Gorham PMA Conference San Diego, CA 21-23 March, 2016 Presented by: Michael J. Howard Principal ICF International mhoward@icfi.com PMA Forecast and Market Trends 0
Today s Agenda MRO Forecast Meet the Frackers! The PMA Market 1 1
MRO Forecast 2 2
The current commercial air transport fleet consists of over 27K aircraft Turboprop Regional Jet 2015 Global Commercial Air Transport Fleet 14% Narrowbody Jet Latin America Middle East 8% 5% 5% North America 31% Widebody Jet 14% 19% 27,114 Aircraft 53% Europe 25% 27,114 Aircraft 27% Asia Pacific By Aircraft Type By Global Region Source: CAPA 2015 3 3
The combination of strong air travel demand and the need to replace ageing aircraft will drive fleet growth at 3.4% annually Air traffic growth of ~4.1% Fuel costs in $55/bbl range ~19,600 aircraft deliveries ~8,800 aircraft retirements # Aircraft 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 10 Year Global Air Transport Fleet Growth Africa Middle East Latin America Europe Asia Pacific North America 27,100 5% 8% 25% 27% 37,900 6% 8% 23% 32% 31% 26% CAGR 5.1% 5.3% 3.8% 2.5% 5.2% 1.6% 0 2015 2025 3.4% Avg. Source: ICF International, CAPA 2015 4 4
Current air transport MRO demand is $64.3B; Asia Pacific is now equivalent to North America and Europe Airframe Line 17% 14% Modifications 7% $64.3B 2015 Global MRO Demand Engines 40% Middle East Europe Latin America 26% 8% Africa 6% 4% $64.3B 29% North America 22% Components 28% Asia Pacific By MRO Segment By Global Region Source: ICF International 5 5
The global MRO market is expected to grow by 4.1% per annum to $96B by 2025 $100 $90 $80 10 Year Global MRO Demand Growth Modifications Airframe Line Component Engine $96.0B 13% CAGR 5.3% 2.8% $70 $64.3B 16% 3.6% $60 $50 $40 14% 17% 22% 4.3% $30 22% $20 $10 40% 41% 4.4% $0 2015 2025 4.1% Avg. Source: ICF International; Forecast in 2015 $USD, exclusive of inflation 6 6
Over the next decade, China and Asia Pacific region will drive absolute MRO spend growth $9.0 $8.0 $7.0 $6.0 $5.0 Difference in MRO Spend, 2025 vs. 2015 By Global Region $ USD Billions $4.0 $3.0 $2.0 $1.0 $0.0 Percent Change: $7.9 Asia Pacific (excl China) $6.4 $5.2 $3.2 China Middle East North America $2.6 $2.2 $2.0 Latin America Eastern Europe (incl CIS) Africa $1.2 Western Europe 71% 93% 103% 17% 73% 72% 85% 10% Source: ICF International; Forecast in 2015 $USD, exclusive of inflation 7 7
Among the top ten airframe MRO providers, ST Aerospace and HAECO account for 50% of manhours performed in 2014 2014 Top 10 Airframe MROs by Man-Hours Performed In Millions ST Aerospace HAECO AAR AFI KLM E&M Lufthansa Technik 3.6 3.0 4.9 12.0 11.7 GAMECO Turkish Technic Evergreen Aviation Tech. Aviation Technical Services Sabena Technics 2.9 2.9 2.2 2.0 2.0 Source: Aviation Week 8 8
Meet the Frackers! 9 9
Breakthrough technologies in horizontal drilling and hydraulic fracturing (aka fracking) resulted in a US-led energy revolution North American crude oil and natural gas production have soared in recent years Thousands 9,500 8,500 7,500 U.S. Crude Oil Production (Barrels / day) 10 year growth = 105% (7.45% CAGR) U.S. Natural Gas Production (Monthly marketed production) Billion cu. ft. 2,450 2,250 2,050 10 year growth = 66% (5.22% CAGR) 6,500 5,500 4,500 3,500 1,850 1,650 1,450 1,250 Source: BP Statistical Review of World Energy June 2015, ICF International Analysis 10 10
The US energy revolution has completely disrupted the global economic and geopolitical balance of power 14 12 10 8 6 4 2 0 making the U.S. a global powerhouse in energy production Global Oil Production (Million barrels / day as of June 2015) 11.6 11.5 10.8 4.3 4.2 3.7 3.6 3.3 3.1 2.8 800 700 600 500 400 300 200 100 0 Global Natural Gas Production (Billions of cubic meters as of June 2015) 728 579 177 173 162 135 109 108 83 73 Source: BP Statistical Review of World Energy June 2015, ICF International Analysis 11 11
Continued low fuel costs will have significant repercussions throughout the aviation & MRO supply chain Aviation fuel costs have dropped by approx. 66% during the past 24 months $ USD $2.8 $2.3 U.S. Gulf Coast Jet Fuel Price per Gallon $1.8 $1.3 $0.8 ~66% Decline Source: EIA; ICF International analysis 12 12
While Asia Pacific & North American airlines have enjoyed record profitability, other regions continue to struggle $USD Billions $40 $30 $20 $10 Global Airline Profitability, 2004-2016 $36B $10 $7 $19 Rest of World Asia Pacific North America $0 -$10 -$20 -$30 Source: IATA 13 13
