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MRO Industry Analysis and Forecast
Presented by:
David Stewart VP and Head of Aerospace & MRO ICF International [email protected]
April 5-7, 2016 Dallas, Texas
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Today’s Agenda
MRO Forecast
New Technology Aircraft Impact
Industry Context
Implications
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MRO Forecast
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The current commercial air transport fleet consists of over 27,000 aircraft
Source: CAPA 2015
NarrowbodyJet
Widebody Jet
Turboprop
Regional Jet
27,110 Aircraft
14%
53% 14%
19%
By Aircraft Type By Global Region
North America
Asia Pacific
Europe
Latin America
Middle East
31%
27%
25%
8% 5% 5%
27,110 Aircraft
2015 Global Commercial Air Transport Fleet
4 4
19,600 aircraft deliveries are driven by a combination of robust air travel demand and high retirement volumes
Source: ICF International, CAPA 2015
Air traffic growth of ~4.1%
Fuel costs in $55/bbl range
~19,600 aircraft deliveries
~8,800 aircraft retirements
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2015 2025
AfricaMiddle EastLatin AmericaEuropeAsia PacificNorth America
27,100
31% 26%
37,900
27%
25%
8%
32%
23%
8%
# Aircraft
3.8%
2.5%
1.6%
5.2%
5.3%
5.1%
CAGR
3.4% Avg.
5%
6%
10 Year Global Air Transport Fleet Growth
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Current air transport MRO demand is $64.3B—Asia Pacific is now equivalent to North America and Europe
Source: ICF International
Engines
Components
Line
Airframe
Modifications
14%
17%
22%
40%
7% North
America
Asia Pacific
Europe
Middle East
Latin America
Africa
29%
28%
26%
8% 6% 4%
$64.3B $64.3B
By MRO Segment By Global Region
2015 Global MRO Demand
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The global MRO market is expected to grow at 4.1% per annum to $96B by 2025
Source: ICF International; Forecast in 2015 $USD, exclusive of inflation
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
2015 2025
ModificationsAirframeLineComponentEngine
40%
22%
14%
17%
$64.3B
$96.0B
2.8%
3.6%
4.3%
4.4%
CAGR
4.1% Avg.
5.3%
41%
22%
16%
13%
10 Year Global MRO Demand Growth
Largest growth: Engine MRO +$13.7B in annual spend 2025 vs 2015
Strongest growth: 5.3% per annum in Modifications
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Modifications growth is driven by airlines seeking differentiation in the cabin (now they have profits to reinvest)
Source: ICF Analysis, constant 2015 US$ Modifications demand includes labor and material spend *Passenger-To-Freighter Conversions **Airworthiness Directives / Service Bulletins
MRO modification market growth drivers include: Latest lie-flat seats are now
the minimum standard
Premium economy
Wi-fi, on-board connectivity
Coming soon: ADS-B Mod program
Capacity (ASM/K) increase
Air Transport Modifications Forecast, 2015–2025 ($USD Billions)
$2.7
$4.9 $0.6
$1.1
$0.4
$0.5
$0.4
$0.4
$0.3
$0.5
$0
$1
$2
$3
$4
$5
$6
$7
$8
2015 2025
AD/SB**PTF Conversions*PaintingAvionics UpgradesInteriors
$4.4B
$7.4B
0.0%
3.7%
6.9%
5.9%
CAGR
5.3% Avg.
3.6%
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Cabin modifications - including new slim line seats and fixtures - have enabled capacity up-gauging & and cabin “densification”, driving lower unit cost and facilitating bottom line growth
Source: ICF Analysis, Delta
12 Seats 16 Seats
130 Seats 120 Seats
Total = 150 Seats
Total = 160 Seats
Delta A320 Interior Modification Program Overview
New seats, outlets, IFE, overhead bins
Space-saving galleys to add a row of seats
18 Seats 18 Seats
2015 - 2025 Capacity Bridge, by Contributing Factor
0 2 4 6 8 10
2025 ASMs
IncreasedSeat Density
Longer StageLengths
Fleet Growth
2015 ASMs
Available Seat-Miles (ASMs), Trillions
6.2T
8.8T
84%
8%
8%
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The North American MRO market is expected to grow to ~$21.6B by 2025, at 1.6% per annum
Source: ICF International; Forecast in 2015 $USD, exclusive of inflation
-
5
10
15
20
25
2015 2025
ModificationsAirframeLineComponentEngine
40%
16%
6% 16%
$18.3B
$21.6B
0.4%
2.2%
2.6%
1.2% 38%
23%
18%
14%
7%
$B USD CAGR
1.6% Avg.
