Latin American MRO Industry Trends & Market Forecast Panama City, Panama February 14, 2018
TODAY S AGENDA 2017 Reflections Alton Fleet & MRO Forecast Latin American Market Update Alton Watch List - 2018 1
COMPANY INTRODUCTION Alton Aviation Consultancy is a boutique aviation consulting firm with deep domain expertise across the aviation value chain Aircraft Leasing & Financing Advisory Airlines Aviation & Aerospace Investors Business & General Aviation Aerospace Manufacturers & Supply Chain MRO & Aftermarket Airports Specialty Projects Agile. Global. Independent. 2
2017 REFLECTIONS Hurricanes Irma and Maria devastated Puerto Rico & many Caribbean islands; approx. 40% of Puerto Rico remain without power Source: Alton Aviation Consultancy 3
2017 REFLECTIONS The circle of life C Series Aircraft Limited Partnership (CSALP) Farewell to the Queen The C Series Resurrection Source: Alton Aviation Consultancy 4
2017 REFLECTIONS The year aviation blinked - J. Berger: http://www.mro-network.com/maintenance-repair-overhaul/aviation-industry-could-face-headwinds-2017 European Airline Shakeout Middle East Carriers Throttle Back Major Asian and African Carriers Restructure Source: Alton Analyses 5
2017 REFLECTIONS Policy matters : The United States is one of only two of the global destinations to see a decline in long-haul travel Percent Change in Arrivals from 2015 to 2017 Canada 21.2% United Kingdom 17.5% Germany 8% United States (-6%) Estimated economic impact: $4.6B in lost spending 40,000 lost jobs France 4% Turkey (-6.7%) Italy 2.2% China 9.3% Thailand 13.9% Saudi Arabia 20.3% United Arab Emirates 16.5% Australia 22% Source: US Travel Association, Bloomberg 6
2017 REFLECTIONS Policy matters : US in-bound market share fell in 9 out the top 10 international source markets Percent Decrease in US International In-Bound Market Share from 2015 to 2017 South Korea 0% Japan (5%) United Kingdom (14%) Germany (15%) France (21%) Italy (11%) China (2%) India (14%) Australia (14%) Brazil (25%) Source: US Travel Association 7
2017 REFLECTIONS A new golden age of aircraft cabin interiors - J. Berger: https://www.linkedin.com/pulse/new-golden-age-aircraft-cabin-interiors-jonathan-berger/ Rockwell Collins acquires B/E Aerospace Safran acquires Zodiac Airbus launches new subsidiary Boeing forms aircraft seat joint venture $6.4bn transaction (and subsequent $30B UTC acquisition) Integration of seats, IFE, and onboard connectivity Expand cabin IoT capabilities $9bn transaction Create the world s No.3 aerospace supplier Improve Zodiac s production efficiency and customer satisfaction Airbus Interiors Services (AIS) Three business lines: 1. Tailored equipment (SFE and BFE) 2. Upgrade solutions (cabin & connectivity) 3. Innovative solutions Joint venture with car seat manufacturer Adient Focus on reducing production delivery delays and aftermarket growth Source: Alton Analyses 8
ALTON FLEET & MRO FORECAST 9
COMMERCIAL AIR TRANSPORT FLEET FORECAST Today s commercial air transport fleet consists of approximately 28,000 aircraft, with Asia Pacific now equal in size to North America 18% 9% 16% 24% 8,400 51% 10% 11% 6,600 61% 51% 2,100 39% 22% Narrowbody Jet Regional Jet Turboprop Widebody Jet 14% 17% 10% 2,100 59% 28% 14% 41% 1,300 17% 7% 3% 10% 5% 8,400 63% 2018 2028 3.8% CAGR Source: CAPA, Alton analysis Growing to 44,000 aircraft by 2028 10
COMMERCIAL AIR TRANSPORT FLEET FORECAST Historically, fleet growth has been directly correlated to GDP Avg. Fleet Growth/yr 14% Fleet and GDP Growth by Region (1997 2017) Avg. GDP Growth/yr 4.5% 12% 4.4% 4.2% % Fleet growth GDP 4.0% 10% 3.8% 10% 3.5% 3.0% 8% 6% 4% 7% 7% 2.5% 6% 5% 1.8% 2.2% 2.5% 2.0% 1.5% 1.0% 2% 3% 0.5% 0% Middle East Asia-Pacific Africa Latin America Europe North America 0.0% Source: CAPA, USDA ERS, Alton analysis 11
Households (millions) 20 Year Growth Rate COMMERCIAL AIR TRANSPORT FLEET FORECAST perhaps a better determinant of future fleet growth is the so-called Disneyland factor ; the growth rate of a country s middle class Middle Class Growth by Region (2016 2036) 3,000 2,500 2,000 103% 2016 2036 20 yr % growth 149% 160% 140% 120% 100% 1,500 75% 80% 1,000 500 6% 51% 2% 41% 60% 40% 20% - 0% Source: Airbus Global Market Forecast 2017-2036, Alton analysis 12
COMMERCIAL AIR TRANSPORT MRO FORECAST Today s commercial air transport MRO market demand is approx. $69B, growing to $103B by 2028 an annualized growth rate of 4.1% Africa Latin America Middle East Europe North America Asia Pacific World Total $2.4B $3.8B $7.4B $16.4B $16.9B $22.6B $69B Modifications Airframe Heavy Line Components Engine World Total $6B $8B $13B $14B $29B $69B $0 $20 $40 $60 $80 $100 $120 $0 $20 $40 $60 $80 $100 $120 10yr CAGR 10yr CAGR Africa Latin America Middle East Europe North America Asia Pacific 5.0% 5.0% 6.5% 2.2% 1.6% 5.7% Modifications Airframe Heavy Line Components Engine 6.1% 2.9% 3.9% 3.1% 4.4% World Total $103B World Total $103B $0 $20 $40 $60 $80 $100 $120 $0 $20 $40 $60 $80 $100 $120 Source: Alton Analysis, all figures constant dollars ($2018 USD) 13
