0 MRO Market Update & Industry Trends Presented by: Jonathan M. Berger Vice President Aerospace & MRO Advisory [email protected] 2016 Annual Conference October 26-27, 2016 Orlando, Florida
0
MRO Market Update & Industry Trends
Presented by:
Jonathan M. BergerVice President Aerospace & MRO Advisory
2016 Annual Conference
October 26-27, 2016
Orlando, Florida
11
Today’s Agenda
Bizarro Aviation The “CRABS”
Meet the Frackers
These are the Good Old Days
Follow the Money
Amazon the Air Cargo Disruptor
March of the Middle East Titans
A New Golden Age of Aircraft Cabin Interiors
MRO & OEM Alternative
Material Forecast
22
“Bizarro Aviation”
33
Four external
macro-economic
forces are having a
significant impact
on the aviation
industry and the
MRO supply chain
Source: ICF analysis
The “CRABS”
44
The dramatic increase
in oil & gas market
supply and reduceddemand for
commodities has led
to a strong US Dollar
Partially offsets the positive impact of low fuel costs for operators
Increases the cost of dollar based flight hour agreements (and parts/material in general)
Cost of labor for in-country MROs is cheaper driving up margins for US dollar based contracts
Buying/leasing aircraft becomes more expensive
FOREX Impact
Source: USForex, ICF analysis
The “CRABS”: Countries with economies that are
heavily dependent on commodity exports
Global Currency Exchange Rates vs USD% Value Change, September 2014 – September 2016
Russian Ruble-37.6%
Brazilian Real-24.6%
S. African Rand-19.1%
Can Dollars-15.3%
Aus Dollars-12.5%
Euro-11.7%
Indian Rupee-7.8%
Chinese Yuan-7.8%
-50%
-40%
-30%
-20%
-10%
0%
10%
B
R
A
SC
55
Commercial aircraft
OEM production
backlog remains at
historical record
levels driven by:
Source: CAPA, ICF Analysis
Commercial Aircraft OEM Production Backlog
0%
10%
20%
30%
40%
50%
60%
70%
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
Order
Backlog
Backlog/
% Active Fleet
Emerging market growth
Low interest rates
Previously high oil and
commodity prices
Introduction of new
technology aircraft/engines
66
Low fuel costs
appear to be
reversing aircraft
retirements trends
Source: CAPA, Airline Monitor, ICF analysis
Industry Impact:
MRO Suppliers - Positive:
Increased spend on older
airframes & engines
Surplus Market - Negative:
Reduced part-out “feed
stock”
- OEMs: Improved new
part sales
- Distributors: Improved
used part values /
pricing
- Operators: Increased
material costs
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
1991-1999 Average: 203
2000-2009 Average: 473
77
Airline return on
invested capital
(ROIC) is clearly
correlated with the
drop in fuel costs
Source: IATA, ICF Analysis
Fuel Price as a % of Airline Operating Expenses
17%
22%
28% 30%
36%
28% 28%31%
33% 33% 32%28%
20%
0
20
40
60
80
100
120
0%
10%
20%
30%
40%
% of Airline
Operating
Expenses
Crude Oil
Price/BBL
88
Airline return on
invested capital
(ROIC) is clearly
correlated with the
drop in fuel costs
Source: IATA, ICF Analysis
Fuel Price and Global Airline Return On Invested Capital (ROIC)
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
$0
$20
$40
$60
$80
$100
$120
$140
Jet Fuel Price ($/barrel) Airline ROIC (%)
Airline ROIC
Jet Fuel Price
$$$
99
Driven by low fuel
costs and
consolidation,
airline the industry
is on target to
achieve record
profitability in 2016
of almost $40B USD
Source: IATA, ICF analysis
These are the “good old days: - for
some airlines…
Global Airline Profitability, 1996 - 2016F
-$30
-$20
-$10
$0
$10
$20
$30
$40
$USD
Billions$39.4B
Asia Pacific, $7.8B
North America, $22.9B
Europe, $7.5B
Middle East, $1.6B
Latin America, $0.1B
Africa, ($0.5B)
1010
However, profit
margin
improvement has
been largely limited
to carriers in North
America
Source: IATA, ICF Analysis
-1.8%
-4.7%
0.1%
2.3%1.0%
-0.9%
3.4%4.7%
0.7%1.5%
3.0%
-0.4%
15.4%
8.4%
5.6%
2.6% 2.8%
-1.1%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
2008
2012
2016F
Global Airline EBIT Margin by Region
…but not all – many airlines continue
to struggle
1111
Brexit has clearly
had an impact on
European airline
stock performance;
specifically UK
based carriers
Source: Company websites
Share Performance of European Airlines Since Brexit
23 June 2016 – 13 October 2016
SAS, -6.3%
Lufthansa, -15.2%
Ryan Air, -16.2%
Norwegian, -16.5%
Wizz, -23.2%
Air France-KLM, -24.8%
IAG, -28.1%
Easy Jet, -41.5%
-50% -40% -30% -20% -10% 0%
1212
Follow the Money:
Airlines are
spending their hard
earned profits in
three primary areas
Source: Company Reports, ICF Analysis
