The analysis in this report is provided by Oliver Wyman for ARSA and its membership.

Transcription

1

2 FOREWORD The analysis in this report is provided by Oliver Wyman for ARSA and its membership. Oliver Wyman s Global Fleet & MRO Market Forecast Commentary marks our firm s 18th assessment of the 10-year outlook for the commercial airline transport fleet and the associated maintenance, repair, and overhaul (MRO) market. We re proud to say that the annually produced research, along with our Airline Economic Analysis (AEA), has become a staple resource of aviation executives whether in companies that build aircraft, fly them, or work in the aftermarket, as well as for those with financial interests in the sector through private equity firms and investment banks. This research focuses on airline fleet growth and related trends affecting aftermarket demand, maintenance costs, technology, and labor supply. The outlook reveals significant changes that are important to understand when making business decisions and developing long-term plans. As you will see from the report, the next decade holds great opportunities and challenges for the industry as both technological innovation and the move away from traditional energy sources redefine business as usual across industries and the globe. This will be an era of disruptive growth, driving companies to ask tough, fundamental questions about what it will take to stay relevant and expand. In conjunction with the Fleet and MRO Forecast, we conduct an annual survey on hot topics, critical issues, and new opportunities across the maintenance, repair, and overhaul space. To participate in this year s edition, or if you have additional questions please contact the research team at MROsurvey@oliverwyman.com. Oliver Wyman s Aviation Competitive & Market Intelligence team, partners, and vice presidents are available to assist with any questions about this forecast, as well as the AEA. We hope you find the data and insights valuable as you refine your business models and develop strategies for moving forward. Best regards and wishes for a wonderful 2018, Steve Douglas, Vice President sdouglas@cavokgroup.com Copyright Oliver Wyman

3 CONTENTS 1. EXECUTIVE SUMMARY 2 2. STATE OF THE INDUSTRY 7 GLOBAL ECONOMIC OUTLOOK 8 ECONOMIC DRIVERS FLEET FORECAST 20 PASSENGER AIRCRAFT DELIVERY FORECAST 21 CARGO AIRCRAFT DELIVERY FORECAST 30 AIRCRAFT REMOVEAL FORECAST 33 IN-SERVICE FLEET FORECAST MRO MARKET FORECAST 50 AIRFRAME MAINTENANCE 57 ENGINE MAINTENANCE 66 COMPONENT MAINTENANCE 73 LINE MAINTENANCE ECONOMIC SENSITIVITY ANALYSIS 88 CLOUND NINE 90 BLACK SWAN 91 STRENGTHENED ECONOMY 91 WEAKENED ECONOMY 92 SYNOPSIS BUSINESS AVIATION OUTLOOK AVIATION MAINTENANCE INDUSTRY EMPLOYMENT & ECONOMIC OUTLOOK 102 AIRFRAME & LINE MAINTENANCE 104 ENGINE MAINTENANCE 105 COMPONENT MAINTENANCE 106 US EMPLOYMENT AND ECONOMIC IMPACT CONCLUSION 112 Copyright Oliver Wyman

4 1 EXECUTIVE SUMMARY

5 EXECUTIVE SUMMARY These are heydays for the commercial aviation industry as well as businesses supporting it from the maintenance, repair, and overhaul (MRO) sector. For the first time in airline history, carriers recorded three consecutive years of record or near record profits, thanks to constrained fuel prices and operational efficiencies. Rising demand for air travel is keeping production lines at aircraft, engine, and component manufacturers busy and setting records. Lower oil prices, along with the willingness of airlines to spend on upkeep, are resulting in delayed retirements of older jets, which in turn provide more business for the MRO industry because of their additional servicing needs. And despite recent political instability and rising global tensions, aviation seems headed for more of the same at least over the short term. Across economies both developed and developing increases in gross domestic product (GDP) and disposable income, as well as expanding middle classes, are producing an unprecedented global demand for passenger air travel and cargo transport. In China, where the size of the middle class now equals the population of the United States, demand for air travel is expected to grow 9.5 percent annually between 2018 and 2028, despite a slight slowing in economic growth over the same 10 years. While for decades air travel rose in tandem with GDP, increased demand this year and in the next several will help it outpace economic growth in most regions, particularly in emerging markets like Asia and Latin America. In Asia, for instance, air travel is expected to expand 8.3 percent in 2018, while real GDP that is, GDP adjusted for inflation will rise 5.6 percent. Even in more mature economies, this trend is evident: In 2017, air passenger miles rose four percent in North America versus a 2.2 percent increase in GDP and eight percent in Europe versus GDP growth of 2.5 percent. In Eastern Europe, where little growth was expected, the industry is seeing airlines such as Budapestbased Wizz Air place large aircraft orders. Wizz expects delivery of 282 Boeing 737s between now and Myriad reasons have led to this intensified demand for air travel. They include rising disposable income in emerging markets, expanding numbers globally of well-off retirees with a propensity to travel, an increase in digital connectivity worldwide through the use of digital boarding passes, greater Wi-Fi accessibility, and on-board tablet usage that makes flying easier. Additionally, a spike in the number and size of low-cost carriers and ultra-low-cost carriers has created downward pressure on airfares and other travel costs. Responding to the demand, US airlines increased available seat miles (ASM) 7.3 percent during 2017 across both domestic and international operations. The year-over-year growth was the largest since the worldwide economic recession, according to the 2018 Oliver Wyman Airline Economic Analysis (AEA). The swelling demand continues to drive expansion of the global fleet. Where in our forecast we projected annual growth averaging 3.4 percent, our current outlook ratchets up that yearly increase to 3.7 percent. Copyright Oliver Wyman 2

6 Inevitably, all this spells more business for the major aircraft manufacturers, pushing production rates to levels never seen before for commercial aircraft. The two largest, Boeing and Airbus, have reported they expect their production of Boeing 737s and A320s to reach an unprecedented 60 aircraft per month each sometime in This compares with 42 per month as recently as 2015 a jump of 43 percent in just four years. By 2028, our forecast projects, the worldwide fleet will total 37,978, up from the 2018 total of 26,307. Narrow-body aircraft will be the biggest beneficiary of this expansion, increasing from about 56 percent of the fleet in 2018 to 66 percent in 2028, thanks to operating costs, range, and capabilities that allow them to encroach on territory once reserved for wide-bodies. By 2028, 55 percent of the fleet will have been designed and built after 2000 and boast the advanced systems, materials, and components that will help keep operating costs down over the near term. We do not expect that recent consolidations particularly those in Europe or mergers to come will interrupt this transformation of the fleet. With this gradual changeover to newer aircraft, airlines will retire older, less fuel-efficient models although at a slightly slower rate than expected last year. Because of strong demand and production challenges with a few of the newer engines and aircraft, such as the PW1000G and A350, some airlines are deferring retirements to give themselves more flexibility to deal with unexpected problems and delays. It s a smart risk-management strategy that allows airlines to incorporate nextgeneration aircraft more seamlessly. (See our Forbes.com article, Nov. 1, 2017 for more details on this strategy.) According to our forecast, 54 percent of the aircraft to be retired over the next decade date to the 1990s. An additional 34 percent were built in the 1980s, and 12 percent were produced in either the 1970s or post Those most likely to be mothballed are smaller-capacity narrow-body planes, regional jets, and turboprops. By 2028, jets built in the 1990s will drop from two-thirds of the global fleet to 41 percent. By that year, aircraft built in 2010 or later equipped with advanced sensors, data collection, analytics, and autonomous functions will represent more than 36 percent of the fleet. The commercial air transport MRO market is growing at a similar clip, with total MRO spending expected to rise to $114.7 billion from $77.4 billion in That s a jump of 48 percent on an average four percent compound annual growth rate (CAGR); in 2017, our forecast projected a slightly lower 3.8 percent CAGR. The expansion is back-end loaded, with growth averaging 3.5 percent for the first five years, increasing the total to $91.9 billion by 2023, and rising to 4.5 percent yearly growth between 2023 and Prospects for growth in air travel and the technological innovation disrupting all sectors of aviation is spawning mergers and acquisitions. That s true for the aftermarket, too, with Illinois-based AAR s agreement to buy two Canadian MRO facilities from Premier Aviation and China s HNA Aviation Group s purchase of Swiss-based SR Technics as prime examples. The trend in MRO is seeing the number of players cut while the scale of those left standing simultaneously increases. Copyright Oliver Wyman 3

7 Some of the fastest growth is projected for MRO operations owned by aircraft manufacturers and other major original equipment manufacturers (OEMs), such as engine maker General Electric. Boeing, for instance, has set a $50 billion goal for its aftermarket services as part of its effort to capture more life-cycle value out of its aircraft. That represents a tripling of its current revenue from the aftermarket. Our research indicates OEMs that service engines handle about 53 percent of the market, while airlines and their affiliated MRO operations control 64 percent of the airframe maintenance market. OEMs handle about 58 percent of the component MRO aftermarket. As airlines begin to favor small and midsize wide-bodies, such as Boeing s 777 and 787 and Airbus A350, another maintenance challenge will present itself a function of how doing better can sometimes cause unexpected problems. For instance, newer aircraft like the 787 and A350 have longer airframe maintenance intervals, essentially extending the time between scheduled maintenance downtime. While this has a positive impact on airlines bottom lines, it causes a small problem for them keeping up their interiors. Whereas conventional check intervals once provided carriers a time slot to refurbish interior components such as seats, overhead bins, and lavatories newer, technologically advanced aircraft with extended check intervals no longer afford timely opportunities for cabin repairs. This can cause image problems for airlines, given their renewed emphasis on customer experience, and may leave some passengers wondering where the new aircraft are. One new technology that could shake up the aftermarket later in the decade is 3-D printing, also called additive manufacturing. Using models built through computer-aided design, 3-D printing can produce virtually any solid object even those with complex architectures in a range of materials, including plastic, ceramic, and metal. For aerospace manufacturers, this has been a boon for producing prototypes, an activity that accounts for half of additive manufacturing today. While potentially transformative, the technology has had only a limited impact. The cost of the equipment and OEMs reluctance to share proprietary designs make it difficult for the MRO industry to adopt 3-D printing for spare parts or for the aftermarket to derive any tangible benefit from the new technology. That s less the case for the OEMs, which have incorporated additive manufacturing into a few operations and may expand its use in the future. While the forecast for aviation, fleet growth, and the MRO market is basically bullish, there are risks on the horizon. Fast growth often leads to strained capacity and higher costs as pent-up demand allows suppliers to raise rates and workers to seek higher wages. The MRO industry is no exception, and companies are beginning to feel the pinch, particularly when it comes to finding qualified mechanics. In mature economies especially, a scarcity of technicians trained to service both the older and newer model aircraft will put pressure on payrolls over the next decade. As we reported last year, the retirement of baby boomer mechanics and the lack of interest in the job among millennials will produce a shortfall in the United States by 2022, with a nine percent gap projected between the supply of aircraft technicians and the demand for them by This shortage could produce problems for the aviation industry just as the fleet is expanding and technologically sophisticated aircraft are being incorporated. Copyright Oliver Wyman 4

8 The aviation industry as a whole is more resilient after years of restructuring and improved management, but the growth and prosperity are not evenly distributed. While emerging-market economies showed strong growth in the decade following the global financial crisis, industry profits during those 10 years were primarily concentrated in the advanced economies of the United States and the Eurozone, where the industry was busy consolidating and restructuring. North American and European airlines controlled a combined 46.5 percent of airline capacity in 2017, but accounted for more than 70 percent of carrier profits, according to the 2018 Oliver Wyman Airline Economic Analysis and data from the International Air Transport Association (IATA). Moving forward, that dearth of profits could prove problematic for airlines in developing nations faced with burgeoning consumer classes demanding more air travel. Over the next decade, more than three-quarters of the pickup in global growth will be fueled by emerging economies, especially China and India. The industry also faces uncertainties over global regulation aimed at reducing emissions in compliance with the Paris Climate Accord and as a result of the implementation of Brexit, the United Kingdom s decision to leave the European Union (EU). While the aviation industry has been working on biofuels as a possible route to reduced emissions, it s unclear whether progress on that solution will be enough to meet unfolding environmental regulations, coming at this point mostly from European and Asian efforts to meet the Paris reduction targets. And while there have been warnings of dire consequences with a hard Brexit in aviation, it seems unlikely that either side will allow that to happen, given the importance of transportation to both the EU and Britain. That said, there are few foreseeable stumbling blocks that could derail the expansionary outlook for either the fleet or the MRO industry. If anything, our research for shows acceleration of the growth trends we reported in earlier research. Copyright Oliver Wyman 5

9 FLEET AND MRO FORECAST SUMMARY REGION 2018 Fleet AFRICA MIDDLE EAST ASIA PACIFIC CHINA INDIA LATIN AMERICA NORTH AMERICA EASTERN EUROPE WESTERN EUROPE WORLD Narrow-body ,074 2, ,060 4, ,187 15,092 Wide-body , , ,012 5,273 Regional jet , ,310 Turboprop ,632 Total 1,080 1,384 4,268 3, ,757 7,830 1,253 5,178 26, Fleet Narrow-body ,729 6, ,596 5,368 1,120 4,688 25,038 Wide-body 273 1,267 1, , ,299 7,377 Regional Jet , ,160 Turboprop ,403 Total 1,216 2,197 6,486 7,090 1,175 2,385 9,047 1,584 6,798 37,978 Fleet Growth Rates % 5.6% 5.0% 10.4% 11.7% 3.3% 1.5% 2.2% 3.5% 4.2% % 3.9% 3.5% 7.2% 5.8% 2.9% 1.4% 2.5% 2.1% 3.3% % 4.7% 4.3% 8.8% 8.7% 3.1% 1.5% 2.4% 2.8% 3.7% 2018 MRO (US$ Billions) Airframe $0.8 $1.5 $3.2 $1.8 $0.4 $1.1 $4.7 $1.1 $4.4 $19.0 Engine $1.0 $5.7 $6.6 $2.2 $0.8 $1.4 $7.9 $1.3 $5.8 $32.7 Component $0.4 $0.8 $2.1 $1.2 $0.3 $0.8 $4.0 $0.6 $2.8 $12.9 Line $0.3 $0.9 $2.2 $1.4 $0.3 $0.7 $3.2 $0.6 $3.2 $12.8 Total $2.5 $8.9 $14.1 $6.5 $1.8 $3.9 $19.9 $3.5 $16.2 $ MRO (US$ Billions) Airframe $0.7 $2.2 $4.4 $3.7 $0.7 $1.3 $4.8 $1.1 $4.6 $23.5 Engine $1.5 $8.4 $9.8 $7.6 $1.2 $2.7 $10.4 $1.6 $9.3 $52.6 Component $0.6 $1.5 $3.5 $3.3 $0.7 $1.2 $4.7 $0.8 $3.7 $20.0 Line $0.4 $1.4 $3.2 $3.1 $0.5 $1.0 $3.9 $0.8 $4.1 $18.5 Total $3.4 $13.5 $20.9 $17.8 $3.2 $6.2 $23.8 $4.3 $21.7 $114.7 MRO Growth Rates % 5.0% 5.3% 10.5% 5.8% 3.5% 0.5% 0.2% 2.7% 3.5% % 3.6% 2.7% 10.7% 5.4% 5.8% 4.2% 3.8% 3.2% 4.5% % 4.3% 4.0% 10.6% 5.6% 4.7% 1.8% 2.0% 3.0% 4.0% Copyright Oliver Wyman 6

10 2 STATE OF THE INDUSTRY

11 State of the Industry STATE OF THE INDUSTRY The drivers of growth in air travel, as they are for the global economy, are changing. Where growth was once determined by the demand generated in large Western economies and Japan, moving forward it will be driven by the purchasing power in emerging markets in Asia, Latin America, the Middle East, and Eastern Europe. A staggering 6.2 billion people 85 percent of the world s population reside in these developing nations. And thanks to globalization, millions of their citizens are filling the ranks of a growing global middle class each year a newly affluent population that, among other things, wants to travel. As we enter 2018, the global economy seems to be on relatively solid footing. In October 2017, the International Monetary Fund (IMF) revised upward its World Economic Outlook, calling for global growth of 3.6 percent in 2017 and 3.7 percent in That would be up from 3.2 percent in And globally, many regional economies have been seeing similar official upward revisions since the second half of Although air travel demand is often tied closely to GDP growth, IATA reports that passenger traffic has outpaced global GDP for a decade. That trend will continue for the next two decades. Air travel in 2018, as measured by revenue passenger kilometers (RPKs), is expected to grow at twice the rate of the world economy at a healthy 7.4 percent and is projected to expand at five percent annually for the next 20 years. GLOBAL ECONOMIC OUTLOOK Over the past two years, both mature and developing economies have benefited from buoyant financial markets and a return of consumer and business confidence. Global economic activity has seen a long-awaited cyclical recovery in investment, manufacturing, and trade. Additionally, commodity prices have strengthened since the beginning of 2016 as a result of the economic pickup and a campaign by oil producers to reduce the global oversupply of crude. Copyright Oliver Wyman 8

12 State of the Industry EXHIBIT 1: IMF WORLD ECONOMIC OUTLOOK GROWTH RATE 6% 5% 4% 3% 2% 1% 0% Source: IMF F 2018F Advanced Economies Emerging & Developing Economies World Output Even so, heavy debt loads in large Western economies as well as emerging markets restrain growth and hold the potential to destabilize economies. Simultaneously, global political tensions are rising: North Korea s expanding nuclear program and deteriorating Middle East relations, for instance, currently threaten the otherwise productive business environment. Political rhetoric and actions in the developed world assailing globalization, such as US moves to weaken or even repeal trade alliances and the UK s Brexit vote, also could prove disruptive. Finally, there is the hard-to-quantify impact of global efforts to combat climate change, which will require emissions reductions by various industries over the next decade to comply with the historic Paris Climate Accord s targets. So there are a few potentially significant clouds on the horizon. EXHIBIT 2: IMF ECONOMIC OUTLOOK FOR ADVANCED ECONOMIES GROWTH RATE 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% United States Canada Eurozone United Kingdom Japan 2017 Projection 2018 Projection Source: IMF Copyright Oliver Wyman 9

