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MRO Forecast & Key TrendsSingapore – 26 September 2016
Presented by:
Richard BrownPrincipal ICF International
© ICF International 2016
11
Today’s Agenda
Industry Context
MRO Market
Trends To Watch
22
Industry Context…
33
Airlines are
achieving
historically high
return on invested
capital (ROIC) levels
– there’s an evident
correlation with
changes in fuel
costs
Source: IATA, ICF Analysis
Fuel Price and Global Airline Return On Invested Capital
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
$0
$20
$40
$60
$80
$100
$120
$140
Jet Fuel Price ($/barrel) Airline ROIC (%)
Airline ROIC
Jet Fuel Price
44
Commercial aircraft
OEM production
backlog remains at
historical record
levels driven by:
Commercial Aircraft OEM Production Backlog
0%
10%
20%
30%
40%
50%
60%
70%
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
Order
Backlog
Backlog/
Active Fleet
Emerging market growth
High oil and commodity
prices
Introduction of new
technology
aircraft/engines
Low interest rates
Source: CAPA, ICF Analysis
55
Continued low fuel
costs are having,
and will have,
important
repercussions for
airlines, aviation and
the MRO supply
chain
U.S. Gulf Coast Jet Fuel Price per Gallon
$0.8
$1.1
$1.4
$1.7
$2.0
$2.3
$2.6
$2.9
$3.2
$ USD
Source: EIA; ICF International analysis
66
…such as an already
visible drop in
aircraft retirements
Potential Impact:
Reduced part-out feed
stock for surplus market
Mature aircraft being placed
with new operators
Increase in airframe and
engine MRO spend on
older airframes
Less pressure OEM new
parts sales
Higher used part values /
pricing
Commercial Air Transport Annual Aircraft Retirements
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
0
200
400
600
800
1,000
1,200
# Retirements
Retirement as % of installed fleet
% Installed
Fleet
1990-99 Average: 191
2000-09 Average: 473
Source: Flight Global ACAS June 2015, CAPA, Airline Monitor, ICF Analysis
77
Thanks partially to
these low fuel
prices, airlines are
anticipating record
profits in 2016,
especially in
North America
Source: IATA
Global Airline Profitability, 2004-2016
$19
$7
$10
-$30
-$20
-$10
$0
$10
$20
$30
$40
$USD
Billions$36B
Rest of World
North America
Asia Pacific
88
China’s seemingly
insatiable demand for
global commodities
was a key driver of
global economic
growth…
Source: IMF, World Economic Outlook Database October 2015, ICF International Analysis
5%
7%
9%
11%
13%
15%
2007 2008 2009 2010 2011 2012 2013 2014 2015F 2016F2015F 2016F
China GDP Year-on-Year Growth (%)
…But now, after years
of remarkable GDP
growth, China’s
economy has been
steadily slowing
99
China’s situation
exacerbated the 54%
fall in commodity
prices in the past
five years…
Source: Dow Jones Commodity Index
Dow Jones Commodity Indices (DJCI)(January 2011 Indexed to 100)
40
50
60
70
80
90
100
110
- 54.0%
Indexed
Values
…which has had a
dramatic impact on
economies dependent
on commodity exports
1010
Russian Ruble-87.1%
Brazilian Real-62.2%
S. African Rand-35.8%
Can Dollars-23.6%
Aus Dollars-20.4%
Euro-16.9%
British Pound-15.5%
Indian Rupee-10.3%
Japanese Yen-9.0%
Chinese Yuan-4.8%
-100%
-90%
-80%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
The increase in oil &
gas market supply
and reduced demand
for commodities has
led to a stronger US
Dollar
Partially offsets the positive
impact of low fuel costs
Increases the cost of dollar
based parts and materials /
flying hour agreements
Buying/leasing aircraft
becomes more expensive
FOREX Impact
B
R
C
S
A
Global Currency Exchange Rates vs USD% Value Change, Apr. 2014 – Apr. 2016
The “CRABS”: Countries with
economies that are heavily
dependent on commodity exports
Source: Oanda historical exchange rates, ICF International Analysis
1111
These four industry
factors are driving
uncertainty…
But this has yet to
impact the backlog
materially -
cancellations and
deferrals will be vital
harbingers of airline
and supply chain
confidence and
outlook
Exchange Rates Commodity Prices
China
Implications of Industry Outlook….
