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MRO Market Forecast & Industry Dynamics
October 15, 2013
Jonathan M. BergerVice President ICF SH&[email protected]
Presented by:
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Today’s Agenda:
1. MRO Market Forecast
2. MRO Industry Trends to Watch
joined ICF in 2011 joined ICF in 2012joined ICF in 2007
2013 Airline E&M
North America
Montreal, Canada
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MRO Market Forecast
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North America
Europe
Asia Pacific
Latin America
AfricaMiddle 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
26,156Aircraft
17%
50%15%
18%
~8,30032%
26%
24%
8%
5% 5%
26,156Aircraft
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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 2012–2022 (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 $80–100/bbl range
15,960 aircraft deliveries
6,560 aircraft retirements
Key Assumptions
~8,300 (32%) ~9,500 (27%)
North America
Europe
Asia
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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 forecastForecast 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%
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$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. 2012––By Region$ Billions
Source: ICF SH&E analysisForecast in 2012 $USD, exclusive of inflation, Includes Turboprops
Latin America
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$0
$5
$10
$15
$20
$25
2012 2022
TurbopropRegional JetWidebody JetNarrowbody Jet
The North American MRO market is expected to grow to approx. $20B by 2022, at 1.2% per annum
MRO MARKET FORECAST
North AmericanMRO Spend 2012–2022 ($B)
-2.9%
-3.4%
3.4%
1.1%
Source: ICF SH&E forecastForecast 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
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MRO Industry Trends to Watch
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Five key MRO industry trends to watch…
Source: ICF SH&E
MRO INDUSTRY TRENDS
Industry Trends
M&A in MRO
Surplus Parts
3-DPrinting
AirframeMRO
Energy & Aviation
Convergence
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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
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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&Eforecast
Source: ICF SH&E Analysis, Airline Monitor Feb 2013, ACAS Jan 2013,
1990-99 Average 171
2000-09 Average 410
2010-22 Average 629
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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
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Industry Trends
M&A in MRO
Energy & Aviation
Convergence
AirframeMRO
3-DPrinting
SurplusParts
Five key MRO industry trends to watch…
Source: ICF SH&E
MRO INDUSTRY TRENDS
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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 enginetechnologies 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
Delta Air Lines acquires oil refinery in Pennsylvania
Rigs powered by industrial
gas turbines (IGTs)
Demand for skilled
technicians
Exotic alloys and materials
required in demanding
environments
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Hydraulic fracturing (i.e. fracking) is leading to a significant shift away from coal to natural gas power generation…
012345678
$/M
MB
tu
Commodity Fuel Prices
Illinois 4lb Pennsylvania 4lb
NYMEX 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 coal’s 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
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…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
$30
Aeroengine IGT
2011 Global Gas TurbineEngine Production ($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 generation…and 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
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Five key MRO industry trends to watch…
Source: ICF SH&E
Industry Trends
MRO INDUSTRY TRENDS
AirframeMRO
M&A in MRO
3-DPrinting
SurplusParts
Energy & Aviation
Convergence
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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-EAvoid competitor from
acquiring first
MARKET SHARESpread 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 EXPANSIONincrease global footprint &
customer base
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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 ActivityCumulative Annual Total Transactions
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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 ActivityAverage Transaction EBITDA Multiple
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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 DeCrane’s 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), AMSafeacquired Satair
acquired safety equipment supplier
AmSafe
acquiredVector Aerospace
acquired Dansk Fly Elektronik acquired Aero
Maintenance Group (AMG)
acquired FinnairEngine shop
acquired Mechanical Enterprises (MEI)
acquired Connector Maker Switchcraft
Summary of active participants in MRO M&A
acquired Aveos Components
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Five key MRO industry trends to watch…
Source: ICF SH&E
Industry Trends
MRO INDUSTRY TRENDS
SurplusParts
Airframe MRO
3-DPrinting
Energy & Aviation
Convergence
M&A in MRO
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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 AerospaceLHT
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 analysisIncludes Turboprops
Supplier Market Share
$9.1B
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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 2013Note: Subsidiaries are included if they are majority owned/operated
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$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
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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-PacificHeavy Check
Migration
More Heavy Maintenance
Stays in Americas
“Right-shoring is the new Outsourcing”
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….and as a result, we will see continued investment activity in the airframe MRO sector
AIRFRAME MRO TRENDS
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Five key MRO industry trends to watch…
Source: ICF SH&E
Industry Trends
MRO INDUSTRY TRENDS
3-DPrinting
Energy & Aviation
Convergence
M&A in MRO
SurplusParts
AirframeMRO
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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
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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
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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
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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
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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
China’s AVIC heavy machinery is using large 3-D printed titanium parts for landing gear and other structural related parts.
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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!
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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&E’s MRO advisory services include the following:
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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
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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 EnvironmentTransportation
Health, Social Programs, and Consumer/Financial
Public Safety and Defense
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Jonathan M. BergerVice President
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