TEAMSAI©2011 MRO Europe 2011 Conference

The Global MRO Forecast 2011 - 2021

Presented by:

Chris Doan President & CEO, TeamSAI

A Delicate Recovery

Let’s start with the summary

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The

Good News 2010 represented the bottom of the MRO business cycle

The

Challenge Aligning MRO business strategies for success with the new reality of a delicate recovery

The

Reality The business has changed forever

The airline & MRO business has become extremely sensitive to shocks

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The global business cycle has a strong influence on MRO activity

Long term traffic growth remains strong

– However, disruptions are becoming more frequent and pronounced

In a global economy connected largely through air transport, isolated impacts have far-ranging effects

– Air transport remains the single largest driver of MRO demand

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Source: Air Transport Association (ATA), USDA Economic Research Service

But the business is forever changed

Airlines have refined the art of capacity management

2010 marked a notable leveling of capacity

– ASMs declined 1% in 2010

– Mostly long-haul WB traffic

But the 1% decline in capacity has taken a dramatic toll on the associated MRO

– 2010’s MRO market was down 7.5%

Airlines are now poised to adjust more rapidly to future changes in demand than they may have in the past

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Source: Ascend, BACK, TeamSAI

MRO is susceptible to short-term fluctuation

-7.5%

-1.0%

Oil price is no longer the wild card … its volatility is the new reality

Oil prices returned to over $100/bbl in the last few months

– Fuel now represents about 30% of operating cost

– With few exceptions, airlines cannot control this cost

– Oil forecast raised from $96 to $110/b in three months

– Average for the year is now expected to be higher than 2008

– 2012 is forecast for $100/b

– Increasing percent of income

Cost will remain a singular focus by airlines

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Source: IATA

MROs can expect additional pressure from airlines as fuel prices rise

Global fleet growth projections show wide variations

While N America and W Europe have the largest fleets and MRO markets, the growth areas lie in emerging regions

– India, China, E. Europe

While these emerging regions are growing fast, their overall size represents just fraction of the total market

Nevertheless, the fleet forecast clearly indicates a shift to the east which is expected to drive a level of parity when combining

– The Americas − Europe (Western & Eastern) − Asia, including China & India

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Global recovery is forecast to be segmented with emerging markets leading the way

Note: bubble size indicates populationSource: Ascend, Economic Research Service/USDA

Average HMV and line maintenance costs have dropped significantly

$0.3

$0.4

$0.5

$0.6

2006 2007 2008 2009 2010 2011

Mill

ion

s

Average MRO Cost per Aircraft

HMV Line

777 upwards of 50% less than 767

HMV frequencies moving from 4-6 to 8-12 years

A350 and 787 promising further improvement

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Source: TeamSAI

Airframe OEMs have leveraged technology to reduce MRO costs

While engine maintenance costs have not followed that trend

$0.3

$0.4

$0.5

$0.6

2006 2007 2008 2009 2010 2011

Mill

ion

s

Average Cost per Engine

Engine cost per hour continues to climb with each passing year

Fleet rationalization (2008-2010) helped to curtail average total spend per engine

However, total operating costs are coming down when considering the improvement in fuel consumption on newer engine types

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Source: TeamSAI

Engine OEMs lead the way in successfully capturing the value of the aftermarket stream

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Mid 1990s, engine OEMs embarked on strategy to capture the total maintenance value as part of their product life cycle

History

Control material prices which is significant portion of mx costs Control intellectual property

Approach

Provide predictable costs (PBTH) Remove asset ownership cost of spare parts Offer expertise that operators cannot easily maintain on their own Provide single source for all maintenance needs Spread the investment in exotic tooling over a larger base Manage the complexity

Value Proposition

Component and airframe OEMs have adopted similar models Component and airframe OEMs have developed less maintenance-intensive

equipment which they control closely Labor arbitrage applies pressure to 3rd party / airline MROs

Today’s Reality for the 3rd Party/ Airline MRO

If you aren’t an OEM MRO, you need a strategy to align yourself to deliver maximum value and stable costs to the customer over the long term

© 2010 TeamSAI, Inc.

MRO Forecast by the Numbers

2011 - 2021

Long term fleet growth still looks solid

Population growth and the growing middle class is what is driving our long term forecast

Fleet growth forecast at 3.5% CAGR to 28,591 in 10 years

ASM growth will increase at 5.3% CAGR over same period – Unit a/c utilization rates remain high – Larger aircraft, more seats – Longer routes

Through August 2011, fleet growth seems to be nearly on pace for the year – Fleet currently stands at 20,617, up 2.0% for the year thus far – Compare to a 2011-21 CAGR forecast of 3.0% in Jan 2011 – NA fleet continues to contract though

2.7% CAGR

3.5% CAGR

2010 19,675

2011 20,203

2021 28,591

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MRO industry outlook has continued to shift to the right

In 2011, global MRO spend will be up 10.8% over 2010, to $46.9B

Global growth is expected to maintain a 3.9% CAGR through 2021

$46.9B industry will grow to $69.0B over 10-year forecast period

– 2011 up 10.8% from 2010

Engine remains largest segment with the highest growth rate

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Europe’s growth will has been solid with the East leading the way

