MRO Asia 10 Year Trend

MRO Asia – Ten Year Forecast & Key Trends

Presented byDavid Stewart, Principal

Ann Arbor, Michigan • Great Missenden, U.K.www.aerostrategy.com

Singapore – November 2005

2MRO Asia 2005AeroStrategy

MRO Market Characteristics

China And India

Agenda

MRO Trends


Nearly $100 Billion Is Spent Annually On Aircraft MRO – More Than The Value Of New Aircraft Production

* excludes major military upgrade programmes** includes civil rotary wing aircraft

Sources: AeroStrategy, Teal Group

• Military MRO market is the largest at $52B

• The value of aircraft MRO now exceeds the value of new aircraft production (~$75 B)

0

10

20

30

40

50

60

Military Air Transport Business & GA

IN-HOUSE

OUTSOURCED

2004 Global Aircraft MRO Spending

Total MRO Spend - $96B

2004 Fleet Size 39,000 16,500 >30,000

0

10

20

30

40

50

60

Military Air Transport Business & GA

IN-HOUSE

OUTSOURCED

2004 Global Aircraft MRO Spending

Total MRO Spend - $96B

2004 Fleet Size 39,000 16,500 >30,000

• Different outsourcing behaviour results in Air Transport being the largest “available” MRO market

• Total available market is ~$41B, of which Air Transport is $18B (44%)

90%50%31%

***


MRO Expenditure Is Over $36B In 2004 And Will Grow At 5.6%; Engine O&R Is The Largest Segment And The Strongest Driver Of Growth

2004 Commercial MRO Market¹$36.1 B

Source: AeroStrategy¹ Western manufactured jets only

Engine34%

Line23%

Component21%

Airframe Heavy14%

Modifications8%

Engine34%

Line23%

Component21%

Airframe Heavy14%

Modifications8%

• Total spend will grow above $62B in 2014• Engine overhaul is forecast to grow at

7.1% per annum, well above market average

2004-2014 Commercial MRO Market ($B)

CAGR*CAGR*CAGR*

5.6%

5.8%

Modifications

Airframe heavy

Component

Line

CAGR*

4.9%

3.7%

TOTAL 5.6%

0

10

20

30

40

50

60

70

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

7.1%Engine

CAGR*CAGR*CAGR*

5.6%

5.8%

Modifications

Airframe heavy

Component

Line

CAGR*

4.9%

3.7%

TOTAL 5.6%

0

10

20

30

40

50

60

70

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

7.1%Engine


Asia Generates 21% Of Global Demand Or $7.7B;This Is Set To Grow At 7.4% To Almost $16B

2004 Commercial MRO Market¹$36.1 B

Source: AeroStrategy¹ Western manufactured jets only

2004-2014 Commercial MRO Market ($B)

• MRO spend by Asian airlines is forecast to grow from $7.7B to $15.8B at 7.4% per annum – well above the global average

• In 2014, Asia will generate 25% of global demand

4.3%N America

8.2%

5.1%

Africa

Latin America

CAGR

5.6%M, East

CAGR

TOTAL 5.6%

0

10

20

30

40

50

60

70

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

7.4%Asia

Europe 5.8%

4.3%N America

8.2%

5.1%

Africa

Latin America

CAGR

5.6%M, East

CAGR

TOTAL 5.6%

0

10

20

30

40

50

60

70

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

7.4%Asia

Europe 5.8%

25%

21%

N. America40%Europe

28%

Asia Pacific21%, $7.7B

L. America 5%Middle East 4%

Africa 2%

N. America40%Europe

28%

Asia21%, $7.7B

L. America 5%Middle East 4%

Africa 2%


Asia Is A Net Exporter Of Engine Overhaul; European Suppliers Are Very Strong Global Players And Attract Significant Demand Into Europe

