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The Global MRO Forecast The Global MRO Forecast 2010 2010 ‐‐ 20202020
Presented by:
David A. MarcontellPresident & COO, M&E Solutions
2010 © TeamSAI, Inc.MRO Europe 2010 Conference
Up or Down? WhatUp or Down? What’’s Next?s Next?
TEAMSAI©201010/8/2010
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TeamSAI
Strategic & Tactical Consulting
• Airline, MRO, Corporate & Airport Management
• Process & Performance Improvements
• Accelerated Change
Partners with the Aviation Week Group
• Global MRO Forecasting
• MRO Prospector Data ‐ Industry Leading Market Research
Customized On‐Going Airline Support
• Technical Services
• Maintenance Management
• Technical Procurement
www.teamsai.com
TEAMSAI©201010/8/2010
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Signs of Recovery Surface—It Won’t Be Easy or Immediate
The storm seems to be clearing … slowly!
Airline industry expects strong
recovery
Airline industry expects strong
recovery
Source: The New Nation (9/14/10)
IATA: Passenger numbers continue to rise but post‐
recession rebound may be slowing
IATA: Passenger numbers continue to rise but post‐
recession rebound may be slowing
Source: ATW Daily News (8/17/10)
Airlines are soaring, but aircraft services
get left behind
Airlines are soaring, but aircraft services
get left behind
Source: Market Watch (8/13/10)
TEAMSAI©201010/8/2010
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Global MRO spend will be down 7.5% in 2010, to $42B
The drivers of the change are important to understand– Fleet change alone drives a 4.2%
drop, due to capacity reduction
– Utilization drop drives market down further (down 9% for the year)
– Airframe, component, and line costs have fallen bringing the market down another 1.4%
– Engine MRO drives a 1.6% increase
– And last, labor rates have eased down ever so slightly
First a Review of the MRO Drivers for 2010
new deliveries = $1,833M+1,128 a/c
stored/retired = $(3,751M)‐783 a/c
Fleet 2009 + Deliveries‐
Retirements‐ Stored Fleet 2010
19,330 + 1,128 ‐ 399 ‐ 384 19,675
TEAMSAI©201010/8/2010
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New Aircraft Types Effecting MRO
While the world fleet has continued to grow, newer, less maintenance intensive aircraft are showing their influence– The contribution of the older vintages
has been in decline as retirements have accelerated
– And the younger vintage aircraft havesignificantly lower unit costs
– In just 2 years’ time there has been a significant shift in the share of the younger vintage fleets
– As a result, the average MRO cost per aircraft per year has fallen
– 2008 ‐‐ $2.4M
– 2010 ‐‐ $2.1M
2010 should be the tipping point as fleet size and utilization increase to meet demand
TEAMSAI©201010/8/2010
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Growth Will Return but Not Till Later in the Forecast Period
‐7.5%+4.4%
It would be foolish to think that another down cycle is not possible
TEAMSAI©201010/8/2010
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Population growth and the burgeoning middle class is what is driving our long term forecast
Fleet growth forecast at 3.3% CAGR to 27,303 in 10 years
ASM growth will increase at 5.1% CAGR over same period– Unit a/c utilization rates remain high
– Larger aircraft % more seats
– Longer routes
