Presented by Michael Howard 28 October 2010 Las Vegas, Nevada

Transcription

1 Presented by Michael Howard 28 October 2010 Las Vegas, Nevada MARPA 2010 Annual Conference Ann Arbor, Michigan Amersham, United Kingdom Singapore MARPA 2010 ANNUAL CONFERENCE

2 AGENDA MRO Market Outlook PMA Market Outlook MARPA 2010 ANNUAL CONFERENCE 2

3 Two Major Factors Influence Aircraft MRO Activity 1. Fundamental Demand For Aircraft MRO Predicted airline maintenance spending as a result of aircraft demographics, utilization, equipment reliability, maintenance programs and regulations A good predictor of supplier MRO and aftermarket activity in normal times 2. MRO Supply Chain Practices Inventory stocking & destocking, use of surplus components, deferred and reduced scope maintenance All of the above act as a buffer between fundamental demand and realized revenue by OEMs and MRO suppliers Important in times of crisis MARPA 2010 ANNUAL CONFERENCE Source: AeroStrategy 3

4 ...And The First Factor, Fundamental Air Transport MRO Demand Is $42.7 Billion In 2009 Modifications 7% Eastern Europe 3% Latin Africa America 4% Airframe Engine 5% North 15% 36% America 34% By Activity Middle East 5% China 5% India 1% By Region Line 20% Asia Pacific 16% Components 22% Western Europe 27% MARPA 2010 ANNUAL CONFERENCE Source: AeroStrategy/OAG Aviation 4

5 Which Is $2.3B Lower Than The 2007 Peak Modifications $45B $44.0B $42.7B Airframe 30.0 Components Line Engine Recession = Three Years Of Lost Growth! MARPA 2010 ANNUAL CONFERENCE Source: AeroStrategy/OAG Aviation 5

6 Fundamental MRO Demand Is Expected To Recover And Reach $58 Billion By CAGR Mods 7.2% 50 Line Airframe 1.2% 40 Line 1.5% 30 Components 3.1% 20 Engine 4.0% The MRO market is expected to recover early next decade and reach $58B by 2018 a 3.2% CAGR (excludes inflation) Airframe maintenance will have the lowest growth due to retirements and introduction of less maintenance intensive aircraft 10 Total = 3.2% Source: AeroStrategy OAG Aviation MARPA 2010 ANNUAL CONFERENCE 6 * Constant 2009 US$

7 India, China And The Middle East Will Be The Fastest Growing Regions CAGR India 10.7% E. Europe 3.3% Africa 2.3% China 91% 9.1% Latin Am. 4.3% Middle East 7.6% Asia Pacific* 4.5% W. Europe 1.9% India, China and the Middle East will be the fastest growing regions North America and Western Europe, the largest markets, will be relatively flat 10 N. America 0.8% Total = 3.2% Note: * Excludes China and India Source: AeroStrategy OAG Aviation MARPA 2010 ANNUAL CONFERENCE * Constant 2009 US$ Asia pacific excludes China and India 7

8 And Absolute Market Growth Will Be Driven By China And The Rest Of Asia-Pacific Asia-Pacific (excluding China and India) will have the highest h absolute increase in MRO spending MRO spending in China will increase by $3B Despite high growth, Indian MRO spending will increase by <$1B Note: * Excludes China and India Source: AeroStrategy OAG Aviation MARPA 2010 ANNUAL CONFERENCE * Constant 2009 US$ Asia pacific excludes China and India 8

9 The Second Factor, MRO Supply Chain Practices Attenuate Fundamental MRO Demand In Times Of Crisis 1. Fundamental Demand For Aircraft MRO Predicted airline maintenance spending as a result of aircraft demographics, utilization, equipment reliability, maintenance programs and regulations A good predictor of supplier MRO and aftermarket activity in normal times 2. MRO Supply Chain Practices Inventory stocking & destocking, use of surplus components, deferred and reduced scope maintenance All of the above act as a buffer between fundamental demand and realized revenue by OEMs and MRO suppliers Important in times of crisis MARPA 2010 ANNUAL CONFERENCE Source: AeroStrategy 9

10 And Operators Have Numerous Options For Reducing Maintenance Spend In Times Of Crisis Engines Components Airframe Heavy Reduced scope of maintenance more repair and less replace Defer replacement of expensive life limited parts until they reach absolute cycle limits(e.g. short-stub engines) Greater leverage of spare engines in lieu of overhauls Acquisition of surplus engines for mature aircraft Renegotiate MRO contracts Burn down rotable inventory in lieu of component MRO repair Reduced scope maintenance more repair and less replace Acquisition of surplus rotables for mature aircraft Renegotiate MRO contracts Reduce utilization and rotate in- service aircraft to minimize heavy maintenance checks required by hour/cycle limits Park older aircraft approaching expensive heavy checks Reduce discretionary modifications (e.g. Interior upgrades, painting) MARPA 2010 ANNUAL CONFERENCE Source: AeroStrategy 10