13 State of the Industry UNITED STATES Third-quarter GDP growth, adjusted for inflation, spiked to 3.2 percent, the highest in three years even with a series of devastating hurricanes in Texas, Florida, and Puerto Rico during that threemonth period. The unexpected boost was attributed to stronger-than-anticipated business investment and consumer confidence. The United States has now hit three percent growth for two consecutive quarters, and expectations are for three percent-plus during the final quarter of The Federal Reserve raised its inflation-adjusted growth estimate for 2018 to 2.5 percent from 2.1 percent, based on the bank s assessment of the anticipated modest and short-term impact of the federal income tax cut. While monetary policy normalization in the US could trigger a faster-than-expected tightening in global financial conditions, markets appear to anticipate gradual rate tightening, even in the wake of long-term bond yields rebounding in late June and early July. Over the long term, US growth is expected to moderate because of the nation s aging population and the consequent diminished growth in the workforce a trend further exacerbated by tighter immigration policies. CANADA Canada s GDP is forecast to grow at three percent in 2017 and 2.1 percent in 2018, a significant increase from 1.5 percent in The growth projection increased from earlier in 2017 reflecting reduced drag from the adjustment to lower oil and gas prices and accommodative fiscal and monetary policies. EUROZONE AND THE UNITED KINGDOM Growth in countries such as France, Germany, Italy, and Spain was slow in the first three quarters of 2017, but still above what was expected at the beginning of the year. For the full year, economists expect growth of about 2.1 percent; GDP expansion in 2018 will decline slightly to 1.9 percent. This modest growth is projected to be supported by a mildly expansionary fiscal stance, accommodative financial conditions, a weaker euro, and a beneficial spillover from the US tax cut. One major factor expected to inject some instability into the economic climate is the uncertain relationship between the European Union and the United Kingdom as a result of the Brexit vote in favor of Britain s departure from the alliance. While early analysis anticipated contraction of the UK economy, neither side so far has shown many negative impacts from the vote and ongoing negotiations. GDP growth in the UK was expected to come in at 1.7 percent for 2017 and then fall marginally to 1.5 percent in Copyright Oliver Wyman 10

14 State of the Industry JAPAN Japan s modest momentum has been driven by the strengthening of global demand and policy actions to sustain a positive fiscal stance. Growth is expected to slow in 2018 based on the assumption that fiscal support, as currently scheduled, will begin to fade and private consumption growth will moderate. GDP growth was one percent in 2016 and was forecast to reach 1.5 percent in 2017 and shrink to 0.7 percent in EXHIBIT 3: IMF ECONOMIC OUTLOOK FOR EMERGING ECONOMIES GROWTH RATE 10% 8% 6% 4% 2% 2017 Projection 0% China India ASEAN CIS Russia Latin America MENAP 2018 Projection Note: ASEAN is the Association of Southeast Asian Nations; CIS is the Commonwealth of Independent States; MENAP is the Middle East, North Africa, Afghanistan and Pakistan Source: IMF Emerging markets have become increasingly important to the health of the overall global economy. Over the near and medium term, most of the pickup in projected global growth will result from stronger activity in these economies, which stunningly account for more than 75 percent of global growth in output and consumption. These economies are forecast to see 4.6 percent GDP growth in 2017, a 0.3 percent increase over In contrast to the mature economies, 2018 GDP growth in the emerging world is expected to top 2017 s, with projections for a 4.9 percent expansion. The anticipated upturn has fueled optimism about emerging-market prospects, which in turn has been reflected in strengthening equity valuations and a contraction in interest rate spreads. Part of the rosier outlook for the emerging world is tied to the long-awaited recovery in commodity prices for agricultural products, metals, oil and gas, and other exports since The recovery, which is expected to push inflation up to 4.4 percent in 2018, follows years of rock-bottom prices and painful economic conditions in the wake of the global financial crisis. Copyright Oliver Wyman 11

15 State of the Industry That said, the emerging world faces challenges. Financial conditions have been more volatile than in the US and Europe and more vulnerable to external factors. For instance, in the immediate aftermath of the election of Donald Trump as US president, long-term interest rates moved up and equity valuations down as investors feared increasing protectionism and tightening monetary policy. Over the medium term, most emerging economies must wrestle with an ongoing slowdown of productivity growth. Despite such trends, the governments of these developing economies are making efforts to maintain solid growth outlooks by strengthening their institutional frameworks, protecting trade integration, permitting exchange rate flexibility, and containing vulnerabilities arising from high current-account deficits and external borrowing, as well as large public debt. CHINA China s GDP growth was expected to show a slight 0.1 percent strengthening year over year to 6.8 percent in 2017, but then slow to 6.5 percent in The slight upward revision in China s GDP growth for 2017 reflects buoyant external demand, a slower rebalancing of activity toward services and consumption, and a higher projected debt trajectory. After four years of deflation, China s producer prices are rising again as the prices of raw materials increased amid governmental efforts to reduce excess industrial capacity. Real estate values are also recovering. The government s goal has been to double real GDP by 2020, using its 2010 level of $6 trillion as the base. China s economy is vulnerable if protectionist rhetoric in the US becomes legislation or regulation. Another risk for China: Economy-wide debt levels are expected to be close to 320 percent of GDP by 2021, the highest in the world. INDIA India s GDP growth in 2017 was stronger than expected because of higher-than-expected government spending and growth would have been even higher but for a botched currency exchange initiative. After growing 7.1 percent in 2016, the GDP growth rate was expected to slow to 6.7 percent in 2017 but reignite in 2018 with a 7.4 percent year-over-year expansion. ASEAN GDP growth in the Association of Southeast Asian Nations (ASEAN) countries was projected to increase to 5.2 percent in 2017, 0.3 percent higher than in 2016, and a slight uptick is expected again in The region includes Indonesia, Malaysia, Vietnam, the Philippines, and Thailand, all of which have experienced increases in global trade and domestic demand. Higher public spending in the Philippines has also contributed to growth. Copyright Oliver Wyman 12

16 State of the Industry RUSSIA Russia is poised to emerge from recession after experiencing a cumulative contraction of three percent during The pickup reflects firming oil prices and a revival in domestic demand as financial conditions and confidence have improved. After a 0.2 percent drop in GDP in 2016, the Russian economy was projected to grow 1.8 percent in 2017 and 1.6 percent in LATIN AMERICA In Latin America and the Caribbean, GDP growth was forecast to reach 1.2 percent in 2017 and 1.9 percent in 2018 after a drop of 0.9 percent in The growth projection is noteworthy given the hurricanes that battered many Caribbean islands and the powerful earthquake that struck Mexico toward the end of In general, things have been tough for Mexico and Brazil, the two largest economies in the region. For Mexico, politics have affected its growth prospects with the uncertain fate of the North American Free Trade Agreement. Its GDP growth rate was expected to slip to 2.1 percent in 2017 and 1.9 percent in 2018 versus the 2.3 percent achieved in While there was better-than-expected growth in the first two quarters of 2017 and a recovery of financial market confidence, the economy is still wobbly. Brazil is expected to finally emerge from one of the deepest recessions in its history, when its GDP contracted by close to four percent in Recovery is supported by such factors as reduced political unrest, easing monetary policy, and further progress on the government s reform agenda. GDP was forecast to achieve growth of 0.7 percent in 2017 and reach 1.5 percent in MIDDLE EAST, NORTH AFRICA, AFGHANISTAN, AND PAKISTAN The near-term outlook has weakened in the Middle East, North Africa, Afghanistan, and Pakistan, known collectively as the MENAP. GDP for the region is expected to decline to 2.6 percent after growing at five percent in In 2018, the region s GDP is expected to expand 3.5 percent. MENAP experienced inflationary pressures throughout 2017 as a result of exchange rate depreciations, the removal of subsidies, and increases in value-added taxes. In Saudi Arabia, although growth outside the oil sector is expected to strengthen, overall output is forecast to be broadly flat. Real oil GDP is likely to decline as a result of production curbs under the extended Organization of Petroleum Exporting Countries (OPEC) agreement and the failure of the November 2016 pact to prop up prices as much as expected. Pakistan is the exception in the region, with its GDP expected to grow 5.3 percent in 2017 and 5.6 percent in 2018 as it benefits from investment in the China-Pakistan Economic Corridor and strong private-sector credit. Copyright Oliver Wyman 13

17 State of the Industry ECONOMIC DRIVERS Although air travel demand is often considered closely tied to GDP growth, IATA reports that passenger traffic has outpaced global GDP for a decade. Consumers travel more when they have greater income, but there also appear to be spikes in demand related to deregulation of global travel by open-skies agreements, service quality improvements, and additional routes. The mature regions of North America and Europe have seen these effects over the last 10 years; the developing regions of Africa, Asia, the Middle East, and Latin America will see the largest gains over the next 10 years as they benefit from higher incomes and these other factors. EXHIBIT 4: 20-YEAR GDP AND RPK PROJECTED ANNUAL GROWTH RATES North America RPK 3.0% GDP 2.1% CIS Europe RPK 4.3% RPK 3.7% GDP 2.0% GDP 1.7% Latin America RPK 6.1% GDP 3.0% Middle East RPK 5.6% GDP 3.5% Africa RPK 5.9% GDP 3.5% Asia RPK 5.7% GDP 3.9% Source: Boeing Airlines have responded to the increasing travel demand by posting strong improvements in productivity, allowing the industry to maintain unit labor costs since For the network carriers in particular and larger value players like JetBlue and Southwest, the focus on controlling capacity growth has significantly increased passenger load factors and kept yields comparatively high. That has driven airline returns on invested capital to all-time highs, and stronger balance sheets have enabled carriers to invest in aircraft interiors modifications, IT systems, and customer experience. Copyright Oliver Wyman 14

18 State of the Industry EXHIBIT 5: GLOBAL PASSENGER LOAD FACTOR VERSUS RETURN ON INVESTED CAPITAL Source: IATA Industry consensus suggests that improvements in aircraft utilization management demonstrate a newfound financial discipline within the airline industry, attracting investors and raising valuations and optimism. While this discipline helps drive strong financial results today, this trend needs to continue if oversupply problems are to be avoided should demand for air travel decline. TRAFFIC As one would expect, consumers travel more when they have more income, but there also are other drivers behind spikes in air travel, such as deregulation, service quality improvements, and the addition of routes. While the mature regions of North America and Europe, where the needle hasn t moved much on income, have benefited more from these external factors, the opposite is the case for the emerging economies. In these nations, disposable income has been on the rise, the ranks of the middle class have been growing, and the demand for air travel exceeds the supply. Copyright Oliver Wyman 15

19 State of the Industry EXHIBIT 6: F PASSENGER AND CARGO TRAFFIC KILOMETERS (TRILLIONS) F Source: IATA Available Seat Kilometers Revenue Passenger Kilometers 0 TON KILOMETERS (MILLIONS) F Available Ton Kilometers Freight Ton Kilometers Nowhere is this truer than in China, where there is substantial pent-up demand for air travel, particularly domestic travel. The next 10 years will see a significant shift in the relative distribution of passenger traffic, moving the epicenter of demand and related fleet activity away from North America and toward Asia. Emerging middle classes in China, and potentially India, will take to the skies, while Middle Eastern airlines will gain long-haul market share through their geographically favorable hubs. Aircraft manufacturers Airbus and Boeing predict nearly five percent compound annual growth in RPKs over the next 20 years, with the most prominent expansions in Asia and Latin America. In these regions, annual growth of roughly six percent per year on average is forecast. EXHIBIT 7: AIRBUS AND BOEING PASSENGER TRAFFIC GROWTH RATES GROWTH RATE 8% 7% 6% 5% 4% 3% 2% 1% 0% North America Latin America Europe CIS Africa Middle East Asia World Airbus Boeing Note: CIS is the Commonwealth of Independent States Source: Airbus, Boeing Copyright Oliver Wyman 16

20 State of the Industry While major hubs prepare for greater traffic and infrastructure improvements, routes are being created to connect cities within China and southern Asia and the roughly 6.2 billion people in developing countries seeking access to air travel. These connections not only represent growth, but also will spawn a redistribution of air traffic around the world. EXHIBIT 8: 2018 OUTLOOK FOR TRAFFIC GROWTH +2.9% +6.9% +6.2% North Atlantic Traffic Middle East-Asia Traffic Intra-China Traffic Source: IATA In 2017, IATA reported that the number of commercial destinations increased more than four percent and the frequency of flights between destinations was up as well. Network growth expands reach and unlocks greater demand. Ultimately, the combination of pent-up demand and these kinds of expansion was expected to expand air transport to one percent of global GDP, or about $776 billion, once all data are in for Hubs with valuable geographic locations, such as those in the Middle East, and lower operating costs stand to gain significantly from changes in global demand. Copyright Oliver Wyman 17

21 State of the Industry FUEL Although rising toward the end of 2017, jet fuel prices were still down 45 percent from Despite signs of economic recovery in the Western world, prices have not been quick to rebound because of alternative supplies from such operations as hydraulic fracking and tar sands in North America. Supply and demand factors can be expected to keep oil prices down over the next five years at least. EXHIBIT 9: SPOT PRICES OF CRUDE OIL AND JET FUEL PER GALLON US DOLLARS Jet Fuel WTI Brent Source: US Energy Information Administration While low oil prices might spark adjustments to short-term fleet plans for instance, prompting some airlines to delay retirements of older, less fuel-efficient models there has been no indication of cancellations of orders for new aircraft. In fact, the case is just the opposite. While a short-term strategy change would allow higher returns by delaying expensive investments in new aircraft or costly aircraft restorations, the long lead times in aircraft orders and low interest rates discourage this option. Aircraft deliveries reached 1,641 for the 12-month period ending August 2017, up from the 12 months ending August 2016, when deliveries stood at 1,629. With strong order books and OEM production issues on the A320neo and A350 largely resolved, deliveries are expected to increase even more over the next year. This reinforces the projection that new aircraft will be delivered at record rates regardless of oil prices. Lower fuel prices also help airlines keep fares down. Of course, that s another driver of air travel demand. Copyright Oliver Wyman 18

22 State of the Industry PROFITABILITY Low fuel prices in conjunction with record passenger traffic have resulted in historically high profits for airlines. The industry s net profits topped $35 billion in 2017 and are expected to total more than $38 billion in Benefiting greatly from industry consolidation and the resulting capacity constraint, the North American airlines are delivering the strongest worldwide financial performance, accounting for nearly 46 percent of global profits over the past two years. EXHIBIT 10: GLOBAL AIR TRANSPORT INDUSTRY FINANCIAL PERFORMANCE Source: IATA As travel demand has increased, airlines have posted strong improvements in productivity, allowing the industry to maintain unit labor costs over the past three years. Focus on capacity management has slowly but steadily increased passenger load factors and kept yields comparatively high. That has driven airline ROIs to all-time highs, endowing stronger balance sheets that can accommodate growth or weather unexpected economic downturns. It has even allowed airlines to focus again on customer experience, a trend that also may lead to growth in air travel. Ultimately, airlines know that oil prices won t stay low forever and a labor shortage could put pressure on wages in the future. But for now, they are using their strengthened financial position to make investments in the fleet with next-generation aircraft and in every detail of the passenger experience. Copyright Oliver Wyman 19

23 3 FLEET FORECAST

24 Fleet Forecast PASSENGER AIRCRAFT DELIVERY FORECAST AIRCRAFT ORDER AND DELIVERY TRENDS The past 10 years have seen dramatic growth in the commercial passenger fleet. Moreover, the composition of the fleet has evolved as operators increasingly choose larger aircraft, preferring narrow-body jets over small-capacity regional jets and turboprops. In 2017 non-boeing/airbus aircraft made up only 16 percent of all deliveries, a significant decline from a high of 26 percent in 2008 and Smaller aircraft manufacturers are likely to see even stronger headwinds because they lack the scale and offerings to meet the desire for larger aircraft. EXHIBIT 11: SHARE OF AIRCRAFT DELIVERIES BY OEM SHARE 50% 40% 30% 20% Airbus 10% Boeing 0% Other There has also been a transition in the composition of deliveries by Airbus and Boeing. While Airbus outpaced Boeing in 2017 orders, Boeing delivered more aircraft (706 versus 697). Appearing to lead a new trend in production, Boeing moved from 38 percent of all deliveries in 2007 to 42 percent for 2017, while Airbus delivery share increased marginally from 40 percent to 42 percent. Copyright Oliver Wyman 21

25 Fleet Forecast EXHIBIT 12: 2017 AIRCRAFT ORDERS AND DELIVERIES BY OEM Orders Deliveries Airbus Boeing NUMBER OF AIRCRAFT Source: Flightglobal Despite Airbus philosophy of building larger planes with greater capacity to move global traffic around mega-hubs, an estimate of seats delivered in production aircraft indicates that Boeing delivered 21 percent more than Airbus. That is because Boeing delivered 36 percent more widebodies than Airbus (244 to 156). Airbus and Boeing have both grown their ratio of orders to deliveries over this period. The overall trend is an increasingly dramatic diversion between the two largest aircraft manufacturers, though that gap slightly narrowed in 2017 EXHIBIT 13: ORDER BACKLOG COMPARED WITH DELIVERIES ORDER BACKLOG TO DELIVERIES RATIO Airbus Boeing Source: Flightglobal Since 2011, Boeing s order to delivery ratio has remained constant while Airbus increased its ratio of orders to deliveries more than 43 percent through 2016, though there was a 13 percent drop-off in This trend signals a different approach to order bookings. Copyright Oliver Wyman 22

26 Fleet Forecast Historically, Airbus and Boeing overbooked production by a small margin to reduce cancellation risks. More recently, Airbus appears to have broken from tradition with aggressive sales campaigns to grab market share. It has secured massive orders for several hundred aircraft from young, low-cost carriers in Europe and Asia despite a published delivery schedule that already exceeds stated production capabilities. Boeing, on the other hand, is booking relatively modest orders from established carriers. AIRCRAFT LEASING TRENDS The last decade s fleet financing evolution has allowed operators to expand growth while maintaining robust, nimble balance sheets. From 2007 to 2012, the number of aircraft on lease rose from 42 percent to 43 percent, due to an increase in new-generation 737, A320 and wide-body aircraft leasing. From 2012 to 2017, every aircraft class increased its share of leased aircraft except for regional jets, pushing the total aircraft on lease to 45 percent Narrow-body 48% 50% 52% Wide-body 30% 33% 36% Regional Jet 41% 39% 37% Turboprop 37% 34% 36% Overall 42% 43% 45% 45%of aircraft are currently on operating leases The leased aircraft option does not find favor in every region of the world. While the percentage of leased aircraft has soared in Europe, Asia and the Middle East, North America has experienced a decrease. Its mature market and older fleet age explain the preference; operators in North America are not acquiring aircraft for expansion. They opt to purchase aircraft to replace aging fleets. On the other hand, operators in emerging markets are electing to lease aircraft, which requires far less capital outlay. EXHIBIT 14: LOW-COST ASIAN OPERATORS IN-SERVICE FLEET SIZE AND AIRCRAFT ON ORDER COMPARISON OPERATOR IN SERVICE ON ORDER TOTAL AIRASIA GOAIR INDIGO LION AIR Copyright Oliver Wyman 23