North American MRO Demand by Major Segment ($USD Billions)
2.4%
21%
10 10
$0
$5
$10
$15
$20
$25
2015 2025
TurbopropRegional JetWidebody JetNarrowbody Jet
Future growth is driven by the narrow body fleet in $ terms and by the wide body fleet by % growth rate
North American MRO Demand Forecast by Fleet Type ($USD Billions)
0.4%
-1.6%
1.8%
30%
50%
34%
51%
Source: ICF International, CAPA 2015
CAGR
1.6% Avg.
$B USD
2.9%
$18.3B
$21.6B
16%
12%
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Impact of New Technology Aircraft
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2,993
18,896
22,212
18,487
2015 2025
In the next decade, the fleet of new generation aircraft fleet will grow by approx. 530% to nearly 19,000 aircraft globally, and by ~400% in North America
10-Year Fleet Forecast by Aircraft Generation
967
4,876
6,010
4,314 1330
533
2015 2025
Global
New Gen
Mid Gen
Old Gen
Source: ICF International Old Gen: 727, 737 Classic, 747 Classic, DC10, L1011, A300 Mid Gen: 757, 767, 747-400, A320 Family, A330/A340, 737NG, 777, ERJ, CRJ New Gen:, 777X, 787, A350, A330neo, A380, E170/175/190/195, CRJ-7/9/1000, 737MAX
+531%
-70%
-17%
North America
+404%
-60%
-28%
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Over the next decade, MRO spend on new technology Airbus A350 & Boeing 787 aircraft will double every three years
Source: ICF International; Forecast in 2015 $USD, exclusive of inflation, includes Boeing 787 and Airbus A350
10-Year MRO Spend for New Technology A350 and 787 Aircraft $ USD Billions
$1.1 $1.6 $2.2 $2.6 $3.0 $3.4 $4.0
$0.5 $1.0
$1.6 $2.3
$3.3
$4.4
$5.8
$7.1
$8.4
$9.7
$11.1
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
RoW
North America
Europe
Middle East
Asia Pacific
+2000%
Airbus and Boeing focus and interest should be no surprise!
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New technology aircraft challenge traditional MRO sourcing strategies
= Heavy C-Check = Light C-Check
767 A/C Age 1 2 3 4 5 6 7 8 9 10 11 12
787
Volume (C-checks)
Intensity (man-hours)
Days (Hangar)
767 8 95,000 136
787 4 33,000 47
Impact
Cost Savings: ~65% fewer routine airframe heavy maintenance man-hours drives an estimated savings of ~$3.5M
Asset Utilization: ~90 additional available flying days enables increased revenue generation potential
12 Year Heavy Maintenance Schedule
*Based on 4,000 FH/yr utilization 767 C-check = 18mo, 4C = 72mo; 787 C-check = 36mo, 4C = 144mo Assumed industry standard labor man-hour rate Aircraft out of Service (AooS) calculated for C/4C/8C checks assuming industry standard MRO hangar productivity
Return on investment challenges: Facilities
Tooling & Equipment
Training
IT Systems
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Challenge: How best to realize value from the disparate terabytes of data generated by new technology aircraft
Source: ICF Analysis
Number of AHM Parameters
A320: 15,000
B787: 100,000
Stakeholder Battle: Who will control and gain most from the operating data IP?
Operators
Lessors
OEMs
MRO Suppliers
767: 10,000
Yr 1 Yr 10
~ 137TB
~11TB
777 787
~ 28MB
< 1MB
Transmittable Data (MB/Flt)
A/C Data Generated (TB/Year)
~1,100%
Aircraft Health Monitoring and Data Generation Outlook
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Industry Context…
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Continued low fuel costs are having, and will have, important repercussions for aviation and the MRO supply chain
Source: EIA; ICF International analysis
U.S. Gulf Coast Jet Fuel Price per Gallon
$0.8
$1.1
$1.4
$1.7
$2.0
$2.3
$2.6
$2.9
$3.2$ USD
~67% Decline
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…such as an already visible drop in aircraft retirements
Source: Flight Global ACAS June 2015, CAPA, Airline Monitor, ICF Analysis
Potential Impact:
Airline capacity increases
Reduced part-out feed stock for surplus market
Increase in airframe and engine MRO spend on older airframes
Less pressure OEM new parts sales
Higher used part values / pricing
Commercial Air Transport Annual Aircraft Retirements
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
0
200
400
600
800
1,000
1,200
# Retirements
Retirement as % of installed fleet
% Installed Fleet
1990-99 Average: 191
2000-09 Average: 473
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Partially thanks to low fuel prices, North American airlines today are enjoying record profitability
Source: IATA
Global Airline Profitability, 2004-2016
$19
$7
$10
-$30
-$20
-$10
$0
$10
$20
$30
$40
$USD Billions
$36B
Rest of World
North America
Asia Pacific
Some other regions continue to struggle – why?
