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ICF’s MRO Market Forecast and Trends

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ICF’s aviation expert, David Stewart, provides an overview of the current air transport MRO market, MRO future growth, and examines future revenue opportunities.

For more information, visit: http://www.icfi.com/markets/aviation/maintenance-repair-and-overhaul

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ICF’s MRO Market Forecast and Trends

  1. 1. ICF International | icfi.com © ICF 2015 00 MRO Market Forecast & Trends 3 November 2015 - Singapore Presented by: David Stewart Vice President, ICF International david.stewart@icfi.com
  2. 2. ICF International | icfi.com © ICF 2015 1 MRO Market Forecast Takeaways Trends MRO = maintenance, repair and overhaul
  3. 3. ICF International | icfi.com © ICF 2015 2 MRO Market Forecast Agenda MRO Market Forecast & Trends
  4. 4. ICF International | icfi.com © ICF 2015 33 Of the 27,500 global fleet, 25% is located in Asia Pacific where the share of turboprops and regional jets is much smaller MRO MARKET FORECAST Source: ICF International Narrowbody Jet Widebody Jet Turboprop Regional Jet 6% 16% 23% 56% Narrowbody Jet Widebody Jet Turboprop Regional Jet 14% 17% 18% 51% 27,500 Aircraft 7,100 Aircraft 2014 Global Fleet 2014 Asia Pacific Fleet
  5. 5. ICF International | icfi.com © ICF 2015 44 The Asian fleet will see a large growth over the next decade and the second fastest growth globally of 4.7% CAGR; +4,200 aircraft MRO MARKET FORECAST 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 2014 2024 Africa Middle East South America Europe Asia Pacific North America Air Transport Fleet Growth 2014–2024 Source: ICF International, ACAS September 2014; CAGR = compound annual growth rate 3.8% 2.7% 4.7% 1.4% 5.3% 4.8% 27,500 37,900 CAGR* 3.2% Average ~7,150 25% ~11,350 30% Highlights  Air travel growth of ~3.8%  ~19,000 aircraft deliveries  ~8,600 aircraft retirements Asia PacificAsia Pacific
  6. 6. ICF International | icfi.com © ICF 2015 55 The current air transport MRO market is $62.1B; Asia Pacific accounts for ~27% of global demand (~$16.9B) MRO MARKET FORECAST Engines Components Line Airframe Modifications 15% 17% 22% 40% 6% North America Asia Pacific Europe Middle East South America Africa 29% 27% 27% 7% 6% 4% 2014 Global MRO Demand Source: ICF International Forecast in 2014 $USD, exclusive of inflation $62.1B Total $62.1B Total By MRO Segment By Region
  7. 7. ICF International | icfi.com © ICF 2015 66 $60.7B $0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 2014 2024 Modifications Heavy Airframe Line Components Engine The global MRO market is expected to grow to $90B by 2024, at 3.8% per annum MRO MARKET FORECAST Global MRO Spend 2014–2024 ($B) 15% 17% 22% 40% 13% 17% 24% 38% 6% 8% Highlights  Averagegrowth is forecast to be 3.8% CAGR  The strongest driversof growth are the engine and component markets  Reducedlabor intensity of airframe heavy checks as the fleet renews and increased intervals  Aircraft upgrades(e.g. interiors, winglets) drivehigh modifications growth 2.6% 3.7% 4.5% 3.5% 5.9% CAGR 3.8% Average $90B $62.1B Source: ICF International Forecast in 2014 $USD, exclusive of inflation
  8. 8. ICF International | icfi.com © ICF 2015 77 Over the next decade, MRO growth will be 3.8% with Asia Pacific and China driving this growth…. MRO MARKET Source: ICF analysis Forecast in 2014 $USD, exclusive of inflation * absolute growth in annual spend US$ Billions $0.0 $10.0 $20.0 $30.0 $40.0 $50.0 $60.0 $70.0 $80.0 $90.0 $100.0 2014 2024 Africa Eastern Europe (Incl. CIS) Latin America Middle East China Asia/Pacific (Excl. China) Western Europe North America 2014-2024 Annual MRO Spend By Region 6.8% 1.7% 1.2% CAGR 3.8% Average $62.1B $90.1B 6.7% 5.2% 6.1% 6.4% 4.9% Africa E. Europe L. America M. East China APAC (ex. China) W. Europe N. America Highlights  Highest % growth rates are the MiddleEast and China regions  Highest absolute growth (in $ terms) in Asia Pacific and China  2024 annual spendin China and Asia Pacific combined $12B higher than in 2014 $5.8B $11.1B $11.2B $18B
  9. 9. ICF International | icfi.com © ICF 2015 8 Agenda MRO Market Forecast & Trends Trends
