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The Global MRO Forecast A Look Forward

2008 - 2018

North American MRO ConventionApril 2008

Presented by:Christopher DoanPresident & CEO

1

Conflicting Forces

▪ Globally, the airline industry has returned to profitability, but market forces make for a turbulent ride ahead

– Economic downturn– Reduced traffic of late– Oil hits new highs– All while new aircraft delivery forecast up:

▪ Fuel efficiency creates a cost advantage▪ But if revenue or demand falls too much, near term deliveries may be pushed out

▪ Despite these ominous signs from the airlines, MRO market growth predictions remain strong

– Regional competitiveness & general skilled labor shortages driving labor rates up– Maintenance queued up for forecast period is a result of fleet/schedule decisions of

5 & 10 years ago▪ Deferrals would require parking or permanent capacity reductions

How can we reconcile the conflicting forces at work?

2

Global Airline Industry Struggles To Maintain Recovery

▪ After 6 straight years of losses– Finally a return to profit in 2007 – $42B losses since 2001– U.S. airlines hardest hit

▪ Unit revenues have been improving slowly– Seats more balanced with demand– Utilization of aircraft increasing– Fares are clearly higher

▪ Oil prices pushing fuel to 30% of operating costs

– $110/b all-time record – Decline expected with bubble burst– IATA still forecasting $78/b for 2008– Goldman Sachs forecast: $60-$200/b

▪ Starting to see a shift in carrier behavior– Capacity reductions– New bankruptcies – Cessation of operations

Source: IATA and Energy Information Administration

3

Airline Industry Giving Mixed Signals

▪ Credit market crisis driving U.S. and global economy to the brink of recession

▪ Passenger and cargo traffic slowing due to economic weakness

▪ Record backlog and new plane deliveries cannot be sustained– Likely to produce delivery deferrals

▪ Environmental concerns will be increasingly at the forefront

U.S.▪ Expect drop in profits

▪ Disciplined capacity growth

▪ Focus on more profitable int’l routes

▪ Consolidation considered imminent

Europe▪ Somewhat insulated from downturn

▪ Stronger euro in face of rising fuel prices▪ Gulf region expansion will challenge

European carriers’ profitable routes

Asia Pacific ▪ Sheltered, but margins eroding ▪ Cargo market sees continued decline

Middle East ▪ Fast growth may begin to normalize as industry matures

South America ▪ Higher exposure to U.S. Downturn ▪ Growth hampered by infrastructure problems

4

But MRO Growth Forecast Remains Strong

Market drivers all have impact on MRO, but long-term growth is still expected

Economic Downturn/ Reduced Traffic

Maintenance requirements accumulate due to previous flying (limited)

Airline ConsolidationReduction in capacity will ultimately be outpaced by realignment of work & overall increase in demand

Possible Reduced New Deliveries

Reduction in deliveries will likely just mean slowing; in the long run, travel demand will bring about fleet & utilization growth (limited)

More Efficient AircraftImproved technology & longer intervals will influence MRO spend as these aircraft replace older models

Environmental DemandsYet to be determined but certain to hasten the advent of more efficient & complex improvements

Labor Shortage/Weak Dollar

Labor rates are on the rise; reflected in 4.5% of the market increase

immediate lastingDRIVER EFFECT ON MRO MARKET SIZE

5

Partners

6

Orders Are Stronger Than Expected

▪ 2007 – third straight year of record orders

▪ Total backlog now nearly 7,300– 40% of in-service fleet

▪ Fleet growth forecast at 4.6% CAGR from 18,816 to 29,437

▪ ASMs will grow faster at 5.7% CAGR – Utilization rates remain high– Larger aircraft & more seats– Longer routes

