Navigating Turbulent Waters: Turbulent Times for North American MROs


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This presentation focuses on the current financial crisis and its impact on North American MROs. Also, the market dynamics of the North American Commercial Aircraft MRO Market, an analysis and forecast of the aircraft MRO market, and demand analysis are presented.

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Navigating Turbulent Waters: Turbulent Times for North American MROs

  1. 1. Navigating Turbulent Waters: Turbulent Times for North American MROs Nathan K. Smith, Industry Analyst Aerospace & Defense October 15, 2009
  2. 2. Focus Points Current Financial Crisis – Impact on North American MROs Market Dynamics – North American Commercial Aircraft MRO Market Aircraft MRO Market Analysis and Forecast Aircraft MRO Demand Analysis Conclusion 2
  3. 3. Current Financial Crisis – Impact on North American MROs Airline profitability is closely tied to economic growth and trade. In 2008, the airline industry was impaired by soaring fuel prices and an economic crisis. In 2009, the industry continues to face a slow economy, weak travel demands, and further reductions in aircraft capacity. Reductions in airline fleet capacity and the retiring of older, less efficient aircraft across North America has resulted in fewer maintenance checks and decreased revenues for MROs. When compared to 2008, the average aircraft utilization for the world's commercial fleet in 2009 is expected to drop by an estimated four percent. Economic factors have pushed North American carriers to embrace outsourcing. These carriers continue to focus on total maintenance support as the most important factor in selecting an MRO provider. Despite the strong push towards outsourcing, the market has been in decline as a result of an industry-wide downturn effecting both airline in-house and third party MROs. 3
  4. 4. Market Engineering Measurements Commercial Aircraft MRO Market: Market Engineering Measurements (North America), 2009 Market Dynamics Measurement Trend Market age Mature Stage --- Revenues (2008) $16.40 billion Increasing Potential revenues (2014) $16.26 billion Decreasing Base year market growth rate (2008) 2.38 % Increasing Forecast period market growth rate (CAGR) (0.1) % Decreasing Price sensitivity High Stable Total potential customers (number of aircraft) More than 7,000 Up Competitors (active market competitors in base year) 2116 Stable Companies entering the market (2008) 2116 Up Companies exiting the market (2008) 0 Stable Degree of competition (scale from 1-10, 10 being the highest) 6 Increasing Degree of technical change High Increasing Customer satisfaction (scale from 1-10, 10 being the highest) 7 Stable Customer loyalty (scale from 1-10, 10 being the highest) 7 Stable Engine market concentration (percent of market controlled by top three competitors) 54.4% Increasing HMV/Mod market concentration (percent of market controlled by top three competitors) 30.9% Increasing Note: All figures are rounded, the base year is 2008 Source: Frost & Sullivan 4
  5. 5. Commercial MRO Market Impact High Impact High Growth Impact Medium Proliferation of Next Generation Aircraft Growth Impact Outsourcing Projected Skilled-Labor Shortage Impact on the Commercial Increased Partnerships and M&A activity MRO Industry The Use of Business Automation Tools (SaaS) Low Growth Impact Low Impact Geographic Expansion Low High Certainty Source: Frost & Sullivan. 5
  6. 6. Market Drivers and Restraints North American Aircraft MRO: Market Drivers and Restraints High Drivers Med Electronic Total Maintenance Next Generation Aircraft Fleet Growth Technology Support Aircraft Low Economic Slowdown Evolving Markets in Financial Restraints Aircraft Capacity APAC, Latin America Reduction Low and the Middle East Restraints Med * Length of arrow indicates relative impact Source: Frost & Sullivan High 6
  7. 7. Competitive Differentiators Commercial Aircraft MRO Market: OEM and 3rd Party MRO Competitive Differentiators (North America), 2009 Category OEM 3rd Party MRO • Primary focus is selling next • Primary focus is maintenance and generation products repair Increasing Part Life • Expertise on mature systems • Expertise on mature systems lessens over time deepens over time • Customer support is usually through a complex technical phone • A person answers your calls support system • People with experience and Customer Support • Person answering the phone may expertise on your part are ready to have no technical experience or talk with you immediately expertise • Significantly lower corporate • High corporate overheads overheads • Requires higher margins Cost • Requires lower operating margins • Lower material costs if supplied by • Material costs may be higher if the OEM purchased from the OEM Source: Frost & Sullivan. 7
