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Military Aircraft MRO ForecastA BRIDGE OVER TROUBLED WATERSA BRIDGE OVER TROUBLED WATERS
Presented by:
Michael Howard Principal, ICF SH&E
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Today’s Agenda
MRO MILITARY~ April 7-10 ~
2014Phoenix, AZ
MRO MILITARY~ April 7-10 ~
2014Phoenix, AZ
Key Market Trends
US Defense Budget Outlook
Global Market Forecast
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ICF SH&E is one of the most experienced global aviation and aerospace consultancies
50 years in business (founded 1963) 85 professional staff
− Dedicated exclusively to aerospace and aviation − 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
Airports • Airlines • Aerospace & MRO • Asset Advisory • Safety / SecurityAirports • Airlines • Aerospace & MRO • Asset Advisory • Safety / Security
New York • Boston • Ann Arbor • London • Singapore • Beijing • Hong Kong
joined ICF in 2012
joined ICF in 2011
joined ICF in 2007
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Key Market Trends
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Field
Airframe
Component
North America
Europe
Asia PacificMiddle East
Africa
Latin America
48%
22%
16%
3%4%
8%
2013 MRO By Region 2013 MRO By Activity
Source: ICF Analysis
KEY MARKET TRENDS
Total $60.7B
Worldwide military MRO spend was nearly $61B in 2013
18%
52%
16%
14%Engine
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There are three key trends impacting military MRO todayKEY MARKET TRENDS
Fleet Renewal
Global Military MRO
Global Military MRO
Shifting Buying Behavior
Political uncertainty
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11,000 deliveries are expected over the next decade and 75% will be for replacement
KEY MARKET TRENDS
75% of all new deliveries will be to replace retiring aircraft such as the JSF for the F-16
Another 800 potential deliveries exist for programs not currently identified
0
200
400
600
800
1000
1200
1400
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Military Aircraft Deliveries2013-2022
Replacement
Growth
Potential New Programs
Source: ICF Analysis
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Over half of the retirements will come from large existing fleets such as the F‐16 and S‐70
KEY MARKET TRENDS
Aircraft Family2013
Installed Fleet
Total Retirements (2013-2022)
% of Installed
Base
F-16 2968 683 23%S-70 3306 480 15%UH-1 1524 461 30%F-4 330 330 100%F-5 720 380 53%F-18 1509 373 25%AH-64 1121 331 30%OH-58 819 259 32%CH-47 933 258 28%MIG-21 766 239 31%
Top 10 Retirements2013-2022
Majority of retirements are focused on large installed base fleets such as F-16 and S-70
This creates the potential for surplus material to cannibalize sales of new material
Also, reduces the MRO activity by retiring more maintenance-intensive aircraft
Source: ICF Analysis
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Fleet renewal has three major implications for industry
KEY MARKET TRENDS
• Countries can change their sustainment strategy with new platforms
• Likely to create opportunities for industry
New Maintenance
Strategies
New Maintenance
Strategies
• Retirements of aircraft with large installed bases means more excess material on the market
• Could impact spare parts sales
More Surplus Material
More Surplus Material
• Retirements of F-16s and S-70s opens up possibility of new markets for non-JSF customers
• Creates opportunities for industry to support
Potential Tertiary Market
Potential Tertiary Market
Source: ICF Analysis
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KEY MARKET TRENDS
In 2009 and 2013, ICF SH&E conducted an extensive survey of military sustainment practices
Secondary Research Primary Research Report Synthesis
Use of publicly available databases
Company websites and Investor Filings
Major defense‐related periodicals and Newsletters
Extensive interview program which included almost 300 interviews– Nearly 100 sustainment
suppliers– Over 100 Government /
Military Representatives– Nearly 50 OEMs– 40 local experts
Forty of the fifty‐seven countries were visited
Additional informational interviews were conducted by phone to close information gaps
A team of 10 consultants was utilized to develop the country profiles
Each profile summarizes:– Country Geopolitical Issues– Current Military Fleet– Major Sustainment
Installations– Detailed sustainment strategy
for each aircraft type
– Analysis of new procurements and sustainment opportunities
Six final reports totaling 1500 pages and fifty‐seven country profiles were produced
Source: ICF Analysis
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The military operator has accelerated outsourcing over the past 4 years
KEY MARKET TRENDS
2009 Sustainment Supply
Organic, 65%
Outsourced, 35%