  10. 10. ICF International | icfi.com © ICF 2015 9 The aftermarket has evolved from being an afterthought to a market of significant importance and a revenue opportunity TRENDS 1980 – 2000 Post-2000s Airlines  Maintenance mainly a cost centre  Low cost carrier’s drive new approach to maintenance - increased outsourcing  Limited focus on aftermarket; Rolls-Royce ahead of the game  Significant growth of point-of- aircraft sale MRO contracts by OEM*s to recover design/ development costs OEMs MROs  Supply mostly in-house – few large airline MRO suppliers and hugely fragmented independent sector  Growth of integrated component services  Globalization of demand The aftermarket has evolved from a cost centre to a highly competitive market OEM = original equipment manufacturer
  11. 11. ICF International | icfi.com © ICF 2015 10 Engine OEMs have the most mature and strongest OEM position across the main air transport aftermarket segments TRENDS 55% 35% 2% 0% 20% 25% 44% 82% 25% 40% 54% 18% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Engine overhaul Component O&R Airframe Heavy Line maintenance Non-OEM MRO Airline in- house OEM Source: ICF International Highlights  OEMs tend to have the strongest share in the more material intensive markets (e.g. engine overhaul)  Component OEM market share lower than engine OEMs  Aircraft OEMs have an almost non-existent position in the airframe- related aftermarket Air Transport Supply (2015)
  12. 12. ICF International | icfi.com © ICF 2015 11 The ramp up and introduction of new generation aircraft creates the opportunity to change the aftermarket supply chain TRENDS Source: ICF International - 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Aircraft deliveries (units) Highlights  New aircraft with higher reliability, lower manhours and complex technology change the business case for establishing MRO capability  …especially with greater airline focus on financial returns  This is a catalyst to change the MRO supply model….  Creating new opportunity for OEMs and aftermarket providers Mature Aircraft New Generation Aircraft
  13. 13. ICF International | icfi.com © ICF 2015 12 ICF believes there are three key trends that are defining the future of the Aftermarket TRENDS Control of operational data Control of the Workscope Control of the Assets Critical to success in market participation and in gaining operational feedback for design and reliability improvement Critical to success in driving parts choice and aftermarket margins Critical to success in growing integrated service market
  14. 14. ICF International | icfi.com © ICF 2015 13 A key challenge for aviation stakeholders is how best to realize value from the terabytes of data being generated TRENDS: Source: ICF Analysis Number of AHM Parameters 767: 10,000 A320: 15,000 787: 100,000 777 787 ~ 28MB < 1MB Transmittable Data (MB/Flight) Aircraft Data Generation (TB/Year) 2012 2022 ~ 137TB ~11TB ~1,100% increase DATA Data ownership versus data access and use are of great concern to operators, and data processing business models are unproven (except at engine OEMs?)
  15. 15. ICF International | icfi.com © ICF 2015 14 Aircraft OEMs are vying to use their leverage to become the arbiters of data for the connected airline… TRENDS: • Boeing EDGE: “Information Services” , the Digital Airline and Gold Care brands • Notable Aircraft Health Management (AHM) successes • “Services by Airbus”: Including engineering and maintenance e-solutions • “Airbus Smarter Fleet” partnership with IBM - integration of e-solutions Boeing View of AHM System Architecture Aircraft OEMs believe that their scale and position in the market make them a natural middleman for data aggregation and analysis DATA
  16. 16. ICF International | icfi.com © ICF 2015 15 Control of workscope is key to input decisions – hence the historic focus on this by engine OEMs and the former PMA* “War” TRENDS: WORKSCOPE 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Engine Materials 80% Labour 20% Airframe Materials 20% Labour 80% Components Materials 55% Labour 45% Line Materials 15% Labour 85% TypicalMROCostBreakdown Typical Aftermarket Cost Breakdown Insight  For engine and component activity “Whoever controls the workscope controls the parts decision” – this is a key driver behind related OEM aftermarket strategies  Use of PMA, repairs and surplus are important alternatives to OEM new parts Source: ICF International; PMA = parts manufacturer approval
