2015 Global MRO Market Forecast and Key Trends

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MRO Market Forecast and Key Trends January 13-14, 2015 – Buenos Aires, Argentina

Presented by: Jonathan M. Berger Vice President ICF International [email protected]


Today’s Agenda:

founded 2001, joined ICF in 2011

founded 1963, joined ICF in 2007 May 2010–May 2014

These are the “Good Old Days”

MRO Market Forecast

Latin American MRO Industry Dynamics

Aviation Week MRO Latin America Buenos Aires, Argentina


These Are the “Good Old Days”


AVIATION INDUSTRY HEALTH & GROWTH INDICATORS

Aviation fuel costs have dropped over 50% during the past 6 months

$1.5

$1.8

$2.0

$2.3

$2.5

$2.8

$3.0

Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14

U.S. Gulf Coast Jet Fuel Price per Gallon In US Dollars

Source: EIA data of 1/7/2015; ycharts 1/7/2015 info for Dec 2014 data

(USD)

Should these low fuel costs continue, there will be a dramatic repercussions throughout the aviation & MRO supply chain (and geopolitics…)

~52%



Most airlines’ growth plans assume oil pricing of around $110/bbl, having proved stable over the past decade…

14% 17%

22% 26% 27%

33%

26% 26% 29% 31% 30% 29%

26%

0%

10%

20%

30%

40%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F

Source: IATA Airline Industry Economic Report, December 2014

Evolution of Fuel Cost as a Share of Operating Expenses Fuel Cost as a Share of Operating Expenses

…resulting in plans for accelerated fleet replacement, and therefore record OEM backlogs…

Forecast


Commercial aircraft OEM production backlog remains at historical record levels


0%

10%

20%

30%

40%

50%

60%

70%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Note: includes narrowbody, widebody, and regional jets in commercial service. Excludes Russian-manufactured aircraft. Only includes passenger, freighter, quick change and combi operational roles Source: Flightglobal ACAS, September 2014

Order Backlog

Backlog/ Active Fleet


Source: IATA Air Transport Market Analysis – Dec reports from 2010-2012; IATA Air Passenger Monthly Analysis 2013, 2014


0.4%

-0.9%

0.6%

4.3% 4.5%

6.0%

3.0% 3.6%

4.9%

6.8%

-2%

0%

2%

4%

6%

8%

2011 2012 2013 2014 2015F

Traffic (FTK) Capacity (AFTK)

Forecast

Air cargo, a key leading indicator of industry growth, has (at long last) shown positive signs of recovery

Freight Traffic / Capacity Growth Year-Over-Year Percent Change


Airlines appear to have embraced the art of “capacity discipline” in recent years to the delight of the investment community…

Source: IATA Air Transport Market Analysis – Dec reports from 2010-2012; IATA Air Passenger Monthly Analysis 2013, 2014


8.0%

6.3%

5.3% 5.4% 5.8%

7.0%

4.5%

6.6%

4.0%

5.0% 5.6%

7.3%

0%

2%

4%

6%

8%

2010 2011 2012 2013 2014 2015F

Traffic (RPK) Capacity (ASK)

Forecast

Passenger Traffic / Capacity Growth Year-Over-Year Percent Change

8 © ICF International 2015

$0

$10

$20

$30

2011 2012 2013 2014F 2015F

Accordingly, driven by a combination of capacity discipline, airline consolidation, and lower fuel costs, the industry has successfully returned to profitability


Global Airline Profitability

Source: IATA Central Forecast Dec 2014

$ Billions

$25B

$20B


Driven by a combination of capacity discipline, airline consolidation and lower fuel costs, the industry has successfully returned to profitability


