24
Examining MRO And Aftermarket Trends And Forecasting Business Demand Presented by Tom Tran Ann Arbor, Michigan • Amersham, United Kingdom • Singapore www.AeroStrategy.com
Examining MRO And Aftermarket Trends And
Forecasting Business Demand
Presented by Tom Tran
Ann Arbor, Michigan • Amersham, United Kingdom • Singaporewww.AeroStrategy.com
© 2011 AeroStrategy
Agenda
Engine MRO Overview
When Will The Market Recover?
2
© 2011 AeroStrategy
Two Major Factors Influence Aircraft MRO Activity: Fundamental Demand And Supply Chain Practices
3
Simplified MRO Supply Chain
• Predicted airline maintenance
spending as a result of
aircraft demographics,
utilization, equipment
reliability, maintenance
programs and regulations
• A good predictor of supplier
MRO and aftermarket activity
in normal times
1. Fundamental Demand For Aircraft MRO
• Inventory stocking &
destocking, use of surplus
components, deferred and
reduced scope maintenance
• All of the above act as a
buffer between fundamental
demand and realized revenue
by OEMs and MRO suppliers
• Important in times of crisis
2. MRO Supply Chain Practices
© 2011 AeroStrategy
The 2010 Air Transport MRO Market Was $43.7 Billion…
4
2010 Air Transport MRO Market
$43.7B
Engine
35%
Components
23%
Line
21%
Airframe
15%
Modifications
7%
Source: AeroStrategy/OAG Aviation
• Engines: includes off-wing shop visits, excludes on-
wing engine activity
• Components: includes O&R, excludes purchase and
carrying cost of inventory
• Line: includes transit, overnight and A checks
(labour and material)
• Airframe: includes C and D checks (labour and
material)
• Modifications: includes PTF conversions, painting,
cabin upgrades, avionics and component upgrades
• Areas of maintenance expenditure excluded from
chart:
– Maintenance control
– Technical services (~ US$2.5B)
– Inventory carrying costs (~ US$10B)
© 2011 AeroStrategy
…Which Is $1.3B Lower Than The 2007 Peak
5
2003-2010 Global Air Transport MRO Market ($B)
0.0
10.0
20.0
30.0
40.0
50.0
2003 2004 2005 2006 2007 2008
Engine
Line
Components
Airframe
Modifications
$45B$44.0B
2009
$42.7B
Source: AeroStrategy/OAG Aviation
Recession = Three Years Of Lost Growth!
$43.7B
© 2011 AeroStrategy
Fundamental MRO Demand Is Expected To Recover And Reach $58 Billion By 2019
6
Air Transport MRO Market ($B)*
Line
Total = 3.2%
Source: AeroStrategy OAG Aviation
* Constant 2009 US$
•The MRO market is
expected to recover
early this decade
and reach $58B by
2018 – a 3.2%
CAGR (excludes
inflation)
•Airframe
maintenance will
have the lowest
growth due to
retirements and
introduction of less
maintenance
intensive aircraft
0
10
20
30
40
50
60
70
2009 2011 2013 2015 2017 2019
CAGR
Mods 7.2%
Airframe 1.2%
Line 1.5%
Components 3.1%
Engine 4.0%
© 2011 AeroStrategy
Europe Is A Significant Exporter Of Engine Overhaul
7Source: AeroStrategy/OAG Aviation
MRO Demand MRO Supply
2010 Engine Overhaul Demand And Supply (US$)
By Region
-24%
Asia Pacific
Net Importer
Europe
Net Exporter
+64%
North America
Net Importer
-2%
$3.6B $4.3B $5.1B
© 2011 AeroStrategy
Approximately One Quarter Of Engine Overhauls Are Done In House Today…
8Source: AeroStrategy OAG Aviation
2010 Engine Overhaul Outsourcing
By Region
0%
20%
40%
60%
80%
100%
Asia
Pacific
Europe North
America
36%
IN HOUSE
26%26% 25%
OEM
43%
38%
Non
OEM
31% 28%
47%
2010 Airframe Heavy Maintenance
Outsourcing By Region
0%
20%
40%
60%
80%
100%
Asia
Pacific
Europe North
America
ATP
30%
IN HOUSE
50%70% 33%
ATP = Airline Third Party; IND = Independent
Ind.