Long Term Fleet Growth Looks Solid
TEAMSAI©201010/8/2010
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MRO Industry Outlook has Continued Shift to the Right
Global growth is expected to maintain a 4.4% CAGR through 2020
$42.3B industry will grow to $65.3B over 10‐year forecast period– 2010 down 7.5% from 2009
Engine remains largest segment
TEAMSAI©201010/8/2010
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AP CH IN ME LA&C EE
$6.6 $2.4 $0.6 $2.4 $1.9 $1.8
16% 6% 1% 6% 5% 4%
5.3% 9.6% 9.4% 5.3% 6.6% 9.8%
NA WE AF
Market ($B)(2010)
$13.9 $11.0 $1.5
Mkt Share (2010)
33% 26% 4%
CAGR(2010‐20)
1.6% 3.6% 3.5%
E. Europe is Expected to Recover More Quickly than the Rest of the World, while W. Europe Leads the Way for Slower Growth Regions
TEAMSAI©201010/8/2010
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Looking at the Regions Combined Show Relative Parity in Ten Years Time
Americas EuropeWest | East
Asia Middle East Africa
Market ($B)(2010)
$15.8 $12.9$11.0 | $1.9
$9.7 $2.4 $1.5
Mkt Share (2010)
37% 30%26% | 4%
23% 6% 4%
Note: Americas = North America and Latin America & the CaribbeanEurope = Western and Eastern EuropeAsia = Asia Pacific, China, and India
CAGR (2010‐20)
2.4% 4.7%3.6% | 9.8%
6.8% 5.3% 3.5%
Mkt Share (2020)
31% 31%24% | 7%
29% 6% 3%
TEAMSAI©201010/8/2010
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Mid‐term Growth in Europe will be Slower than Long Term but Solid
EU aircraft growth is solid– Combined, all fleet classes
expected to grow in next 5 and 10 years
– CAGR accelerates growth in second half
– WE RJs in decline, but more than balanced by EE RJs
Operators are unlikely to bring backsome parked aircraft– Inactive fleet has fallen by 273 while stored
fleet has grown by 100 suggesting continued retirements
Despite tightened capacity and a higher level of discipline, concerns remain that expected fleet growth could outpace demand at the expense of profitability– EU market growth largely mirrors
change in fleet– NB MRO makes up largest share, but WB
MRO in WE enjoys significantly larger share
Europe’s MRO should benefit from moderate fleet growth
Regional MRO Western Europe Eastern Europe EuropeBillions 2010 2015 2020 2010 2015 2020 2010 2015 2020# Aircraft 4,278 4,631 5,525 797 1,275 1,940 5,075 5,906 7,465ASM (M) 880,941 1,078,810 1,323,225 125,976 211,988 328,764 1,006,917 1,290,798 1,651,990HMV& Mods $2.4 $2.8 $3.6 $0.5 $0.7 $1.1 $2.9 $3.5 $4.8Engines $4.2 $4.7 $5.4 $0.6 $1.0 $1.5 $4.8 $5.7 $6.9Components $2.2 $2.7 $3.5 $0.4 $0.7 $1.1 $2.6 $3.4 $4.5Line Mtce $2.2 $2.5 $3.2 $0.4 $0.6 $1.0 $2.6 $3.2 $4.2Total MRO $11.0 $12.8 $15.7 $1.8 $3.0 $4.7 $12.9 $15.7 $20.4
TEAMSAI©201010/8/2010
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Uncertainty Surrounds Impact of Volcanic Ash on Engine MRO
Consensus suggests volcanic ash can have a significant impact on engines– Potential for affecting engine maintenance of
aircraft flown through volcanic ash plumes
However, most flights were cancelled duringthe height of the Iceland (Eyjafjallajokull) eruptions– Any maintenance bumps should be limited,
potentially extend maintenance intervals
But, if there was persistent/lingering ash as flights resumed, it does create the question: Will it affect engine overhauls?– If the regulations change to allow [more] flying
during such events, the issue may be more pronounced
© 2010 TeamSAI, Inc.
