TURBULENCE AHEAD DISENGAGE THE AUTOPILOT 2015-2025 GLOBAL FLEET & MRO MARKET FORECAST 2015 MRO AMERICAS CONFERENCE David A. Marcontell Vice President
Oliver Wyman acquired TeamSAI and integrated the business into CAVOK, its aviation technical consulting and services practice ~130 Dedicated CAVOK employees located in DFW and ATL (Supported by +250 Oliver Wyman aviation consultants) +2,300 years of combined airline operations expertise +70% of CAVOK staff hold FAA certification/license The respected TeamSAI Global Fleet & MRO Market Forecast, and related betterinsight TM market intelligence data, remains available at www.planestats.com/betterinsight 1
CAVOK expanded technical consulting & services capabilities Technical Consulting Certification, Compliance, Quality, & Safety Operations Performance Improvement Program Development & Redesign Market Forecasting & Intelligence betterinsight MRO Market Intelligence PlaneStats Schedule, Traffic & Financial Data M&E Solutions Engineering & Technical Services Maintenance Program Management Reliability & CASS Support Technical Data Auditing & Validation Technical Publications Management Aircraft Acquisition & Conformity Aircraft Records Management 2
Global Fleet & MRO Market Outlook
Number of Aircraft The global air transport jet and turboprop fleet will grow by more than 10,000 net new aircraft by 2025 2015-2025 Global Fleet Forecast by Aircraft Class 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 23,927 2,721 3,396 4,686 13,124 3.9% 2.5% -1.0% 4.2% 5.2% 2015 2015-2020 CAGRS 29,003 3,079 3,222 5,753 16,949 3.5% 1.0% -2.0% 4.5% 4.5% 2020 2020-2025 CAGRS Forecast Year and Forecast CAGR Narrowbody Widebody Regional Jet Turboprop 34,408 3,232 2,906 7,181 21,089 2025 Key Fleet Forecast Growth Rates Global fleet will grow on average 3.7% annually over the full forecast period Passenger fleet is expected to grow at 3.8% annually Cargo fleet is forecast to grow by 2.3% annually Narrowbody aircraft will lead the growth Regional jets will actually decline in the mix The growth outlook, however, varies widely from region to region 4
A 5 pt spread in regional growth rates leads to a significant share shift over the decade ahead 2015 Fleet Size 10YR CAGR 2015-2025 Absolute Growth North America 7,420 0.9% 722 Europe 6,131 2.8% 1,965 Latin America & the Caribbean 1,720 4.7% 997 Africa / Middle East 2,204 5.5% 1,562 Asia Pacific / China / India 6,452 6.1% 5,235 The mature North American and Western European markets will continue to undergo significant refleeting efforts during the next 10 years 5
A 5 pt spread in regional growth rates leads to a significant share shift over the decade ahead 2025 Fleet Size North America 7,420 8,142 Europe 6,131 8,096 Latin America & the Caribbean 1,720 2,717 Africa / Middle East 2,204 3,766 Asia Pacific / China / India 6,452 11,687 6.1% The mature North American and Western European markets will continue to undergo significant refleeting efforts during the next 10 years 6
43% of all new aircraft deliveries will replace old technology aircraft over the forecast period The systematic elimination and replacement of older aircraft with new technology aircraft will drive significant change is the business for airlines and maintainers 7
The result is a staggering change in fleet mix by 2025 2015 Global Air Transport Fleet by Vintage 2025 Global Air Transport Fleet by Vintage 2000's 9% 1970's 2% 1980's 26% 2000's 16% 2010's 29% 1980's 9% 1970's 0.1% 1990's 63% 1990's 46% The significant move towards late generation aircraft, in addition to improving airline costs, will undoubtedly impact MRO dynamics 8
MRO Spend in 2015 Dollars ($USB) Billions Market Share The fleet dynamics of the period result in a forecast that tops $100 billion by 2025, a 4.1% average annual growth rate 2015-2025 Global MRO Market Size Forecast by MRO Segment 2015-2025 Global MRO Market Share Forecast by MRO Segment $120 3.8% 100% $100 $80 $67.1 4.4% 4.0% $83.2 $15.0 3.5% 4.7% $100.4 $17.8 $19.2 90% 80% 70% 60% 18% 18% 18% 19% 18% 19% $60 $12.3 4.1% $15.2 4.8% 50% $40 $20 $0 $12.4 $27.9 5.9% $37.1 $46.8 1.9% 1.0% $14.5 $15.9 $16.7 2015 2015-2020 CAGRS 2020 2020-2025 CAGRS Forecast Year and Forecast CAGR Airframe Engine Component Line 2025 40% 30% 20% 10% 0% 42% 45% 47% 22% 19% 17% 2015 2020 2025 Forecast Year Airframe Engine Component Line Airframe Heavy Maintenance costs improve with the new technology while both Engine and Component sectors will take a larger share 9