Fleet data courtesy ASCEND

200818,816

201829,437

4.6% CAGR

Rrgional Jets17%

Widebody23%

Narrowbody60%

Regional Jets19%

Widebody24%

Narrowbody57%

Fleet Average Number of SeatsComposition 2008 2018

RJ 62 73NB 133 139WB 245 252

Total 147 154

7

MRO Industry Outlook Remains Healthy

▪ Global growth is expected to maintain a 4.3% CAGR through 2018

▪ $45.1B industry will grow to $68.6B over 10-year forecast period

▪ Engine remains largest segment

Engines42%

Component19%

Line18%

HMV&Mod21%

2008 Segment Value Mix

8

MRO Forecast & Historical Forecast

▪ 2007-2008 growth rate strongest YoY in history10.9%

4.4%

3.5%

4.0%

07-08

08-13

13-18

08-18

9.6%

4.6%

4.4%

4.5%

07-08

08-13

13-18

08-18

10.4%

4.2%

4.2%

4.2%

07-08

08-13

13-18

08-18

x`

10.3%

4.2%

4.2%

4.2%

07-08

08-13

13-18

08-18

x`

growth rates

9

MRO Growth Varies As The World Market Matures

▪ N America’s commanding market share will continue to fall

– $16.6B in 2008 (37% share)– $20.2B in 2018 (29% share)

▪ W Europe’s share will fall slightly(27% vs. 25%)

▪ Asia Pacific, excluding China & India, will gain market share

– $6.0B in 2008 (13% share)– $11.1B in 2018 (16% share)

▪ S America gains one point– $2.1B in 2008 (5% share)– $3.9B in 2018 (6% share)

▪ All other regions combined gain 5%, growing from $8.4B to $16.3B

▪ But the top three regions will only fall from 77% to 71%

10

But U.S. Sees Recent Capacity Reductions

▪ Major U.S. carriers announce planned parking to reduce capacity

– Less fuel efficient aircraft due for maintenance likely targets

▪ Abrupt cessation of operations adds to the reduction

▪ MRO impact will generally be isolated to the North American region, representing relatively small percentage of total market

– Estimated $300M reduction most likely case; potentially $500M for worst case scenario

▪ But for the MROs that the downturn hits, such impacts are not inconsequential

North America$16.336%

impact on market $0.31%

Asia Pacific$6.013%

Rest of World$10.523%

Western Europe$12.027%

Total Global MRO Market - $45.1B

North America$16.637%

11

Continued cost pressures drive outsourcing trends

MRO Unit Cost Improvements Significant

▪ Unit costs have fallen 15% since 2001

▪ Influences include– Outsourcing (lower labor rates)– Productivity improvements– Design improvements – Maintenance program improvements

▪ But labor pressures are increasing– Bill rates in some regions are definitely

climbing▪ W Europe rates at top of scale▪ China aligned with Asia Pacific average▪ Weak U.S. dollar

– Labor supply tightening

12

Outsourcing Continues To Grow

▪ Provides total cost advantage

▪ Offers more flexibility to operators

▪ Gives independent MROs opportunity to form credible network

▪ Affords larger players key advantages– Lufthansa Technik & ST Aero have been

very aggressive leaders driving globalization

▪ Additional regulation may temper outsourcing growth somewhat, but large players will adapt

Independent MROs have theability to offer more value

13

Airframe Outsourcing Stays Close To Home

Outsourced 64%Spend $1.5B1

N. America 65%Asia 26%

Europe 3%Other 6%

North America Europe Asia

1 HMV (check) activity excludes modifications here for this analysis. Total HMV (including Mods): NA = $3.6B, Europe = $3.2B, Asia = $1.7B; Other = $1.2B and includes Middle East, South America, Africa

Outsourced 47%Spend $1.0B1

Europe 76%Asia 12%

N. America 2%Other 10%

Outsourced 56%Spend $0.6B1

Asia 93%Europe 4%

N. America 0%Other 3%

14

Same Trend For Engines, Except In Asia

1 Total Engine: NA = $6.8B, Europe = $4.9B, Asia = $4.5B; Other = $2.6B and includes Middle East, South America, Africa

Outsourced 77%Spend $5.2B1

N. America 75%Europe 19%

Asia 2%Other 4%

North America Europe AsiaOutsourced 71%

Spend $3.5B1

Europe 71%N. America 23%

Asia 3%Other 3%

Outsourced 73%Spend $3.3B1

Europe 45%N. America 28%

Asia 26%Other 1%

15

Trends&

Strategies

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Globalization & Consolidation Continue

