MRO Opportunities and Challenges For OEMs. Insert Title Here. Insert Bullet Text Level 1 Here. Insert Bullet Text Level 2 Here

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1 Insert Title Here MRO 2020 Opportunities and Challenges For OEMs Dr. Kevin Michaels 31st Annual Commercial Aerospace Suppliers Conference 14 March 2017 Beverley Hills, CA 0

2 Insert Title Here Agenda Historical context MRO Megatrends Implications for OEMs 1

3 Maintenance, Repair & Insert Overhaul Title Here has evolved over 45 years Operators OEMs MROs The Development Insert Subtitle of Air Transport Here MRO 1970s 1980s 1990s 2000s 2010s Self-sufficiency emphasis US Deregulation Atlas & KSSU alliancess Reactive; focus on customer support & spares Niche independent MROs Selective outsourcing & rationalization European liberalization Awakening; more aftermarket focus GE acquisitions RR TotalCare Growth of independent MROs LH Technik M RO Conference Broad outsourcing Gulf carriers; Asian liberalization Aggressive; control IP GoldCare, FHS Rise of MRO integrators Small independents challenged 2

4 MRO has quadrupled since Insert 1990 Title while HereMRO outsourcing grew Global Airline Maintenance Spending ($B) % 80% 60% 40% Airline Maintenance Outsourcing MROs OEMs 20 20% % Airframe Heavy Aeroengines Components Self Sources: AeroDynamic, AeroStrategy, Canaan Group, Aviation Week 3

5 Today, global air transport Insert Title MRO Here spending is $74.3 billion Airframe Modifications 8% 9% Global Air Transport MRO Spending Engines Middle East Latin America Africa 9% 5% 3% 27% North America Line 22% 32% $74.3 Billion $74.3 Billion Europe 29% 27% Components 27% Asia Pacific Insert Source: Source Aviation and/or Week Notes MRO Here Database 4

6 The aftermarket is the key to Insert engine Title and Here component OEM profitability Engines* Wheels & Brakes* Mechanical Components * sometimes > 100% Aftermarket contribution to OEM business profits (%) Avionics Aircraft Insert Source: Source AeroDynamic and/or Notes Advisory Here 5

7 Insert Title Here Agenda Historical context MRO Megatrends Implications for OEMs 6

8 Seven megatrends Insert are shaping Title Here Air Transport MRO Air Transport MRO Mega Trends Digital & AHM Aircraft OEM Aggressiveness RONA-Driven Airlines 7 Used Integrated MRO Solutions Used &Serviceable & Serviceable Material Material Interior Modifications Rise Of Asia 7

9 RONA-Driven Airlines Insert Title Here Airlines are embracing return on capital as a key performance metric ROIC in 2016 (part year) by region and airline Airlines less interested in holding assets It s been about changing the mindset and the approach to the industry, and really treating the airline industry like any other industrial business. For that reason, we target 15% ROIC just like other highquality industrial transports. Provisioning of spare components and engines is down Source: IATA Delta CEO Richard Anderson (former) 8

10 Integrated MRO Programs Integrated Component Insert MRO programs Title Here are gaining popularity Examples: Shifts In Maintenance Behavior A Mostly captive Airbus Flight Hour Services Captive & Some Outsourcing LufthansaTechnik & UTAS CARE Captive & Some Outsourcing Outsourced: Boeing GoldCare Captive & Outsourcing Boeing GoldCare Insert Source: Source ICF International and/or Notes MRO Here Industry Outlook Speech, 28 April

11 Used & Serviceable Material Used & serviceable Insert material Title consumption Here is $3.5 billion Used & Serviceable Material Usage Insert Bullet Text Level 3 $ Here 3.5 B $ 1.8 B $ 0.5 B Used & serviceable material consumption is ~$3.5 billion Penetration is 15% of total material parts consumption 5-6 times greater than PMA parts The USM industry has transitioned from small, entrepreneurial traders to large, integrated suppliers About two-thirds of USM usage is engine parts Engine OEMs are major participants in the USM market Aircraft and component OEMs are increasing their involvement Insert Sources: Source Canaan and/or Group, Notes AeroStrategy, Here ICF International, AeroDynamic analysis 10

12 Used & Serviceable Material Insert Title Here Delta is reverse integrating and parting out its own aircraft Opportunities to acquire Insert older Bullet airplanes Text Level 3 Here and harvest them for parts has provided significant savings for us going forward in terms of a lower-cost basis for the overhauls that we have Paul Jacobson CFO Delta Air Lines Delta Air Lines Reverse Integration Parting out own aircraft + re-using parts Launched Delta Material Solutions a USM trading business Revenue $B % Outside Materials & Repair Lowers component repair volume through use of USM (6%) Leverages its internal engineering capability to develop DER repairs and modified repair scopes (e.g. hard time on condition) Insert Source: Source Delta and/or Air Lines Notes Here 11

13 Rise Of Asia Asia will lead Insert the growth Title Here of MRO Sector Asia comprises 60% of global MRO Growth 15 Air Transport MRO Growth ($B) Asia Pacific China India Eastern Europe Latin America Middle East North America Western Europe Africa Source: Insert Source Aviation and/or Week Notes MRO Forecast Here 12