Shadowing the fleet trends, large differences in regional growth rates will lead to a significant shift in MRO demand over the decade ahead 2015 MRO Spend ($USB) 10YR CAGR 2015-2025 Absolute Growth North America $20.0 0.6% $1.3 Europe $17.9 3.3% $7.0 Latin America & the Caribbean $3.2 7.3% $3.3 Africa / Middle East $7.5 5.5% $5.3 Asia Pacific / China / India $18.3 6.6% $16.5 Asia Pacific / China / India will be challenged to build the necessary infrastructure capable of handling the volume of MRO the combined region will demand 10
Shadowing the fleet trends, large differences in regional growth rates will lead to a significant shift in MRO demand over the decade ahead 2025 MRO Spend ($USB) North America $20.0 $21.3 Europe $17.9 $24.9 Latin America & the Caribbean $3.2 $6.5 Africa / Middle East $7.5 $12.8 Asia Pacific / China / India $18.3 $34.8 6.6% Asia Pacific / China / India will be challenged to build the necessary infrastructure capable of handling the volume of MRO the combined region will demand 11
North American MRO Market Outlook
Passenger traffic is picking up; however, the fleet growth will be limited over the next 10 years as most deliveries are slated to replace aging aircraft 2015 PASSENGER TRAFFIC (RPK) GROWTH 7.0% 2015 CURRENT FLEET 7,420 +0.9% 2015-2025 FLEET CAGR 4,100+ 2015-2025 AIRCRAFT DELIVERIES 3,100+ 2015-2025 AIRCRAFT RETIREMENTS 13
$4.6B in MRO from 70s and 80s vintage aircraft will be lost over the next 10 years; however, 90s, 00s and 10s vintage aircraft will see a $5.9B increase Top 10 North American Aircraft Families in 2015 Top 10 North American Aircraft Families in 2025 A320C/NEO 737NG/MAX 737NG/MAX A320C/NEO 757 777 CRJ 787 777 CRJ 767 767 ERJ EJET EJET A330C/NEO MD-80 A350 747 MRJ 14
Spot Price per Gallon ($USD) Jet-A Spot Price per Gallon ($USD) Oil prices have plummeted over the past year and could remain low over the short term. Many are concluding that this will cause airlines to alter fleet plans and drive an increase in MRO. Crude Oil Spot Price per Gallon Aircraft Profitability Curve Current Generation vs New Generation $3.00 $3.00 New gen aircraft are more profitable than current gen April 2014 1 YEAR PRICE DROP $2.00 $2.00 April 2015 New gen aircraft are less profitable than current gen $1.00 2014 2015 WTI Brent Jet A $1.00 2,000 2,400 2,800 3,200 3,600 4,000 4,400 4,800 Utilization in Hours Our view: Long term, oil prices will likely recover, OEM order books will remain largely unaffected, and net fleet growth will progress as forecasted 15
Operator Name There are currently 140 commercial operators based in North America. The top 20 operators comprise over 80% of the North American fleet. Top 20 North American Airlines by Fleet Size American/US Airways Delta Air Lines United Airlines Southwest Airlines ExpressJet Airlines SkyWest Airlines FedEx UPS Airlines Envoy JetBlue Airways Endeavor Air Air Canada Alaska Airlines Republic Airlines Jazz WestJet Mesa Airlines Air Wisconsin Allegiant Air Shuttle America 237 224 199 168 162 136 131 127 107 85 71 70 66 340 332 403 700 677 777 969 0 200 400 600 800 1,000 1,200 Fleet Size The top 4 operators carry over 50% of the North American Traffic 16
MRO Spend in 2015 Dollars ($USB) Billions With 78% of the new deliveries forecast to replace older aircraft, the MRO forecast is virtually flat 2015-2025 North American MRO Market Forecast by MRO Segment $25 $20 $20.0 $18.1 $17.4 $18.6 $18.3 $19.2 $19.0 $18.0 $19.0 $19.2 $21.3 $15 $10 $5 $0 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Forecast Year and Forecast CAGR Airframe Engine Component Line North American MRO will be impacted by less maintenance intensive HMV work and honeymoon periods of engines and components 17
Fleet changes and technological advances will create turbulence for the MRO business OEM s increased aftermarket presence New repair capabilities required Increased aftermarket market share for the newest generation of aircraft Decisions necessary enter new markets for each of airframe, engine and component repairs Less maintenance Increased use of data analytics Health monitoring and predictive maintenance will reduce overall time-on-tool requirements for individual checks with fewer repairs Critical new source of value to the aftermarket driven by those who design the best algorithms and most rigorous data management Market participants will need aggressive and innovative plans for growth 18
MRO Survey Results
The collection, storage, aggregation and analysis of data will be key factors in aircraft health monitoring and predicative maintenance. Who is best positioned within the industry to benefit from predictive maintenance? Airlines 65% OEMs 19% Too early to predict MROs 9% 7% PMA Manufacturers 0% Source: Oliver Wyman s 2015 MRO Survey 20