Fuel Price
Order deferrals and/or cancellations?
1212
MRO Market
1313
The current
commercial
air transport fleet
consists of over
27K aircraft
Source: CAPA 2015
NarrowbodyJet
Widebody Jet
Turboprop
Regional Jet
27,114
Aircraft
14%
53%14%
19%
By Aircraft Type By Global Region
North America
Asia Pacific
Europe
Latin America
Middle East
31%
27%
25%
8%
5% 5%
27,114
Aircraft
2015 Global Commercial Air Transport Fleet
© ICF International 2016
1414
The combination of
strong air travel
demand and the
need to replace
ageing aircraft will
drive fleet growth at
3.4% annually
Source: ICF International, CAPA 2015
Air traffic growth of ~4.1%
Fuel costs in $55/bbl range
~19,600 aircraft deliveries
~8,800 aircraft retirements
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2015 2025
Africa
Middle East
Latin America
Europe
Asia PacificNorth America
27,100
31% 26%
37,900
27%
25%
8%
32%
23%
8%
# Aircraft
3.8%
2.5%
1.6%
5.2%
5.3%
5.1%
CAGR
3.4% Avg.
5%
6%
10 Year Global Air Transport Fleet Growth
© ICF International 2016
1515
Current air transport
MRO demand is
$64.3B; Asia Pacific
is now equivalent to
North America and
Europe
Source: ICF International
Engines
Components
Line
Airframe
Modifications
14%
17%
22%
40%
7%North
America
Asia Pacific
Europe
Middle East
Latin America
Africa
29%
28%
26%
8%
6%4%
$64.3B$64.3B
By MRO Segment By Global Region
2015 Global MRO Demand
© ICF International 2016
1616
The global MRO
market is expected
to grow by 4.1%
per annum to $96B
by 2025
Source: ICF International; Forecast in 2015 $USD, exclusive of inflation
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
2015 2025
Modifications
Airframe
Line
Component
Engine
40%
22%
14%
17%
$64.3B
$96.0B
2.8%
3.6%
4.3%
4.4%
CAGR
4.1% Avg.
5.3%
41%
22%
16%
13%
10 Year Global MRO Demand Growth
© ICF International 2016
1717
The Asia Pacific
fleet consists of
nearly 7,300
aircraft, with 37%
(approx. 2,700
aircraft) in China
Source: CAPA 2015
NarrowbodyJet
Widebody Jet
Turboprop
Regional Jet
7,289
Aircraft
5%
59%13%
23%
By Aircraft Type By Country
China
Japan
AustraliaIndonesia
South Korea
Malaysia
Other
7,289
Aircraft
37%
9%8%
26%
8%
4%
4%4%
2015 Asia Pacific Commercial Air Transport Fleet
© ICF International 2016
1818
The Asia Pacific
MRO market is
expected to nearly
double to approx.
$32.2B by 2025, at
6.0% per annum
Source: ICF International; Forecast in 2015 $USD, exclusive of inflation
0
5
10
15
20
25
30
35
2015 2025
Modifications
Airframe
Line
Component
Engine
39%
23%
12%
19%
$17.9B
$32.2B
5.8%
4.6%
5.7%
6.8%
CAGR
6.0% Avg.