Bigger Players Offer

▪ More services▪ More points of repair▪ More innovation▪ More flexibility▪ Competitive prices

▪ Increasing market share▪ Total care services▪ Logistics services/

component ▪ Single point-of-service

management▪ Outsourcing to cost-

competitive locations▪ OEMs accessing repair

revenue streams

Examples

▪ Lufthansa Technik & ST Aero▪ AAR: Reebaire & Avborne acquisitions▪ Abu Dhabi Aircraft Technologies

expanding into total care provider▪ Dubai Aerospace making substantial

investment▪ AMETEK: Drake Air, Umeco ▪ Significant partnership expansion

- Boeing / Air India JV- CFM56 capacity growth- LHT Hyderabad partnership

▪ Messier’s move from Dulles to Mexico▪ Delta/Chromalloy CFM56 PMA deal

Impact

17

Search For Value Continues To Bring About Change

Financial Players Offer

▪ Opportunities for new business ventures and products

▪ Increased working capital

▪ Increased investment capital

▪ Private equity over debt

▪ Improved operational focus

▪ Greater market penetration and share

▪ New business revenue

▪ Technology improvements

▪ DAE divest Landmark Aviation’s FBO business to GTCR

▪ Goodrich divests HMV subsidiary to Macquarie

▪ ACTS spun off to private investors

▪ Pemco World Aviation Services sold to Sun Capital Partners

▪ Carlyle Group cashes out

▪ AMR & United mull options with service arms

ExamplesImpact

18

The Environment & Economics are Beginning to Merge

Environmental Awareness Offers

Valuable products & services that reduce environmental impact

Opportunity for leadership in area of growing importance

Demonstrated sharing of responsibility with airline customers who face increasing pressure

Reduced carbon footprint

Reduced costs through waste elimination/awareness

Increasingly expect to see good will from efforts

AAR works to reduce energy use in ways big & small; offsets entire electricity footprint through renewable energy credit purchase

AFI, KLM E&M & LHT have leading environmental programs

Pratt & Whitney engine washing services

Winglet modification programs

Airbus paint system improvements

ExamplesImpact

19

But A Shortage Of Human Capital Stands In The Way

ExamplesImpact

Higher wages

Lower capacity

More need for training

Shortage of leadership talent

Already seeing increased wages around the world

Expatriates returning home from the middle east as local MROs expand

Reduced student enrollment at aviation schools as aviation jobs lose their glamour vis-à-vis other technology jobs

Executive ranks are expected to experience shortages of seasoned talent

20

How Can MROs Respond?

▪ Focus on ways to lower costs & increase value through LEAN execution▪ Implement incremental improvements to lower unit costs▪ Turn increased attention to material & inventory management in the face

of increased labor costs

▪ Look for opportunities presented by private equity▪ Value individual businesses objectively to identify where they best fit

▪ Recognize green movement offers economic benefits▪ Apply efficiency improvement and waste reduction efforts to

environmental issues to stay ahead of curve▪ Promote innovative green approaches as marketing tool

Global Competition

Environment

Consolidation

21

The Pressure Will Not Subside

▪ MROs must persevere

▪ Price sensitivity will not subside– Airlines expect value as they seek to remain/achieve profitability– Performance & turn-times can be turned to strategic opportunities – Creative solutions are essential to maximize maintenance opportunities

▪ MROs will be expected to respond notwithstanding their own pressures– Upward drifting wage rates– Labor shortages– Union pressures– Increased offshore competition– Green movement will reach MRO

Economic downturn could expand to

other regions

Environmental focus will add additional

challenges to airlines worldwide

Airlines will experience more familiar challenges over the coming years

Profits are expected to fall

Oil prices will remain uncertain but high

Flying demand will keep utilization high

22

Remember In Today’s Market, The World Is Flat

Economic downturn: how do you manage risk in an increasingly

uncertain market?

Global competition: how will you compete in an increasingly global market where labor is increasingly

in short supply?

Environmental concerns: how will you respond to public perception and changing regulatory requirements in

a market that is increasingly concerned for the environment?

Identify Value Offer Flexibility Embrace Opportunities

23April 2008

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