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China’s seemingly insatiable demand for global commodities was a key driver of global economic growth…
Source: IMF, World Economic Outlook Database October 2015, ICF International Analysis
5%
7%
9%
11%
13%
15%
2007 2008 2009 2010 2011 2012 2013 2014 2015F 2016F2015F 2016F
China GDP Year-on-Year Growth (%)
…But now, after years of remarkable GDP growth, China’s economy has been steadily slowing
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China’s situation exacerbated the 54% fall in commodity prices in the past five years…
Source: Dow Jones Commodity Index
Dow Jones Commodity Indices (DJCI) (January 2011 Indexed to 100)
40
50
60
70
80
90
100
110
- 54.0%
Indexed Values
…which has had a dramatic impact on economies dependent on commodity exports
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The increase in oil & gas market supply and reduced demand for commodities has led to a stronger US Dollar
Partially offsets the positive impact of low fuel costs
Increases the cost of dollar based parts and materials / flying hour agreements
Buying/leasing aircraft becomes more expensive
FOREX Impact
Source: Oanda historical exchange rates, ICF International Analysis
Russian Ruble -55.1%
Brazilian Real -41.1%
S. African Rand -34.1%
Can Dollars -23.1%
Aus Dollars -20.8%
Euro -20.0%
British Pound -12.8%
Japanese Yen -11.9%
Indian Rupee -7.8%
Chinese Yuan -7.2%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
B
R
C
S
A
Global Currency Exchange Rates vs USD % Value Change, Jan. 2014 – Jan. 2016
The “CRABS”: Countries with economies that are heavily
dependent on commodity exports
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Implications for Debate
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Whilst uncertainty - driven by four key industry factors - has yet to impact the backlog materially, cancellations and deferrals will be vital harbingers of airline and supply chain confidence and outlook
Exchange Rates Commodity Prices
China
Implications of Industry Outlook….
Fuel Price
Order deferrals and/or cancellations?
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For New Technology Aircraft MRO, there are three key battlegrounds
Source: IATA
Control of operational data
Control of the Workscope
Control of 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
This new world is already
rapidly changing the competitive landscape
The outcomes and winners in these battles will define the future “winning business models”
Implications of New Technology….
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The MRO market outlook remains robust with expected growth of 3.4% per annum
The combined impact of low fuel prices, exchange rates and some regional economic weaknesses is creating some uncertainty
The very rapid ramp up of New Technology Aircraft is creating both new challenges and opportunities aviation and MRO stakeholders
…and is having a significant impact on the competitive landscape
In Conclusion…
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For questions regarding this presentation, please contact:
David Stewart VP and Head of Aerospace & MRO [email protected] +44 (0) 20 3096 4931
THANK YOU!
April 5-7, 2016 Dallas, Texas
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Market Research & Analysis
Airline Maintenance Benchmarking
M&A Commercial Due Diligence
OEM Aftermarket Strategy
Aviation Asset Valuations & Appraisals
MRO Information Technology (IT) Advisory
Strategic Sourcing & Supply Chain Mgt.
LEAN Continuous Process Improvement
Military Aircraft Sustainment
ICF provides a full range of MRO advisory services
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ICF is one of the world’s largest and most experienced aviation & aerospace consulting firms 53 years in business (founded 1963) 100+ professional staff
− Dedicated exclusively to aviation and aerospace − Blend of consulting professionals and experienced
aviation executives
Specialized, focused expertise and proprietary knowledge
Broad functional capabilities More than 10,000 private and public sector
assignments Backed by parent company ICF International
(2014 revenue - $1.05B) Global presence –– offices around the world
joined ICF in 2011
joined ICF in 2007
New York • Boston • Ann Arbor • London • Singapore • Beijing • Hong Kong
Aerospace & MRO
Aircraft Asset Advisory
Airline Advisory
Airports