  17. 17. ICF International | icfi.com © ICF 2015 16 The share of integrated programs in component support is set to increase TRENDS: ASSETS Component Support Buying Behaviour Growth Drivers  Small fleet size  Perceived technology risk  Improved Return on Investment  Maintenance no longer core  Predictable outgoings  Attractive value propositions  Lower investment, less infrastructure Source: ICF International 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2004 2014 2024 Integrated* Traditional Integrated Component Programs Penetration 777 787/A350 ~20% 55%-70% 9% 30% 45% Control of assets enables aftermarket players to support integrated programs more effectively – The more inventory held by a supplier, the lower the inventory cost per aircraft supported
  18. 18. ICF International | icfi.com © ICF 2015 17 Takeaways Agenda MRO Market Forecast & Trends
  19. 19. ICF International | icfi.com © ICF 2015 18 Today, airlines have strong ownership/control of their destiny, but do they make the most of it? TAKEAWAYS Who Owns The Workscope? Who Owns The Assets? Airlines StrongKeyWeak Improving Worsening Eng Comp Airframe Who controls the operational data? Who controls the workscope? Who controls the assets? Source: ICF International Airlines, as a buyer of aircraft and the owner of the operational data, should push the aftermarket supply chain...to benefit from better, more cost efficient solutions
  20. 20. ICF International | icfi.com © ICF 2015 19 The Airframe and Component OEMs – who have the most to gain – will be very active and focused on MRO moving forward TAKEAWAYS Airlines OEMs * Airline MRO Eng. OEMs Source: ICF International WHO HAS MOST TO GAIN (example benefits)  Higher reliability (e.g., predictive maintenance)  Lower costs (fuel, maintenance, less inventory)  Operational data for feedback into design loop  Increased revenue & margin  Reduce costs and improve competitiveness  Market access CURRENT POSITION IN MARKET  Operational data for feedback into design loop  Increased revenue & margin
  21. 21. ICF International | icfi.com © ICF 2015 20 Large airline integrator MROs are well positioned – in contrast to independent MROs TAKEAWAYS Who Owns The Data? Who Owns The Workscope? Who Owns The Assets? Airline MROs Independent MROs StrongKeyWeak ImprovingWorsening Who controls the operational data? Who controls the workscope? Who controls the assets? Takeaways  For Airline MROs, significant scale is a must for engine and component markets  The business case for small airline MROs will erode significantly moving forward  Independent MROs have to become the lowest cost producer and/or align with the large airlines or OEMs
  22. 22. ICF International | icfi.com © ICF 2015 21 In summary... TAKEAWAYS  Airlines have the opportunity to drive efficient solutions and competition into the aftermarket  Airframe and Component OEMs will invest more and increase their focus on aftermarket especially on integrated component packages  (Large) Airline MROs can and need to protect their market position versus the OEMs  Scale and scope of assets under management is vital
  23. 23. ICF International | icfi.com © ICF 2015 22 Last but not least, it is very important not to forget the MRO market for current aircraft is large and growing TAKEAWAYS Current Generation New Generation Old Generation 5% 22% 73% Current… Old Generation New Generation 3% 24% 73%$16.9B $29.1B 2014 Asia Pacific MRO Demand 2024 Asia Pacific MRO Demand Source: ICF International Forecast in 2014 $USD, exclusive of inflation ...And the supply chain and competition for this current generation of aircraft is not changing so dramatically and is well served by all MROs
  24. 24. 23© ICF International 2015 Thank you! For questions regarding this presentation, please contact: David Stewart Vice President Aerospace & MRO Advisory +44 (0)7770 410011 david.stewart@icfi.com icfi.com/aviation
  25. 25. ICF International | icfi.com 24© ICF International 2015 24  M&A Commercial Due Diligence  MRO Market Research & Analysis  Aerospace Manufacturing Strategy  Aviation Asset Valuations & Appraisals  MRO Cost & Performance Benchmarking  MRO Information Technology (IT) Assessment  MRO Strategic Sourcing Support  Supply Chain Management  LEAN Continuous Process Improvement  Military Aircraft Sustainment ICF International’s Aviation advisory services include the following:

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