11 One Alternative Is To Destock Some Of The $47 B Of Inventory In The MRO Supply Chain About $47B in inventory $47B The weighted average holding cost of 21.5% 14% implies a cost $10.1B 1B for the 19% industry Surplus 21.5% Distributors MROs OEMs Airlines 61% $10.1B Airlines bear the brunt of this burden - $6.3B per annum or 62% of the total Total Inventory Holding Cost MARPA 2010 ANNUAL CONFERENCE Source: AeroStrategy/IATA 2009 Inventory & Logistics Survey, Aerostrategy / OAG MRO model 11

12 And Operators Hold 60% Of MRO Supply Chain Inventory; ~40% Is Aircraft Rotables Airline Operator Inventory Overhaul Shop Inventory Outside Parts Repairs & Processes Service Parts Inventory Casting, Forging & Raw Materials By Organization Airlines: 61% MRO suppliers: 14% OEMs: 19% Distributors 6% By Type Of Inventory Rotables (components): 41% Consumables 24% Spare engines 12% Airframe parts 8% Other (piece parts) 17% Source: AeroStrategy * Inventory estimates based on a 2009 global supply chain survey MARPA 2010 ANNUAL CONFERENCE conducted by AeroStrategy and IATA 12

13 The Near-Term Impact Of Destocking Will Be Greatest For Downstream Suppliers Airline Operator Inventory Overhaul Shop Inventory Outside Parts Repairs & Processes Service Parts Inventory Casting, Forging & Raw Materials Near-term impact of inventory reduction on MRO demand Moderate Significant Very Significant MARPA 2010 ANNUAL CONFERENCE Source: AeroStrategy 13

14 And This Results In Larger Swings In Parts Demand Than Overhaul & Repair Services Airline Capacity Overhaul & Repair Services Service Parts MARPA 2010 ANNUAL CONFERENCE Source: AeroStrategy 14

15 Most OEMs Experienced A 10-20% Reduction In Aftermarket Revenue In 2009 Airline Operator Fundamental MRO demand down in 2009 Overhaul Shop Outside Parts Repairs & Processes Service Parts Casting, Forging & Raw Materials Near-term reduction in supplier revenues (10 15%) (15 30%) (20 40%) AeroStrategy believes that OEMs and MRO suppliers saw between a 10 and 40% reduction in 2009 due to the industry crisis depending on the position in the supply chain and on the supplier s portfolio Most OEMs had a 10 20% reduction in aftermarket t revenue in 2009 based on a blend of service parts and overhaul services MARPA 2010 ANNUAL CONFERENCE Source: AeroStrategy 15

16 As Evident By The 9% Decline In Revenue For HEICO s Flight Support Group In : Down 9% : Down 9% CAGR = 24%** Note: * Flight support group includes distribution, repair and PMA business ** Growth rate includes organic growth and acquisitions MARPA 2010 ANNUAL CONFERENCE Source: HEICO 10-K 16

17 There Is Still Room For Continued Destocking Particularly In The Middle East And Asia-Pacific US$ - Million ns* Airline Average = $1.9 M USD per aircraft Middle East Asia Pacific Latin America North America Africa Europe MARPA 2010 ANNUAL CONFERENCE 17 * Book Value Source: AeroStrategy/IATA 2009 Inventory & Logistics Survey

18 AeroStrategy Anticipates A Return To MRO Growth In 2010 With The Makeup For Destocking In 2011/ Realized supplier revenue 2012: Low double digit growth Fundamental MRO demand 2009: Down : Mid Single digit 15-20% 20 growth : Low Single digit growth Source: AeroStrategy/OAG Aviation MARPA 2010 ANNUAL CONFERENCE * Constant 2009$ 18

19 AGENDA MRO Market Outlook PMA Market Outlook MARPA 2010 ANNUAL CONFERENCE 19

20 The 2009 PMA Market Contracted By An Estimated 8% ($M) $416 M $381 M $353 M PMA Penetration (%) 3.0% 2.5% 2.0% 15% 1.5% 1.0% 05% 0.5% 0.0% 2009 PMA market wass down 8% versus 2008, from $381M to $353M Since the peak in 2007, the PMA market has fallen by 17% Several factors drove the PMA market contraction Reduction in Fundamental Demand Airline use of buffers Deferred maintenance Work scopes (e.g. more repair and less replace) Cannibalization of surplus aircraft and engines Lack of airline resources devoted to PMA approval process OEM defensive measures MARPA 2010 ANNUAL CONFERENCE Source: AeroStrategy/IATA 2009 Inventory & Logistics Survey, Aerostrategy / OAG MRO model 20