27 Fleet Forecast The number of leased aircraft is partially attributable to young, fast-growing airlines, such as IndiGo and Lion Air, employing a different fleet planning model in which lease orders can significantly exceed existing fleet size. These operators take aircraft on a six- or eight-year lease, returning them before midlife maintenance costs hit the strategy being to effectively operate only new, leased aircraft. Mature operators tend to finance aircraft in a more traditional manner and utilize the full economic life of the assets. An increasing portion of cash flow from aircraft sales is flowing through a bank/lessor or an operating leasing company associated with an airline. Some to-be-leased aircraft are ordered directly by the lessor, which then finds an operator. The line between airlines as a service industry and as a financial institution seems to be fading. Another option is a sale-and-leaseback, in which the airline places an order directly with the aircraft manufacturer, paying the initial deposit and any phase payments during production. The manufacturer makes the final payment and takes ownership; a leasing agreement is then reached with the airline. This lease option allows the airline to order and configure aircraft for its operations without incurring the large capital cost associated with purchasing the aircraft. It is a mutually beneficial arrangement, giving the airlines more financial flexibility while providing the lessor with a strong revenue stream and a relatively new, low-risk asset. The leasing market can affect other aspects of the industry, however. As an example, 777 lease expirations may present a problem for Boeing. Orders for the aircraft have not met expectations and, with many leases expiring in the next several years, a market glut could result. Operators may take the much cheaper, midlife, and previously leased 777s instead of spending cash on a new aircraft which also has a secondary effect of increasing maintenance spend. Boeing may then be forced to make cuts to the production rate as the line transitions toward the 777X. EXHIBIT 15: US OPERATORS IN-SERVICE FLEET, AIRCRAFT ON ORDER, AND OPERATING LEASE COMPARISON OPERATOR IN SERVICE ON ORDER TOTAL % LEASED AMERICAN AIRLINES ,193 43% DELTA AIR LINES ,124 19% UNITED AIRLINES % SOUTHWEST AIRLINES % Among the mature operators in the US, each employs different leasing strategies. Delta Air Lines tends to purchase many of its aircraft, while nearly half of the American Airlines fleet is leased. These strategies will no doubt continue. American Airlines has a large order book for leased new aircraft as it phases out its older fleet, while Delta expects to extend the life of its current fleet, with few, if any, leases anticipated. United s strategy falls somewhere in between. Southwest Airlines hasn t leased an aircraft since Observing how profitable these operators are compared with each other and how they handle the next unpredictable black swan event will provide better insight into the effectiveness of the leasing strategies. Copyright Oliver Wyman 24

28 Fleet Forecast EXHIBIT 16: REGIONAL AIRCRAFT LEASING TRENDS SHARE OF IN-SERVICE FLEET 80% 60% 40% 20% % Latin America North America Eastern Europe Western Europe Africa Middle East Asia Pacific China India 2018 The Americas Europe Africa & Middle East Asia NEW TECHNOLOGY Advances in technologies promote flexible and efficient airline operations. For example, the Boeing 787 electrical flight systems eliminate many hydraulic and pneumatic components that extracted energy and power from the engines. Half of the 787 s airframe is composite materials, specifically carbon-fiber-reinforced polymer, with a higher strength-to-weight ratio. Winglets are now standard and are regularly retrofitted to reduce drag and increase fuel efficiency. Advances in fuel efficiency have resulted in retrofitting newer engines on aging aircraft platforms. The 737, A320 and A330 families all offer MAX and neo derivatives; Airbus is seriously evaluating a similar option for the A380. New technologies don t just reduce fuel cost but increase overall operational performance as well. Higher-performance aircraft provide greater operational flexibility, allowing longer routes and increased seating or cargo capacity in addition to lower seat- and ton-mile costs. This increased operational flexibility can help germinate new routes and stimulate demand. The 787 is an introductory aircraft for budding long-distance routes because it is efficient enough to be economically viable at lower passenger and cargo demands. Once the route becomes wellestablished, a larger-capacity aircraft such as the 777 can be used. The benefits of new technology extend to maintenance requirements. Prolonged intervals between heavy maintenance visits and less intensive inspection and repair schemes reduce the unit cost of airframe heavy maintenance. While new-generation engines will drive an increase in maintenance costs on a unit basis, they will be more than offset by fuel-efficiency gains. Copyright Oliver Wyman 25

29 Fleet Forecast FORECAST The key economic drivers, coupled with aircraft order and delivery trends, have created the most favorable market conditions that commercial aircraft manufacturers have experienced. In spite of low fuel costs, commercial air transport operators have made unprecedented demand on the manufacturers to produce more efficient, more reliable passenger aircraft. Despite demand for new aircraft being at an all-time high, manufacturers were able to deliver only eight more aircraft than Of the 1,629 deliveries, 1,598 were passenger aircraft. The number of deliveries was well below forecasts primarily because of supplier issues at Pratt & Whitney in 2016, and the manufacturer has been playing catch-up ever since. The launch engine for the A320neo, the now one-year-old Pratt & Whitney PW1000G geared turbofan, experienced a rotor-bowing issue that increased the start-up times to levels that operators found unacceptable. Most notably, launch customer Qatar, as well as other airlines, refused to take delivery of the A320neo until the issue was resolved. Based on the published production rates of the new narrow-body aircraft using this engine, the expectation is that the previous delay will no longer be an issue. With supplier issues largely resolved, production rates are ramping up to their stated targets and deliveries are expected to reach record levels in the coming years. EXHIBIT 17: NEW PASSENGER AIRCRAFT DELIVERY DISTRIBUTION BY AIRCRAFT CLASS NUMBER OF AIRCRAFT 25,000 20,000 15,000 Turboprop 10,000 Regional Jet 5,000 Wide-body Narrow-body For the next five-year period, Oliver Wyman forecasts the delivery of nearly 9,900 new passenger aircraft, of which 70 percent will be narrow-bodies, 17 percent wide-bodies, eight percent regional jets, and five percent turboprops. For the second five-year period, the forecast is for an even higher level of deliveries almost 10,500 to meet forecast demand. Over the next 10 years, 20,400 new passenger aircraft are projected to be delivered to commercial operators worldwide. Copyright Oliver Wyman 26

30 Fleet Forecast EXHIBIT 18: NEW PASSENGER AIRCRAFT DELIVERY DISTRIBUTION BY AIRCRAFT CLASS Narrow-body Regional Jet 70% 8% Wide-body Turboprop 17% 5% FINANCING REQUIREMENTS Nearly $3.0 trillion is needed to fund the 20,300 new passenger aircraft deliveries over the next 10 years. EXHIBIT 19: NEW PASSENGER AIRCRAFT DELIVERY FINANCING US DOLLARS (TRILLIONS) Turboprop Regional Jet Wide-body 0.0 Narrow-body Over the next five years, $1.5 trillion will be needed, with 51 percent for narrow-body aircraft and 45 percent for wide-bodies; regional jets and turboprops make up the remaining four percent. Copyright Oliver Wyman 27

31 The latter half of the forecast period will require $1.5 trillion in financing, with a similar split of 53 percent for narrow-body aircraft, 45 percent for wide-bodies, and 2 percent for regional jets and turboprops. Fleet Forecast Delivery financing is expected to be a key consideration in upcoming years. The high levels of forecast deliveries and continued interest rate increases in advanced economies will likely provide lessors a larger role in the commercial aviation market. Nearly 50 percent of the global commercial aircraft fleet is expected to be under an operating lease by Copyright Oliver Wyman 28

32 Fleet Forecast CARGO AIRCRAFT FORECAST The global air transport cargo fleet is small but has a vital role in the world economy by transporting 51.3 million metric tons of goods worth $6.8 trillion annually. The fleet added 31 aircraft over the last year, representing 1.6 percent growth, and now stands at 1,954 aircraft. Growth is forecast to be flat for the next five years, then slowly decline in the latter half of the forecast. Overall, the cargo fleet is forecast to average 0.5 percent growth over 10 years. After several years of expecting the air cargo market to rebuild, it appears that any considerable recovery is unlikely. Cargo revenue has been flat for nearly a decade, and there are not enough dedicated freighter orders or scheduled conversions to forecast much growth in the industry. Short-haul and domestic cargo traffic faces strong competition from trucks in the US and Europe. The long-haul dedicated freighter market is threatened by the cargo-carrying capabilities of passenger aircraft such as the 777, which has 25 percent more capacity under the floor than a EXHIBIT 20: IN-SERVICE CARGO FLEET BY AIRCRAFT CLASS NUMBER OF AIRCRAFT 3,000 2,500 2,000 1,500 1, % 0.1% 0.5% -5.1% -15.0% -10.2% -9.7% -16.7% -13.3% 2.5% 1.1% 1.8% 1.1% CAGR 2.6% CAGR 1.9% CAGR Turboprop Regional Jet Wide-body Narrow-body The wide-body cargo fleet depends mostly on new deliveries as there have been only a few passenger-to-freighter conversions recently, those being the Wide-body aircraft are the only dedicated freighters being produced, so the narrow-body cargo fleet is carried solely by passenger-to-freighter conversions. EXHIBIT 21: CARGO AIRCRAFT DELIVERIES, CONVERSIONS, AND RETIREMENTS DELIVERIES CONVERSIONS RETIREMENTS Copyright Oliver Wyman 29

33 Fleet Forecast Over the next decade, 676 passenger-to-freighter conversions will account for 67 percent of the cargo fleet additions. Lower capital cost of acquisition and conversion, fueled by the high number of aircraft deliveries putting pressure on valuations of older passenger aircraft, are critical to the business model economics for carriers with lower utilization. EXHIBIT 22: PASSENGER-TO-FREIGHTER CONVERSION FORECAST BY AIRCRAFT CLASS NUMBER OF AIRCRAFT Turboprop Regional Jet Wide-body Narrow-body Boeing aircraft, especially the in recent years, have dominated the narrow-body passengerto-freighter conversion market. Airbus has not previously developed a narrow-body freighter for several reasons, chiefly the placement of the A320 family s fly-by-wire system, which runs through the cargo door area. However, Airbus has launched a program to convert A320/A321 aircraft and expects deliveries to begin in The , like its predecessor, is expected to become a popular conversion candidate. The aircraft is capable of transporting one additional pallet over the and is a proven airframe with much newer technology and greater reliability. The first MD-80 passenger-to-freighter supplemental type certificate was issued in This aircraft is considerably more expensive to operate than the slightly smaller Boeing , which burns about 12 percent less fuel. But the significantly lower ownership costs make the MD-80 an attractive niche aircraft for low-utilization cargo operators. Estimates for acquiring a are between $3.3 million and $4.0 million, compared with the MD-80 s $750,000 to $800,000 range. The first MD 80 conversion was completed in Boeing has been promoting the 777 passenger-to-freighter conversion alongside the new-build 777F with little success. Design and cost issues are a major drawback to the program. The wide-body dedicated freighter market has suffered as more cargo is now transported by large passenger aircraft and demand has been soft for expedited shipping. Airbus has been affected as well as the A330 passenger-to-freighter conversion and the new-build A330 freighter programs have been slow to gain momentum. Copyright Oliver Wyman 30

34 Fleet Forecast Lastly, Miami-based Aeronautical Engineers Inc. launched a CRJ passenger-to-freighter conversion program in 2013, but the market is limited, especially since the CRJs will have to compete against lower-cost turboprop freighters such as the ATR72. Copyright Oliver Wyman 31

35 AIRCRAFT REMOVAL FORECAST Fleet Forecast Of the 25,368 aircraft in the fleet at the beginning of 2017, 1,337 are no longer in service, a turnover rate of five percent. 1,185 aircraft were placed in storage, but 559 aircraft returned to service from storage. Counting the number returned to service after a passenger-to-freighter conversion or transferred to a commercial operator, the net removals from the 2017 fleet total stands at 729 aircraft with an average age of 19.1 years. 1,337 Storage for passenger-tofreighter conversion Transferred to a non-commercial operator aircraft were removed from service in 2017 Involved in an accident Formally retired Sent to storage ,185 Oliver Wyman s forecast for aircraft removals is based on a balance of maintaining an active fleet that meets current and future passenger and cargo demand. With deliveries expected to accelerate, the number of aircraft removed from the fleet is expected to reach historic levels. The word removal is used instead of retirement to better represent what actually happens with in-service aircraft; few are formally retired each year, but many are placed into storage, unlikely to return to service. Aircraft that are involved in an accident, stored for conversion into a freighter, or transferred to a noncommercial operator are all considered removals from the fleet. The net removal number includes aircraft that have returned from storage, have undergone a passenger-to-freighter conversion or have transferred to a commercial operator. Copyright Oliver Wyman 32

36 Fleet Forecast EXHIBIT 23: AIRCRAFT REMOVAL FORECAST BY AIRCRAFT CLASS NUMBER OF AIRCRAFT 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, Turboprop Regional Jet Wide-body Narrow-body Over the next 10 years, 9,022 aircraft are forecast to be removed from the fleet, averaging 811 aircraft per year over the next five years and 993 over the last five. This equates to 44 percent of new deliveries being replacements for removed aircraft. As a result, nearly half of the 2018 fleet will be permanently removed within 10 years. EXHIBIT 24: AIRCRAFT REMOVAL FORECAST AGE DISTRIBUTION BY AIRCRAFT CLASS NUMBER OF AIRCRAFT Removals (Relative Scale) Net Removals (Relative Scale) Turboprop Regional Jet Wide-body Narrow-body The average permanent removal age of 19.6 years is expected to increase to 22.7 years over the forecast period, driven primarily by very old turboprop aircraft. The wide-body permanent removal age is expected to rise 3.5 years to The age for narrow-bodies, regional jets and turboprops are forecast to be 22.9, 19.0 and 28.4 years, respectively. Copyright Oliver Wyman 33

37 Fleet Forecast EXHIBIT 25: AIRCRAFT REMOVAL DISTRIBUTION BY AIRCRAFT CLASS Narrow-body Regional Jet 48% 20% Wide-body Turboprop 19% 13% Nearly half of removals over the next 10 years will be narrow-body aircraft. Wide-body and regional jets split 39 percent. Fifty-four percent of all removals are expected to be from the 1990s, and 34 percent from the 1980s. The 1970s and 2000s vintages account for the final 12 percent of aircraft to be removed. The 1990s vintage makes up two-thirds of the in-service fleet and will see that share fall to 41 percent by The 2010s vintage will nearly overtake the lead share with 36 percent by the end of the forecast period, with 1980s vintage falling to just eight percent. Oliver Wyman expects to see a continuation of the trend to discard smaller regional jets and turboprops along with smaller capacity narrow-body aircraft in favor of larger aircraft that are more efficient on a cost per available seat mile (CASM) basis. At the height of the fuel crisis, many smaller aircraft were not economical to operate. Delta Air Lines, for example, negotiated a deal with its pilot union in 2012 to remove seat regional jets and add 88 Boeing 717s, a small narrow-body aircraft, supplemented by 70 larger regional jets operated by Delta Connection. Building on Delta s 2012 agreement, the three large intercontinental US airlines, along with large network operators in other regions of the world, are expected to increase the seat count of their fleets over the coming decade. Indeed, it is driving Bombardier to enter the small narrow-body market, Embraer to increase the capacity of its E-Jet family with its E2 generation, and Mitsubishi to re-enter the commercial jet market with the MRJ-70/90. Copyright Oliver Wyman 34

38 Fleet Forecast EXHIBIT 26: AIRCRAFT REMOVAL FORECAST BY REGION NUMBER OF AIRCRAFT 1,200 1, ACTUAL Eastern Europe Western Europe Latin America Asia Pacific China India Africa North America Middle East Shifting to a regional view, removals fell in 2017, in large part because of the 550 aircraft removed from storage; only 116 were put back into service in North America, nearly half of what occurred in It appears that the higher removal rate in 2016 was directly related to low fuel costs, which significantly reduce, if not eliminate, the operating cost disadvantage of older aircraft. Over the long term, regional removal rates in North America and all other regions are expected to more closely follow historical trends. About 60 percent of removals are forecast to be from the mature markets in North America and Western Europe, with 40 percent from North America alone. Removals are forecast to increase steadily in the Asia Pacific, China and India because of the aircraft leasing strategies used in those regions. Copyright Oliver Wyman 35

39 IN-SERVICE FLEET FORECAST Fleet Forecast The active global commercial fleet currently stands at 26,307 aircraft; the next 10 years will see 3.7 percent net annual growth, increasing the fleet to 37,978. The fleet is forecast to grow 4.2 percent annually over the first five years, then slow to 3.3 percent in the second five years as the rate of deliveries decreases and removals remain high. These dynamics will result in a fleet that is younger and larger in average seating capacity. The new fleet is expected to support RPK growth of nearly five percent as operators improve capacity management with the larger average seating capacity. EXHIBIT 27: GLOBAL FLEET CHARACTERISTICS FLEET SIZE 26,307 32,321 37,978 CAGR N/A 4.2% 3.3% AVERAGE AGE By 2028, the average age of the active fleet will have decreased from 11.2 to 10.5 years, a significant reduction. Of nearly 20,700 aircraft deliveries, 44 percent will replace in-service aircraft; a slight reduction from last year s forecast of 50 percent. EXHIBIT 28: GLOBAL AIRCRAFT DEMAND New Passenger Deliveries 20,346 New Cargo Deliveries , Fleet Passenger Fleet 676 P2F Conversions Cargo Fleet 11,671 Net Growth 8, ,978 Passenger Retirements Cargo Retirements 2028 Fleet Copyright Oliver Wyman 36