MRO Demand MRO Supply

• N. America -net exporter

-2%

$5B

2004 Engine Overhaul Demand And SupplyBy Region

-16%

• Asia - net exporter

$2.8B

• Europe -net importer

+40%

$3.1B

Source: AeroStrategy


In Asia, Just Over 60% Of Engine Overhaul Is Outsourced – Similar To The Other Major Geographic Markets

Share Of Market By Supplier Type By Region – Engine Overhaul


INDEPENDENT

AIRLINE 3RD PARTY

OEM

SELF0%

20%

40%

60%

80%

100%

Asia North America Europe Rest of World

• In Asia, 37% of engine overhaul is done in-house; OEMs have a strong 34% market share

• In-house vs. outsourcing behaviour is quite consistent except in “Rest of World” regions

• Globally, 34% of engine overhaul is done in-house / 66% is outsourced

34%

37%

16%

13%


In Airframe Heavy Maintenance, Asia Is Unsurprisingly A Net Importer– As Is (Surprisingly) Europe

• Europe net importer

+10%+7%

• Asia - net importer

MRO Demand MRO Supply

• N. America -net exporter

-7%

2004 Airframe Maintenance Flow

0

10

20

30

40

50

60Europe

N. America

Asia

Typical Labour Rates ($ US)

• Europe has the highest labour rate• …and heavy maintenance is 75%

labour• Asia enjoys comparative advantage

in this labour-intensive MRO activity

WHICH IS CONTRARY TO WHAT ONE MIGHT EXPECT BECAUSE….



0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Asia North America Europe Rest of World

Asia Has The Highest Proportion Of In-House Airframe Heavy Maintenance

SELF

AIRLINE THIRD PARTY

OEM

INDEPENDENT

85% 55% 71%

58%

Share Of Airframe Heavy Maintenance Market By Supplier Type ($M)

• Asia has the highest proportion of in-house airframe heavy maintenance, reflecting the current importance of flag carriers to the regions operations

• The largest “outsourcing” region is North America where 45% of demand is available

• Europe, despite its high labour rates, shows the second-highest share of in-house sourcing

• Globally, 67% of this activity is done in-house / 33% is outsourced




India And China

Agenda

MRO Trends


China And India Represent 35% Of The Asia Fleet; The China Fleet Will Grow From 25% To 34% Of The Asia Fleet Over The Next Decade

Source: AeroStrategy , ACAS

2004 Asia FleetActive Total = 2,960 a/c

* Includes Macau and Hong Kong

China*30% (880)

India5% (160)

Other Asia65%

2004-2014 Asian Air Transport Fleet Forecast

2004 2009 2014

1,948 1,265 721

25%

Of Aircraft

2009 2014

1,948 1,265 721

25%

0

1000

2000

3000

4000

5000

6000

7000

2009 2014

China

1,950 1,120 750* 25% 30% 34%

Number

Rest OfAsia

* Mainland China only

360

620 India


India And China MRO Demand Represent 5% ($405M) And 17% ($1.3B) Of Asia MRO Demand Respectively


2004 Asia CommercialMRO Market $7.7B

2004 China MRO Market$1.3 B

ENGINE35%

COMPONENT24%

LINE24%

AIRFRAME12%

MODIFICATIONS5%

ENGINE35%

COMPONENT24%

LINE24%

AIRFRAME12%

MODIFICATIONS5%

China17%

India5%

2004 India MRO Market$405M

ENGINE43%

COMPONENT20%

LINE17%

AIRFRAME12%

MODIFICATIONS8%


In China, There Is No In-House Capability For Engines Except Via Joint Ventures; 64% Of Airframe Heavy Maintenance Is Done In-House

2004 China Engine OverhaulBy Supplier Type $450 M

Source: AeroStrategy* inc. MTU Zhuhai, Ameco Beijing, HAESL** inc. Ameco

• Chinese airlines have little in-house engine overhaul capability except through joint ventures