20%
15%
15%
53%
12%
OEM ~2%
© 2011 AeroStrategy
…But Engine MRO Outsourcing Is Expected To Increases Significantly By 2020
9
• Captive engine maintenance
declines significantly
• OEM adoption of licensed service
centers and JVs for some engine
models restricts PMA
encroachment to less than 5%
• Vertical integration by airline third
party and independent overhaul
providers into parts repair
• OEMs retain the largest share and
control 50% of the engine
overhaul market0
20
40
60
80
100
2010 2020
OEM
50%
ATP +
IND
40%
In-house
10%
2020 Engine Overhaul Market Shares
In-house
25%
OEM
42%
ATP +
IND. 33%
+ 6%
+ 6%
(12%)
Source: AeroStrategyNote: OEM includes JVs
ATP = Airline Third Party; IND = Independent
© 2011 AeroStrategy
Material Drives 65% Of Engine MRO Costs – And New Parts Drive Material Costs; PMA Is Approximately 2% Today…
10
Breakdown Of Engine MRO Costs
Material65%
Labor13%
Outside P.R.12%
Inside P.R.10%
$15.2B
New Parts61%
LLP27%
Used/serviceable
10%
PMA2%
$9.9B
Breakdown Of Engine MRO Material Costs
Source: AeroStrategy
© 2011 AeroStrategy
…But Is Anticipated To Be Strong From 2009 Especially Outside Of The Engine
11
• The PMA market will begin
to recover in 2010 with an
estimated 7% growth rate
and double digit growth
through 2014
• Most of this growth is
expected in the
components and airframe
areas, not engine
• In 2014, PMA penetration
is expected to reach 3.3%
of total material
consumption
• By 2019, AeroStrategy
estimates PMA penetration
will reach about 5%
Source: AeroStrategy analysis,
AeroStrategy Engine Overhaul Survey
Penetration
(%) 2.3% 2.4% 2.7% 2.9% 3.1% 3.3%
-
100
200
300
400
500
600
700
2009 2010 2011 2012 2013 2014
Engine
Components
Airframe
2010: 7%
Growth
2011: 15%
Growth
2012-2014:
12% Growth
* Constant 2009 US$
2009-2014 Air Transport PMA Forecast*
© 2011 AeroStrategy
Agenda
Engine MRO Overview
When Will The Market Recover?
12
© 2011 AeroStrategy
MRO Supply Chain Practices Attenuate Fundamental MRO Demand In Times Of Crisis…
13
Simplified MRO Supply Chain
• Predicted airline maintenance
spending as a result of
aircraft demographics,
utilization, equipment
reliability, maintenance
programs and regulations
• A good predictor of supplier
MRO and aftermarket activity
in normal times
1. Fundamental Demand For Aircraft MRO
• Inventory stocking &
destocking, use of surplus
components, deferred and
reduced scope maintenance
• All of the above act as a
buffer between fundamental
demand and realized revenue
by OEMs and MRO suppliers
• Important in times of crisis
2. MRO Supply Chain Practices
© 2011 AeroStrategy
…And Airlines Utilized Several Cost Savings Levers Since Late 2008…
Engines
• Reduced scope of
maintenance – more “repair”
and less “replace”
• Defer replacement of
expensive life limited parts
until they reach absolute
cycle limits(e.g. short-stub
engines)
• Greater leverage of spare
engines in lieu of overhauls
• Acquisition of surplus
engines for mature aircraft
• Renegotiate MRO contracts
Components
• Burn down rotable
inventory in lieu of
component MRO repair
• Reduced scope
maintenance – more
“repair” and less “replace”
• Acquisition of surplus
rotables for mature aircraft
• Renegotiate MRO contracts
Airframe Heavy
• Reduce utilization and rotate
in-service aircraft to minimize
heavy maintenance checks
required by hour/cycle limits
• Park older aircraft
approaching expensive heavy
checks
• Reduce discretionary
modifications (e.g. Interior
upgrades, painting)
14
© 2011 AeroStrategy