  8. 8. Market Forecast and Analysis From January 2008 to the first quarter of 2009, global commercial jet aircraft storage has increased approximately 63 percent (or from 620 aircraft to 1,012). Currently, total global aircraft in storage exceed 2350. The current economic climate and airline losses are expected to diminish MRO revenue between 2009 and 2014. All MRO segments are expected to have negative growth other than HMV/Mod. This negative growth can be attributed to a reduction in aircraft capacity, the retirement and storage of older aircraft and engines, and the addition of next generation aircraft. Commercial Aircraft MRO Market: Aircraft Status Commercial Aircraft MRO Market: Summary of Market (North America), 2009 Segments (North America), 2009 2009 2009-2014 Aircraft Mfg On Order Stored In Service Market Segment Market Size CAGR ($ Billion) (%) Airbus 298 44 1,054 HMV / Mod 3.80 2.5 Boeing 515 222 2,869 Component MRO 3.37 (1.0) Bombardier 66 31 1570 Line Maintenance 3.12 (0.8) Embraer 77 56 964 Engine MRO 6.50 (0.8) Total 956 353 6457 Total NA MRO 16.79 (0.1) Source: Frost & Sullivan Source: Frost & Sullivan 8
  9. 9. Market Forecast and Analysis (Contd.) Commercial Aircraft MRO Market: Aircraft MRO Market Size (Global), 2009 18.0 16.79 16.0 14.0 12.27 Market Size ($ Billion) 12.0 10.0 8.0 7.43 6.0 4.0 2.34 2.23 2.47 1.73 2.04 2.0 0.714 0.0 na a a a pe an pe st c r ic di ic i Ea cif i ro be ro In Ch er Af Pa Eu Eu Am rib e dl rn Ca ia n id rth er te As M & es st No Ea ica W er Am tin La Source: Frost & Sullivan 9
  10. 10. Major Industry Participants The tables below provide a tiered market share overview for the commercial MRO market segmented by participants in the HMV space and the engine MRO space. Tier one participants hold more than 15 percent of the market, Tier two participants hold 5-10 percent of the market, and Tier Three participants hold less than 5 percent. Commercial Aircraft MRO Market: HMV Third Party Commercial Aircraft MRO Market: Engine MRO Vendor Vendor Tiered Market Share (North America), 2009 Tiered Market Share (North America), 2009 Company Market Tier Company Market Tier American Airlines 1 GE Engine Services 1 Delta Tech Ops 2 Rolls-Royce Canada 1 TIMCO 2 Delta Tech Ops 2 ST Mobile Aerospace 2 American Airlines 2 Aviation Technical Services 2 Pratt & Whitney 2 Pemco 3 IAE 3 AAR – Indianapolis 3 United Services 3 AAR – Miami 3 Texas Aero Engine 3 Aveos 3 Aveos 3 ExelTech Aerospace 3 Rolls Royce, PLC. 3 Source: Frost & Sullivan. Source: Frost & Sullivan. 10
  11. 11. Demand Analysis The greatest demand for aircraft maintenance in North America will be from the narrowbody aircraft fleet. The Boeing B737 is the largest aircraft fleet in North America, and will produce the most MRO revenue for aircraft greater than 100,000 pounds. Demand for the Boeing B747 and MD80 will diminish for the forecast as they are replaced by next generation aircraft. Demand for widebody HMV/Mod is not expected to increase for this forecast. It is likely a large percentage of HMV/Mod work will continue to be outsourced to foreign destinations. Demand for regional jets and turbo prop aircraft is expected to remain steady for this forecast. Commercial Aircraft MRO Market: Aircraft MRO Demand Commercial Aircraft MRO Market: Aircraft MRO Demand (North America), 2009 (North America), 2014 MRO Market Size ($ Million) MRO Market Size ($ Million) 3500 3.5 3500 3.5 3000 3 3000 3 Aircraft (Units) Aircraft (Units) 2500 2.5 2500 2.5 2000 2 2000 2 1500 1.5 1500 1.5 1000 1 1000 1 500 0.5 500 0.5 0 0 0 0 TP 37 57 67 47 77 80 B 19 20 TP W 37 57 67 47 77 80 B 19 20 D J/ B7 B7 B7 B7 B7 A3 A3 W M R us D J/ B7 B7 B7 B7 B7 A3 A3 M R us rb Ai Aircraft rb Aircraft Ai Market Size Market Size Note: All figures are rounded, the base year is 2009. Source: Frost & Sullivan Note: All figures are rounded, the base year is 2009. Source: Frost & Sullivan 11
  12. 12. Conclusion Market participants will have to keep their North America is forecasted to lose three competitive position to maintain a viable percent of its market share during the forecast business. Strategically, the providers' intent because of growing competition. MRO growth is should be to provide reliable and cost-effective forecasted at a CAGR of (0.1) percent or a maintenance services. North American MRO decrease of $0.14 billion. vendors should rethink and respond to foreign Global MRO growth from 2009 to 2014 is competition. They should revaluate their expected to increase at a CAGR of 2.3 percent organizational structure at present and continue with 2009-2011 expected to be relatively flat. to seek improvements. Traditional cost cutting Beyond this period, the MRO market is and productivity measures will not enable the expected to accelerate at a CAGR of 2.9 MRO vendor to bridge the gap between wage percent. and productivity. The availability of skilled labor will be a challenge for the industry. Therefore, MRO providers must be prepared for the rise in labor cost. 12
  13. 13. Next Steps Register for the next Chairman’s Series on Growth: The Growth Excellence Model: Competitive Benchmarking & Growth Investing (November 3, 2009) ( Register for Frost & Sullivan’s Growth Opportunity Newsletter and keep abreast of innovative growth opportunities ( 13
  14. 14. Your Feedback is Important to Us What would you like to see from Frost & Sullivan? Growth Forecasts? Competitive Structure? Emerging Trends? Strategic Recommendations? Other? Please inform us by taking our survey. 14
  15. 15. For Additional Information Johanna Haynes Gary Leikin Senior Corporate Communications VP Business Development Executive Corporate Communications Aerospace & Defense (210) 247-3870 (310) 318-8551 Wayne Plucker Nathan K. Smith Industry Manager Industry Analyst Aerospace & Defense Aerospace & Defense (210) 247-3869 (512) 276-5162 15