JOINT VENTURE*37%

INDEPENDENT26%

AIRLINE THIRD PARTY16%

OEM21%

2004 China Airframe Heavy MaintenanceBy Supplier Type $162 M

• 64% of airframe heavy maintenance is conducted in-house

INDEPENDENT16%

AIRLINE THIRD PARTY

20%AIRLINE IN-

HOUSE64%

INDEPENDENT16%

AIRLINE THIRD PARTY

20%AIRLINE IN-

HOUSE64%

INDEPENDENT16%

AIRLINE THIRD PARTY

20%AIRLINE IN-

HOUSE64%

INDEPENDENT16%

AIRLINE THIRD PARTY

20%AIRLINE IN-

HOUSE**64%


In India, OEMs Have Virtually No Presence In Engine Overhaul; 80% Of Airframe Heavy Maintenance Is Done In-House

2004 India Engine OverhaulBy Supplier Type $173M


• Independents have a strong 58% share of the India engine market; 39% is conducted in-house

• OEMs have virtually no presence

INDEPENDENT58%

AIRLINE THIRD PARTY3%IN-HOUSE

39%

2004 India Airframe Heavy MaintenanceBy Supplier Type $50M

SELF 80%

AIRLINE THIRD PARTY

20%

• 80% of airframe heavy maintenance is done in-house



India And China

Agenda

MRO Trends


Market Trends Identified And Described By AeroStrategy In 2004 Are Still Prevalent…

LOW FARE CARRIER GROWTH

AIRFRAME MAINTENANCE INFLOW

GLOBAL CHANGES IN COMPONENT SUPPORT

PMA WILL INCREASE

AeroStrategy Key Trends – 2004 MRO Asia Observations in 2005

• Especially in India and Indonesia

• It’s happening – perhaps not as fast as may have been expected

• Increasing penetration in Asia

• Volumes increasing but acceptability still restrained


AeroStrategy Believes Five Key Trends Will Drive Asia MRO In 2006, All Presenting New Opportunities For Asia’s MRO Providers

• Low fare carriers (LFCs) will become an increasingly important driver of air travel growth in Asia

• Many LFCs have been established in Australasia and Southern Asia in recent years

LOW FARE CARRIERS

Freedom Air

• As LFCs are typical outsourcers of MRO, they also will drive MRO growth

• All LFCs in the region will create MRO opportunities for suppliers – from in and outside the region

AustralasiaSouthern Asia

• And 2005 has seen significant development of the LFC market in India

India

Indigo

• LFCs are now beginning to make in-roads in China though regulatory barriers are tough, e.g., recent changes at Okay

United EagleOkay Airways

China

Huaxia Airlines(Expected Soon)

Spring Airlines



Europe – the “home” of broad support supply and demand

Growing interest broad component

support led by regionals and LFCs

Spirit Contract For A320s

Mesa Contract For CRJs

Asia Pacific: rapid emergence of low fare

carriers, plus airline cost pressures, increasing

demand for broad support

Example Asia Pacific Contracts

• KLM: Spice Jet• SAS Components: Air

Deccan• SR Technics: Dragonair,

Sky Net, Transmile• ST Aerospace: Air Asia,

China United, Spring Airlines, Okay AW, Jet Star Asia

• LH Technik: Star Flyer, EVA (A330)

CONTINUED GLOBAL GROWTH OF BROAD COMPONENT SUPPORT


A Key Reason For The Growth Of Broad Component Support Is Customers’ Increased Focus On The Indirect Costs Of Holding Rotables -- $3.2B

Source: 2005 AeroStrategy Inventory & Logistics Survey

Total Airline Inventory$27B

Rotables52%

Consumables 22%

Spare Engines17%

Other5%Major A/F Parts

4%

Airline Inventory Holding Costs$6.2B

Consumables $1.3

Rotables$3.2

Spare Engines, $1.0

Major A/F Parts, $0.2

Other$0.3

• Based on AeroStrategy MRO Logistics research programme with inputs from over 80 airlines, MROs, OEMs and distributors

