MRO Market Update & Industry Trends

Transcription

1 2016 Annual Conference October 26-27, 2016 Orlando, Florida Presented by: Jonathan M. Berger Vice President Aerospace & MRO Advisory MRO Market Update & Industry Trends 0

2 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 1 1

3 Bizarro Aviation 2 2

4 Four external macro-economic forces are having a significant impact on the aviation industry and the MRO supply chain The CRABS Source: ICF analysis 3 3

5 The dramatic increase in oil & gas market supply and reduced demand for commodities has led to a strong US Dollar FOREX Impact 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 The CRABS : Countries with economies that are heavily dependent on commodity exports 10% 0% -10% -20% -30% -40% -50% Russian Ruble -37.6% R Global Currency Exchange Rates vs USD % Value Change, September 2014 September 2016 Brazilian Real -24.6% B S. African Rand -19.1% S Can Dollars -15.3% C Aus Dollars -12.5% A Euro -11.7% Indian Rupee -7.8% Chinese Yuan -7.8% Source: USForex, ICF analysis 4 4

6 Commercial aircraft OEM production backlog remains at historical record levels driven by: Order Backlog 16,000 Commercial Aircraft OEM Production Backlog Backlog/ % Active Fleet 70% Emerging market growth 14,000 60% Low interest rates 12,000 50% Previously high oil and commodity prices Introduction of new technology aircraft/engines 10,000 8,000 6,000 4,000 40% 30% 20% 2,000 10% 0 0% Source: CAPA, ICF Analysis 5 5

7 Low fuel costs appear to be reversing aircraft retirements trends # Retirements 1,200 Commercial Air Transport Annual Aircraft Retirements % Installed Fleet 3.5% 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 1, Average: 203 Retirement as % of installed fleet Average: % 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Source: CAPA, Airline Monitor, ICF analysis 6 6

8 Airline return on invested capital (ROIC) is clearly correlated with the drop in fuel costs % of Airline Operating Expenses 40% Fuel Price as a % of Airline Operating Expenses Crude Oil Price/BBL % % 10% 17% 22% 28% 30% 36% 28% 28% 31% 33% 33% 32% 28% 20% % 0 Source: IATA, ICF Analysis 7 7

9 Airline return on invested capital (ROIC) is clearly correlated with the drop in fuel costs Fuel Price and Global Airline Return On Invested Capital (ROIC) Jet Fuel Price ($/barrel) Airline ROIC (%) $140 $120 Jet Fuel Price 12.0% 10.0% $100 $80 $60 $40 $20 $0 Airline ROIC $$$ 8.0% 6.0% 4.0% 2.0% 0.0% Source: IATA, ICF Analysis 8 8

10 Driven by low fuel costs and consolidation, airline the industry is on target to achieve record profitability in 2016 of almost $40B USD These are the good old days: - for some airlines $USD Billions $40 $30 $20 Global Airline Profitability, F $39.4B Africa, ($0.5B) Latin America, $0.1B Middle East, $1.6B Asia Pacific, $7.8B $10 $0 Europe, $7.5B North America, $22.9B -$10 -$20 -$30 Source: IATA, ICF analysis 9 9

11 However, profit margin improvement has been largely limited to carriers in North America but not all many airlines continue to struggle 20.0% 15.0% 10.0% 15.4% Global Airline EBIT Margin by Region 8.4% F 5.0% 0.0% -5.0% -1.8% 3.4% -4.7% 4.7% 0.1% 0.7% 5.6% 2.3% 2.6% 3.0% 2.8% 1.5% 1.0% -0.4% -0.9% -1.1% -10.0% Source: IATA, ICF Analysis 10 10

12 Brexit has clearly had an impact on European airline stock performance; specifically UK based carriers Share Performance of European Airlines Since Brexit Easy Jet, -41.5% 23 June October 2016 IAG, -28.1% Air France-KLM, % Wizz, -23.2% Norwegian, -16.5% Ryan Air, -16.2% Lufthansa, -15.2% SAS, -6.3% -50% -40% -30% -20% -10% 0% Source: Company websites 11 11

13 Follow the Money: Airlines are spending their hard earned profits in three primary areas Debt Repayments 16% Airline Profit Spend Analysis Stock Buy- Back & Dividends 26% 1. Labor ~ 20%: Profit sharing Wage increases 2. Capex ~ 38%: Fleet renewal & cabin upgrades Facilities, offices, lounges Equity partner investments Other capex 10% Investors, 42% Capex, 38% Labor, 20% Profit Sharing 15% 3. Investors ~ 42%: Stock buy-backs Dividends Debt repayment Equity Investments 5% Fleet 23% Wage Increases 5% Source: Company Reports, ICF Analysis 12 12