A 10% increase in outsourced activity for airframe, component, and engine depot maintenance; an almost $3B change in industry revenue
Reflects the dynamic shift that occurred in the market as a result of the financial crisis
Organic, 55%
Outsourced, 45%
2013 Sustainment Supply
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And are increasingly using PBL contracts as the method for outsourcing
KEY MARKET TRENDS
2009 Sustainment Supply
Transactional, 75%
Performance Based, 25%
Of the outsourced activity, only 25% was under a PBL in 2009
In 2013 that has shifted to about 35% of the outsourced activity
However, the majority of these PBLs tend to be material or supply chain PBLs which focus on inventory management and availability as opposed to labor
2013 Sustainment Supply
Transactional, 65%
Performance Based, 35%
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Militaries are looking for way to ensure best value for their sustainment dollar
KEY MARKET TRENDS
• Countries are looking to industry to provide “best-in-class capability”
• Limited outsourcing of labor-intensive workOutsourcingOutsourcing
• Long term contracts incentivize suppliers to improve reliability
• Predictable costs allow militaries to best plan operations
Use Of Performance
Based Contracts
Use Of Performance
Based Contracts
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KEY MARKET TRENDS
Changing politics and declining budgets are driving militaries to rationalize their force
Political Unrest
Russia, N. Korea, Iran, and Syria all have the potential to quickly become hotspots that require intervention from the U.S. and NATO partners
At a minimum, tension in these regions will require an active force in region as a deterrent
Budget Dichotomy
Budgets in N. America and Europe continue to be in free fall
Budgets in emerging economies appear to growing, particularly in Asia and Russia
Bottom line: NATO partners face a challenge between supporting current weapons systems and fielding new ones
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U.S. budget has stabilized, but growth is slowKEY MARKET TRENDS
Spain devotes less than 1% of GDP to military spending in 2012
Given the general cuts in spending in Europe, militaries will have to converge requirements to maintain capability readiness
Russia to boost defense spending 59% by 2015
Country Defense Budget ∆
Russia 25.8%
Poland 20.4%
Germany 2.1%
France 0.0%
UK -1.0%
c
Sou
rce:
Nat
iona
l Def
ense
Bud
gets
Budget growth is rapid in Asia with a major emphasis on new weapons systems
Japan passed law to allow export of defense items
Indian Air Force inked deal with Dassault for $30B for Rafale
Country DefenseBudget ∆
India +15.8%
China +13.2%
S. Korea +7.8%PB is now in line with BCA “Over the next 10 years, the growth in the defense budget will slow, but the fact of the matter is this: It will still grow, because we have global responsibilities that demand our leadership. In fact, the defense budget will still be larger than it was toward the end of the Bush administration.”
- US President Barack Obama
Country Defense Budget ∆
USA ~ 2.0%
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US Defense Budget
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U.S. Defense Budget as been reduced significantly as a result of the Budget Control Act of 2011
Forecast CAGR 2012-2017 = 0.1%
Defense Budget Forecast
2015 Defense Budget Breakdown
All Values In Real U.S. Dollars
US DEFENSE BUDGET
Source: ICF SH&E, Market Interviews
$0
$100
$200
$300
$400
$500
$600
DefenseBudget 2012
O&M Sustainment AircraftSustainment
Bill
ions
$0$100$200$300$400$500$600$700
2012a 2013a 2014a 2015f 2016f 2017f
Bill
ions
Base Budget OCO Budget Sequester
Base budget reflects the FY2015 Presidential Budget request
OCO spending assumes an approved request of ~$45B for 2015 and then an annual reduction of ~$20B to a 2017 budget of 0
Sequester budget is based on the annual spending limit and $54.7B spending reduction as determined by the Budget Control Act of 2011
Key Assumptions:
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President’s FY2015 Budget Request is flat with 2014, but adds $6B for O&M
US DEFENSE BUDGET
Category FY 201Enacted
FY 2015 (PB Request) % Diff
Military Personnel $135.9 $135.1 -$0.8
Operations and Maintenance $192.3 $198.7 $6.4
Procurement $92.4 $90.4 -$2.0
Research, Development, Test and Evaluation $62.8 $65.5 $3.7
Military Construction $8.4 $5.4 -$3.0
Family Housing $1.4 $1.2 -$0.2
Revolving Funds $2.2 $1.2 -$1.0
Total $496.0 $495.6 -$0.4
2014-2015 Base Budget
Source: ICF SH&E, Market Interviews
Procurement drops by about $2B
O&M increases by about $6B
Budget request will not trigger sequestration cut as it is in line the BCA
Key Budget Points:
Bottom line: Budget is still
challenging for the U.S.