6.9%
42%
23%
16%
12%
8%
10-Year Asia Pacific MRO Demand Growth
© ICF International 2016
1919
Over the next
decade, China and
Asia Pacific region
will drive absolute
MRO spend growth
Source: ICF International; Forecast in 2015 $USD, exclusive of inflation
Difference in MRO Spend, 2025 vs. 2015 – By Global Region
$ USD Billions
$7.9
$6.4$5.2
$3.2$2.6 $2.2 $2.0
$1.2$0.0
$1.0
$2.0
$3.0
$4.0
$5.0
$6.0
$7.0
$8.0
$9.0
Asia Pacific(excl China)
China Middle East NorthAmerica
LatinAmerica
EasternEurope (incl
CIS)
Africa WesternEurope
71% 93% 103% 17% 73% 72% 85% 10%Percent
Change:
© ICF International 2016
2020
Trends To Watch
2121
Challenge: Meeting
customer needs
across the lifecycle
Key issues:
Managing changing
operator MRO behaviour
as aircraft mature
Need to understand
customer needs and
develop value
propositions to meet
these needs
Lessors play an
increasingly important
role and are considering
the full lifecycle
MATURE
737-1/200
747-1/2/300
747-8
A380
10 250
DC10
A300
A320*
(Old)
CRJ-1/2/400A330
777
A340
SUNSETGROWTH
737-3/4/500
747-400
767757
A300-600/310
MD80
ERJ-140
MD11
787
SSJ 100
CRJ-7/9/1000
ERJ-170/190
777-2LR/3ER
A320*
(New)
Years since Entry into Service
Bubble size
proportional to
Component
MRO spend
$1B
737 NG
Cost Per Flight Hour Fixed Price / T&M Surplus / Green Time
Source: ICF International
Aircraft Lifecycle
© ICF International 2016
2222
Engine OEMs have
been developing new
value propositions
Refinement of the cost per
flight hour contract
Trying to become more
competitive in the mature
phase
Embracing surplus,
module swaps, reduced
workscopes
Example Engine OEM Aftermarket Products
Source: ICF Analysis
• TotalCare Life
• TotalCare Term
• TotalCare Flex
• Lessor Care
• Select Care
• MRO Services
• TrueChoice Flight Hour
• TrueChoice Overhaul
• TrueChoice Material
• TrueChoice Transactions
• Various support options
ranging from long-term fleet
management programs to
fixed price agreements to
transactional services
Example OEM approaches:
• Emphasising choice of service offerings and service providers
• Recognizing that customer needs change across the lifecycle
• Focusing on lessors, remarkability and residual values
2323
Trend Watch: New
Technology Aircraft
2424
613
6,1016,296
5,838
2015 2025
2,993
18,896
22,212
18,487
2015 2025
In the next decade,
the fleet of new
generation aircraft
fleet will grow by
approx. 530% to
nearly 19,000 aircraft
globally, and by
~900% in Asia
Pacific
10-Year Fleet Forecast by Aircraft Generation
Global
New Gen
Mid Gen
Old Gen
+531%
-70%
-17%
Asia Pacific
+895%
-61%
-7%
Source: ICF International
Old Gen: 727, 737 Classic, 747 Classic, DC10, L1011, A300
Mid Gen: 757, 767, 747-400, A320 Family, A330/A340, 737NG, 777, ERJ, CRJ
New Gen:, 777X, 787, A350, A330neo, A380, E170/175/190/195, CRJ-7/9/1000, 737MAX © ICF International 2016
2525
Challenge: How best
to realize value from
the disparate
terabytes of data
generated by new
technology aircraft
Number of AHM
Parameters
A320: 15,000
B787: 100,000
Stakeholder Battle:
Who will control and gain
most from the operating
data IP?
Operators
Lessors
OEMs
MRO Suppliers
767: 10,000
Yr 1 Yr 10
~ 137TB
~11TB
777 787
~ 28MB
< 1MB
Transmittable Data(MB/Flt)
A/C Data Generated(TB/Year)
~1,100%
Aircraft Health Monitoring and Data Generation Outlook
Source: ICF Analysis
2626
For New Technology
Aircraft MRO, there
are three key
battlegrounds
Source: IATA
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
This new world is already
rapidly changing the
competitive landscape
The outcomes and
winners in these battles
will define the future
“winning business
models”
Implications of New Technology….
© ICF International 2016
2727
To win these in these
battlegrounds, Big
Data analytics is a
key enabler
Aircraft health monitoring
Predictive maintenance
Inventory optimization
Leading to…
Improved aircraft availability
Cost control
GE is leveraging the Predix
software platform, Rolls-
Royce is partnering with
Microsoft and Pratt &
Whitney is working IBM
Big Data Analytics
Inventory
Optimization
Predictive
Maintenance
Aircraft Health
Monitoring
Control of
operational data
Control of
the Workscope
Control of
the Assets
2828
Airlines stand to
benefit the most and
they own the
data…the challenge
for MROs is whether
and how to take a
lead, and add value
What technology to
deploy and when?
Which partners?
What commercial and
business model?
Which solutions are
going to win?