40 Fleet Forecast The passenger fleet is forecast to grow nearly 11,700 by 2028, while the cargo fleet is forecast to grow by 434 aircraft. Of new deliveries, 1.6 percent is forecast to be cargo aircraft. Two-thirds of the cargo aircraft introduced over the forecast period will be passenger-to-freighter (P2F) conversions. IN-SERVICE FLEET FORECAST BY AIRCRAFT CLASS Overall fleet growth is solid, but it is not spread evenly among aircraft classes. Narrow-body aircraft have had the greatest gains in recent years, a trend expected to continue as capacity increases at the expense of regional jets and turboprops. EXHIBIT 29: GLOBAL FLEET FORECAST BY AIRCRAFT CLASS NUMBER OF AIRCRAFT 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10, % -0.3% -0.6% 4.1% 5.9% 3.3% -0.6% -1.2% 2.8% 4.5% 3.7% -0.5% -0.9% 3.4% 5.2% Turboprop Regional Jet Wide-body 5, CAGR CAGR CAGR Narrow-body Narrow-body aircraft are forecast to grow from more than 15,100 aircraft to just over 25,000, an average annual rate of 5.2 percent. Wide-bodies are the second-fastest growing class, with a 3.4 percent average annual growth rate, and are forecast to reach 7,400 by Regional jets and turboprops are forecast to decrease in fleet size, falling an average 0.9 percent and 0.5 percent, respectively, each year. The two classes will combine for just 5,563 aircraft by NARROW-BODIES The majority of orders are driven by operators either adding to fleets or trying to improve margins by replacing regional jets and turboprops with larger, more profitable aircraft or doing both. The significant influx of new aircraft will cut the narrow-body fleet age from 10.4 to 10.1 years and raise the narrow-body share from 56 percent to 66 percent. Historically, low-cost operators have had a strong preference for narrow-bodies, although such carriers as Norwegian and Wow are challenging that thinking with low-cost, long-haul services. Copyright Oliver Wyman 37

41 Fleet Forecast EXHIBIT 30: NARROW-BODY FLEET CHARACTERISTICS FLEET SIZE 15,092 20,068 25,038 CAGR N/A 5.9% 4.5% MARKET SHARE 56% 62% 66% AVERAGE AGE For the first time, Boeing and Airbus narrow-bodies are being challenged by the Bombardier C Series, COMAC s C919 and Irkut s MC-21. However, the C Series program experienced delays that surrendered the entry-into-service timing advantage it originally had over the A320neo and 737MAX, both of which experienced no development delays and have the efficiency gains the latest technology engines offer similar to the C Series. The Chinese C919 and Russian MC-21 will serve only a small portion of operators in their home countries, given certification hurdles in other parts of the world. Even with new competitors, the Boeing 737 and Airbus A320 platforms are forecast to account for 92 percent of all narrow-body deliveries through EXHIBIT 31: PASSENGER NARROW-BODY FLEET COMPOSITION BY SIZE CATEGORY SHARE OF CLASS 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Large Intermediate Small Small narrow-bodies with a seat count below 140 currently make up 19 percent of the passenger narrow-body fleet. Only nine percent of narrow-bodies are forecast to be in this size category by With strong operator preference for larger narrow-body aircraft with improved operating efficiency, medium-size narrow-body aircraft, such as the MAX and A320neo, are expected to represent 75 percent of the narrow-body fleet. These aircraft, with 140 to 190 seats, currently make up 70 percent of the narrow-body fleet. Narrow-bodies with more than 190 seats are also forecast to grow in share relative to the overall fleet. Copyright Oliver Wyman 38

42 Fleet Forecast EXHIBIT 32: NARROW-BODY AIRCRAFT SIZE CATEGORIES SMALL INTERMEDIATE LARGE SEAT COUNT < >190 AIRCRAFT TYPE VARIANT A319 C SERIES MAX, , MAX, A319neo, A320, A320neo Irkut MC-21 COMAC C MAX, MAX 737 MAX 200 A321, A321neo The remaining 737 Classics, 757s and MD-80s will leave the fleet or be converted into freighters. Operators are also forecast to increase the rates of conversion and removal for 737NGs and A320s as they aggressively change out aging fleets. EXHIBIT 33: NARROW-BODY DELIVERIES BY AIRCRAFT PLATFORM NUMBER OF AIRCRAFT 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 A320neo 737 MAX 737 NG C Series A320 C919 MC-21 WIDE-BODIES The global wide-body fleet is forecast to grow from 5,273 aircraft to nearly 7,400 by Market share for the class is expected to drop slightly from 20 percent to 19 percent over the forecast period, with a 3.4 percent year-over-year growth rate. Similar to narrow-bodies, the average wide body fleet age is expected to decrease from 10.9 years to 10.6 years over the forecast period. Copyright Oliver Wyman 39

43 Fleet Forecast EXHIBIT 34: WIDE-BODY FLEET CHARACTERISTICS FLEET SIZE 5,273 6,441 7,377 CAGR N/A 4.1% 2.8% MARKET SHARE 20% 20% 19% AVERAGE AGE Oliver Wyman anticipates that the 787 series will be the most delivered wide-body, followed by the A350. This contrasts with today s fleet, in which the A330/A340 family is the largest fleet, followed by the 777 series. The change, among other things, will create a significantly more fuel-efficient, high tech fleet. Even though Airbus is introducing the A330neo, improvements in operational costs and efficiencies offered by the 787, A350 and 777X will ultimately outweigh the A330neo s lower acquisition cost. The A380 is not expected to expand far beyond its current network of operators, with a demand of only about 15 aircraft per year. EXHIBIT 35: WIDE-BODY DELIVERIES BY AIRCRAFT PLATFORM NUMBER OF AIRCRAFT 1,600 1,400 1,200 1, A X 777CL A330neo A330 A Over the forecast period, the aircraft platforms most quickly retiring will be the 767, 777, and A330/A340, along with most of the remaining s. Additionally, the 767 will account for the majority of all wide-body freighter conversions. Copyright Oliver Wyman 40

44 Fleet Forecast EXHIBIT 36: WIDE-BODY AIRCRAFT SIZE CATEGORIES SMALL INTERMEDIATE LARGE SEAT COUNT < >350 AIRCRAFT TYPE VARIANT A , A neo A , A , A neo A X A A380 The wide-body fleet is experiencing a similar phenomenon to the upsizing trend in the narrow-body fleet. Operators are forecast to move quickly toward intermediate and, to a lesser extent, large wide bodies; meanwhile, the market share of small wide-bodies will shrink considerably. Currently making up 49 percent of the wide-body fleet, intermediate twin-aisle aircraft are forecast to reach 64 percent of the share by This share is taken almost entirely from small wide-bodies, which are expected to account for only a 20 percent share, sliding from the current 37 percent of the wide body fleet. The share of large wide-bodies will increase marginally from 13 percent to 17 percent by EXHIBIT 37: PASSENGER WIDE-BODY FLEET COMPOSITION BY SIZE CATEGORY SHARE OF CLASS 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Large Intermediate Small REGIONAL JETS Regional jets will play an interesting though less important role in the future fleet. Even though operators are scaling out of the smaller regional jet market, multiple new platforms will enter service. In North America, where over half of all regional jets are domiciled, the role of these aircraft hinges on whether large network carriers and their pilot unions can agree on loosening current weight and seat count restrictions on regional carriers. Copyright Oliver Wyman 41

45 Fleet Forecast The fleet size is forecast to decrease by 150 aircraft to less than 3,200 by 2028, representing an average annual decline of 0.5 percent. The market share of regional jets will fall from 13 percent to eight percent. During the first half of the forecasting period, the average age of a regional jet will increase marginally. This trend will reverse over the second half with the emergence of the E Jet E2 and MRJ platforms. EXHIBIT 38: REGIONAL JET FLEET CHARACTERISTICS FLEET SIZE 3,310 3,254 3,160 CAGR N/A 0.3% 0.6% MARKET SHARE 13% 10% 8% AVERAGE AGE The Embraer E Jet and E Jet E2 families are forecast to dominate the regional jet delivery schedule over the next decade. The new, more advanced E Jet E2s will provide greater flexibility with their increased range, allowing operators to connect to additional strategic routes. In fact, the regional jet competition appears to be narrowing to a one-platform race, with the CRJ order book falling dramatically and the Mitsubishi MRJ struggling to get certified. The Chinese-made ARJ21 has finally entered service but is unlikely to draw orders from outside China because of stricter certification requirements in other regions of the world. EXHIBIT 39: REGIONAL JET DELIVERIES BY AIRCRAFT PLATFORM NUMBER OF AIRCRAFT E-Jet E2 E-Jet ARJ21 MRJ CRJ NextGen Superjet 100 Older CRJs are among the first to be culled, forecast to represent more than 40 percent of all regional jet removals over the next 10 years. Many of the remaining Embraer ERJ aircraft are also expected to leave the fleet by Copyright Oliver Wyman 42

46 Fleet Forecast TURBOPROPS Like the regional jets, turboprops are expected to decline in fleet size and market share. A projected drop in this type of aircraft, from slightly more than 2,600 to close to 2,400, will result in a six percent share of the market by 2028, down from 10 percent in The average age of turboprops will fall from 16.4 years old to 14.4 by While the turboprop will remain a niche player by providing service to airports not suited for jet aircraft, it is still less desirable than its jet counterparts. EXHIBIT 40: TURBOPROP FLEET CHARACTERISTICS FLEET SIZE 2,631 2,558 2,403 CAGR N/A 0.6% 1.2% MARKET SHARE 10% 8% 6% AVERAGE AGE Most older-generation turboprops, such as Saab 340s and Fokker 90s, will be removed over the forecast period. Bombardier s Q Series, largely uncompetitive because of higher operating costs, has few deliveries scheduled over the next 10 years. As the one remaining niche player, the ATR fleet is projected to grow at an average annual rate of 4.6 percent over the next 10 years. EXHIBIT 41: TURBOPROP DELIVERIES BY AIRCRAFT PLATFORM NUMBER OF AIRCRAFT ATR 72 Q Series ATR 42 Copyright Oliver Wyman 43

47 Fleet Forecast IN-SERVICE FLEET FORECAST BY AIRCRAFT USAGE Although the cargo fleet will fill an important role in air service, its relative share of the commercial airline fleet will decrease from seven percent to five percent over the next 10 years. The cargo fleet will grow modestly at a rate of 0.5 percent on average, increasing from close to 1,950 aircraft to 2,050 aircraft by The growth rate is marginal because newer passenger aircraft offer more cargo space. Also, manufacturers and freight forwarders are getting more sophisticated at matching cargo with alternate, often cheaper transportation, such as ships, rail, and trucking. EXHIBIT 42: GLOBAL FLEET FORECAST BY AIRCRAFT USAGE NUMBER OF AIRCRAFT 45,000 40,000 35,000 30,000 25,000 20, % 0.8% 4.5% 3.3% 0.2% 3.5% 3.7% 0.5% 4.0% 15,000 10,000 Cargo 5, CAGR CAGR CAGR Passenger As a result of the cargo fleet shrinkage, the passenger fleet is forecast to grow its share from 93 percent to nearly 95 percent over the next decade and sustain an average annual growth rate of 4.0 percent. EXHIBIT 43: GLOBAL FLEET AVERAGE AGE BY AIRCRAFT USAGE PASSENGER CARGO OVERALL While the passenger fleet will become younger with unprecedented numbers of deliveries and permanent removals, the average age in the cargo fleet will reach 23.7 years by It is a direct result of the success of passenger-to-freight conversions and few orders for dedicated cargo aircraft. That said, FedEx placed an order this year for 30 dedicated ATR 72 freighters, which could signal a change in established strategy toward cargo aircraft acquisition. Copyright Oliver Wyman 44

48 Fleet Forecast REGIONAL IN-SERVICE FLEET CHARACTERISTICS While numerous changes are occurring across the fleet, some of the most interesting are in regional growth. North America will lead the world in deliveries and removals but overall will have little growth. With the increasing passenger demand in Asia, China s fleet is expected to grow by more than 4,174 aircraft, a net 137 percent increase. China will rank second in the world in operating aircraft numbers, behind North America. More impressive, much of that country s growth will come from deliveries, reducing the average aircraft age significantly. China is not the only region expected to see high growth. India is expected to grow 100 percent; the Middle East, 63 percent; and Asia Pacific (excluding China and India), 52 percent. EXHIBIT 44: FLEET GROWTH BY REGION NUMBER OF AIRCRAFT 5,000 14% 137% 4,000 35% 52% 3,000 2,000 63% 43% Net Growth 1,000 19% 100% 0% Retirements 0 North America China Western Europe Asia Pacific Middle East Latin America Eastern Europe India Africa Deliveries The influx of new aircraft into Asia is occurring rapidly. Combined, the Asia Pacific, China, and India regions will operate more aircraft than any other in just a year s time. By the end of the forecast period, Asia will domicile nearly 40 percent of the global fleet. Copyright Oliver Wyman 45

49 Fleet Forecast EXHIBIT 45: FLEET SHARE CHANGE BY REGION China Asia Pacific India Middle East Latin America Africa Eastern Europe Western Europe North America -8% -6% -4% -2% 0% 2% 4% 6% 8% PERCENT CHANGE Not surprisingly, China will see the largest jump in fleet distribution ranking as it accommodates a growing middle class. Nearly all other regions are projected to remain relatively stable, moving in concert with overall trends and maintaining share of the in-service fleet. EXHIBIT 46: FLEET GROWTH RATES BY REGION AFRICA 1.0% 1.4% 1.2% ASIA PACIFIC 5.0% 3.5% 4.3% CHINA 10.4% 7.2% 8.8% EASTERN EUROPE 2.2% 2.5% 2.4% INDIA 11.7% 5.8% 8.7% LATIN AMERICA 3.3% 2.9% 3.1% MIDDLE EAST 5.6% 3.9% 4.7% NORTH AMERICA 1.5% 1.4% 1.5% WESTERN EUROPE 3.5% 2.1% 2.8% North America will experience modest growth, with an average annual growth rate of 1.5 percent over the decade. Western Europe, despite the uncertainty over Brexit, will grow at an average annual rate of 2.8 percent. China and India are forecast to be the fastest-growing regions, averaging 8.75 percent growth per year. The Middle East, at 4.7 percent, and Asia Pacific, at 4.3 percent, will be the third and fourth fastest-growing regions, even with both slowing during the second half of the decade. In particular, India will grow rapidly, at 11.7 percent during the first five years. The rate will slow substantially in the second five years because of expected challenges in further developing the country s infrastructure and building a robust middle class. Copyright Oliver Wyman 46

50 Fleet Forecast EXHIBIT 47: AVERAGE AGE OF FLEET BY REGION AFRICA ASIA PACIFIC CHINA EASTERN EUROPE INDIA LATIN AMERICA MIDDLE EAST NORTH AMERICA WESTERN EUROPE As fleets grow, the aircraft age dynamic varies among regions. North America, Western Europe, Latin America and Africa will see the average aircraft age decrease as aging fleets are replaced with new deliveries. In contrast, the China, India, and Asia Pacific fleets will age as aircraft stay in service to meet increased demand, leading to greater emphasis and importance for aircraft maintenance programs. Historically, Africa and other developing nations acquired most of their fleets through migrations of older aircraft from mature regions such as North America and Western Europe. That trend appears to be changing as new aircraft orders have become the dominant source of growth. The surge of newer aircraft has driven a dramatic shift in migrations between the regions, fueled by new low-cost acquisition options through aircraft lessors and export credit financing. Copyright Oliver Wyman 47

51 Fleet Forecast EXHIBIT 48: NET AIRCRAFT REGIONAL MIGRATIONS In 2017, there were 357 total migrations of older aircraft worldwide, resulting in 194 net migrations. Many of these aircraft left developing regions for Latin America and India. The Middle East had the largest net loss in aircraft from migrations, sending many of the aircraft to Western and Eastern Europe. With similar moves likely, 1,116 net migrations are forecast over the next 10 years. Copyright Oliver Wyman 48

52 4 MRO MARKET FORECAST

53 MRO Market Forecast MRO MARKET FORECAST The commercial air transport MRO market will revolve around the growth and changes of the global fleet. The total MRO spend in 2018 is expected to be $77.4 billion. It will rise to $91.9 billion by 2023, representing a 3.5 percent CAGR over the five-year period. The growth rate will increase modestly to 4.5 percent annually in the second half of the forecast period. Over the full 10-year period, the global air transport MRO market will grow on average four percent annually, rising to $114.7 billion by EXHIBIT 49: MRO MARKET FORECAST BY MRO SEGMENT US DOLLARS (BILLIONS) % 4.3% 4.8% 3.3% 4.5% 3.3% 4.2% 6.5% 4.0% 3.8% 4.5% 4.9% Line Component % 1.9% 2.2% Engine CAGR CAGR CAGR Airframe Airframe maintenance will continue its trend of lower unit costs, driven primarily by heavy maintenance visit intervals stretching to 12 years. This is possible through the increased use of composites and hybrid alloys in new-generation aircraft, providing better fatigue and corrosion resistance than in previous generations. Engines, while much more fuel-efficient, are operating at ever higher temperatures and pressures, resulting in more expensive shop visits to restore and replace increasingly exotic and expensive materials hence, the 4.9 percent average annual growth rate in engine MRO. There is little change expected in the relative mix of component and line MRO spend over the forecast period. Copyright Oliver Wyman 50

54 MRO Market Forecast EXHIBIT 50: MRO MARKET FORECAST BY AIRCRAFT CLASS US DOLLARS (BILLIONS) % -0.4% -0.1% 3.1% 4.7% 4.5% -0.5% 0.6% 2.0% 7.3% 4.0% -0.5% 0.3% 2.5% 6.0% Turboprop Regional Jet Wide-body CAGR CAGR CAGR Narrow-body Globally, MRO spend related to narrow-body and wide-body aircraft will account for $69.2 billion of the $77.4 billion total, with regional jets and turboprops combining for an MRO spend of just $8.2 billion. For 2018, narrow-bodies make up 57 percent of the fleet and 45 percent of MRO market share. Wide-bodies, on the other hand, make up 20 percent of the global fleet, but represent more than 44 percent of the MRO expenditures because the aircraft are more maintenance-intensive and more complex. Oliver Wyman forecasts a significant shift in spending away from regional jets and turboprops and toward narrow-body aircraft over the next 10 years. Narrow-body MRO spend will see a $27.6 billion increase to $62.6 billion by 2028, with overall market share rising to nearly 55 percent. This share is taken from every aircraft class, as wide-body market share will drop to 38 percent, totaling $43.9 billion, and regional jets and turboprops will combine for seven percent of MRO spend, totaling $8.2 billion. The additional narrow-body and wide-body spend is significant, but it will not be distributed evenly. The total MRO market is expected to become increasingly concentrated within a handful of aircraft platforms. Copyright Oliver Wyman 51