Trends and StrategiesTrends and Strategies
TEAMSAI©201010/8/2010
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Airline Financial Results Intensifies the COST Focus
Profits have been elusive in the last decade– One profitable year – Net $45.7B in cumulative losses
The quest for profitability drives business behavior– Revenue focused innovation is evident– Cost improvements are needed at every turn
For MRO value stream, this means– Motivation toward best value– Outsourcing will continue to grow– Supply chain innovation will be imperative– Preparing for a new generation of
technology– Consolidation will be important to value
creation– Value‐oriented innovation will be rewarded
Source: IATA and Energy Information Administration
TEAMSAI©201010/8/2010
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Cost Savings: Outsourcing and Optimizing
Note: Outsourced MRO includes work outsourced to independent MROs or to OEMs but not work done by operator‐affiliated MROs
Optimized Maintenance ProgramsAirlines have increasingly begun to examine their maintenance programs, paying particular attention to intervalsEfforts are underway to examine industry standards for best practices and appropriate intervalsEscalation of A and C check intervals offers significant opportunities
Airline interest in outsourcing and optimizing aligns with their desire to seek out best value
BenefitsOptimized maintenance programsLonger time between maintenanceReduced costsImmediate source of cost‐savings
TEAMSAI©201010/8/2010
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The Transformation of the Value Stream Represents a Dramatic Shift Toward Best Value Innovations
Airline / Operator MRO
Labor
key decision guidelines for choosing maintenance services/outsourcing
Material Turn time Performance Quality
Engineering
Technical Services
Supply Chain
Planning
Direct MaintenanceAirline will…manage core operations (flying)
outsource maintenance as it chooses, basing outsourcing decision on key guidelines
M&E
Customer service
Scheduled service
Core Operations
Planning
Marketing
Etc.
focus: cost
MRO must…identify new market needs and value added services that support airline requirementsreinvent the business model to position itself to meet needsdevelop business processes to optimize service
focus: value
The airlines’ unrelenting focus on cost continues to drive change
New Value Stream
Engineering
Technical Services
Supply Chain
Planning
Direct Maintenance
M&E
TEAMSAI©201010/8/2010
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Given Significant Fleet Renewal, Follow the Growth Platforms
New technology airframes are forecast to make up an increasing share of the market over the period
Critical future capabilities– Composite airframe material repair– Re‐engined NB repair (including GTF)– Drop‐in fuel engine repair– Next Generation‐capable avionics repair/
automated test equipment– Intelligent/health management systems and the
ability for MROs to interface with the system
Training
Demand planning– Outsourced inventory management– Information technology systems
Shift to new aircraft drives the need for improved offerings tailored to the reality of the new fleet mix
TEAMSAI©201010/8/2010
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Top‐to‐bottom value chain assessment will identify optimum cost structure– Continued pressure to outsource non‐core
activities
– Supply chain innovation
– New generation of technology
– Consolidation to create value
Market Ups and Downs Aside, Airlines Focused on STAYING in the BlackMROs must do everything possible to help customer meet this goal
Value‐oriented innovation will be rewarded
Profit
Time
TEAMSAI©201010/8/2010
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Thank You To Our Partners
TEAMSAI©201010/8/2010
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Transforming the MRO Business Model Around Value Creation
What are YOU doing to take the
out of thisbusiness?
Upsand
Downs
TEAMSAI©201010/8/2010
THANK YOU!
TEAMSAI©201010/8/2010
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Consolidation of and Investment in MRO Providers has Potential to Generate Better Value
Global Aerospace & Defense (A&D) M&A
2009 2010
Value at lowest level in a decade• overall deals: $10B, ▼54% vs 2008• causes: worries about costs, delays, fewer military orders, lower passenger numbers and reduced freight movements
Near term• expect small & strategic acquisitions to remain dominant
• activity forecast for $10‐$20B (leaning toward high end of range)
Volume at near record levels• transactions skewed toward small size
Long term • improved conditions for deal sizes to grow as stock market climbs and financing becomes easier
• M&A activity in aerospace/defense sector was relatively sluggish in 2Q10 but optimism for “reasonable” acquisitions remains
Global M&A
After record low M&A activity in 2009, deals expected to rise in 2010
Asia has significantly outpaced Europe and US in Q1‐2010
Misaligned expectations could impede recovery if rational thinking does not prevail
Expert Opinions
Orion Capital Group
For the lower middle market A&D M&A activity, growth is expected to skyrocket as the industry ditches old legacy designs and moves towards new standards.
PricewaterhouseCoopers
As we look ahead into the start of a new decade, ‘small and strategic’ is likely to remain the name of the game in the short term but major restructuring forces are likely to be felt increasingly strongly in the long term with consequent implications for deal strategies and values.
Discipline must be applied to the M&A/investment process to drive value