Oliver Wyman s 2015 MRO Survey identified a slew of new technologies that are poised to come to market Most prominent new technologies by 2020 (All respondents) Aircraft Health Monitoring Systems Predictive Maintenance Live maintenance through wearable and mobile technology Composite repair capabilities New repair technology Additive manufacturing Artificial intelligence 6% Drone-supported maintenance 4% 26% 25% 35% 57% 66% 66% Source: Oliver Wyman s 2015 MRO Survey 21
However, digesting innovative change is not standard fare for the MRO industry Survey respondents completed this sentence: The MRO industry innovates... periodically 39% Historically, little need to build internal organizations devoted to R&D, corporate strategy and product development sporadically primarily as a response to OEM innovation 27% 21% frequently 13% Lack of regular disruptions decrease relative: Devoted resources Tried and tested review processes Time and attention of executives Clarity of ownership / leadership Assessment infrastructure Source: Oliver Wyman s 2015 MRO Survey Internal ability to recognize, assess and prepare for change is not a core capability for the industry 22
and though they have a vision, many organizations struggle with how to rapidly evaluate and bring innovative ideas to market Positive survey responses Top management has a clear, shared vision and strategy for growth Top management in new business has areas a clear, shared vision and strategy for growth in new business areas 76% Use We use a strategic a planning method to to visualize areas areas of of opportunity and and identify the the most most promising promising prospects prospects Our innovation process allows allows us to us to quickly translate identified identified opportunities into plans and get sign-off from top management opportunities into plans and get sign-off 43% 68% Decreasing impact; More difficulty bringing vision to market We can quickly translate the identified We quickly opportunities pilot ideas into and pilot roll out projects fast-to-market and fast-to-market roll-out programs programs 33% Source: Oliver Wyman s 2015 MRO Survey 23
So what s really inhibiting change in MROs? The primary inhibitors of innovation at my organization are: Budget / capital availability Inability to prove innovative process / product / service will offer margin benefits over current techniques Total cost / lack of clear payback Organization resistance Review and approval process Lack of personal capability Implementation difficulties 50% 44% 44% 35% 32% 21% 21% How can you eradicate these barriers within your own organization? Lack of need for change 6% Note: Responses to the question: The primary inhibitors of innovation at my organization are:, Percent of MRO responses per inhibitor (multiple selections possible per category). Not shown Other responses from a total of 9% of respondents; Source: Oliver Wyman s 2015 MRO Survey 24
New technologies will reshape our perception of MRO aftermarket commercial offers. Advances could cut or redistribute 15 to 20 percent of MRO spend, but also spawn new business models and revenue streams. 25
Take the controls and make strategic investments now: Technologies will likely come online faster than anticipated Additive Manufacturing (3D Printing) Quickly gaining traction A350 will feature 3D-printed plastic and metal brackets GE will introduce 3D-printed fuel nozzles in its CFP LEAP engine Out-of-production parts can be printed on-demand Aircraft Health Monitoring (AHM) and Big Data Expected to be a significant driver of innovation over the next five years Boeing recently invested $100M into expanding AHM A 787 flight can generate 500GB of data Augmented Reality and Automated Inspection Tech Augment reality allows for live audio and visual communication with OCC Robots used for visual inspections and non-destructive testing Highly efficient Highly accurate 26
Time to disengage the Autopilot Is your corporate Auto Pilot engaged? Focusing solely on business as usual is a risky strategy in the coming years Relying on current commercial offers, sales practices, resources, will challenge an MRO s future business Advances could cut 15-20% of MRO spending from the aftermarket But also spawn new business models and revenue streams Amounts to a reduction or redistribution of $10-15B among current industry players & new competitors MROs and operators must actively choose technologies to develop and exploit Those that fail will end up as innovation takers, ceding further aftermarket control to competitors 27
The future is now 28