…As A Result, OEM Aftermarket And MRO Supplier Revenues Plunged In 2009
15
Airline
Operator Overhaul
Shop
Outside
Parts
Repairs &
Processes
Service
Parts
Casting,
Forging &
Raw
Materials
2009 Reduction In MRO Supply Chain Revenues Due To Industry Crisis
(10 – 15%) (15 – 30%) (20 – 40%)Near-term reduction
in supplier revenues
Fundamental
MRO demand
down in 2009
• Most suppliers had a 10 –25% reduction in MRO/aftermarket revenue in 2009; the
effects were more pronounced for parts suppliers than overhaul shops
Source: AeroStrategy
© 2011 AeroStrategy
12%
88%
A Key Difference From Previous Recessions Is The Scope Of Parked Aircraft That Could Come Back –Given Today’s Fuel Prices
16
Air Transport Fleet: Temporarily Inactive/ In Storage
1,553
High
potential to
return to
service at
current fuel
prices
Low-
moderate
potential /
obsolete
• Despite the large size (1,553) of the parked fleet, only a
small portion – 200 – is likely to return to service at
current fuel prices
• This equates to 1% of global capacity….or
approximately two months of production rates
Source: OAG Aviation
Aircraft Family Sep-10
737-3/4/500 201
MD80 181
DC9 136
737-1/200 106
146 74
727 73
EMB-135/140/145 78
757 54
747-1/2/300 47
747-400 47
CRJ-100/200 56
F100 48
A300-600 43
DC8-6/70 32
DC10 38
F28 31
328JET 29
A310 12
A300 19
MD11 9
717 9
L1011 12
707 10
F70 4
BAC 1-11 2
MD10 5
MD90 6
Total 1,362
Aircraft Family Sep-10
767 67
737-6/7/8/900 15
777 3
A320 Series 64
A330 11
A340 20
CRJ-700/900/1000 4
EMB-170/190 7
Total 191
© 2011 AeroStrategy
High Fuel Costs Have Also Contributed To Early Aircraft Obsolescence And Growing Retirements…
17
• High fuel costs
combined with the
recession have
contributed to higher
retirement rates
• In 2007/08, 400 aircraft
were scrapped each
year – equivalent to
40% of deliveries
• Qantas recently
changed its
depreciation policy to
recognize shorter
aircraft economic life-
spans; will other
airlines follow suit?
Source: Airline Monitor Feb 2010
0
200
400
600
800
1000
1200
1400
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Air Transport Retirements and Deliveries
Retired/scrapped
aircraft
Deliveries
© 2011 AeroStrategy 18
High Potential – Return To Service
Air Transport Fleet: Temporarily Inactive/ In Storage (Sept 2010 vs. April 2010)
Low Potential – Return To Service
• The “high potential” parked fleet has
declined 48 (~20%) since April 2010;
most were likely returned to service
• The “low potential” fleet is also 110
smaller; most of this difference is due to
scrapping and “parting out” aircraft
…And The Parked Fleet Continues To Shrink –Primarily Due To Scrapping And Parting Out Aircraft
Source: OAG Aviation
© 2011 AeroStrategy
An Estimated 15-20 Aircraft Are Being “Parted Out” Each Month…
19
• Globally, 15-20 aircraft per month are being “parted
out”
• Engines, avionics, and other aircraft components are
re-circulated to the market, thereby suppressing MRO
demand
• Facilitating this phenomenon is a new breed of
surplus parts suppliers, with an impressive blend of
financial skills, technical capability and market savvy
• “Parting out” is not limited to mature aircraft; new
generation aircraft are also being cannibalized
including A320, A340, and advanced B767 models
• “Hot” surplus parts markets include:
− Aircraft: B737-3/4/500, B767, B747-400, CRJ
− Engines: CFM56-3, CFM56-5, CF34, V2500A1,
CF6-80C2
− High value components: APUs, avionics, others
• Surplus parts represent 15%+ of total aircraft parts
spending…and for some products 30-40%!