China s seemingly insatiable demand for global commodities was a key driver of global economic growth After years of remarkable GDP growth, China s economy has been steadily slowing 15% China GDP Year-on-Year Growth (%) 13% 11% 9% 7% 5% 2007 2008 2009 2010 2011 2012 2013 2014 2015F 2016F Source: IMF, World Economic Outlook Database October 2015, ICF International Analysis 14 14
The fall in commodity prices have had a dramatic impact of economies dependent on commodity exports Indexed Values 110 Over the past 5 years, commodity prices have plummeted more than 55% Dow Jones Commodity Indices (DJCI) (January 2011 Indexed to 100) 100 90 80 70 60 50-56.0% 40 Source: Dow Jones Commodity Index 15 15
The dramatic increase in oil & gas market supply and reduced demand for commodities has led to a stronger US Dollar FOREX Impact Partially offsets the positive impact of low fuel costs for operators Increases the cost of dollar based flight hour agreements (and parts/material in general) Cost of labor for in-country MROs is cheaper driving up margins for US dollar based contracts Buying/leasing aircraft becomes more expensive The CRABS : Countries with economies that are heavily dependent on commodity exports 10% 0% -10% -20% -30% -40% -50% -60% Russian Ruble -55.1% R Brazilian Real -41.1% B Global Currency Exchange Rates vs USD % Value Change, Jan. 2014 Jan. 2016 S. African Rand -34.1% S Can Dollars -23.1% C Aus Dollars -20.8% A Euro -20.0% British Pound -12.8% Japanese Yen -11.9% Indian Rupee -7.8% Chinese Yuan -7.2% Source: Oanda historical exchange rates, ICF International Analysis 16 16
The PMA Market 17 17
Last year, operators spent over $28B on OEM new parts and an additional $13B on alternatives such as PMA, surplus, and parts repairs 2015 Parts Alternatives Compared To OEM New Parts 46% PMA ($0.54B) $28B $3.7B Surplus $9B Repair (incl DER) OEM new Alternatives Source: ICF International 18 18
Parts pricing and availability continue to drive demand for PMA parts Price and availability are the main reasons for PMA usage Part Price PMA parts are typically 20 to 40% off OEM list price Many OEMs may protect their aftermarket revenue streams by campaigning against PMA and by insisting that licensed MROs discard PMA parts found during overhaul Part Availability In an AOG situation, any permitted serviceable part will be used irrespective of price, including PMA Use of PMA is usually driven by long lead time for OEM parts % OEM List 120 100 80 60 40 20 0 New Illustrative* Parts Price Bands New Surplus Overhauled Exceptional circumstances As Removed PMA TAT on repair order and warranty management are most important for my component repair business. Parts availability might drive the use of alternative parts in the future. - Major Chinese Airline Source: ICF International 19 19
PMA parts tend to be best suited for low price, high velocity parts Alternative Parts Exposure vs. Part Type Source: ICF International 20 20
PMA growth is expected to be slower due to the retirement of mature aircraft, but still healthy at 5.1% $ millions 800 700 600 500 400 300 200 100 - Air Transport PMA Market Forecast In $ Millions (2015-2020) 15-20 CAGR: 5.1% 2015 2016 2017 2018 2019 2020 % of total MRO material 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% CAGR: Component Engine Airframe Total Penetration (%) 2015 2020 7.3% 1.4% 6.5% 5.1% Source: ICF International Forecast in 2015 USD, exclusive of inflation 21 21
In Summary The air transport MRO market is expected to grow 4.1% per annum through 2025 driven by the Asia Pacific region The two largest global airframe MRO suppliers are headquartered in the Asia Pacific region The US energy revolution combined with the economic slowdown in China are having a significant impact commodity export dependent CRABS The PMA market is expected to grow 5.1% per annum to $700M USD by 2020 22 22
THANK YOU! For questions regarding this presentation, please contact: Michael J. Howard Principal Aerospace & MRO mhoward@icfi.com +1 734.604.9651 23
ICF provides a full range of MRO advisory services Market Research & Analysis Airline Maintenance Benchmarking M&A Commercial Due Diligence OEM Aftermarket Strategy Aviation Asset Valuations & Appraisals MRO Information Technology (IT) Advisory Strategic Sourcing & Supply Chain Mgt. LEAN Continuous Process Improvement Military Aircraft Sustainment 24 24
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