The Challenge…
AIRLINES own the data and
have the most to gain e.g.,
improved reliability
ENGINE & AIRFRAME OEMs
see themselves as the natural
arbiter for leveraging the data
MROs with large fleets under
management can leverage and
benefit from Data Analytics
Other MROs risk losing the data
access and “intelligence” to
optimize performance and costs
2929
Trend Watch: Aircraft
Modifications
3030
Modifications growth
is being impacted by
three mutually
reinforcing drivers
New aircraft
introduction – need for
commonality of
customer offering
across fleet
Low fuel prices –
airlines keeping older
planes longer
Airline determination to
differentiate via
competitive (latest
technology) on-board
offer
3131
Modifications growth
is expected to be
5.3% per annum
Latest lie-flat seats are
now the minimum
standard for business
Premium economy
Wi-Fi, on-board
connectivity
Coming soon: ADS-B
Mod program
Capacity (ASM/K)
increase
Air Transport Modifications Forecast, 2015–2025 ($USD Billions)
$2.7
$4.9
$0.6
$1.1
$0.4
$0.5
$0.4
$0.4
$0.3
$0.5
$0
$1
$2
$3
$4
$5
$6
$7
$8
2015 2025
AD/SB**
PTF Conversions*
Painting
Avionics Upgrades
Interiors
$4.4B
$7.4B
0.0%
3.7%
6.9%
5.9%
CAGR
5.3% Avg.
3.6%
Source: ICF Analysis, constant 2015 US$
Modifications demand includes labor and material spend
*Passenger-To-Freighter Conversions
**Airworthiness Directives / Service Bulletins
3232
Cabin modifications -
including new slim
line seats and
fixtures - have
enabled capacity up-
gauging and cabin
“densification”,
driving lower unit
cost and facilitating
bottom line growth
12 Seats 16 Seats
130 Seats120 Seats
Total =
150 SeatsTotal =
160 Seats
Delta A320 Interior Modification
Program Overview
New seats, outlets,
IFE, overhead bins
Space-saving
galleys to add a row
of seats
18 Seats18 Seats
2015 - 2025 Capacity Bridge, by
Contributing Factor
0 2 4 6 8 10
2025 ASMs
IncreasedSeat Density
Longer StageLengths
Fleet Growth
2015 ASMs
Available Seat-Miles (ASMs), Trillions
6.2T
8.8T
84%
8%
8%
Source: ICF Analysis, Delta
3333
Trend Watch: Airframe
OEMs
3434
~50%~40%
~10%
50%60%
90%
0%
20%
40%
60%
80%
100%
Engine OEMs ComponentOEMs
AircraftOEMs
Typical OEM Revenue Mix
M’facturing
Services
Airbus Vision: 25% services by 2020
Satair acquisition (2011)
First FHS contract in 2008; multiple
wins since
Services by Airbus launched in 2015
EDGE launched in 2012
Major player in flight training,
distribution, and consumables
management
Growing number of Goldcare
contracts; SIAEC joint venture
Source: ICF Analysis, company web sites
The Airframe OEMs
have demonstrated
the strength of their
ambition to
participate strongly
in the aftermarket
The Airframe OEMs
have demonstrated
the strength of their
ambition to
participate strongly
in the aftermarket
3535
…. and poses
challenging strategic
questions for each
industry participant
Independent MROs• Which will survive?
• What niches to pursue?
• What partnership strategy?
Integrators How best to
secure
capability on
new platforms?
Airframe
OEMs –
customer,
supplier or
competitor?
Who best to
partner with?
Airframe OEMs Will Airframe OEMs succeed in
establishing share and enduring
success in the MRO market?
Component
OEMs Which
integrators to
work with – the
airlines and/or
Airframe
OEMs?
The Airframe OEMs
have demonstrated
the strength of their
ambition to
participate strongly
in the aftermarket
Growing Airframe
OEM presence in the
aftermarket has
created uncertainty
and poses
challenging strategic
questions for each
industry participant
3636
Implications
3737
The Air Transport MRO market outlook remains
robust with expected growth of 4.1% per annum
The Asia Pacific and China markets will see the
largest growth in MRO spend at 6.2% per annum
OEMs and MROs are promoting new value
propositions to better meet operator and lessor
needs across the lifecycle (and signing new
partnerships along the way)
Growth in New Technology Aircraft will bring
change. With a new competitive ecosystem, MROs
need to identify “how to win” and invest to
maintain leadership
In Conclusion…
38
THANK YOU! QUESTIONS?
Richard BrownPrincipal ICF International
MRO Forecast & Key TrendsSingapore – 26 September 2016
3939
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 2011joined in 2007 joined in 2012 joined in 2014
New York • Boston • London • Singapore • Beijing • Hong Kong
4040
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
ICF provides a full range of MRO
advisory services