Airline Profit Spend Analysis
Labor, 20%
Capex,38%
Investors, 42%
Profit Sharing15%
Wage Increases
5%Fleet23%
Equity Investments
5%
Other capex10%
Debt Repayments
16%
Stock Buy-Back &
Dividends26%
1. Labor ~ 20%:
Profit sharing
Wage increases
2. Capex ~ 38%:
Fleet renewal & cabin
upgrades
Facilities, offices, lounges
Equity partner investments
3. Investors ~ 42%:
Stock buy-backs
Dividends
Debt repayment
1313
After positive signs
in 2014, air cargo
supply continues to
exceed demand
Source: IATA, ICF Analysis
0.4%
-0.9%
0.6%
5.0%
2.3%2.1%
6.0%
3.0%
3.7%
5.4%6.3%
6.3%
-2%
0%
2%
4%
6%
8% Traffic (FTK)
Capacity (AFTK)
Global Freight Traffic (FTK) and Capacity Growth (AFTK)
Year-Over-Year Percent Change
(- $$$)
1414
$0
$5
$10
$15
$20
$25
$30
$35
$40
Amazon Quarterly Revenue
Amazon is very well
positioned to lead a
major disruption of
the air cargo industry
Source: Amazon SEC Filings
Amazon’s Growing Revenue & Shipping Costs
0%
2%
4%
6%
8%
10%
12%
14%
Shipping Costs as a Percentage of Revenue
$B
USD
1515
March of the Middle
East Titans:
Middle East carriers
have been very
effective in
capturing valuable
business passenger
traffic from
European secondary
airports
Source: OAG Data, ICF Analysis
European Secondary AirportsAverage Number of Seats per Departure in 2016
“…Lufthansa’s Frankfurt hub has lost nearly a 3rd of its market
share on routes between Europe and Asia since 2005, with
more than three million people now flying annually via Gulf
hubs” – The Economist
363
408 400 400 394
370
343
400 400
306
180
148128
146
121
163149
117135
149
100
150
200
250
300
350
400
450
500
Gulf Carriers Non-Gulf Carriers
1616
Trend Watch:
A New Golden Age of Aircraft
Cabin Interiors
1717
Modifications growth
is driven by airlines
seeking differentiation
in the cabin and
customer experience
Modifications demand includes labor and material spend
*Passenger-To-Freighter Conversions
**Airworthiness Directives / Service Bulletins
Source: ICF analysis, constant 2015 US$
MRO modification market
growth drivers include:
Premium 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
Commercial Air Transport Modifications Forecast
$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*
Painting
Avionics Upgrades
Interiors
$4.4B
$7.4B
0.0%
3.7%
6.9%
5.9%
CAGR
5.3% Avg.
3.6%
$USD
Billions
1818
Cabin “densification”
has emerged as cost
effective strategy for
airlines to increase
capacity and drive
bottom line growth
2015 - 2025 Capacity Bridge
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%
12 Seats 16 Seats
130 Seats120 Seats
Total = 150 Seats
Total = 164 Seats
Example: Delta A320 Interior
Modification Program
New seats, outlets, IFE, overhead bins
Space-saving galleys to add a row of seats
Source: ICF analysis, delta.com
18 Seats18 Seats
Cabin Upgrades:
Slim seats
Slim lavatories
Slim galleys
Slim coat closets
1919
MRO Forecast
2020
The current
commercial
air transport fleet
consists of over
27K aircraft; over
half are narrowbody
aircraft
Source: CAPA 2015
NarrowbodyJet
WidebodyJet
Turboprop
Regional Jet
27,114
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%
27,114
Aircraft
2015 Global Commercial Air Transport Fleet
2121
The combination of
strong air travel
demand and the
need to replace
ageing aircraft will
drive fleet growth at
a healthy 3.4%
annually
Source: ICF analysis: CAPA 2015
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2015 2025
Africa
Middle East
Latin America
Europe
Asia Pacific
North 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
2222
Current commercial
air transport MRO
demand is $64.3B;
with Asia equivalent
to North America
and Europe in
market size
Source: ICF analysis; Forecast in 2015 $USD, exclusive of inflation
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 Commercial Air Transport Global MRO Demand
2323
The global MRO
market is expected
to grow by 4.1% per
annum to $96B by
2025
Source: ICF analysis; Forecast in 2015 $USD, exclusive of inflation
Engine and component MRO markets remain the largest segments
Modifications market will see the strongest growth (e.g. interiors, connectivity)
Airframe market slows due to reduced man-hour intensity and increased check intervals as new fleets are introduced
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
2015 2025
Modifications
Airframe
Line
Component
Engine
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 Commercial Air Transport MRO Demand Growth
$USD
Billions
2424
There two primary
reasons operators
are aggressively