14 After positive signs in 2014, air cargo supply continues to exceed demand Global Freight Traffic (FTK) and Capacity Growth (AFTK) Year-Over-Year Percent Change 8% Traffic (FTK) Capacity (AFTK) 6.3% 6% 6.0% 5.4% 6.3% 4% 3.7% 5.0% (- $$$) 2% 0% 0.4% 3.0% 0.6% 2.3% 2.1% -2% -0.9% Source: IATA, ICF Analysis 13 13

15 Amazon is very well positioned to lead a major disruption of the air cargo industry $B USD $40 $35 $30 $25 $20 $15 $10 $5 $0 Amazon s Growing Revenue & Shipping Costs Amazon Quarterly Revenue 14% 12% 10% 8% 6% 4% 2% 0% Shipping Costs as a Percentage of Revenue Source: Amazon SEC Filings 14 14

16 March of the Middle East Titans: European Secondary Airports Average Number of Seats per Departure in 2016 Middle East carriers have been very effective in capturing valuable business passenger traffic from European secondary airports Gulf Carriers Non-Gulf Carriers Lufthansa s Frankfurt hub has lost nearly a 3 rd 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 Source: OAG Data, ICF Analysis 15 15

17 Trend Watch: A New Golden Age of Aircraft Cabin Interiors 16 16

18 Modifications growth is driven by airlines seeking differentiation in the cabin and customer experience 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 $USD Billions $8 $7 $6 $5 $4 $3 $2 $1 AD/SB** PTF Conversions* Painting Avionics Upgrades Interiors $4.4B $0.3 $0.4 $0.4 $0.6 $2.7 $7.4B $0.5 $0.4 $0.5 $1.1 $4.9 CAGR 3.6% 0.0% 3.7% 6.9% 5.9% $0 Modifications demand includes labor and material spend *Passenger-To-Freighter Conversions **Airworthiness Directives / Service Bulletins Source: ICF analysis, constant 2015 US$ % Avg

19 Cabin densification has emerged as cost effective strategy for airlines to increase capacity and drive bottom line growth Capacity Bridge 2015 ASMs Fleet Growth 6.2T 84% Example: Delta A320 Interior Modification Program Total = 150 Seats 12 Seats 16 Seats 18 Seats Total = 164 Seats 18 Seats Cabin Upgrades: Slim seats Slim lavatories Longer Stage Lengths 8% 120 Seats 130 Seats Slim galleys Slim coat closets Increased Seat Density 8% 2025 ASMs 8.8T Available Seat-Miles (ASMs), Trillions New seats, outlets, IFE, overhead bins Space-saving galleys to add a row of seats Source: ICF analysis, delta.com 18 18

20 MRO Forecast 19 19

21 The current commercial air transport fleet consists of over 27K aircraft; over half are narrowbody aircraft Turboprop Widebody Jet Regional Jet 14% 14% 19% 2015 Global Commercial Air Transport Fleet 27,114 Aircraft Narrowbody Jet 53% Latin America Europe Middle East 25% 8% 5% 5% 27,114 Aircraft 27% North America 31% Asia Pacific By Aircraft Type By Global Region Source: CAPA

22 The combination of strong air travel demand and the need to replace ageing aircraft will drive fleet growth at a healthy 3.4% annually # Aircraft 40,000 35,000 30,000 25, Year Global Air Transport Fleet Growth Africa Middle East Latin America Europe Asia Pacific North America 27,100 5% 8% 37,900 6% 8% 23% CAGR 5.1% 5.3% 3.8% 2.5% 20,000 25% 15,000 10,000 27% 32% 5.2% 5,000 31% 26% 1.6% % Avg. Source: ICF analysis: CAPA

23 Current commercial air transport MRO demand is $64.3B; with Asia equivalent to North America and Europe in market size Airframe Line 17% 2015 Commercial Air Transport Global MRO Demand 14% Modifications 7% $64.3B Engines 40% Middle East Europe Latin America 26% Africa 6% 4% 8% $64.3B 29% North America 22% Components 28% Asia Pacific By MRO Segment By Global Region Source: ICF analysis; Forecast in 2015 $USD, exclusive of inflation 22 22