21 AeroStrategy Conducted The Survey In Conjunction With IATA; Respondents Include More Than 70 Companies Survey Objectives MRO Inventory and Supply Chain Logistics Survey Respondents OEMs 13% (10) Distributors 14% (11) Airlines 47% (36) Sent survey instrument to more than 200 airlines via IATA and 100+ airlines, OEMs and distributors via AeroStrategy Survey questions included Current inventory value and type Location of inventory Inventory turns and costs Anticipated changes in inventory levels Use of pooling, vendor-owned inventory, and PMA parts MROs 25% (19) 36 airlines with over 3,800 aircraft in total 19 MROs with over $11B in MRO revenue 11 distributors and surplus dealers with inventory valued at $2.6B 10 OEMs with nearly $3.5B in spare parts sales volume MARPA 2010 ANNUAL CONFERENCE 21

22 The Majority Of Airlines And MROs Feel That OEM Pricing Policy Significantly Drive The Usage Of PMA 60% MRO Airline 50% % of Re espondents 40% 30% 20% 10% 0% (1) Not Significant (2) (3) Moderately (4) (5) Significant MARPA 2010 ANNUAL CONFERENCE 22 Source: AeroStrategy/IATA 2009 Inventory & Logistics Survey

23 And Have Seen Price Increase From The OEMs Of At Least 3% In Recent Years 60% MRO Airline 50% % of Re espondents 40% 30% 20% 10% 0% Decline Remain Same Increase <2% Increase 3%-5% Increase >5% MARPA 2010 ANNUAL CONFERENCE 23 Source: AeroStrategy/IATA 2009 Inventory & Logistics Survey

24 While The Perception Is That PMA Offers At Least 20% Discount Compared To OEM Parts 80% 70% MRO Airline 60% % of Re espondents 50% 40% 30% 20% 10% 0% 0%-10% 11-20% 21%-30% 31%-40% >40% MARPA 2010 ANNUAL CONFERENCE 24 Source: AeroStrategy/IATA 2009 Inventory & Logistics Survey

25 Over 90% Of The Airlines In The Survey Have Authority To Use PMA Parts Does your authority allow your airline to use PMA parts? NO YES Do you know if your authority has a general policy of accepting/endorsing the FAA PMA approval of parts? 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%100% % of Respondents MARPA 2010 ANNUAL CONFERENCE 25 Source: AeroStrategy/IATA 2009 Inventory & Logistics Survey

26 But Many Airlines Believe That Leasing Companies Are The Largest Barrier To Greater PMA Penetration ts # of Respondent 18 Regulatory 16 OEM Agreements Very Significant Leasing Companies Culture Other Insignificant It is not even possible to arrive at a reasonable financial formula to allow a lessee to use substitute materials in return for a higher rent. Chief Technical Officer of A Leasing Company MARPA 2010 ANNUAL CONFERENCE 26 Source: AeroStrategy/IATA 2009 Inventory & Logistics Survey

27 The Air Transport PMA Market Is Expected To Reach $618M Within The Next Five Years : 7% Growth 2011: 15% Growth The PMA market will begin to recover in 2010 with an : estimated 7% growth rate In 2011, the PMA market is forecasted to spring-back with a robust growth rate of 15% Overall, the PMA market is estimated to grow from Engine $353M in 2009 to $618M Components in 2014, a 12% CAGR Airframe PMA penetration expected to reach 3.3% of total material consumption 12% Growth 300 Components Penetration (%) 2.3% 2.4% 2.7% 2.9% 3.1% 3.3% * Constant 2009 US$ Source: AeroStrategy analysis, MARPA 2010 ANNUAL CONFERENCE AeroStrategy Engine Overhaul Survey 27

28 Key Messages Fundamental air transport MRO demand is $42.7 billion in 2009, which h is $2.3B lower than the 2007 peak In the near-term, use of MRO demand buffers have magnified the recession; most OEMs experienced a 10-20% reduction in aftermarket revenue in 2009 AeroStrategy anticipates a return to MRO growth in 2010 with the makeup for destocking in 2011/2012 Airlines and MROs in the survey feel that OEM pricing policy drive the usage of PMA and have seen price increase of at least 3% in recent years While over 90% of the airlines surveyed have authority to use PMA parts, many airlines believe that leasing companies are the largest barrier to greater PMA usage The 2009 PMA market contracted by an estimated 8%, but is expected to reach $618M within the next five years MARPA 2010 ANNUAL CONFERENCE 28

29 Thank You For Your Attention! AeroStrategy is a specialist management consulting firm devoted to aviation and aerospace sectors with offices in Ann Arbor, Amersham, U.K., and Singapore To learn more about AeroStrategy visit or contact: David Stewart, Partner Ph: dstewart@aerostrategy.com Kevin Michaels, Partner Ph: kmichaels@aerostrategy.com Hal Chrisman, Principal Ph: hchrisman@aerostrategy.com MARPA 2010 ANNUAL CONFERENCE 29