55 MRO Market Forecast EXHIBIT 51: TOP AIRCRAFT PLATFORMS BY TOTAL MRO SPEND US DOLLARS (BILLIONS) US DOLLARS (BILLIONS) A320ceo/neo 737NG/MAX 777 A330ceo/neo A380 E-Jet/E A320ceo/neo 737NG/MAX 777/ 777X 787 A330ceo/neo A350 A380 E-Jet/E2 747 ATR 2018 Top Platforms 2028 Top Platforms In 2018, the top 10 aircraft platforms will make up 84 percent of the total MRO market. By 2028, the top 10 aircraft platforms will represent 92 percent of the market. More important, the 2000s and 2010s vintage fleets will grow from a 12 percent share of the global MRO market in 2018 to nearly half of the market by EXHIBIT 52: TOTAL MRO SPEND BY AIRCRAFT VINTAGE MARKET SHARE 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% s 2000s 1990s 1980s 1970s Copyright Oliver Wyman 52

56 MRO Market Forecast Given the rapid transition to new-generation aircraft over the next decade, it s evident that MRO providers must prepare for the work associated with the newer fleet types or focus their strategy to capture end-of-life markets. From an airframe MRO perspective, providers must be able to handle the new composite and metal matrix materials dominant in the latest-generation aircraft, such as the 787 and A350. Next-generation engines will require a significant investment in training and tooling. Advancements include much more sophisticated systems that interface with health monitoring technology, designed to recognize pending system or component failures. This new era of big data capture and processing will require a clear strategy to take full advantage of its potential. Challenges extend to component and line maintenance MRO providers as well. Component MROs need the capital to acquire testing equipment and licenses to access OEM manuals and data for these new parts. Line maintenance providers will face challenges related to training and the use of the new aircraft health monitoring systems, fault isolation systems, and software configuration protocols. Regionally, as fleet growth shifts to Asia and other developing economies, MRO spend will also migrate to those regions. By 2028, the combined MRO demand in the Asia Pacific, China, and India will be more than double that in North America. EXHIBIT 53: TOTAL MRO SPEND BY REGION US DOLLARS (BILLIONS) Projection 0 North America Western Europe Asia Pacific China Middle East Latin America Eastern Europe India Africa 2028 Projection North America MRO spend is forecast to shrink from $19.9 billion in 2018 to $19.4 billion by 2023, then rebound to $23.8 billion by 2028 overall, relatively flat growth with 1.8 percent CAGR. Latin America MRO spend, which currently represents five percent of the total market, is expected to grow 4.7 percent annually, from $3.9 billion to $6.2 billion, and increase market share by less than half a point over the period. Copyright Oliver Wyman 53

57 MRO Market Forecast European MRO spend is expected to fare marginally better than that of North America. Western Europe MRO, as it grows at three percent annually, will lose four percentage points of market share and add $5.5 billion to its current $16.2 billion MRO demand. Eastern Europe, though continuing to suffer from economic sanctions placed on Russia, is forecast to increase two percent annually. Growing at a 4.3 percent average annual rate, the Middle East is expected to add over $4.6 billion in MRO demand and will constitute nearly 12 percent of the global MRO market by Africa, highly subject to terrorism and political unrest, is still expected to grow three percent per year and will retain its current three percent market share. Asia, as has been the case for years, remains the driver of MRO growth. India is forecast to grow 5.6 percent annually but will represent less than three percent of the market. The Asia Pacific region will grow at a healthy four percent annually, with MRO demand levels rising to equal those of Western Europe and North America. China, forecast to jump 10.6 percent annually, is expected to increase market size to nearly 16 percent of world MRO. While China will be the key driver of MRO spend growth in Asia, rising labor costs, coupled with temporary infrastructure and capacity constraints, are likely to force Chinese operators to look to countries south and east to fulfill maintenance needs. Complicating the demand in Asia Pacific and China, operators around the world are currently sending nearly 24 percent of wide-body heavy airframe maintenance needs to the region. There will be an inflection point where capacity growth within Asia cannot keep pace with the MRO demand of its own countries plus that of foreign operators, particularly those in the mature North America and Western Europe regions. Operators will have to look elsewhere for their MRO needs, presenting opportunities in North America, Western Europe, and Latin America. Copyright Oliver Wyman 54

58 MRO Market Forecast EXHIBIT 54: NORTH AMERICA AND WESTERN EUROPE WIDE-BODY HEAVY AIRFRAME MAINTENANCE IMPORTED FROM ASIA North America Western Europe China $312 M IMPORTED $77 M IMPORTED $139 M EXPORTED Asia Pacific Imported from Asia $250 M EXPORTED Exported to Mature Markets Other Region Exports/Imports M = Millions, B = Billions MROs can target wide-body work currently performed by Asia-based MROs with the introduction of new capacity and the development of the necessary technical skills. As regional labor rates move toward global parity, MROs that invest in new wide-body capabilities and can deliver a high-quality, on-time product will be positioned to capture market share from operators that get squeezed out of the Asia market. Notwithstanding the potential, capturing market share will not be simple. Even when labor rate parity is reached, Asian MROs have demonstrated the capacity and skills to secure long-term contracts. Although MROs in developing regions do have wide-body capability, investment in facilities, equipment, tooling, and training is essential. Paying the cost of capital for expansion will be a necessity to compete. The repatriating of wide-body heavy maintenance work will create some revenue growth in otherwise stagnant MRO markets in North America and Western Europe; a global focus is needed to meet the growing demand being generated in Asia. MROs are already expanding facilities to increase capacity and opening operations closer to their Asian customers. Adding and improving facilities is not a silver bullet. Better use of process analysis and production methodology to reduce errors, rework, and turn times, as well as to expedite material or repair delivery, will increase capacity and competitiveness. Increasing capacity, capability, and efficiency can be combined with partnerships for engineering and workforce development to maximize growth in any market, particularly a better-positioned region. Copyright Oliver Wyman 55

59 MRO Market Forecast AIRFRAME MAINTENANCE The airframe maintenance market is comprised of two distinct segments: heavy airframe maintenance and modifications. Heavy airframe maintenance involves work carried out on a periodic, scheduled basis under the protection of a hangar. It includes inspection, replacement, restoration, and preventive maintenance of the airframe s structure, systems and cabin interior. The aircraft is removed from commercial service at specified intervals for a predetermined time. Operators either perform the work themselves or through a qualified third-party provider. Individual operators develop schedules for aircraft maintenance that satisfy operational requirements and aviation regulators, such as the Federal Aviation Administration (FAA) and the European Aviation Safety Administration (EASA). Heavy airframe maintenance is based on calendar time, a fixed number of flight hours, a fixed number of flight cycles or a whichever comes first mandate. While some operators and aircraft types have highly customized phase check maintenance programs, most fit into a traditional model of a light C check and a heavy maintenance visit (HMV). Newer-generation aircraft will have longer intervals; turboprops and older aircraft have shorter intervals. EXHIBIT 55: HEAVY AIRFRAME SCHEDULED MAINTENANCE ACTIVITY DESCRIPTION FREQUENCY MAN-HOURS REQUIRED LIGHT C CHECK Detailed inspection Months 2,000 12,000 FH 1,000 15,000 FC HMV Major reconditioning Months 8,000 36,000 FH 6,000 24,000 FC 1,000 15,000 MH 2,000 70,000 MH Airframe modifications involve planned improvements related to cabin reconfigurations, passengerto-freighter conversions, winglet retrofits, and/or various component upgrades. The work requires that the aircraft be removed from commercial service for a predetermined period. Airframe modifications can be performed in conjunction with heavy airframe maintenance, but often heavy maintenance schedules do not satisfy the short-term urgency of modifications to special programs, and dedicated out-of-service lines are common. Copyright Oliver Wyman 56

60 MRO Market Forecast MARKET FORECAST The 2018 commercial air transport heavy airframe maintenance and modifications spend is expected to be $19.0 billion, 25 percent of the total MRO market. EXHIBIT 56: AIRFRAME MARKET FORECAST BY SEGMENT US DOLLARS (BILLIONS) % 2.8% 1.9% 2.0% 2.2% 2.4% % 1.7% 1.8% Modifications CAGR CAGR CAGR Heavy Airframe Maintenance The total combined airframe market is forecast to grow 2.4 percent per year through 2023, but the pace will slow to 1.9 percent per year for the rest of the forecast period. The slow growth rate results from advances in design and construction that extend the interval between heavy maintenance visits for newer aircraft. Narrow-body spend currently dominates the global airframe MRO market, and this trend will continue through the full forecast period as the narrow-body fleet size burgeons. Wide-body airframe MRO market share will remain effectively unchanged at 38 percent over the next five years before declining to 35 percent by Airframe MRO spend for regional jets is expected to slip 1 percent, while turboprop spend is likely to shrink 2 percent. Copyright Oliver Wyman 57

61 MRO Market Forecast EXHIBIT 57: AIRFRAME MARKET FORECAST BY AIRCRAFT CLASS US DOLLARS (BILLIONS) % -2.6% 0.2% 2.2% 3.3% 1.9% -2.0% -1.2% 0.5% 3.4% 2.2% -2.3% -0.5% 1.4% 3.4% Turboprop Regional Jet Wide-body CAGR CAGR CAGR Narrow-body MARKET STRUCTURE AND REGIONAL BALANCE OF TRADE Airframe maintenance providers can be classified into five categories: Airline: Commercial air transport operators that perform maintenance using in-house capabilities. Airline-affiliated: Maintenance provided by airline-affiliated companies or subsidiaries, such as KLM Maintenance & Engineering, Air France Industries, Delta TechOps and Lufthansa Technik. The organization performs work for the affiliated airline as well as other operators and customers. These organizations leverage and scale their capabilities to offer competitive pricing and robust services. Independent: Dedicated maintenance providers with no relation to either manufacturers or airlines. From large to small, these maintenance providers often have lower labor costs. Joint venture: Airframe maintenance providers that are formed by joining the resources of OEMs and government support or through large multinational MRO providers and government support to build indigenous capacity, such as Ameco Taikoo and GAMECO. OEM: Airframe manufacturers, such as Embraer, Bombardier, Sukhoi and ATR that offer maintenance capabilities for their aircraft types using company-managed facilities. Based on long-term, routine airframe MRO contract information researched and tracked by Oliver Wyman, the market share that each market category holds can be calculated. Copyright Oliver Wyman 58

62 MRO Market Forecast EXHIBIT 58: HEAVY AIRFRAME MAINTENANCE MARKET SHARE BY MAINTENANCE PROVIDER CLASSIFICATION 7% 3% 22% 26% 50% OEM 50% 42% Joint Venture Independent Contracted Airline Affiliated Total MRO In-House Airline For all the media and political discussion about airlines contracting out maintenance, operators still perform about 50 percent of their own fleet s airframe maintenance in-house. Airline and airlineaffiliated providers capture an additional 16 percent of the market when including contracted work done for other airlines. Independent maintenance providers carry out roughly 26 percent of the work, while joint ventures represent about eight percent of the market. Finally, OEMs hold a three percent share of the heavy airframe maintenance market. However, as new-generation aircraft need MRO, the OEMs are expected to pursue after-market strategies championed in the engine and component MRO segments to increase market share. The 787 doubled the heavy check interval of the aircraft it replaced, driving operators to reconsider the strategy of maintaining in-house MRO capability. The trend continues as other new-design aircraft such as the A350 and C Series enter service. These new aircraft, with optimized maintenance intervals and more electronic systems, will experience much longer intervals between scheduled hangar visits. In addition to longer check intervals, new composite materials will drive down airframe maintenance labor demands over the next decade as repairs for corrosion or fatigue are expected to drop dramatically. As a result, operators with small or medium-size fleets will continue contracting out work as it becomes more difficult to balance resource management over the long maintenance intervals. The words contracting and offshoring are almost synonymous today, but there is a subtle distinction. Contracting is used when maintenance work is performed by another legal entity, no matter the location or region. Offshoring also refers to contracting but specifies that the maintenance work is performed outside the owner s or operator s home region. Copyright Oliver Wyman 59

63 MRO Market Forecast The general belief is that offshoring maintenance is done in foreign regions for the cost savings from lower labor rates and facility costs. But further analysis of the information known on long-term heavy airframe maintenance contracts indicates that 78 percent is performed by a maintenance provider in the same region as the operator, leaving only 22 percent, or $1.24 billion, of the heavy airframe maintenance work being performed in another region. An estimate of the balance of trade among regions can be drawn from a comparison of supply and demand levels. EXHIBIT 59: NET HEAVY AIRFRAME MAINTENANCE EXPORTS AND IMPORTS BY REGION Eastern Europe North America Western Europe China $72 M $467 M $53 M Middle East $299 M India Latin America $4 M Asia Pacific Demand Supply Net Exporter $139 M Africa $1 M $80 M $170 M Net Importer M = Millions, B = Billions Copyright Oliver Wyman 60

64 MRO Market Forecast DEFINITIONS: Imported work: MRO work an operator sends outside its home region; essentially, the operator is importing the MRO service, even though it must physically send the airframe/engine/component outside its home region. Exported work: MRO work provided in a region for an operator in another region; essentially the MRO is exporting its MRO services, even though the airframe/engine/component will be physically located in MRO s home region when the work is done. DEMAND SUPPLY REGION TOTAL IMPORTED WORK IN REGION EXPORTED WORK TOTAL NET TRADE BALANCE Africa $105 M $32 M $74 M $32 M $105 M Importer Asia Pacific $1.1 B $226 M $876 M $396 M $1.3 B Exporter China $562 M $70 M $492 M $369 M $861 M Exporter Eastern Europe $177 M $93 M $84 M $90 M $174 M Importer India $96 M $80 M $15 M >$1 M $15 M Importer Latin America $258 M $16 M $242 M $156 M $398 M Exporter Middle East $560 M $90 M $471M $86 M $556 M Importer North America $1.9 B $521 M $1.4 B $53 M $1.5 B Importer Western Europe $1.6 B $ 270M $1.3 B $218 M $1.5 B Importer M = Millions, B = Billions Copyright Oliver Wyman 61

65 MRO Market Forecast COST STRUCTURE Airframe spend can be divided into two primary cost elements: labor and material. EXHIBIT 60: AIRFRAME MAINTENANCE COST ELEMENTS Labor 51% Material 49% Labor is the largest element of airframe work at 51 percent of the segment spend. This includes labor for certificated technicians (mechanics, repairers and engineers) and non-certificated technicians as well as the cost of benefits and overhead. When differentiating the labor component between heavy airframe maintenance and modifications work, labor represents 64 percent and 40 percent, respectively. Accounting for 49 percent of airframe MRO spend, material is the smaller primary cost element. It includes all required materials, hardware and consumables but excludes the cost of off-wing repair and overhaul of rotable line-replaceable unit components, which are captured in the Component MRO Forecast. When differentiating between heavy airframe maintenance and modifications, material represents 36 percent and 60 percent, respectively. MATERIALS SUPPLY CHAIN By its very nature, material can age and deteriorate from use, fatigue and/or stress while installed on an aircraft. Material that no longer conforms to design specifications is removed and replaced. Replacement may be a new or used material or it may be repaired, thus the material cost element can be further divided into new/used material and repaired material. Copyright Oliver Wyman 62

66 MRO Market Forecast EXHIBIT 61: AIRFRAME MATERIALS MARKET SHARE BY MATERIALS SOURCE (US$ BILLION) $0.9 $0.3 $0.1 $8.0 $9.4 $8.5 Repaired Material New/Used Material OEM PMA Material Surplus New/used material is comprised of all material obtained from original equipment manufacturers (OEMs), Parts Manufacturer Approval (PMA) holders and Surplus/Used Serviceable Material (USM) providers. Combined, these material sources account for 90 percent of available replacements. OEM: Materials manufactured by the existing Production Approval Holder (PAH), commonly referred to as the original equipment manufacturer, account for about 95 percent of new/used material demand, making it the largest sub-segment of new/used materials. PMA: PMA material is the smallest segment of airframe MRO and accounts for just over 1 percent of the new/used spend. The segment includes new materials manufactured by a firm with Parts Manufacturer Approval from its local aviation regulator. Surplus/USM: Surplus material is new material purchased from the inventory of an operator or a non-oem seller. Used Serviceable Material is obtained from an operator s spare inventory or harvested from an aircraft that has been permanently removed and torn down. Combined, surplus and USM material account for less than 4 percent of the new/used material cost segment. While new/used material sources typically have direct sales channels from the manufacturers to MROs and operators, it is estimated that 20 percent of all new/used airframe material is supplied by distributors that act as intermediaries between the part sources and the MROs and operators. Distributors acquire new/used materials in a variety of ways, including buying excess stock from the OEMs and airlines and purchasing surplus material from surplus/usm dealers. Repaired material, which is the application of OEM- and Designated Engineering Representativeapproved (DER-approved) repairs, accounts for nearly 10 percent of the segment spend. This includes all DER/parts repair (PRP) costs incurred during full restoration. Copyright Oliver Wyman 63

67 MRO Market Forecast EXHIBIT 62: AIRFRAME MATERIAL SUPPLY CHAIN Airframe Warehouse 3 rd Pty MRO In-Service Engine Warehouse PMA DER/PRP Operator Component Warehouse Distributor Other Warehouse Surplus Retired Original Equipment Manufacturers New/Used Material Sources Alternate Sources Repaired Material Sources Material Providers Maintenance Providers Aircraft Copyright Oliver Wyman 64

