MRO Forecast and Market Trends - IATA - Home

1 0 MRO Forecast and Market TrendsPresented by:Martin HarrisonManaging Director ICF s AgendaFollow the MoneyMRO ForecastImpact of New Technology AircraftTrends to Watch: The Mod Squad March of the Middle East Titans Amazon the Disrupter Training : Virtual Reality22 Follow the Money33 Airlines are achieving historically high return on invested capital (ROIC) levels, and clearly correlated with the drop in fuel costsSource: IATA, ICF AnalysisFuel Price and Global Airline Return On Invested $0$20$40$60$80$100$120$140 Jet Fuel Price ($/barrel)Airline ROIC (%)Airline ROICJet Fuel Price44 Driven by the significant drop in fuel costs and consolidation, the airline industry is achieving record profitabilitySource: IATA, ICF analysisThese are good days for some, but not Airline Profitability, 1996 -2016F-$30-$20-$10$0$10$20$30$40$USD Billions$ pacific , $ America, $ , $ East, $ Am.

2 / Africa = $ , profit margin improvement has been largely limited to carriers in North America and EuropeSource: IATA, ICF EBIT Margin by Region66 Four external macro-economic forces are having a significant impact on the aviation industryThe CRABS Currency Exchange RatesGlobal Commodity PricesChina s Economic SlowdownFuel CostsSource: ICF analysis 77 The dramatic increase in oil & gas Market supply and reduceddemand for commodities has led to a strong US Dollar 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 expensiveFOREX ImpactSource: Oanda historical exchange rates, ICF analysis The CRABS.

3 Countries with economies that are heavily dependent on commodity exports Global Currency Exchange Rates vs USD% Value Change, April 2014 April 2016 Russian African with the highest net income are concentrated in North AmericaSource: Airline Weekly, Airline Monitor, ICF AnalysisExcludes Special Items$0$2$4$6$8$0$100$200$300$400$ $ $ $ $ $ $ $ $ $ $ $50$0$50$100$150$200$ $ $ $ $ 5 Profitable Airlines by Net Profit (2015) & by Global Region99 Airlines with the highest profit margins tend to be LCCsSource: Airline Weekly, Airline Monitor, ICF Analysis-10%0%10%20%30%40%-10%0%10%20%30 %40%-10%0%10%20%30%40%-10%0%10%20%30%40% -10%0%10%20%30%40%-10%0%10%20%30%40%Top 5 Profitable Airlines by EBIT Profit Margin (2015) & Global Region1010 Airlines are investing their newly found profits in three primary areas:Source: ICF ~ 49%: Fleet renewal, Airport facilities & lounges Cabin modifications, etc.

4 ~ 34%: Debt repayment Stock buybacks ~ 17%: Profit sharing Wage increases & bonuses New hiring1111 MRO Forecast1212 The current commercialair transport fleet consists of over 27K aircraftSource: CAPA 2015 NarrowbodyJetWidebodyJetTurbopropRegiona l Jet27,114 Aircraft14%53%14%19%By Aircraft TypeBy Global RegionNorth AmericaAsia PacificEuropeLatin AmericaMiddle East31%27%25%8%5%5%27,114 Aircraft2015 Global Commercial Air Transport Fleet1313 Current air transport MRO demand is $ ; asia pacific is now equivalent to North America and EuropeSource: ICF InternationalEnginesComponentsLineAirfra meModifications14%17%22%40%7%North AmericaAsia PacificEuropeMiddle EastLatin AmericaAfrica29%28%26%8%6%4%$ $ MRO SegmentBy Global Region2015 Global MRO Demand1414 The combination of strong air travel demand and the need to replace ageing aircraft will drive fleet growth at annuallySource.

5 ICF International, CAPA 2015 Air traffic growth of ~ Fuel costs in $55/bblrange ~19,600 aircraft deliveries ~8,800 aircraft retirements05,00010,00015,00020,00025,00 030,00035,00040,00020152025 AfricaMiddle EastLatin AmericaEuropeAsia PacificNorth America27,10031%26%37,90027%25%8%32%23%8 %# Year Global Air Transport Fleet Growth1515 The global MRO Market is expected to grow by 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$1 0020152025 ModificationsAirframeLineComponentEngine 40%22%14%17%$ $ Year Global MRO Demand Growth1616 Over the next decade, China and asia pacific region will drive absolute MRO spend growthSource: ICF International; Forecast in 2015 $USD, exclusive of inflationDifference in MRO spend , 2025 vs.