Latin America Global $ Billions


$0

$10

$20

$30

2011 2012 2013 2014F 2015F

$ Billions

-$0.5

$0.0

$0.5

$1.0

$1.5

2011 2012 2013 2014F 2015F

$1B

$.7B




North America Global $ Billions


$0

$10

$20

$30

2011 2012 2013 2014F 2015F

$ Billions

$0.0

$3.0

$6.0

$9.0

$12.0

$15.0

2011 2012 2013 2014F 2015F

Latin America $ Billions

-$0.5

$0.0

$0.5

$1.0

$1.5

2011 2012 2013 2014F 2015F

$13B $12B




Rest of World Global $ Billions


$0

$10

$20

$30

2011 2012 2013 2014F 2015F

$ Billions

$0.0

$3.0

$6.0

$9.0

$12.0

$15.0

2011 2012 2013 2014F 2015F

Latin America $ Billions

-$0.5

$0.0

$0.5

$1.0

$1.5

2011 2012 2013 2014F 2015F

North America $ Billions

$0.0 $3.0 $6.0 $9.0

$12.0 $15.0

2011 2012 2013 2014F 2015F

$11B

$7B



Current industry forecasts are based on $85/bbl – given today’s price, tremendous short-term upside exists…

$(40)

$(20)

$-

$20

$40

$60

$80

$100

$120

$50 $55 $60 $65 $70 $75 $80 $85 $90 $95 $100 $105 $110

Prof

it ($

Bill

ions

)

Crude Oil Cost per Barrel

2015 IATA Forecast: $25B industry profit

based on $85/bbl

However, in the long-term, low fuel costs will lead to increased capacity and new market entrants ….ultimately eroding hard fought margins gains…

Source: IATA Airline Industry Economic Report, December 2014; ICF Analysis


MRO Market Forecast


NarrowbodyJet

Widebody Jet

Turboprop

Regional Jet

The current civil air transport fleet consists of over 27K aircraft

MRO MARKET FORECAST

Source: FlightGlobal ACAS September 2014

North America

Asia Pacific

Europe

Latin America

Middle East

2014 Global Air Transport Fleet

27,531 Aircraft

17%

50% 15%

18%

31%

26%

25%

8% 5% 5%

By Aircraft Type By Global Region

27,531 Aircraft


The air transport fleet will grow at a 3.2% rate over the coming decade

MRO MARKET FORECAST

0

5000

10000

15000

20000

25000

30000

35000

40000

2014 2024

Africa Middle East Latin America Europe Asia Pacific North America

Commercial Fleet Growth 2014–2024

Source: ICF analysis, ACAS September 2014

27,500

31% 26%

37,900

ICF Insight

Air travel growth of 4.0%

Fuel costs in $80-100/bbl range

20,500 aircraft deliveries

8,624 aircraft retirements

26%

25%

8%

30%

24%

9%

CAGR

3.2% Average

3.8%

2.7%

4.7%

1.4%

5.3%

4.8%


Engines

Components

Line

Airframe

Modifications

15%

17%

22%

40%

6%

The current civil air transport MRO market is valued at $62.1 billion USD

MRO MARKET FORECAST

North America

Asia Pacific

Europe

Middle East

Latin America

Africa

29%

27%

27%

7%

6% 4%

2014 Global MRO Demand

$62.1B $62.1B

By MRO Segment By Global Region Source: ICF analysis Forecast in 2014 $USD, exclusive of inflation


$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

15%

17%

22%

40%

13%

17%

24%

38%

6%

8%

Source: ICF analysis Forecast in 2014 $USD, exclusive of inflation

ICF Insight

Average growth is forecast to be 3.8% CAGR

The strongest driver of growth is expected to be the engine market

Reduced labor intensity of airframe heavy checks as the fleet renews and increased intervals...offset in emerging markets by increasing labor rates

Aircraft upgrades (e.g. interiors, winglets) drive high modifications growth

2.6%

3.7%

4.5%

3.5%

5.9%

CAGR

3.8% Average

$90B

$62.1B


$0

$1

$2

$3

$4

$5

$6

$7

2014 2024

Turboprop Regional Jet Widebody Jet Narrowbody Jet

The Latin American MRO market is expected to grow to approx. $5.9B by 2024, at 5.2% per annum

MRO MARKET FORECAST

Latin American MRO Spend 2014–2024 ($B)

2.8%

3.1%

7.0%

5.3%

Source: ICF analysis Forecast in 2014 USD, exclusive of inflation.