24 The global MRO market is expected to grow by 4.1% per annum to $96B by Year Global Commercial Air Transport MRO Demand Growth $USD Billions $100 $90 $80 Modifications Airframe Line Component Engine $96.0B 13% CAGR 5.3% 2.8% 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 $70 $60 $50 $40 $30 $20 $10 $0 $64.3B 16% 14% 22% 17% 22% 41% 40% % 4.3% 4.4% 4.1% Avg. Source: ICF analysis; Forecast in 2015 $USD, exclusive of inflation 23 23

25 There two primary reasons operators are aggressively seeking non-oem supplied parts; Three alternatives to purchasing OEM-supplied parts: Surplus DER Repair PMA 1. Cost savings 2. Part availability Three types of surplus material: 1. Used Serviceable Material (USM) 2. New Material 3. Used, unserviceable material 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 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 Lower Perceived Risk Higher Source: ICF analysis 24 24

26 The alternative material market is concentrated on the back half of mature aircraft lifecycle (17-25 years old aircraft) and early sunset aircraft GROWTH SSJ 100 A380 MATURE SUNSET ERJ-140 CRJ-7/9/1000 MD11 A320* ERJ-170/190 A330 (Old) 737 NG 737-3/4/ LR/3ER A320* (New) A /310 A340 CRJ-1/2/ MD80 A A350 A320neo Alternative Material 747-1/2/300 DC /200 Bubble size proportional to MRO spend 0 Limited OEM Alternatives Years since Entry into Service Growth Phase * New: CFM56-5B / V2500-A5 / PW6000 Old: CFM56-5A / V2500-A1 Healthy OEM Alternative Market Source: ICF analysis 25 25

27 In 2015, operators spent over $32B on OEM new parts and an additional $13B on alternatives $35B $30B $25B 2015 OEM New Material Demand vs. Alternatives ~ $32.4B 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 $20B $15B $10B 41% ~ $13.4B $2.2B $3.9B PMA ($0.54B) DER Repairs Surplus 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 $5B $0B OEM new $6.8B Alternatives OEM Manual Repairs Source: ICF analysis 26 26

28 There are nearly 1.1 million total PMA parts that are FAA approved, of which over 75% are for Boeing aircraft FAA Approved PMA Part Numbers, by OEM Airbus 15% Bombardier 3% P&W 1% Other 5% Boeing 76% 1,077,971 Source: Federal Aviation Administration 27 27

29 The volume of PMA approvals has been steadily growing since 1990, with over about 440,000 new approvals granted since , , , ,000 FAA Approved PMA Part Numbers, by Year Approved 420, , , , ,030 85,238 22,421 Source: Federal Aviation Administration 28 28

30 Surplus material usage has risen sharply over the past few years, driven by tangible cost savings and minimal perceived risk % OEM List Typical Material Price Bands, By Part Type OEM Catalogue List Price 40 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 20 0 OEM New New Used Serviceable As Removed / Surplus Surplus Unserviceable PMA Lower Perceived Risk Higher Source: ICF analysis 29 29

31 Numerous regional factors influence operator PMA consumption to include: Virtually every major carrier leverages PMA parts as an OEM alternative Estimated PMA Demand by Major Region Fleet age Mix of lease vs owned aircraft 46-56% 28-38% Technical capability & experience Airline procurement historical practices and culture 4-7% 5-8% 12-18% Source: ICF analysis 30 30

32 In Summary 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 31 31

33 2016 Annual Conference October 26-27, 2016 Orlando, Florida THANK YOU! For questions regarding this presentation, please contact: Jonathan M. Berger Vice President Aerospace & MRO Advisory

34 ICF provides a full range of Aerospace & MRO advisory services Market Research & Analysis Airline Maintenance Benchmarking M&A Commercial Due Diligence OEM Aftermarket Strategy Aviation Asset Valuations & Appraisals MRO Information Technology (IT) Advisory Strategic Sourcing & Supply Chain Mgt. LEAN Continuous Process Improvement Military Aircraft Sustainment 33 33

35 ICF is one of the world s largest and most experienced aviation and aerospace consulting firms Airports Airlines Aerospace & MRO Aircraft 53 years in business (founded 1963) 80+ professional staff Dedicated exclusively to aviation and aerospace Blend of consulting professionals and experienced aviation executives Specialized, focused expertise and proprietary knowledge Broad functional capabilities More than 10,000 private sector and public sector assignments Backed by parent ICF International (2015 revenue: 1.13 billion USD) Global presence offices around the world joined in 2007 joined in 2011 joined in 2012 joined in 2014 New York Boston Ann Arbor London Singapore Beijing Hong Kong 34