68 MRO Market Forecast ENGINE MAINTENANCE Engine maintenance involves scheduled or on-condition work that is performed in the shop. It includes inspection, replacement, repair, restoration, and preventive maintenance. The major drivers of engine maintenance spend are the cost of restoration and replacing life-limited parts (LLPs) and turbine blades. However, the frequency of these two distinct activities is often different, resulting in significant variance in shop visit spend. EXHIBIT 63: ENGINE SCHEDULED MAINTENANCE WORK SCOPES ACTIVITY DESCRIPTION FREQUENCY TOTAL COST OVERHAUL Off-wing disassembly, inspection, repair and/or replacement of parts, reassembly, and testing Months 3,000 24,000 FH 1,400 15,000 FC $200 K $8.6 M MARKET FORECAST The commercial air transport engine MRO spend is forecast to be $32.7 billion in 2018, representing 42 percent of the total MRO market. It is forecast to grow at 3.3 percent annually over the next five years, then at a substantially higher rate of 6.5 percent per year over the following five-year period, for a total 10-year annual growth rate of 4.9 percent. The full forecast growth rate makes it the fastest-growing MRO segment, primarily driven by the higher costs of new-generation engine material. EXHIBIT 64: ENGINE MRO MARKET FORECAST BY AIRCRAFT CLASS US DOLLARS (BILLIONS) % 2.0% -1.1% 2.9% 4.7% CAGR 6.5% 0.6% 2.3% 2.1% 13.4% CAGR 4.9% 1.3% 0.6% 2.5% 9.0% CAGR Turboprop Regional Jet Wide-body Narrow-body Copyright Oliver Wyman 65

69 MRO Market Forecast In 2018, the global engine MRO market, unlike other segments, will be led by wide-body aircraft. Wide-body engine MRO is expected to constitute more than half of the market s value. The dominance will marginally wane after 2024 as the wide-body engine MRO market cedes share to the growing volume of narrow-body aircraft engines. Narrow-body engine MRO spend, at 32 percent of the market in 2018, is expected to grow 15 points by 2028; forecast to just barely surpass that of wide-bodies as next-generation narrow-bodies enter the market. The regional jet engine MRO spend will decline $121 million by 2028 as it sheds two points. With no turboprop introduction on the horizon and a tiny order book, turboprop engine MRO spend is expected to fall nearly $130 million over the next 10 years. The GE90, CFM56-7B, Trent 700, CF6, PW4000, V A5, and the CF34, each driving no less than $1.65 billion in MRO spend, are the engines with the largest MRO demand in Collectively, these engines represent about 64 percent of the total market, while the top 10 engine variants constitute more than 78 percent. By the end of the 10-year forecast period, the CFM56-7B, is expected to be the largest engine MRO spend, requiring more than $6.8 billion in services. Powering the 737NG series, the engine will have a fleet size of 5,350. Similar to the Trent XWB, the LEAP-1A and -1B engines, powering the A320neo and 737 MAX platforms, are just entering commercial service and are forecast to account for a significant portion of engine MRO demand. In 2028, these two engine models combined will represent about 14 percent of the total engine MRO market. Pratt & Whitney s PW1000G, which powers both narrow bodies and next-generation regional jets, is expected to drive more than $3.4 billion in spend, representing roughly seven percent of the market in In 2017, the four largest regional jet engines by MRO spend are the CF34-10, CF34-8, CF34-3, and the AE3007. The CF34-10 is the only regional jet engine expected to drive more than $500 million in MRO demand, representing more than one-third of all regional jet engine MRO spend. The top four engines represent 94 percent of the total market. The top four regional jet engines in 2017 the CF34-8, PW1000G, CF34-10, and SaM146 are expected to drive 97 percent of the market. The PW1000G will become a dominant engine in the market, with over 1,350 installed units. Of the top four engines in 2017, the AE3007 and CF34-8 should be all but retired by 2028, and spend for the engines will be reduced to 10 percent of their 2018 demand. Among turboprop engines, the PW100 is expected to have the largest MRO spend in As the early generation turboprops (e.g., Beech 1900, J41, Saab 2000) are removed en masse during the forecast period, the PW100, powering the ATR fleet and Bombardier s Q Series, is expected to make up nearly 98 percent of the market in Engine MRO spend reflects the continued increases in annual material pricing, modestly offset by PMA influences on older engine models and longer on-wing life. Concentration of pricing power in the engine MRO value chain has allowed OEMs to remain a commanding force in the market. Copyright Oliver Wyman 66

70 MRO Market Forecast Additionally, the price of fuel and environment-related issues drive a continued push for better designs, alternative drop-in fuels, improved aircraft, and air traffic control system designs (the EU ETS could come into force for all airlines flying to or from the EU sometime soon). Although direct effects on the engine MRO market remain uncertain, these issues will require improvement in engine performance and care, the two elements that impact the engine MRO market structure. MARKET STRUCTURE AND REGIONAL BALANCE OF TRADE Engine maintenance providers can be classified into five categories: Airline: Commercial air transport operators that perform work using in-house engine maintenance capabilities. Generally, these are operators that have a large enough fleet and experience to merit conducting in-house engine maintenance. Airline-affiliated: Maintenance provided by affiliated companies or subsidiaries of airlines (such as KLM Maintenance & Engineering, Air France Industries, Delta TechOps and Lufthansa Technik). The organization performs work for the affiliated airline as well as other operators and customers. These organizations leverage and scale capabilities to offer competitive pricing. Independent: Dedicated maintenance providers with no relation to either airlines or OEMs (not part of an authorized service center network). From large to small, these maintenance providers often have lower labor costs. Joint venture: Maintenance providers that are typically formed by joining the resources of OEMs and in-country capabilities to build indigenous capacity (such as HAESL, Ameco and Turkish Engine Center). OEM: Engine manufacturers (such as GE, CFM, Rolls-Royce, Pratt & Whitney, Snecma and IAE) offering maintenance capabilities for their respective engine types using company owned facilities. Based on known MRO contract information, it is possible to estimate the market share of each maintenance provider category. Copyright Oliver Wyman 67

71 MRO Market Forecast EXHIBIT 65: ENGINE MRO MARKET SHARE BY MAINTENANCE PROVIDER CLASSIFICATION 3% 18% 53% 83% 26% 10% 8% OEM Joint Venture Independent Contracted Airline Affiliated Total MRO In-House Airline In stark contrast to the airframe maintenance sector, OEMs are by far the dominant player in engine MRO, controlling over half of the market. In-house airline and affiliated shops working on the named airline s engines represent just under 16 percent of the spend, while airlines and affiliated shops serving other airlines engines tack on 10 percent for a total of 26 percent of engine MRO performed by airline-centric shops. JVs, which benefit from OEM connections, control 10 percent of the market. Independent providers capture just eight percent of the market spend, though it will be interesting to see if their collective efforts to obtain repair information from increasingly restrictive, less cooperative OEMs affect their market position. Considering the dominant role of OEMs and the capital-intensive nature of engine MRO, it is no surprise that offshoring is prevalent in the sector. In-depth analysis of long-term engine overhaul contract information reveals that 52 percent of all work is offshored. Predictably, Western Europe, the location of many OEM facilities, is where about half of all work is done; consequently, it is the only region that is a significant net exporter. Copyright Oliver Wyman 68

72 MRO Market Forecast EXHIBIT 66: NET ENGINE MAINTENANCE EXPORTS AND IMPORTS BY REGION Eastern Europe North America Western Europe China $1.5 B $631 M $8.4 B Middle East $1.4 B India Latin America $4.5 B Asia Pacific Demand Supply Net Exporter $655 M Africa $474 M $552 M $406 M Net Importer M = Millions, B = Billions DEFINITIONS: Imported work: MRO work an operator sends outside of its home region to be performed; essentially, the operator is importing the MRO service, even though it must physically send the airframe/engine/component outside its home region. Exported work: MRO work provided in a region for an operator in another region; essentially the MRO is exporting its MRO services, even though the airframe/engine/component will be physically located in MRO s home region when the work is done. Copyright Oliver Wyman 69

73 MRO Market Forecast DEMAND SUPPLY REGION TOTAL IMPORTED WORK IN REGION EXPORTED WORK TOTAL NET TRADE BALANCE Africa $507 M $491 M $16 M $17 M $33 M Importer Asia Pacific $5.0 B $2.8 B $2.3 B $3.1 B $5.4 B Exporter China $2.0 B $1.8 B $156 M $453 M $610 M Importer Eastern Europe $643 M $632 M $11 M >$1 M $11 M Importer India $552 M $552 M >$1 M >$1 M >$1 M Importer Latin America $1.1 B $1.0 B $86 M $355 M $441 M Importer Middle East $4.8 B $4.6 B $191 M $48 M $239 M Importer North America $6.5 B $3.1 B $3.4 B $2.4 B $5.9 B Importer Western Europe $4.0 B $956 M $3.0 B $9.3 B $12.4 B Exporter M = Millions, B = Billions COST STRUCTURE Engine MRO spend can be divided into two elements: labor and material. EXHIBIT 67: ENGINE MAINTENANCE COST ELEMENTS Labor 15% Material 85% Labor (excluding labor to repair individual piece parts) is the smallest element, accounting for just 15 percent of spend. It includes direct labor for disassembly, inspection, reassembly, and testing. It also includes benefits and overhead for the labor resources. Copyright Oliver Wyman 70

74 MRO Market Forecast Labor for the piece parts repair market is increasingly affected by technology. These new parts are gradually becoming more difficult to repair because of their exotic materials and OEM intellectual property restrictions. Material accounts for 85 percent of the total engine MRO spend, by far the largest cost element. MATERIALS SUPPLY CHAIN The process of maintaining aircraft, engines and components involves labor and material consumption. Material requirements are defined and determined based on condition and/or time limits defined by the OEM. The replacement may be with new/used material or repaired material. Accordingly, the material cost element can be further divided into new/used material and repaired material. EXHIBIT 68: ENGINE MATERIAL MARKET SHARE BY MATERIAL SOURCE (US$ BILLION) $8.3 $3.3 $0.3 $15.8 $19.4 Repaired Material OEM $27.7 New/Used Material PMA Material Surplus New/used material comprises material obtained from OEMs, PMA manufacturers, and Surplus/Used Serviceable Material (USM) providers. Combined, these material sources account for approximately 70 percent of replacement materials. OEM: Materials manufactured by the existing Production Approval Holder (PAH), commonly referred to as the original equipment manufacturer (OEM), account for about 81 percent of new/used material demand, making OEM materials the largest sub-segment of new/used materials. PMA: PMA material is the smallest element of engine MRO and accounts for less than two percent of the new/used material sub-segment spend. This cost element includes new materials manufactured by a firm with Parts Manufacturer Approval (PMA) from their local airworthiness authority. Copyright Oliver Wyman 71

75 MRO Market Forecast Surplus/USM: Surplus material is new material purchased from the inventory of an operator or another materials provider. USM is used material obtained from an operator s spare inventory or harvested from an aircraft that has been retired and torn down. Combined, surplus and USM material account for 17 percent of the new/used material cost element. While new/used material sources typically have direct sales channels from the manufacturers to MROs and operators, an estimated 15 percent is supplied by distributors acting as intermediaries between material sources, MROs, and operators. Distributors acquire new/used materials in a variety of ways, including buying excess stock from the OEMs and airlines, and purchasing surplus material from surplus/usm dealers. Repaired material, restored through application of OEM- and DER-approved repairs, accounts for roughly 30 percent of the segment spend. This includes all DER/PRP costs incurred during the full restoration of a component. EXHIBIT 69: ENGINE MATERIAL SUPPLY CHAIN Airframe Warehouse 3 rd Pty MRO In-Service Engine Warehouse PMA DER/PRP Operator Component Warehouse Distributor Other Warehouse Surplus Retired Original Equipment Manufacturers New/Used Material Sources Alternate Sources Repaired Material Sources Material Providers Maintenance Providers Aircraft Copyright Oliver Wyman 72

76 MRO Market Forecast COMPONENT MAINTENANCE Component MRO involves shop (or off-wing) work on components removed from an aircraft or engine for inspection, repair, overhaul, modification and preventive maintenance. Component maintenance requirements are primarily defined by the OEM and the airline, with occasional mandates from the national regulatory body. The majority of component maintenance programs are defined as on-condition, meaning removal and maintenance occurs when the part is malfunctioning or has failed. Relatively few components have mandatory overhaul frequencies. EXHIBIT 70: MAJOR COMPONENT MAINTENANCE SEGMENTS SEGMENT AVIONICS AUXILIARY POWER UNIT CABIN SYSTEMS EQUIPMENT FURNISHINGS ELECTRICAL ENGINE ACCESSORIES FLIGHT CONTROLS FUEL SYSTEMS HYDRAULICS PNEUMATICS LANDING GEAR WHEELS AND BRAKES THRUST REVERSER OTHER DESCRIPTION Maintenance related to auto flight, communications, indicating/recording systems, navigation, and integrated modular avionics Maintenance of the auxiliary power unit Maintenance of cabin core systems, in-flight entertainment system (such as audio, video, and Wi-Fi equipment), external communication system, cabin mass memory system, cabin monitoring system, miscellaneous cabin system Maintenance of the aircraft equipment and/or furnishings, such as buffets/galleys, lavatories, cargo compartments, emergency equipment, accessory compartments, and insulation Maintenance of the generator drive, AC generation, DC generation, external power, etc. Maintenance of the ignition, engine air, engine controls, engine indicating systems, engine exhaust systems (excluding thrust reversers), engine oil systems, and engine starting systems Maintenance of the flight controls, such as aileron, rudder, elevator, stabilizer, flaps, spoiler, etc. Maintenance of the fuel, in-flight fuel dispensing, and engine fuel and control systems Maintenance of the hydraulic power systems Maintenance of the pneumatic systems, such as packs, air cycle machines, distribution and indicating Maintenance of the landing gear systems, including main gear and doors, nose gear and doors, extension and retraction, etc. Maintenance of the wheels and brakes Maintenance of the nacelles/pylons and thrust reversers Maintenance of the air-conditioning/environmental control systems, fire protection systems, ice and rain protection systems, lights (flight compartment, passenger compartment, cargo compartment, exterior, and emergency), oxygen systems, vacuum systems, multi-system, diagnostic and maintenance systems, information systems, and inert gas systems. The increasing cost of test equipment and technical data, coupled with operator initiatives to obtain greater utilization of spare parts, results in component work being contracted to OEM and thirdparty MRO service providers, often including spare parts availability guarantees, on a cost per flight hour or cost per flight cycle basis. Copyright Oliver Wyman 73

77 MRO Market Forecast MARKET FORECAST Component MRO, consisting of work on such equipment as auxiliary power units (APUs), avionics, wheels/brakes, landing gear, flight controls, pneumatics, hydraulics, equipment/furnishings, cabin systems, etc., represents $12.9 billion, or 17 percent, of total MRO activity. EXHIBIT 71: COMPONENT MARKET FORECAST BY AIRCRAFT CLASS US DOLLARS (BILLIONS) % % -0.1% 1.1% 5.2% 5.5% 0.1% -0.2% 3.7% 5.1% 4.5% 0.0% 0.5% 4.4% 5.3% Turboprop Regional Jet Wide-body 0 Narrow-body CAGR CAGR CAGR Component MRO, similar to engine MRO is an area where the costs continue to rise because of pricing power among a smaller set of major competitors. The market is expected to grow 4.8 percent annually over the first five-year period and 4.2 percent annually over the second five-year period, for a total growth of 4.5 percent per year over the full 10 year forecast period. MARKET STRUCTURE AND BALANCE OF TRADE Component MRO providers can be classified into five categories. Airline: Commercial air transport operators that perform work using in-house maintenance capabilities. Generally, the operators have a large enough fleet and experience to merit conducting in-house component maintenance. Airline-affiliated: Maintenance provided by affiliated companies or subsidiaries of airlines (such as KLM Maintenance & Engineering, Air France Industries, Delta TechOps, and Lufthansa Technik). The organization performs work for the affiliated airline as well as other operators and customers. These organizations leverage and scale capabilities to offer competitive pricing. Independent: Dedicated maintenance providers with no relation to either airlines or OEMs (not part of an authorized service center network). From large to small, these maintenance providers often have lower labor costs. Copyright Oliver Wyman 74

78 MRO Market Forecast Joint venture: Maintenance providers that are typically formed by joining the resources of OEMs and in-country capabilities to build indigenous capacity. OEM: Tier 1 original equipment manufacturers, such as BAE, Eaton, UTC-Aerospace Systems Goodrich, UTC-Aerospace Systems Hamilton Sundstrand, Honeywell, Meggitt, Messier, Panasonic, Rockwell Collins and Thales, offering maintenance capabilities. Based on known MRO contract information, it is possible to estimate the market share that each category holds. EXHIBIT 72: COMPONENT MRO MARKET SHARE BY MRO PROVIDER CLASSIFICATION 19% 2% 21% 64% 15% 43% 36% OEM Joint Venture Independent Contracted Airline Affiliated Total MRO In-House Airline Independent MROs, along with airlines and their affiliated providers, enjoy a notable share of the total market. Although OEMs control 19 percent of the total market for component maintenance, they are by far the dominant players in this MRO segment for complex component types, such as auxiliary power units, electrical systems, avionic and fuel systems. Component MRO, similar to engine MRO and for the same reasons, experiences a significant amount of offshoring. Further analysis of known long-term component maintenance contract information reveals that 36 percent of all component MRO work is offshored. North America and Western Europe, the location of many of the component OEM facilities, is where about 78 percent of all component work is done. Copyright Oliver Wyman 75

79 MRO Market Forecast EXHIBIT 73: NET COMPONENT MRO EXPORTS AND IMPORTS BY REGION Eastern Europe North America Western Europe China $150 M $431 M $1.3 B Middle East $159 M India Latin America $365 M Asia Pacific Demand Supply Net Exporter $301 M Africa $173 M $190 M $440 M Net Importer M = Millions, B = Billions DEFINITIONS: Imported work: MRO work an operator sends outside of its home region to be performed; essentially, the operator is importing the MRO service, even though it must physically send the airframe/engine/component outside its home region. Exported work: MRO work provided in a region for an operator in another region; essentially the MRO is exporting its MRO services, even though the airframe/engine/component will be physically located in MRO s home region when the work is done. Copyright Oliver Wyman 76