Overall, Europe can expect ~4% growth over the next 5 to 10 years

Western Europe, as a mature region will experience ~3% growth

– YTD, fleet growth has been slightly stronger than expected – WE has returned to fleet growth after a decline in 2010

Eastern Europe is amongst the fastest growth regions worldwide

– Relatively smaller than its next door neighbor, though it is forecast to gain 8-9% of the overall share by 2021

– YTD, fleet growth is very healthy; on pace to break 1000 aircraft threshold by the end of the year

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CAGR

Fleet WE EE Total

2011 2.7% 9.9% 4.1%

2016 3.2% 6.9% 4.1%

2021 2.9% 8.4% 4.1%

Total MRO ($M)WE EE Total

2011 3.2% 9.3% 4.3%

2016 3.2% 7.5% 4.1%

2021 3.2% 8.4% 4.2%

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MRO movement in the European and Middle East region

Western Europe, with its established infrastructure (especially in engines), takes in more work than it exports to Eastern Europe or the Middle East

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EE ME

WE

8%

31%

4% 61%

1%

4%

Airframe

EE ME

WE

1%

28%

0%

88%

0%

0%

Engine

But growth varies considerably region to region

Middle class growth (represented by GDPPC) is driving demand for air travel (among all other things) which drives MRO demand

Red-to-green gradient in GDPPC aligns well with the forecast MRO growth

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SAIRegion GDPPC GDP Pop

North America 1.8% 2.6% 0.8%

Western Europe 1.6% 1.9% 0.4%

Africa 2.5% 4.7% 2.2%

Asia Pacific 1.6% 2.7% 1.1%

Middle East 2.7% 4.3% 1.6%

Latin America & Caribbean 3.3% 4.4% 1.0%

Eastern Europe 4.2% 3.8% -0.4%

China 7.6% 8.0% 0.4%

India 7.3% 8.6% 1.2%

2011-2021 CAGR

Note: •Regions are ordered by forecast MRO growth rate.

•GDPPC, GDP, and Pop are ordered according to the MRO growth.

•Red, Yellow, Green indicates relative order within GDPPC, GDP, and Pop GDPPC = Gross Domestic Product per Capita

GPD = Gross Domestic Product

Pop = Population

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Looking at the regions combined show relative parity in ten years time

$0.0

$5.0

$10.0

$15.0

$20.0

$25.0

Americas Europe Asia Middle East Africa

2011 2021

Americas Europe Asia Middle East Africa

Market ($B) (2011) $17.0 $13.7 $11.6 $3.1 $1.5

Mkt Share (2011)

36% 29% 25% 7% 3%

Note: Americas = North America and Latin America & the Caribbean Europe = Western and Eastern Europe; Asia = Asia Pacific, China, and India

CAGR (2011-21)

2.4% 4.7% 6.8% 5.3% 3.5%

Mkt Share (2021)

29% 30% 30% 7% 3%

In Summary

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Business expectations are changing rapidly

Relationship Based Performance Based

Inventory Tolerant Inventory Intolerant

Asset Utilization Not a Focus Turn-Around Time Prioritized

Little Accountability Accountability for Results

Limited Competitive Threat Global Competition

Metal & Mechanical Composites & Electronic

Western Focused Eastern Focused

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Business strategies must recognize the changing conditions

When the world is stable and the customer is expanding, creating a sustaining business is reasonably predictable

But when instability disrupts the status quo, profitability becomes very challenging and calls for adjustments in strategy

Growth in the airline business will continue to generate new MRO demands – The good life of 2007 is gone forever and the business is changing rapidly

– Cost and performance pressures will continue to intensify

– Demand may be more erratic as airlines quickly adjust capacity for disruptive conditions

The MRO business challenge remains the same – Create value for the airline customer

– Grow the business and thrive despite the changeable input from airline operators

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Whether a “big player” or a “small player,” key adjustments in the business model will be more important than in the past

MRO growth strategies

Keep in mind MRO’s place and sensitivity to the total transportation value chain

Four strategies for MRO growth: especially pertinent to non-OEM MROs

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Oil prices, airline cost pressures

OEM MRO growth

Less maintenance

intensive airframes Capital

requirements to develop new product lines

Global labor shortage

Labor Value Creation M&A Diversification

An increased OEM MRO presence can have a greater impact on independent MROs than on other OEM competitors

Four basic strategies for MRO growth

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Strategies for MRO growth

Labor Capitalize on outsourcing needs of airlines Develop expertise in core activity areas and outsource non-core activity With upward wage pressures, focus on efficiency and productivity Actively develop new talent as a hedge against a labor shortage

Value Creation Implement cost reductions and new efficiencies Adopt supply chain innovations Focus on reliability and dependability Embrace new, smart aircraft systems Manage and showcase efforts with appropriate metrics

Diversification Expand market offerings Expand geographical reach Pursue full-service capabilities Create strategic OEM alignments Balance portfolio with counter-cyclical businesses

Merger & Acquisition Identify value-oriented innovations that contribute to airline customer’s cost focus

Focus on the supply chain & distribution channels for components & material

Leverage JVs and alliances

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Transforming the MRO business model around value creation

Thank you to our partners

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THANK YOU!

Chris Doan

Chairman & CEO

TeamSAI, Inc.

303-987-3454 Ext. 104

cdoan@teamsai.com