14 Interior Modifications Interior modifications will Insert grow Title significantly Here as airlines pursue service differentiation and connectivity Interiors Modification Forecast ($B) The life of interiors is shortening and interior modifications are growing More competition in premium cabins Growth of premium economy Densification of economy cabin Cabin connectivity continues to grow with new satellite constellations entering service Insert Source: Source Tronos and/or Aviation Notes Consulting, Here 13

15 Aircraft OEM Aggressiveness Boeing is changing its organization Insert Title to sharpen Here its focus on services Insert Boeing s Bullet New Text Organization Level 1 Here CEO - Muilenburg Announced the creation of a Boeing Global Services business unit, which will combine commercial and defense activities beginning in 2017 Recruited Kevin McAllister, former head of GE Aviation Services, to run Commercial Aircraft Commercial Aircraft K. McAllister Global Services S. Deal Defense & Space L. Caret Appointed Stan Deal to lead Global Services, which will be based in Dallas Defense & Space leader Leanne Caret also has a service background New organization will go live in July 2017 Insert Sources: Source Reuters, and/or Boeing Notes Here 14

16 Aircraft OEM Aggressiveness and it recently unveiled Insert a goal Title of Here $50B in services revenue Boeing recently established a Big, Hairy, Audacious Goal (BHAG) of achieving $50 B in services revenue within 10 years The goal is an important element of Boeing s drive to reach double-digit profitability and steadier cash flow Boeing Services Goal 11.1% CAGR $50 B Boeing has $17-18B in services revenue Major acquisitions will be required to reach goal Boeing Services Revenue Estimates GS&S (military) $9.4 Billion CAS (commercial) $7-8 Billion Includes Aviall Insert Sources: Source AeroDynamic and/or Notes research, Here Boeing 15

17 Aircraft OEM Aggressiveness Insert Title Here Airbus has 8.9 billion in services revenue; most is outside of air transport Airbus Service Revenue Defense & Space 38% 8.9 Billion 26% Air transport The last Airbus public goal was to reach 20B in services by 2020 as part of its Vision 2020 initiative Most of Airbus s service revenue is from Helicopters and Defense & Space Airbus has increased its air transport services revenue from the Satair acquisition and Flight Hour Services; it created the Services By Airbus business unit in % Helicopters Airbus is also increasing wrench turning activity in SE Asia (Sepang Aircraft Engineering) It is unlikely to reach its goal without acquisitions Insert Source: Source Airbus, and/or AeroDynamic Notes Here 16

18 Digital & AHM Machine learning is now being Insert applied Title Here to aircraft health management Aircraft health management Physicsbased models (traditional focus) Machine learning (emerging focus) Aircraft health monitoring grew in the 1980s, led by aeroengines (ETOPs) and helicopters (HUMS); the focus since then has been on physics-based models Machine learning - the ability to automatically apply complex mathematical calculations to big data is a recent development and is now being applied to AHM Most major OEMs established partnerships with IT firms to apply machine learning to AHM; GE has created its own algorithm --PREDIX Improved AHM has the promise of reducing maintenance costs and improving reliability including for systems lacking sound physicsbased models 17

19 Insert Title Here Agenda Historical context MRO Megatrends Implications for OEMs 18

20 Aircraft OEMs can Insert seize Title several Here opportunities Aircraft OEMs Insert MRO Subtitle Opportunities Here & Challenges OPPORTUNITIES IP expansion; converting BFE SFE Grow integrated MRO solutions penetration Acquisitions Modifications Used & Serviceable Material Monetizing digital Supplier royalties CHALLENGES Executing reorganizations Cost structures for wrench turning Moving beyond the core Creating genuine customer value avoiding margin on margin Alienating suppliers 19

21 Aeroengine OEMs can Insert focus Title on solutions Here for mature aircraft Aeroengine OEMs Insert MRO Subtitle Opportunities Here & Challenges OPPORTUNITIES Coping with RONA-driven airlines Capturing customers for new-gen engines Service innovation for mature/sunset aircraft Improving prognostics with big data/machine learning Incorporating additive manufacturing CHALLENGES Supporting new-generation engines Managing growth of USM Executing new services Airline consolidation = more bargaining leverage Aircraft OEM encroachment? 20

22 Playing over the entire aircraft Insert lifecycle Title Here is an opportunity for OEMs Aircraft Lifecycle & Customer Needs GE Perspective Traditional OEM focus The Rolls-Royce CareStore 21

23 Component OEMs face Insert several Title Here aftermarket challenges Component OEMs Insert MRO Subtitle Opportunities Here & Challenges OPPORTUNITIES Coping with RONA-driven airlines Service innovation for new, mature and sunset aircraft Active participation in Used & Serviceable Material Creating prognostics with big data/machine learning Optimizing service networks Incorporating additive manufacturing CHALLENGES Improving cycle times & responsiveness Encroachment by MRO Integrators Encroachment and rulesetting by aircraft OEMs Managing growth of USM Executing new services Airline consolidation = more bargaining leverage 22

24 Insert Title Here THANK YOU! Kevin Michaels Managing Director AeroDynamic Advisory, LLC