Source: AeroStrategy interviews
© 2011 AeroStrategy
…Which Is Suppressing Aftermarket Demand Even As Inventory De-Stocking Runs Its Course
+%
-%
Start of
global
recessionReduction To
Fundamental MRO
Demand Due To
Deferred Maintenance
& Destocking
Reduction To
Fundamental MRO
Demand Due To
Aircraft Cannibalization
& High Use Of Surplus
Parts
Addition To
Fundamental MRO
Demand Due To
Deferred Maintenance
& Destocking
“Normal”
MRO Demand
(Fundamental
Demand =
realized
supplier
demand)
20
Factors Supressing Fundamental MRO Demand
Source: AeroStrategy
© 2011 AeroStrategy
AeroStrategy Anticipates Mid-To-Upper Single Digit MRO Growth This Year, Followed By Low Double Digit Growth In 2012
21
Air Transport MRO Market – Realized Supplier Revenue($B) *
0
10
20
30
40
50
60
2008 2010 2012 2014 2016 2018
Source: AeroStrategy
* Constant 2009 US$
2009: Down 15-20%
Fundamental MRO
demand
Realized supplier
revenue
2010: Low Single
digit growth
2011: Mid-to-upper
single digit growth
2012: Low double
digit growth
Key Assumptions
• Fuel costs remain
high (>$80/bbl)
• Modest global
GDP growth
• Improved airline
profitability
continues in 2011
The Wildcard: Will Improving Airline Profitability Change Behavior?
© 2011 AeroStrategy
The Outlook For MRO Market Recovery Will Depend On Economic Growth And Fuel Costs
22
Economic Recovery (Global GDP Growth)
Fuel
Costs
High
(>$80/bbl)
Low
(<$80/bbl)
Low – ”W” Shaped Recession Modest – 2-3% GDP Growth
AeroStrategy
Scenario
Best case:
V Shaped
Recovery
Worst case:
Depressed
market
Slow
Recovery
Source: AeroStrategy
The Wildcard: Will Improving Airline Profitability Change Behavior?
© 2011 AeroStrategy
Key Messages
23
• The global economic recession will result in significant
airline capacity, inventory reduction and losses. As a
result, the MRO market will contract from $45B in 2007 to
$43.7 B in 2010
• Engine MRO market is the largest segment of MRO spend
at 35% of total or $15.2B
• Approximately one quarter of engine overhauls are done in
house today, but engine MRO outsourcing is expected to
increases significantly by 2020
• In the near-term, use of MRO demand buffers and cost
control measures will magnify the drop in spend, but
AeroStrategy anticipates mid-to-upper single digit MRO
growth this year, followed by low double digit growth in
2012
© 2011 AeroStrategy
Thank you for your attention!
EMEA
London, England
43 Hill Avenue, Amersham
Buckinghamshire HP6 5BX
United Kingdom
Phone: +44 1494 431-600
Fax: +44 1494 434-500
Email: [email protected]
AmericasAnn Arbor, Michigan
101 North Main Street, Suite 400
Ann Arbor, Michigan 48104
United States of America
Phone: +1 734 821-0220
Fax: +1 734 821-0221
Email: [email protected]
Asia PacificSingapore
314 Tanglin Road, #01-05
Phoenix Park Office Campus
Singapore 247977
Phone: +65 9111-8435
Fax: +65 6884-4951
Email: [email protected]
www.aerostrategy.com