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US DEFENSE BUDGET
FY2014 O&M budget had a major impact on the U.S. Navy
$0B
$50B
$100B
$150B
$200B
$250B
2013 2014
$ Billions
O&M Budget FY2013–2014 & HAC Defense Appropriations Bill Highlights
Source: FY2013 Budget Request / HAC 2013 Defense Appropriations Bill
DoD‐wide
Air Force
Army
Navy
DoD‐Wide O&M Decrease in spares and repair parts for Special Operations Command Additional ISR support to operation observant compass
Army O&M Cut in Army OCO O&M to protect Base Operations and Depot Maintenance
Air Force O&M Insured Airlift Operations and Depot Maintenance against sequester Cuts in spares inventory, civilian personnel compensation and certain combat operations support
Navy O&M Navy ships seeing less activity Majority of USMC O&M request were funded with additional funding in OCO Depot Maintenance
1.8%1.8%
5.5%5.5%
‐7.4%‐7.4%
‐1.1%‐1.1%
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US DEFENSE BUDGET
Overall the O&M budget grows slightly between the FY2014 and FY2015 requests
$0B
$50B
$100B
$150B
$200B
$250B
2014 2015
$ BillionsO&M Base Budget FY2014–2015
DoD-Wide -1.0%
Air Force 5.0%
Navy 3.9%
Army 0.5%
*OCO budget yet to be determinedSource: FY 2014 Budget Request
FY13-14 % Change
1.8% Overall
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Aircraft acquisition remains flat at ~$45B FY2014; A‐10 retirements will accelerate
US DEFENSE BUDGET
Aircraft Program Highlights
Source: FY2013 Budget Request / Defense Industry Daily
Program Details
F-35 26 units at $4.6B (Air Force)
EA-18G 18 units at $2.0B
C-130J MYP for 79 aircraft over five years
V-22 On course under current MYP with 21 units at $1.9B
A-10 Retirements begin in 2015
KC-46A 55 aircraft fielded by 2019
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Global Market Forecast
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Field37%
Airframe13%
Component11%
Engine10%
Supply Chain9%
Pilot Training8%
Engineering Services
6%
Mechanic Training
6%
North America43%
Europe22%
Asia Pacific20% Middle East
10%
Latin America3%
Africa2%
2013 Sustainment By Region 2013 Sustainment By Activity
Source: ICF Analysis
GLOBAL MARKET FORECAST
Total $92.9B
Global military sustainment spend was nearly $93B in 2013
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$64.1 $64.7
$65.4 $66.0
$62.5
$60.7 $61.0
2008 2009 2010 2011 2012 2013 2014
ICF SH&E forecasts the military MRO market will be flat in 2014
GLOBAL MARKET FORECAST
2008–2013 Worldwide Military MRO Total
Source: ICF Analysis
$ Billions
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The global military MRO market to grow slightly through 2018GLOBAL MARKET FORECAST
$0B
$10B
$20B
$30B
$40B
$50B
$60B
$70B
2013 2014 2015 2016 2017 2018
2008–2013 Worldwide Military MRO By Region
Source: ICF Analysis
$ Billions
Latin America +2.1%
Africa +0.5%
Middle East +2.3%
Asia/Pacific +1.7%
Europe +1.1%
North America +0.9%
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The JSF, A400M, and CH‐53K will drive sustainment growthGLOBAL MARKET FORECAST
Platform 2013 MRO ($) 2022 MRO ($) CAGR (%)
Win
ners
CH-53K $ 3,197,754 $ 361,273,894 38%
A400M $ 8,854,460 $ 333,441,274 30%
PAK FA T-50 $ 2,810,751 $ 58,169,301 26%
F-35 $ 122,142,179 $ 1,945,146,487 24%
K-8 $ 9,403,302 $ 109,813,866 22%
TEJAS $ 6,268,565 $ 71,629,511 22%
Lose
rs
PROWLER $ 233,251,931 $ 4,550,042 -48%
CH-46 $ 114,853,063 $ 13,680,621 -24%
MIRAGE 3 $ 95,565,434 $ 21,267,924 -16%
ETENDARD $ 71,049,897 $ 16,805,678 -16%
Source: ICF Analysis
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