6 2015 By Global Region$ USD Billions$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ pacific (excl China)ChinaMiddle EastNorthAmericaLatinAmericaEasternEurop e (inclCIS)AfricaWesternEurope71%93%103%17 %73%72%85%10%Percent Change:17172014 Top 10 Airframe MROs by Man-Hours PerformedIn MillionsAmong the top ten airframe MRO providers, two asia based MROs account for 50% of heavy airframe check man-hours performed in 2014 Source: Aviation AerospaceHAECOAARAFI KLM E&MLufthansa TechnikGAMECOT urkish TechnicEvergreen Aviation Technical ServicesSabena Technics1818 Impact of New Technology Aircraft1919In the next decade, the global fleet of new generation aircraft fleet will grow by approx. 531% to nearly 19,000 aircraft10-Year Fleet Forecast by Aircraft Generation2,99318,89622,21218,4872015202 5 GlobalNew GenMid GenOld GenSource: ICF InternationalOld Gen: 727, 737 Classic, 747 Classic, DC10, L1011, A300 Mid Gen: 757, 767, 747-400, A320 Family, A330/A340, 737NG, 777, ERJ, CRJNew Gen:, 777X, 787, A350, A330neo, A380, E170/175/190/195, CRJ-7/9/1000, 737 MAXAsia pacific +531%-70%-17%6136,1016,2965,83820 152025+895%-7%-61%2020 Over the next decade, MRO spend on new technology A350 & Boeing 787 aircraft will double every three yearsSource: ICF International.

7 Forecast in 2015 $USD, exclusive of inflation, includes Boeing 787 and Airbus A35010-Year MRO spend for New Technology A350 & 787 Aircraft$ USD Billions$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ AmericaEuropeMiddle EastAsia pacific +2000%2121 New technology aircraft challenge traditional MRO sourcing strategies= Heavy C-Check= Light C-Check767A/C Age123456789101112787 Volume(C-checks)Intensity(man-hours)Days (Hangar)767895,000136787433,00047 Impact Cost Savings: ~65% fewer routine airframe heavy maintenance man-hours drives an estimated savings of ~$ Asset Utilization: ~90 additional available flying days enables increased revenue generation potential12 Year Heavy Maintenance Schedule*Based on 4,000 FH/yrutilization767 C-check = 18mo, 4C = 72mo.

8 787 C-check = 36mo, 4C = 144moAssumed industry standard laborman-hour rateAircraft out of Service (AooS) calculated for C/4C/8C checks assuming industry standard MRO hangar productivityReturn on investment challenges: Facilities Tooling & Equipment Training IT Systems2222 Challenge: How best to realize value from the disparate terabytes of data generated by new technology aircraftSource: ICF AnalysisNumber of AHMP arametersA320: 15,000B787: 100,00020122022~ 137TB~11TB777787~ 28MB< 1 MBStakeholder Battle: Who will control and profit from the operating data IP? Operators Lessors OEMs MRO SuppliersTransmittable Data(MB/Flt)A/C Data Generated(TB/Year)767: 10,000~1,100%2323 Trends to growth is driven by airlines seeking differentiation in the cabin and customer experienceModifications demand includes laborand material spend *Passenger-To-Freighter Conversions**Airworthiness Directives / Service BulletinsSource: ICF analysis, constant 2015 US$MRO modification Market growth drivers include: Latest lie-flat seats are now the minimum standard Premium economy Wi-fi, on-board connectivity Coming soon.

9 ADS-B Mod program Capacity (ASM/K) increaseCommercial Air Transport Modifications Forecast $ $ $ $ $ $ $ $ $ $ $0$1$2$3$4$5$6$7$820152025AD/SB**PTF Conversions*PaintingAvionics UpgradesInteriors$ $ $USDB illionsThe Mod Squad!2525 Cabin densification has emerged as cost effective strategy for airlines to increase capacity and drive bottom line growth2015 -2025 Capacity Bridge02468102025 ASMsIncreasedSeat DensityLonger StageLengthsFleet Growth2015 ASMsAvailable Seat-Miles (ASMs), Seats16 Seats130 Seats120 SeatsTotal = 150 SeatsTotal = 164 SeatsExample: Delta A320 Interior Modification ProgramNew seats, outlets, IFE, overhead binsSpace-saving galleys to add a row of seatsSource: ICF analysis, Seats18 SeatsThe Mod Squad!2626 After positive signs in 2014, Air cargo capacity continues to outpace freight growthSource: IATA, ICF (FTK)Capacity (AFTK)Global Freight Traffic (FTK) and Capacity Growth (AFTK)Year-Over-Year Percent ChangeAmazon the Disruptor!

10 2727 Middle East carriers have been very effective in capturing valuable secondary airport traffic from Europe to AsiaSource: OAG Data, ICF International AnalysisEuropean Secondary AirportsAverage Number of Seats per Departure in 2015 Lufthansa s Frankfurt hub has lost nearly a 3rdof its Market share on routes between Europe and asia since 2005, with more than three million people now flying annually from Germany to other destinations via Gulf hubs The Economist3333283543543243703393543542641 7414112114011115315010912114810015020025 0300350400 Gulf CarriersNon-Gulf CarriersMarch of the Middle East Titans!2828 ICF believes that virtual reality (VR) technology will be as disruptive to MRO training as 3D-printing is to parts manufacturingTraining : Virtual Reality29 For questions regarding this presentation, please contact:Martin Harrison / Jonathan BergerVice President Aerospace & +1 YOU!