFRAME MRO TRENDS

  • ICF International | icfi.com ICF SH&E 2013 26

    Widebody airframe heavy check migration from North America to Asia will peak

    Source: ICFI SH&E

    Shifting Heavy Airframe MRO Migration Patterns

    AIRFRAME MRO TRENDS

    Average labor hours per heavy maintenance check is declining

    High fuel prices increase maintenance ferry flight costs

    Skilled labor shortages in Asia driving up labor rates

    South-eastern US labor rates now comparable to leading emerging market MRO rates

    Excess facility supply in North America increasing local competitiveness

    ICF SH&E Insight

    Less Trans-Pacific Heavy Check

    Migration

    More Heavy Maintenance

    Stays in Americas

    Right-shoring is the new Outsourcing

  • ICF International | icfi.com ICF SH&E 2013 27

    .and as a result, we will see continued investment activity in the airframe MRO sector

    AIRFRAME MRO TRENDS

  • ICF International | icfi.com ICF SH&E 2013 28

    Five key MRO industry trends to watch

    Source: ICF SH&E

    Industry Trends

    MRO INDUSTRY TRENDS

    3-D Printing

    Energy & Aviation

    Convergence

    M&A in MRO

    Surplus Parts

    Airframe MRO

  • ICF International | icfi.com ICF SH&E 2013 29

    Additive manufacturing, also known as 3-D printing, has the potential the be the next disruptive technology in aviation

    3-D PRINTING

    Source: ICF SH&E Research & analysis

    The GE Aviation-Parker Aerospace joint venture will 3-D print more than 30,000 LEAP-X fuel nozzles per year by 2017

  • ICF International | icfi.com ICF SH&E 2013 30

    Additive manufacturing, also known as 3-D printing, has the potential the be the next disruptive technology in aviation

    3-D PRINTING

    Source: ICF SH&E Research & analysis

    HEICO is using 3-D printers to produce PMA part prototypes as well as tooling fixtures

  • ICF International | icfi.com ICF SH&E 2013 31

    Additive manufacturing, also known as 3-D printing, has the potential the be the next disruptive technology in aviation

    3-D PRINTING

    Source: ICF SH&E Research & analysis

    Boeing is using 3-D printing to fabricate plastic interior parts for prototypes and test evaluation units

  • ICF International | icfi.com ICF SH&E 2013 32

    Additive manufacturing, also known as 3-D printing, has the potential the be the next disruptive technology in aviation

    3-D PRINTING

    Source: ICF SH&E Research & analysis

    NASA has certified a 3-D printer to be used on the International Space Station in 2014

  • ICF International | icfi.com ICF SH&E 2013 33

    Additive manufacturing, also known as 3-D printing, has the potential the be the next disruptive technology in aviation

    3-D PRINTING

    Source: ICF SH&E Research & analysis

    Chinas AVIC heavy machinery is using large 3-D printed titanium parts for landing gear and other structural related parts.

  • ICF International | icfi.com ICF SH&E 2013 34

    Additive manufacturing, also known as 3-D printing, has the potential the be the next disruptive technology in aviation

    3-D PRINTING

    Source: ICF SH&E Research & analysis

    Pratt & Whitney will feature 25 different 3-D printed parts in its next generation GTF engine family

  • ICF International | icfi.com ICF SH&E 2013 35

    Additive manufacturing, also known as 3-D printing, has the potential the be the next disruptive technology in aviation

    3-D PRINTING

    Source: ICF SH&E Research & analysis

    Industry experts predict that 3-D printing technology could lower the cost of structural parts by up to 90% Not surprisingly, GE plans to invest $3.5B in 3-D printing technology within the next 5 years!

  • ICF International | icfi.com 36 ICF SH&E 2013 36

    Thank you!