80 MRO Market Forecast DEMAND SUPPLY REGION TOTAL IMPORTED WORK IN REGION EXPORTED WORK TOTAL NET TRADE BALANCE Africa $217 M $177 M $40 M $3 M $44 M Importer Asia Pacific $1.3 B $624 M $641 M $184 M $800 M Importer China $600 M $184 M $413 M $25 M $438 M Importer Eastern Europe $233 M $158 M $75M $8 M $83 M Importer India $239 M $190 M $49 M >$1 M $49 M Importer Latin America $458 M $375 M $86 M $74 M $158 M Importer Middle East $513 M $394 M $119 M $29 M $148 M Importer North America $3.0 B $48 M $2.5 B $919 M $3.5 B Exporter Western Europe $1.7 B $277 M $1.4 B $1.6 B $3.0 B Exporter M = Millions, B = Billions COST STRUCTURE The component MRO spend can be divided into two elements: labor and material. The cost split between the elements depends on the component type. EXHIBIT 74: NET COMPONENT MAINTENANCE COST ELEMENTS Labor 38% Material 62% Labor is the smaller element and includes disassembly, cleaning, inspection, reassembly, and testing of the component. Copyright Oliver Wyman 77

81 MRO Market Forecast Material tends to represent the larger share of the component MRO spend and involves the piecepart material required to restore the line replaceable component. MATERIALS SUPPLY CHAIN Often exposed to harsh and varied environments, component materials wear down in service. When the material no longer satisfies design requirements, it is must be removed and replaced. The replacement may be a new/used or repaired material. Accordingly, the material cost element can be further divided into new/used and repaired material. EXHIBIT 75: COMPONENT MATERIALS MARKET BY MATERIALS SOURCE (US$ BILLION) $1.0 $0.8 $0.1 $6.1 $7.0 Repaired Material OEM $8.0 New/Used Material PMA Material Surplus New/used material is comprised of all items obtained from OEMs, PMA manufacturers, and Surplus/USM providers. Combined, these material sources account for around 88 percent of replacement materials. OEM: Materials manufactured by the existing Production Approval Holder (PAH), commonly referred to as the original equipment manufacturer (OEM), account for over 87 percent of new/used material demand, making OEM materials the largest sub-segment of new/used materials. PMA: PMA material is the smallest element of engine MRO and accounts for less than two percent of the new/used material sub-segment spend. This cost element includes new materials manufactured by a firm with Parts Manufacturer Approval (PMA) from its local airworthiness authority. Copyright Oliver Wyman 78

82 MRO Market Forecast Surplus/USM: Surplus material is new material purchased from the inventory of an operator or another materials source. Used Serviceable Material (USM) is material obtained from an operator s spare inventory or harvested from an aircraft that has been retired and torn down. Combined, surplus and USM material account for over 11 percent of the new/used material cost element. While new/used material sources typically have direct sales channels from the manufacturers to MROs and operators, it is estimated that 14 percent of all new/used engine material is supplied by distributors, which act as intermediaries between part sources, MROs, and operators. Distributors acquire new/used materials in a variety of ways, including buying excess stock from the OEMs and airlines and purchasing surplus materials from surplus/usm dealers. Repaired material, which is restored through application of OEM- and DER-approved methods, accounts for about 13 percent of the segment spend. This includes all DER/PRP costs incurred during the full restoration of a component. EXHIBIT 76: COMPONENT MATERIALS SUPPLY CHAIN Airframe Warehouse 3 rd Pty MRO In-Service Engine Warehouse PMA DER/PRP Operator Component Warehouse Distributor Other Warehouse Surplus Retired Original Equipment Manufacturers New/Used Material Sources Alternate Sources Repaired Material Sources Material Providers Maintenance Providers Aircraft Copyright Oliver Wyman 79

83 MRO Market Forecast LINE MAINTENANCE Line maintenance involves work performed on an in-service aircraft or on-wing engine on a daily basis or in response to discrepancies noted during operations. It is conducted before, after, and between flight operations, often at a gate or on the ramp. The aircraft is typically not removed from commercial service. Airlines budget time and resources for routine (scheduled) and non-routine (discrepancy correction) tasks. Scheduled line maintenance work can be grouped into preflight checks, transit checks, daily checks, weekly/overnight checks, and A checks. EXHIBIT 77: LINE MAINTENANCE SCHEDULED WORK SCOPES ACTIVITY DESCRIPTION FREQUENCY MAN-HOURS MATERIALS PRE-FLIGHT/ TRANSIT CHECKS DAILY CHECKS WEEKLY/ OVERNIGHT CHECKS A CHECKS Walk-around visual inspections performed by flight crew or mechanic to fix any defects that developed during flight operations Visual inspections and minor routine maintenance including measuring brake pad thickness; inspecting and testing emergency systems and equipment; testing hydraulics; fluid level checks; reviewing onboard maintenance computer messages; and maintaining IFE Similar routine as the daily checks but with allowances for additional tasks Routine and non-routine work included in the weekly check plus functionality testing; emergency and safety equipment checks; control surface and mechanism checks; and non-destructive testing Daily/before each flight Daily or every other day as applicable Weekly or every other week as applicable MH $0 $ MH $30 $ MH $0 $1, FH MH $500 $40 K While most line maintenance programs are standardized for given airframe types, various aircraft and varying flight schedules will dictate needs. Moreover, line maintenance requirements will gradually increase as the volume of technical defects and discrepancies climb with an aircraft s age. Copyright Oliver Wyman 80

84 MRO Market Forecast MARKET FORECAST Line maintenance represents $12.8 billion, or 17 percent, of total MRO activity. This segment is expected to grow 4.3 percent annually over the first five-year period and 3.3 percent annually over the second five-year period, for a total growth of 3.8 percent per year for the entire forecast period. EXHIBIT 78: LINE MAINTENANCE MARKET FORECAST BY AIRCRAFT CLASS US DOLLARS (BILLIONS) % 0.0% 0.7% 3.2% 5.4% 3.3% -0.5% 0.1% 2.2% 4.2% 3.8% -0.2% 0.4% 2.7% 4.8% Turboprop Regional Jet Wide-body CAGR CAGR CAGR Narrow-body In 2018, the global line maintenance market will be dominated by narrow-body spend, and this dominance should continue through the decade as market share is forecast to increase from 59 percent to 65 percent. Wide-body line maintenance is expected to grow at a healthy rate but will lose market share over the forecast period, falling from 31 percent to 28 percent. Line maintenance spend for regional jets and turboprops is expected to remain virtually the same over the 10-year period. Both classes are expected to slip one percent in market share. Regionally, North America and Western Europe are virtually tied for demand in Western Europe should widen its lead over North America throughout the forecast period. However, both Western Europe and North America are forecast to lose overall market share over the next decade as the growth rates for Asia and smaller developing regions outpace those of the mature regions. Copyright Oliver Wyman 81

85 MRO Market Forecast MARKET STRUCTURE Because of its importance in keeping an aircraft flying, line maintenance is carefully controlled by operators, which often perform the work in-house and only contract emergency on-call maintenance at non-maintenance stations. An operator s decision to contract line maintenance is often tied to locations with limited flight activity or few aircraft, which represent the most likely opportunities for contract line maintenance providers. Based on known MRO contract information, it is possible to estimate the share of the market that is in-house and contracted. EXHIBIT 79: LINE MAINTENANCE MARKET SHARE BY MRO PROVIDER CLASSIFICATION 23% 77% Contracted In-House Approximately 77 percent of line maintenance is performed in-house. When contracting out, operators look to providers that have experience for the aircraft in transit at that station. Key considerations include reputation, the ability to provide rapid service, response times, turn times, and labor rates, especially given that line maintenance labor rates tend to be higher. Line maintenance, when performed offshore, is only for international carriers that are likely to position their own employees at airports just as they do for domestic routes, and thus the trade balance among the regions is statistically insignificant. Copyright Oliver Wyman 82

86 MRO Market Forecast COST STRUCTURE Line maintenance spend can be divided into two elements: labor and material. EXHIBIT 80: LINE MAINTENANCE COST ELEMENTS Labor 78% Material 22% Labor is the major element of line work, constituting more than three-quarters of total spend. Skilled labor is required to perform the maintenance required during the operational day and overnight. Material tends to represent the smaller portion of the line MRO spend, making up just less than one quarter of the total. The cost is dominated by expendables and consumables small-dollar items. Repairable and line replaceable component MRO costs are captured in the component MRO segment. MATERIALS SUPPLY CHAIN Line maintenance is responsible for servicing and caring for the in-service fleet to support the daily flying schedule. Routine maintenance generally focuses on aircraft servicing, while non-routine maintenance deals with in-service discrepancies and damage reported by flight crews and cabin attendants. Any replacement parts needed may be new/used material or may be repaired material. Accordingly, the material cost element can be further divided into new/used material and repaired material. Copyright Oliver Wyman 83

87 MRO Market Forecast EXHIBIT 81: LINE MAINTENANCE MATERIALS MARKET SHARE BY MATERIALS SOURCE (US$ BILLION) $0.1 $0.03 $2.7 $2.7 $2.8 Repaired Material New/Used Material Material OEM PMA Surplus New/used material includes all material obtained from OEMs and PMA manufacturers. Combined, these material sources account for roughly 96 percent of replacement materials. OEM: Materials manufactured by the existing Production Approval Holder (PAH), commonly referred to as the original equipment manufacturer (OEM), account for 99 percent of new/used material demand, making OEM materials the largest sub-segment of new/used materials. PMA: PMA material is the smallest element of engine MRO and accounts for about 1 percent of the new/used material sub-segment spend. This cost element includes new materials manufactured by a firm with Parts Manufacturer Approval (PMA) from its local airworthiness authority. PMA is a combined design and production approval by a firm s local airworthiness authority for replacement parts for type-certificated aircraft, engines, and components. While new/used material sources typically have direct sales channels from the manufacturers to MROs and operators, it is estimated that 75 percent of all new/used material is supplied by distributors, which act as intermediaries between the part sources, MROs, and operators. Distributors acquire new/used materials in a variety of ways, including buying stock from the OEMs and airlines and from surplus/usm dealers. Repaired material, which is restored through application of OEM- and DER-approved repairs, accounts for three percent of the segment spend. This includes all DER/PRP costs incurred during full restoration so all aspects of the initial design requirements (such as strength, hardness, finish, dimensions) are satisfied. Copyright Oliver Wyman 84

88 MRO Market Forecast EXHIBIT 82: LINE MAINTENANCE MATERIALS SUPPLY CHAIN Airframe Warehouse 3 rd Pty MRO In-Service Engine Warehouse PMA DER/PRP Operator Component Warehouse Distributor Other Warehouse Surplus Retired Original Equipment Manufacturers New/Used Material Sources Alternate Sources Repaired Material Sources Material Providers Maintenance Providers Aircraft Copyright Oliver Wyman 85

89 MRO Market Forecast THIS PAGE IS INTENTIONALLY LEFT BLANK Copyright Oliver Wyman 86

90 5 ECONOMIC SENSITIVITY ANALYSIS

91 Economic Sensitivity Analysis ECONOMIC SENSITIVITY ANALYSIS Forecasting, particularly over the long term, is complex and subject to many variables. This analysis is based on Oliver Wyman s view of the most likely scenario, but slight changes in assumptions relating to the political and economic landscape can lead to considerable differences in the size and complexion of the global fleet and MRO market when the effects are amplified over time. Commercial airlines are highly subject to external influences, and it takes only one significant global event to alter the course of the industry. Given the degree of uncertainty surrounding particular economic and political variables over time, numerous scenarios are possible, each resulting in disparate fleet and MRO market predictions based on key factors. EXHIBIT 83: FACTORS AFFECTING FORECASTING GDP TRAFFIC FUEL PRICES INTEREST RATES Global GDP, passenger traffic growth, jet fuel prices, and long-term interest rates are the four primary factors affecting growth in the global fleet and MRO market. These elements influence demand and therefore can alter airline fleet planning, ultimately affecting the delivery rate of new aircraft and the retirement rate of in-service aircraft. A climb in the global GDP would likely result in increased traffic for operators, leading to a greater demand for new aircraft. If the opposite occurs a slowdown in the world economy that hurts demand operators will likely alter fleet plan growth or even scale back to more closely match the demand. Alternatively, a significant jump in jet fuel prices would encourage airlines to increase retirements of old, less fuel-efficient aircraft. Interest rates at their current levels benefit operators and lessors as the cost of financing is very low. If interest rates continue to rise, operators may stick with their current fleets as the cost of borrowing increases. The four factors impact the global fleet and MRO market with different magnitudes. Global GDP, a proxy for traffic growth, will contribute the most to potential changes to the fleet over the forecast period. If passenger and cargo growth both soar, operators are going to supply the world with the appropriate number of seat and ton miles to handle demand regardless of fuel prices and interest rates. Copyright Oliver Wyman 88

92 Economic Sensitivity Analysis The factors in the scenarios discussed below are in relation to the values used in our base forecast. For example, if global GDP growth is up, it is an increase from what is expected in our base forecast scenario. Below we outline the best- and worst-case scenarios. EXHIBIT 84: FLEET FORECAST WITH ALTERNATIVE SCENARIOS NUMBER OF AIRCRAFT 44,000 39,000 34,000 29,000 Baseline Forecast Likely Case Alternative Scenarios Best-/Worst-Case 24,000 Alternative Scenarios Four alternative scenarios to the base forecast will be reviewed in the following sections: Cloud Nine: First, there is a scenario that depicts the global economy as a well-oiled machine, running in perfect harmony year after year. This is the extreme best-case scenario. Black Swan: Next, there is an extreme negative scenario illustrating the effects of an event or series of events that have devastated the world economy. Strengthened Economy: This is a more likely better case where demand, and therefore the fleet, would vary based on a slightly strengthened economy. Weakened Economy: This is the opposite, a more likely case involving the weakening of the economy. Copyright Oliver Wyman 89

93 Economic Sensitivity Analysis CLOUD NINE This scenario is the most extreme and therefore the most unlikely. For this best-case turn of events to come about, global GDP would need to dramatically increase along with traffic growth, and fuel prices and interest rates would need to stay lower than expected. In this environment, operators would be quite profitable, have a low cost for borrowing, and demand for additional seat miles and new aircraft deliveries would increase. Low fuel prices would likely keep older, less fuel-efficient aircraft in the fleet to meet demand as there would no longer be a high, variable cost disadvantage to operate them. EXHIBIT 85: CLOUD NINE FLEET FORECAST NUMBER OF AIRCRAFT 44,000 Cloud Nine 39,000 34,000 29,000 Baseline Forecast Best-/Worst-Case 24,000 Alternative Scenarios In this scenario, the commercial fleet would grow to 41,695 by 2028, a nearly 4,000-aircraft increase from our base forecast. This fleet growth would fuel the MRO market to $128.5 billion in 10 years time, nearly $14 billion more than our current base forecast. Copyright Oliver Wyman 90

94 Economic Sensitivity Analysis BLACK SWAN This is the worst-case scenario. This outcome would involve a devastating event that severely impacts the world economy in general and the airline industry in particular. The horrific terrorist attacks of 9/11 are a prime example of such an event. In this scenario, world GDP growth would be much lower than anticipated, traffic growth would be exceptionally low, fuel prices would soar because of economic uncertainty or supply problems, and interest rates would climb. In this environment, operators would likely increase aircraft retirements because of high fuel prices and low passenger traffic growth. New aircraft orders would be deferred or cancelled altogether. EXHIBIT 86: BLACK SWAN FLEET FORECAST NUMBER OF AIRCRAFT 44,000 39,000 34,000 29,000 Black Swan Baseline Forecast Best-/Worst-Case 24,000 Alternative Scenarios In a Black Swan event, the fleet would grow to only 31,156 by 2028, nearly 7,000 aircraft fewer than the base forecast. The lack of new aircraft and the removal of older, more MRO-intensive aircraft would see the MRO market reach only $106.7 billion by Copyright Oliver Wyman 91

95 Economic Sensitivity Analysis STRENGTHENED ECONOMY In this scenario, world GDP growth and passenger traffic growth would be higher than expected. In a strengthened economy where GDP is growing at a higher rate, it is likely that the price of jet fuel would rebound to prices closer to the highs of With airline profitability up and higherthan-expected passenger traffic growth, the rate of new deliveries would increase. But higher fuel prices would lead operators to increase retirements of less fuel-efficient aircraft, limiting overall fleet growth. EXHIBIT 87: STRENGTHENED ECONOMY FLEET FORECAST NUMBER OF AIRCRAFT 44,000 39,000 Strengthened Economy 34,000 29,000 Baseline Forecast Likely Case 24,000 Alternative Scenarios A strengthened economy would drive the global fleet upward to 38,994 by 2028, over 1,000 more than the base forecast. In this scenario, MRO spend would trail the baseline forecast through 2026 before beginning a strong upturn. By 2028, this fleet would result in an MRO market of almost $124 billion, over $9 billion more than the base forecast. Copyright Oliver Wyman 92

96 Economic Sensitivity Analysis WEAKENED ECONOMY This scenario, with bearish assumptions about the economy, would result in lower-than-expected GDP and passenger traffic growth rates. In a moderately weaker global economy, fuel prices would stay depressed, continuing the struggles of oil-rich nations. With industry profitability down and lower-than-expected traffic growth, operator fleet plans would be altered to favor older fleets. EXHIBIT 88: WEAKENED ECONOMY FLEET FORECAST NUMBER OF AIRCRAFT 44,000 39,000 Weakened Economy 34,000 29,000 Baseline Forecast Likely Case 24,000 Alternative Scenarios A weakened economy scenario limits growth of the global fleet to 36,704 aircraft by 2028, nearly 1,300 less than the base forecast. This scenario is forecast to track with the baseline forecast until 2020 before quickly falling behind. By 2028, MRO spend would be nearly $3 billion below the base forecast. SYNOPSIS The economic and political landscape of the world will greatly shape the commercial airline industry over the next 10 years. While the fleet could range from 31,000 to 42,000 in 2028, it is likely that the number will fall between 37,000 and 39,000 aircraft. There is some good news for MROs in these more likely scenarios in the medium term. The likely case and base forecasts show that by 2023, the fleet will be between 31,000 and 32,000 aircraft, and the associated MRO spend will reach between $93 billion and $98 billion. Regardless of any change in the economy, the overall MRO market looks stable over the next five years. Copyright Oliver Wyman 93