10% 13%

17%

60%

8% 10%

21%

61%

CAGR

5.2% Average

$3.6B

$5.9B

ICF Insight

Latin American MRO growth is driven by continued narrowbody aircraft deliveries

Turboprop & Regional Jet aircraft will see a decrease in total share

Widebody deliveries will remain stable


Over the next decade, Latin America will drive $2.3B in absolute MRO spend growth

MRO MARKET FORECAST

Difference in $ MRO Spend, 2024 vs. 2014 – By Global Region US$ Billions

Source: ICF analysis Forecast in 2014 $USD, exclusive of inflation

$6.9 $5.4

$4.2

$2.6 $2.5 $2.3 $2.3 $1.8

$0.0

$1.0

$2.0

$3.0

$4.0

$5.0

$6.0

$7.0

$8.0

Asia/Pacific (excl China)

China Middle East Eastern Europe (incl

CIS)

Western Europe

Latin America North America

Africa Asia/Pacific (ecl. China)

China Middle East


The top 7 Latin American airlines account for over 50% of the total MRO spend in the region

LATAM 23%

GOL 8%

Aeromexico 5%

Avianca 5%

Aerolineas Argentinas

4% Azul 3%

COPA 3%

Other 49%

$3.6B

2014 Latin American Operator MRO Spend By Major Airline Group

LATIN AMERICAN INDUSTRY DYNAMICS

Source: ICF analysis Forecast in 2014 USD, exclusive of inflation. Includes turboprops

ICF Insight

While the aviation market in Latin American remains quite fragmented…

...the region has seen significant airline consolidation over the past few years…

Investment in MRO infrastructure, however, has been limited


Latin American Industry Dynamics



Latin American countries continue to polarize around two alternative trading blocks: Pacific Alliance vs. Mercosur

Source: ICF analysis, Economist, Moody’s Analytics * Costa Rice- currently in the process of becoming 5 member of bloc Boliva – Accessing member, soon to be a full member

Intra-regional trade makes up just 27% of total trade in Latin America; compared with 63% in the European Union, and 52% in Asia

Pacific Alliance Mercosur Year Founded 2011 1991

Members Chile, Colombia, Costa Rica*, Mexico, Peru

Argentina, Brazil, Paraguay, Uruguay, Venezuela, Bolivia*

Economic Approach Free-market capitalism, globalization, international trade deals

More state-control, protectionism for certain industries, heavy tax burden

GDP Growth (5 yr avg) 3.7% 2.9%

Population 212 million 280 million

GDP per Capita (PPP) USD $15,640 USD $12,582

Key Programs

Removing trade tariffs Seamless border agreements Standardized labeling for goods &

services Common stock exchange

Free movement of people and goods within Mercosur

Common trade policy towards non-members


706

418

286

161

155

133

101

82 59 55

49 0

10

20

30

40

50

60

70

0 5 10 15 20 25 30 35

Latin American Fleet Profile by Country

Brazil

Venezuela Mexico

Colombia Argentina

Chile Bolivia

Peru Panama

Ecuador El Salvador

Num

ber o

f Ope

rato

rs

Average Fleet Age Source Data: ACAS September 2014


Brazil operates the largest fleet followed by Mexico and Colombia; Venezuela and Bolivia operate the oldest fleets


GDP growth, the key driver of aviation growth, has slowed across the region, well below the trailing 5-year average

United States

Brazil

Argentina 5 Yr. GDP Avg: 6.0% GDP 2014F: 1.1%

GDP Avg. 2009-2013: CAGR (%)

Note: GDP growth in local currency (real);

Source: IMF World Economic Outlook October 2014, The Conference Board Dec-2014, Focus Economics Dec-2014