    MRO Market Research & Analysis

    M&A Commercial Due Diligence

    Aerospace Manufacturing Strategy

    Aviation Asset Valuations & Appraisals

    MRO Cost & Performance Benchmarking

    MRO Information Technology (IT) Assessment

    MRO Strategic Sourcing Support

    Supply Chain Management

    LEAN Continuous Process Improvement

    Military Aircraft Sustainment

    ICF SH&Es MRO advisory services include the following:

  • ICF International | icfi.com ICF SH&E 2013 37

    ICF SH&E is one of the most experienced global aviation and aerospace consultancies

    50 years in business (founded 1963) 100+ professional staff

    Dedicated exclusively to aviation and aerospace Recruited from the industry

    Specialized, focused expertise and proprietary knowledge Broad functional capabilities More than 8,000 private sector and public sector assignments Backed by parent company ICF International ($937M revenue) Global presence seven major offices

    New York Boston Ann Arbor London Singapore Beijing Hong Kong

    Airports Airlines Aerospace & MRO Asset Advisory Safety & Security

  • ICF International | icfi.com ICF SH&E 2013 38

    ICF International delivers professional services and technology solutions in three focus areas, which ICF SH&E draws upon, further expanding its service offerings and technology solutions

    One of ICF's founders and its first president was a Tuskegee Airman. C.D. "Lucky" Lester flew more than 90 missions and earned the Distinguished Flying Cross. In 1969, "Lucky" and 3 DoD analysts founded the organization that is now ICF International.

    $937M Revenues 4,500+ Employees ICFI NASDAQ

    Energy Environment Transportation

    Health, Social Programs, and Consumer/Financial

    Public Safety and Defense

  • ICF International | icfi.com ICF SH&E 2013 39

    Jonathan M. Berger Vice President

    [email protected]

    icfi.com

    Slide Number 1Todays Agenda:MRO Market ForecastThe current civil air transport fleet is in excess of 26K aircraftThe air transport fleet will grow at a 3.1% rate to 2022The North American MRO market size in 2012 was $17.9 billionOver the next decade, North American MRO absolute growth will be the lowest of all major global regionsThe North American MRO market is expected to grow to approx. $20B by 2022, at 1.2% per annumMRO Industry Trends to WatchFive key MRO industry trends to watchICF SH&E estimates that commercial MRO industry spending on surplus parts is approximately $3.0 billionAircraft retirements will average between 600 700 per year over the forecast periodSurplus dealers now obtain over 80% of their inventory from parting-out aircraftFive key MRO industry trends to watchGrowing interdependencies between Aviation, Energy, and the Oil & Gas industries will continue to impact the MRO industryHydraulic fracturing (i.e. fracking) is leading to a significant shift away from coal to natural gas power generationand should underpin expansion of the industrial gas turbine (IGT) market, currently valued at approx. $20BFive key MRO industry trends to watchPositive market forces are driving continued investment interest in the MRO industryWhile peaking in 2007, MRO-related M&A transactions have shown steady growthalso peaking in 2007, MRO related M&A EBITDA multiples appear to have stabilizedICF SH&E anticipates strong growth in MRO related M&A activity to continue over the next few yearsFive key MRO industry trends to watchAirframe MRO is very fragmented; no supplier has more than a 6% market shareThree of the top four airframe MRO by man-hours are Asian ownedSlide Number 26Widebody airframe heavy check migration from North America to Asia will peak.and as a result, we will see continued investment activity in the airframe MRO sectorFive key MRO industry trends to watchAdditive manufacturing, also known as 3-D printing, has the potential the be the next disruptive technology in aviationAdditive manufacturing, also known as 3-D printing, has the potential the be the next disruptive technology in aviationAdditive manufacturing, also known as 3-D printing, has the potential the be the next disruptive technology in aviationAdditive manufacturing, also known as 3-D printing, has the potential the be the next disruptive technology in aviationAdditive manufacturing, also known as 3-D printing, has the potential the be the next disruptive technology in aviationAdditive manufacturing, also known as 3-D printing, has the potential the be the next disruptive technology in aviationAdditive manufacturing, also known as 3-D printing, has the potential the be the next disruptive technology in aviationThank you!ICF SH&E is one of the most experienced global aviation and aerospace consultanciesICF International delivers professional services and technology solutions in three focus areas, which ICF SH&E draws upon, further expanding its service offerings and technology solutionsSlide Number 40

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