seeking non-OEM
supplied parts;
Three alternatives to purchasing
OEM-supplied parts:
1. Cost savings
2. Part availability
Source: ICF analysis
PMA
PMA (Parts Manufacturer
Approval) is approval
granted by the FAA to a
non-OEM manufacturer of
aircraft parts
Two types of PMA:
1. Licensed
2. Competitive
DER Repair
DER (Designated
Engineering
Representatives), FAA
approved engineers
who can approve
technical data for
repairs and
modifications outside
the CMM
Design Organization
Approval (DOA), a
blanket approval for an
MRO organization to
develop internal
repairs
Surplus
Three types of surplus
material:
1. Used Serviceable
Material (USM)
2. New Material
3. Used, unserviceable
material
Lower HigherPerceived Risk
2525
The alternative
material market is
concentrated on the
back half of mature
aircraft lifecycle (17-
25 years old aircraft)
and early sunset
aircraft
Source: ICF analysis
* New: CFM56-5B / V2500-A5 / PW6000
Old: CFM56-5A / V2500-A1
MATURE
737-1/200
747-1/2/300
747-8
A380
10 250
DC10
A300
A320*
(Old)
CRJ-1/2/400
777
A340
SUNSETGROWTH
737-3/4/500
747-400
767757
A300-600/310
MD80
ERJ-140
MD11
787
SSJ 100
CRJ-7/9/1000
ERJ-170/190
777-2LR/3ER A320*
(New)
Years since Entry into Service
Limited OEM
Alternatives
Healthy OEM
Alternative
Market
Growth
Phase
737 NG
A350
A320neo
Alternative
Material
A330
Bubble size
proportional
to MRO
spend
2626
In 2015, operators
spent over $32B on
OEM new parts and
an additional $13B
on alternatives
2015 OEM New Material Demand vs. Alternatives
$0B
$5B
$10B
$15B
$20B
$25B
$30B
$35B
OEM new Alternatives
OEM Manual
Repairs
DER Repairs
PMA ($0.54B)
Source: ICF analysis
~ $13.4B
~ $32.4B
$2.2B
$3.9B Surplus
$6.8B
41%“…the OEM’s increasingly tight grip on
the aftermarket means Delta’s spares
costs double about every seven years.”
“Without TechOps parting-out engines
to bolster spares and coming up with
other alternatives to OEM-supplied
support, that increase could be even
steeper…”
…“We’re pretty good at sourcing
outside the OEMs…and we’re always
working to develop those alternatives.”
- Richard Anderson
CEO Delta Air Lines
Keynote Speech, MRO Americas
April 2013
2727
There are nearly 1.1
million total PMA
parts that are FAA
approved, of which
over 75% are for
Boeing aircraft
Source: Federal Aviation Administration
Boeing76%
Airbus15%
Bombardier3%
P&W1%
Other5%
1,077,971
FAA Approved PMA Part Numbers, by OEM
2828
The volume of
PMA approvals has
been steadily
growing since
1990, with over
about 440,000 new
approvals granted
since 2011
Source: Federal Aviation Administration
41,030
85,238
204,570
301,905
420,051
22,421
0
100,000
200,000
300,000
400,000
500,000
FAA Approved PMA Part Numbers, by Year Approved
2929
Surplus material
usage has risen
sharply over the
past few years,
driven by tangible
cost savings and
minimal perceived
risk
Source: ICF analysis
OEM New As Removed /
Unserviceable
Used Serviceable
Surplus
New
Surplus
Typical Material Price Bands, By Part Type%
OEM List
0
20
40
60
80
100
120
PMA
“Surplus parts have increased the
demand for component DER…
because the unserviceable
surplus parts must repaired. The
biggest customer for DER is
ourselves.”
- Major PMA / DER
Supplier
Lower HigherPerceived Risk
OEM Catalogue List Price
3030
Numerous regional
factors influence
operator PMA
consumption to
include:
Source: ICF analysis
Estimated PMA Demand by Major Region
46 - 56%
5 - 8%12 - 18%
28 - 38%
4 - 7%
Virtually every major carrier leverages PMA
parts as an OEM alternative
Fleet age
Mix of lease vs owned aircraft
Technical capability & experience
Airline procurement historical practices and culture
3131
In order to control and reduce material spend, airlines
must have a comprehensive OEM alternative strategy
PMA parts, DER repairs, and surplus material are
valuable material sourcing solutions that drive
tangible cost savings and improve part availability
Safety concerns with regards to OEM alternative
material usage have demonstrated to be meritless;
yet clearly perceptions of risk remain
As long as certain airlines continue to have restrictive
PMA policies, Lessors will continue to include
conservative language in their lease agreements
Continued education is the only solution
In Summary…
32
For questions regarding this
presentation, please contact:
Jonathan M. BergerVice President Aerospace & MRO Advisory
[email protected] +1 404.819.7669
THANK YOU!
2016 Annual Conference
October 26-27, 2016
Orlando, Florida
3333
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