• Average rotable inventory per aircraft held by airlines: $730,000

• Average inventory carrying cost for airlines = 22.8%

Inventory Carrying Cost

22.8%

Airline Inventory Carrying Cost

• Includes:– Cost of capital– Overhead (e.g., insurance)– Labour– Facilities



LFC growth and major restructurings is stimulating

increased outsourcing

• JetBlue and America West Aeroman

• Delta Avborne and Air Canada

• United 777 Ameco Beijing

• Northwest announcements

Emergence of LFCs, low cost China and restructuring

leading to more outsourcing

• Recently announced reviews of possible heavy check outsourcing from Qantas and Air New Zealand

• Japan Air Lines and Cathay Pacific TAECO

• In Europe, LFCs and charters are outsourcing…

• But despite being the region with highest labour costs, there is little sign of changes to the embedded in-house practices of the traditional carriers

CONTINUED RESTRUCTURING OF AIRFRAME HEAVY MAINTENANCE



MIGRATION OF FREIGHTER CONVERSION CAPACITY TO ASIA

• Major passenger-to-freighter (PTF) type certificate holders are increasingly seeking Asia-based capability / capacity to access:

– Demand– Low cost labour

747-400BCF Contractors• EGAT• Korean• Singapore Airline

Engineering• TAECO

PTF Sub-Contractor Arrangements

• Gameco• GMF Aero Asia (?)

PTF Sub-Contractor Arrangements

• Malaysian• TAECO



“EXTRAORDINARY” MRO GROWTH IN REGION

Inherent High Regional Growth - 7.4%

4.3%N America

8.2%

5.1%

Africa

Latin America

CAGR

5.6%M, East

CAGR

TOTAL 5.6%

0

10

20

30

40

50

60

70

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

7.4%Asia

Europe 5.8%

4.3%N America

8.2%

5.1%

Africa

Latin America

CAGR

5.6%M, East

CAGR

TOTAL 5.6%

0

10

20

30

40

50

60

70

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

7.4%Asia

Europe 5.8%

25%

21% 4.3%N America

8.2%

5.1%

Africa

Latin America

CAGR

5.6%M, East

CAGR

TOTAL 5.6%

0

10

20

30

40

50

60

70

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

7.4%Asia

Europe 5.8%

4.3%N America

8.2%

5.1%

Africa

Latin America

CAGR

5.6%M, East

CAGR

TOTAL 5.6%

0

10

20

30

40

50

60

70

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

7.4%Asia

Europe 5.8%

25%

21% +LOW FARE CARRIERS

GROWTH OF BROAD COMPONENT SUPPORT

GLOBAL RESTRUCTURING OF AIRFRAME MAINTENANCE

MIGRATION OF FREIGHTER CONVERSION CAPACITY

Key Trends Generating More MRO Outsourcing To / In Asia

“EXTRAORDINARY” GROWTH


This “Extraordinary” Growth Raises Key Challenges

LOW FARE CARRIERS

GROWTH OF BROAD COMPONENT SUPPORT

Key Trends Generating More MRO Outsourcing To / In Asia

Challenges To Asia Providers

• New products and services required• Competition with European suppliers with

greater LFC experience• Growth in countries with limited

maintenance infrastructure e.g., India and Indonesia – how best to deliver support?

GLOBAL RESTRUCTURING OF AIRFRAME MAINTENANCE

MIGRATION OF FREIGHTER CONVERSION CAPACITY

• Retention of comparative cost advantage• World class productivity standards required


Key Messages

• Global MRO spend is $36B; Asia represents 21% or $7.7B

• Asia MRO demand will grow at 7.4% per annum to $15.8B in 2014

• India and China represent 5% and 17% of Asia MRO demand respectively in 2004

• There will be “extraordinary” MRO growth in the region driven by:

– LFC growth– Growth of outsourced broad component support– Global restructuring of airframe maintenance– Migration of PTF capacity

• This growth will create delivery / support challenges especially in countries with limited MRO infrastructure


Thanks For Your Attention!

www.aerostrategy.com

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MRO Asia 10 Year Trend

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