97 6 BUSINESS AVIATION OUTLOOK

98 BUSINESS AVIATION OUTLOOK While the global air transport jet and turboprop fleet stands at 26,307 aircraft in 2018, the business aviation fleet is comprised of 32,029 aircraft, making up 55.0% of the global civil commercial and business aircraft fleet. EXHIBIT 89: 2018 CIVIL AVIATION FLEET BY MARKET SEGMENT The business aviation fleet includes 1,048 very light jets, 8,491 light jets, 4,202 midsize jets, 2,001 super midsize jets, 4,047 large cabin jets, 1,862 ultra-long range jets, 136 regional jets, 282 narrowbodies, and 51 wide-bodies. The remaining 31% of the global business aviation fleet contains nearly 9,909 air transport category turboprops as well as small turboprops such as the Cessna Caravan. General aviation aircraft with a maximum takeoff weight (MTOW) of less than 8,000 pounds are not included in the business aviation fleet. Copyright Oliver Wyman 95

99 BUSINESS AVIATION OUTLOOK EXHIBIT 90: 2018 BUSINESS AVIATION FLEET BY CLASS Nearly 65% (20,682) of the business aviation fleet is domiciled in North America. Latin America and the Caribbean is the second largest market with 4,524 aircraft, followed by Western Europe with nearly 3,320 aircraft. The remaining regions make up merely 11% of the business aviation fleet. Copyright Oliver Wyman 96

100 BUSINESS AVIATION OUTLOOK EXHIBIT 91: 2018 BUSINESS AVIATION FLEET BY REGION As with the commercial air transport jet and turboprop fleet, aircraft utilization is the key driver of MRO services. While the business aviation fleet is significantly larger than the commercial air transport fleet, utilization is substantially lower. An air transport aircraft, on average, is utilized more than 8-10 hours each day of the year while a business aircraft averages less than one hour per day. The business aviation MRO spend complexion and scale is, therefore, quite different as well. Total 2018 MRO spend for the business aviation segment which is reported separately from the commercial figures discussed throughout this report is projected to be $12.3 billion, and consists of four major segments: airframe, modification, engine, and component. Checks and other maintenance tasks that fall under line maintenance for air transport aircraft are captured in airframe maintenance. At 35.6% of total MRO spend, engines make up the largest portion of business aviation MRO, followed closely by component MRO spend at 24%. The remaining 40.3% of total MRO is split between airframe and modification spend. Copyright Oliver Wyman 97

101 BUSINESS AVIATION OUTLOOK Unlike air transport MRO, no aircraft class dominates MRO spend globally. The business aviation turboprop constitutes approximately 30.9% of the global fleet but only accounts for 13.4% of the business aviation MRO spend. Large cabin jets, on the other hand, made up 12.6% of the global fleet and accounted for 25% of the business aviation MRO market in 2018 due to higher utilization rates. EXHIBIT 92: 2018 BUSINESS AVIATION MRO MARKET BY SEGMENT Copyright Oliver Wyman 98

102 BUSINESS AVIATION OUTLOOK A relatively small number of aircraft manufacturers dominate the market. Textron Aviation, Bombardier, Gulfstream, Dassault Aviation, and Embraer comprise of over 81% of the global fleet and also account for more than 91%of the expected MRO spend in Pilatus, Boeing, Piper, Airbus, and Daher-Socata, make up just over 13% of the global fleet and just over 6% of the MRO spend forecast in The remaining 6% of the fleet and 2.6% of 2018 MRO spend is split among 19 aircraft manufacturers. EXHIBIT 93: 2018 BUSINESS AVIATION FLEET AND MRO MARKET BY OEM Copyright Oliver Wyman 99

103 7 AVIATION MAINTENANCE INDUSTRY EMPLOYMENT & ECONOMIC IMPACT

104 AVIATION MAINTENANCE INDUSTRY EMPLOYMENT & ECONOMIC IMPACT There are more than 380,000 employees participating in the civil MRO market from nearly 4,900 firms. 81% of these firms are small and medium-sized enterprises (SMEs). Globally, there are almost 280,000 technicians 21% of which are certificated. In the United States, there are about 4,000 firms with close to 185,000 employees in the civil MRO market. SMEs comprise 85% of all firms and account for over 21% of all employees. There are more than 136,000 technicians in the USA and approximately 38% are certificated. EXHIBIT 94: 2018 CIVIL AVIATION MRO ENTITIES AND EMPLOYMENT Copyright Oliver Wyman 101

105 AVIATION MAINTENANCE INDUSTRY EMPLOYMENT & ECONOMIC IMPACT AIRFRAME & LINE MAINTENANCE Airframe maintenance facilities employ just over 300,000 employees within approximately 3,000 companies; nearly 80% are SMEs, which employ nearly 30,000 people worldwide. In the US, there are over 133,000 employees in the airframe maintenance supply chain within about 2,400 companies; over 84% of the providers in the US are SMEs employing more than 24,000 people. According to the FAA, there are 220,000 technicians engaged in airframe maintenance, with just over 25% being FAA-certificated individuals. In the US, there are over 98,000 technicians half of which are FAA certificated. EXHIBIT 95: 2018 CIVIL AVIATION AIRFRAME & LINE MRO ENTITIES AND EMPLOYMENT Labor, devoted to line maintenance facilities, accounts for just over 95,000 employees; nearly 10,500 additional employees support work in other parts of the line maintenance supply chain. The U.S. line maintenance supply chain is estimated to be close to 39,000 employees. Copyright Oliver Wyman 102

106 AVIATION MAINTENANCE INDUSTRY EMPLOYMENT & ECONOMIC IMPACT ENGINE MAINTENANCE The global engine overhaul supply chain employs nearly 288,000 workers within about 1,900 companies; close to 72% of which are SMEs, employing nearly 21,000 worldwide. In the US, there are close to 123,000 employees in the engine overhaul supply chain within 1,600 entities; 78% are SMEs employing approximately 17,600 employees. Globally, there are close to 288,000 technicians in the engine overhaul supply chain with about 24% of these technicians being FAA certificated. In the US there are over 90,000 technicians 51% being FAA certificated. EXHIBIT 96: 2018 CIVIL AVIATION ENGINE MRO ENTITIES AND EMPLOYMENT Copyright Oliver Wyman 103

107 AVIATION MAINTENANCE INDUSTRY EMPLOYMENT & ECONOMIC IMPACT COMPONENT MAINTENANCE The global component maintenance supply chain employs nearly 332,000 workers within about 3,600 companies. Almost 79% of these companies are SMEs, employing nearly 36,000 people worldwide. In the US, there are almost 152,000 employees in the component maintenance supply chain within nearly 3,000 entities; about 83% are SMEs employing over 28,000 employees. Globally, there are more than 243,000 technicians in the component maintenance supply chain; around 22% being FAA certificated. Nearly 112,000 technicians are employed in the U.S. with 42% being FAA certificated. EXHIBIT 97: 2017 CIVIL AVIATION COMPONENT MRO ENTITIES AND EMPLOYMENT Copyright Oliver Wyman 104

108 AVIATION MAINTENANCE INDUSTRY EMPLOYMENT & ECONOMIC IMPACT US EMPLOYMENT AND ECONOMIC IMPACT The US civil aviation maintenance industry employs nearly 279,000 workers and generates $47B in economic activity. The MRO segment accounts for 76% of these employees with more than 212,000 workers. Companies that are certificated by the FAA under part 145 are the largest employers with just under 185,000 employees. The remaining 27,000 MRO workers are employed by air carriers involved in civil aviation. Parts manufacturing and distribution, accounts for the remaining 24% of employment with close to 67,000 employees. Despite employing three-quarters of workers, MRO accounts for 52% of the economic activity or $24.2B while the 24% working in parts manufacturing and distribution generate 48% or $22.7B. EXHIBIT 98: 2018 US CIVIL AVIATION EMPLOYMENT AND ECONOMIC IMPACT At the state level, Oliver Wyman estimates that California, Texas, Washington, Florida and Georgia represent just over a combined 41% of the total US civil aviation maintenance employment with close to 115,000 employees; the top ten states represent 63% of total US employment. California and Washington also generate the most economic activity followed by Arizona, Texas, Connecticut, and Florida. These six states generate about 47% of the total economic activity. Copyright Oliver Wyman 105

109 AVIATION MAINTENANCE INDUSTRY EMPLOYMENT & ECONOMIC IMPACT EXHIBIT 99: 2018 US CIVIL AVIATION EMPLOYMENT AND ECONOMIC IMPACT Copyright Oliver Wyman 106

110 AVIATION MAINTENANCE INDUSTRY EMPLOYMENT & ECONOMIC IMPACT EXHIBIT 100: 2018 US CIVIL AVIATION EMPLOYMENT AND ECONOMIC IMPACT Aviation Maintenance Industry Employement Aviation Maintenance Industry Economic Activity Maintenance, Repair and Overhaul (MRO) Parts Manufacturing Maintenance, Repair Parts Manufacturing Total Employment State FAA Repair Station Air Carrier /Distribution and Overhaul (MRO) /Distribution Total Economic Activity AK ,027 $115,999 $3,060 $119,060 AL 4, ,303 $487,243 $9,181 $496,424 AR 1, ,379 $150,298 $20,402 $170,699 AZ 6, ,809 16,739 $789,662 $3,335,321 $4,124,983 CA 24,944 2,793 5,439 33,176 $3,160,583 $1,849,405 $5,009,988 CO 1, ,263 $256,156 $5,100 $261,256 CT 4,710-6,997 11,707 $536,696 $2,379,166 $2,915,863 DE ,028 $107,795 $27,882 $135,677 FL 17,878 2, ,044 $2,287,740 $328,806 $2,616,545 GA 16,774 1,132 1,420 19,326 $2,040,358 $482,838 $2,523,196 GU $5,811 $0 $5,811 HI $89,222 $2,720 $91,942 IA 2, ,399 7,118 $309,825 $1,495,777 $1,805,603 ID $57,316 $11,221 $68,537 IL 3,871 3,002 1,427 8,300 $783,167 $485,218 $1,268,385 IN 2, ,153 4,137 $340,022 $392,051 $732,072 KS 5, ,883 10,433 $632,413 $1,660,350 $2,292,763 KY 823 1, ,809 $315,067 $14,961 $330,028 LA 1, ,161 $225,162 $62,905 $288,067 MA 2, ,849 $294,328 $90,447 $384,775 MD ,198 $69,622 $199,596 $269,218 ME 1, ,345 $138,675 $43,523 $182,198 MI 4, ,506 7,188 $533,506 $852,107 $1,385,613 MN 2, ,405 $347,428 $121,049 $468,478 MO 1, ,721 $193,598 $7,481 $201,079 MP $798 $0 $798 MS 1, ,148 $115,088 $46,924 $162,011 MT $46,149 $6,120 $52,270 NC 3, ,868 $511,286 $129,550 $640,836 ND $22,904 $33,323 $56,226 NE 1,404-1,284 2,688 $159,983 $436,594 $596,578 NH $85,461 $11,221 $96,682 NJ 3, ,897 $507,298 $151,312 $658,610 NM $85,347 $15,981 $101,329 NV ,403 $146,765 $39,103 $185,868 NY 5,176 1,206 2,716 9,098 $727,218 $923,512 $1,650,730 OH 6, ,142 10,012 $782,825 $1,068,364 $1,851,188 OK 11, ,161 $1,326,700 $176,134 $1,502,834 OR 1, ,930 $206,816 $39,103 $245,919 PA 2, ,797 $419,785 $38,423 $458,208 PR $79,764 $0 $79,764 RI $28,373 $14,961 $43,334 SC 1, ,804 $204,423 $3,400 $207,823 SD $7,635 $57,124 $64,759 TN 2,273 1, ,541 $449,640 $202,316 $651,956 TX 15,909 2,524 3,871 22,304 $2,100,409 $1,316,243 $3,416,652 UT ,118 $75,662 $154,372 $230,034 VA 1, ,313 4,612 $261,967 $786,482 $1,048,449 VI $1,253 $0 $1,253 VT $21,194 $99,968 $121,162 WA 9, ,920 18,882 $1,135,153 $3,033,038 $4,168,190 WI 2, ,463 $270,057 $31,622 $301,680 WV 1, ,129 $124,318 $12,921 $137,239 WY $5,811 $5,780 $11,592 Total 184,772 27,410 66, ,984 $24,177,774 $22,714,460 $46,892,234 Copyright Oliver Wyman 107

111 AVIATION MAINTENANCE INDUSTRY EMPLOYMENT & ECONOMIC IMPACT AVIATION MAINTENANCE TECHNICIAN FORECAST The aviation maintenance technician labor market is tightening across all segments. The Oliver Wyman 2017 MRO Survey found almost every respondent in North America is already experiencing labor imbalances, choosing to mitigate shortcomings primarily through the use of overtime / internal productivity and efficiency strategies, and internal training to expand skill sets. The period from illustrates how supply has stagnated while demand has increased at a steady rate. EXHIBIT 101: AVIATION MAINTENANCE TECHNICIAN SUPPLY AND DEMAND BY AIRCRAFT SEGMENT Source: A4A Members, Other US Airlines, US MROs, BLS, FAA, Oliver Wyman Analysis If there s one thing that can give the commercial industry room to breathe, it s that labor demand is expected to level off for the next five years. The rash of forecast retirements of old generation aircraft and the introduction of new aircraft in North America allow for a honeymoon period before a first major maintenance event occurs. Copyright Oliver Wyman 108

112 AVIATION MAINTENANCE INDUSTRY EMPLOYMENT & ECONOMIC IMPACT That honeymoon period is expected to end in Once major maintenance events start occurring for new generation aircraft, labor demand is going to increase rapidly and broadly. At the current attrition rate of technicians, demand will greatly outpace supply within the next decade. EXHIBIT 102: U.S. COMMERCIAL AVIATION MAINTENANCE TECHNICIAN SUPPLY AND DEMAND Source: Oliver Wyman Analysis Copyright Oliver Wyman 109

113 AVIATION MAINTENANCE INDUSTRY EMPLOYMENT & ECONOMIC IMPACT We estimate that there are 85,337 aviation maintenance technicians currently employed in the US commercial MRO industry with a median age of 51, nearly 9 years older than the median age of the US labor force. EXHIBIT 103: 2017 US COMMERCIAL MRO MAINTENANCE TECHNICIAN WORKFORCE BY AGE Source: A4A Members, Other US Airlines, US MROs, BLS, FAA, Oliver Wyman Analysis Copyright Oliver Wyman 110

114 AVIATION MAINTENANCE INDUSTRY EMPLOYMENT & ECONOMIC IMPACT Over the next ten years, we expect a wave of technicians leaving the industry by way of retirement. The distribution in 2027 is a stark contrast from present day. The industry median age is forecast to appear much more similar to the average industry in the U.S. EXHIBIT 104: 2027 US COMMERCIAL MRO MAINTENANCE TECHNICIAN WORKFORCE BY AGE Source: A4A Members, Other US Airlines, US MROs, BLS, FAA, Oliver Wyman Analysis Copyright Oliver Wyman 111

115 8 CONCLUSION

116 This report details the worldwide commercial air transport jet and turboprop fleet and corresponding MRO market that supports that international fleet. Cautiously optimistic economic forecasts predict an improved market environment with continuing concerns. By 2028, more than 55% of the fleet will consist of aircraft delivered during the forecast period. It will include nearly 20,700 new aircraft; just over 9,000 aircraft will leave the fleet. Narrow-body aircraft will total 66% of the in-service aircraft, an increase from 57%. Wide-bodies will marginally decrease to 19% of the fleet, down from 20% in Regional jets and turboprops will steadily decrease in absolute numbers. This will leave the world with a much younger, more technically advanced fleet in Globally, fleet growth is solid; however, in the US, where fleet growth is virtually flat, new deliveries will largely be replacement aircraft. Still, North America is a large market and will remain so as other regions grow fleets to comparable proportions. Developing regions such as Asia Pacific and China are poised for substantial fleet growth. Asia as a whole is the driver of worldwide fleet growth and, in turn, global MRO growth. EXHIBIT 105: COMMERCIAL AIR TRANSPORT MRO NET GROWTH BY REGION Globally, air transport jet and turboprop MRO spend in 2018 is expected to be $77.4 BN, growing to $114.7 BN by 2028, representing a healthy 4.0% CAGR. North America is the single largest region for MRO spend, with $19.9 BN in 2018, but is forecast to grow modestly at just 1.8% annually to $23.8 BN through Copyright Oliver Wyman 113

117 Regionally, China, Asia Pacific, and the Middle East represent the greatest absolute net growth in MRO. Looking at the vintages expected to drive this growth by the end of the forecast, the 2000s and 2010s aircraft will dominate. As large numbers of 737 Classics and A320 family aircraft leave the fleet, the 1980s vintage will become a much less important piece of the MRO market. Aircraft from the 2010s vintage will account for over a quarter of the MRO market by EXHIBIT 106: COMMERCIAL AIR TRANSPORT MRO NET GROWTH BY VINTAGE Copyright Oliver Wyman 114

118 Airframe MRO spend is forecast to be $19.0 BN for Airlines and their affiliated providers maintain a solid hold on this market. The airframe MRO market is a low-margin, labor-intensive segment. Engine MRO spend is expected to be $32.7 BN in Engine MRO is largely contracted, and OEMs have the largest share of this market. Engine MROs enjoy higher margins as the market is more material-intensive. Component MRO spend is forecast to be $12.9 BN in Like the engine MRO business, much of the component MRO market is contracted, although this varies greatly from one component type to the next. Similarly, the labor/material mix can vary. Finally, line maintenance spend is pegged at $12.8 BN in The nature of line maintenance work and its impact on airline operational performance makes it less prone to contracting. The business aviation fleet currently consists of more than 32,000 aircraft requiring roughly $12.3 BN in MRO demand in Nearly 65% (20,682) of the business aviation fleet is domiciled in North America. In the U.S., roughly 4,000 firms with nearly 185,000 employees operate in the civil MRO market (including airline employees). SMEs account for 85% of U.S. firms and 21% of all employees. There are over 136,000 technicians in the U.S. and approximately 38% are certificated. Copyright Oliver Wyman 115

119