Brazil 5 Yr. GDP Avg: 3.4% GDP 2014F: 0.2%

United States 5 Yr. GDP Avg: 2.3% GDP 2014F: 2.2%

Mexico 5 Yr. GDP Avg: 3.5% GDP 2014F: 2.3%

Panama 5 Yr. GDP Avg: 9.3% GDP 2014F: 6.3%

Colombia 5 Yr. GDP Avg: 4.8% GDP 2014F: 4.9%

Peru 5 Yr. GDP Avg: 6.7% GDP 2014F: 2.9%

Chile 5 Yr. GDP Avg: 5.3% GDP 2014F: 1.9%



Most Latin American airlines remain profitable – led once again by Copa; LATAM appears to be turning a corner

United States

Brazil

Source: Respective company websites, except for Avianca which ICF used investing.businessweek, IATA for regions in 2013, 2014F Note: All values expressed in USD

Copa Q1-3 2014 Net Profit: $335.6M Q1-3 2014 Net Margin: 16.2%

AeroMexico Q1-3 2014 Net Profit: $1.5M Q1-3 2014 Net Margin: 0.1%

GOL

Q1-3 2014 Net Profits: (182.6M) Q1-3 2014 Net Margins: -6.6%

North American Carriers

2013 Net Profit: $7.2 billion 2014F Net Profit: $11.9 billion

Latin American Carriers

2013 Net Profit: $0.2 billion 2014F Net Profit: $0.7 billion


Avianca

Q1-3 2014 Net Profit: $24.3M Q1-3 2014 Net Margin: 0.7%

LAN & TAM (LATAM)

Q1-3 2014 Net Profits: ($208M) Q1-3 Net Margins: -2.2%


-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

Dec-11 Dec-12 Dec-13 Dec-14

The Argentine Peso, Venezuelan Bolivar, and Brazilian Real have depreciated significantly vs. the US dollar over the last 3 years


Source: OANDA.com

Foreign Currency Exchange Rate vs. US Dollar

Colombia

Peru Mexico

Chile

Brazil

Argentina

Weaker national currencies make purchases of dollar-denominated goods and services (i.e. fuel, aircraft parts) more expensive;

Conversely, Latin American MROs gain a labor rate advantage

Venezuela

-52%

-34%

-25%

0%


AIRFRAME MRO

Today, more than half of the $460M Latin American airline airframe MRO spend is performed in-house

Source: ICF analysis

2014 Latin American Airframe MRO Sourcing Behavior

60%

28%

12%

0%

20%

40%

60%

80%

100%

Outsourced (Out of Region)

Outsourced (In-Region)

In-House

$460M

ICF Insight

Competitive labor costs and high quality skilled labor make Latin America a net importer of airframe heavy maintenance

Virtually all engine MRO and the majority of component MRO are outsourced by Latin American carriers

Very limited widebody capacity in the region


North American carriers account for over 90% of “imported” airframe heavy maintenance to Latin America

AIRFRAME MRO

*Note: AHM spend includes modifications / Source: ICF International, based on publicly announced contracts

North America

93%

Europe 3%

Other 4%

$130M $130M

$121M $4.2M

$2.2M

$0.5M

$1.8M

2013 Global Airframe Heavy maintenance flows into Latin America: $130M


Change is in the air in the Latin American skies LATIN AMERICAN INDUSTRY DYNAMICS

New Generation Widebodies are replacing mid generation aircraft – LAN is operating 9 B787s with 23 more on order – Aeromexico is operating 5 B787s with 10 more on

order – Avianca has 15 B787s on order, and is expecting to

commence scheduled flights in 2015 – TAM has orders for 27 A350s, with entry into service

as early as 2015

Low Cost Carriers (LCCs) continue to making significant inroads in Latin America, signaling significant growth in the future – Grupo Viva was recently created by the owners of

Mexico’s VivaAerobus and Colombia’s VivaColombia – Based in Panama City, the group seeks to expand the

Viva airlines footprint across the continent

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Thank you! For questions regarding this presentation, please contact:

Jonathan M. Berger Vice President Global MRO Practice

630 Third Avenue 11th Floor New York, NY 10017 +1 (404) 819-7669 [email protected]

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2015 Global MRO Market Forecast and Key Trends