LATIN AMERICAN MARKET UPDATE 14
LATIN AMERICAN MARKET UPDATE In 2017, Latin American GDP growth was ~1.0%; 2018 is showing strong signs of growth, more the doubling to ~2.25% 6% 4% 2% 0% 8% 4% 0% 4% 2% 0% 2% 0% MEXICO UNITED STATES PERU 4% 3% 2% ARGENTINA BOLIVIA COLOMBIA 2% 0% 1% 0% 3% 0% -3% BRAZIL 2% 6% 4% 2% 0% 0% -2% -4% Source: USDA Economic Research Service 15
LATIN AMERICAN MARKET UPDATE If you build it, they will come 2018 2016 2018 2017 Construction of first hangar ARGENTINA Construction of new hangar - 4NB and 2WB BOLIVIA PERU 6 th hangar being added, 32 NB capacity EL SALVADOR COSTA RICA COLOMBIA 100,000 sqm 12 NB capacity MEXICO UNITED STATES 2016 2017 BRAZIL PUERTO RICO 2016 2015 7WB or 19NB capacity 2 WB Line Mtc. hangar Source: Alton analysis 44,000 sqm 5 NB or 2 WB capacity 20,000 sqm 5 NB capacity 16
ALTON WATCH LIST - 2018 17
ALTON WATCH LIST - 2018 A rising tide lifts all cargo aircraft Source: CAPA, IATA, Alton Analysis 18
ALTON WATCH LIST - 2018 A rising tide lifts all cargo aircraft (con t) Alton Insight Amazon Air, recently renamed from Amazon Prime Air to better distinguish the airline from its new drone-based delivery service The virtual cargo carrier s current fleet consists of 32 Boeing 767s; in talks for additional P2F conversions and new freighters Amazon Air s new $1.5B hub in Cincinnati International Airport (CVG) is projected to have capacity to handle approx. 100 freighters In Europe, Amazon utilizes a single Boeing 737-400(F) operated by ASL Airlines France in the UK, France, Spain, and Italy Source: Source: Boeing, US Dept. of Commerce, FTI Consulting, Internet Retailer, China Daily, GB Times, China Xinhua, Alton Analyses 19
Indexed Stock Value ALTON WATCH LIST - 2018 Notable aviation industry stocks to watch in 2018 200 180 160 140 120 100 80 60 40 20 Boeing Stock Value S&P 500 Stock Value Comparison January 2017 thru January 2018 AAR Stock Value GE Stock Value +89% +20% +19% - 43% Famous for great management, General Electric is staring down a plunging share price, a federal investigation, and possible breakup Bloomberg BusinessWeek February 1, 2018 0 Source: Nasdaq, Bloomberg BusinessWeek, Alton Analysis 20
ALTON WATCH LIST - 2018 Competition for the aftermarket is reshaping the Tier 1 OEM landscape Vertical integration strategy: Created new in-house avionics unit Acquired Jeppesen and AerData Established seat JV with Adient Awards 777X landing gear contract to Heroux-Devtek that includes parts distribution rights (Aviall) Stated Goal: $50B in aftermarket revenue within 10 years Source: Canaccord Genuity, Alton Analysis 21
ALTON WATCH LIST - 2018 More than other MRO segments, the role of the Line Maintenance technician has undergone significant changes in recent years Hat #1 Priority: On-Time Performance & Dispatch Reliability Troubleshooting live aircraft at the gate Deferred defect rectification & MEL approval coordination Airworthiness release Hat #2 Priority: Scheduled Maintenance Overnight maintenance checks A-checks Scheduled component removals, engine washes and changes, etc. Hat #3 Priority: Cabin Condition & Appearance In-flight entertainment (IFE) & connectivity Premium seat defect rectification Galleys & lavatories Line technicians wear several hats and must manage numerous, often competing, priorities Alton analysis 22
ALTON WATCH LIST - 2018 To phase or not to phase, that is the question! Phased A-Check Program Optimize ground time; take advantage of layovers and overnights A1-A8 Checks, tasks scheduled ~ every 10 days Planned aircraft out-of-service time = 6-8 hours (one shift) Cabin items and scheduled component removals (time permitting) Deferred C-Check items (if tooling & material availability) vs. Block A-Check Program Provide operational buffer; plan it, find it, fix it Single A-Check, scheduled ~ 90 days Planned aircraft out-of-service time = 14-18 hours (1.5-2 shifts) Planned deferred C-Check items, cabin items, & scheduled component removals Dispatch a clean aircraft: Pre-planned availability of parts, paperwork, tooling, manpower, skill, etc. Higher Operational Risk Lower Operational Risk Alton analysis, typical new generation narrowbody aircraft 23
ALTON WATCH LIST - 2018 An army of tiny robots are on the march; with plans to disrupt engine MRO inspection and repair processes Alton Insight OEMs are developing very small robots which venture inside an engine to perform inspections and carry out any necessary repairs The robots are small enough to navigate their way around various fan and turbine blades, taking videos of everything they see, and will wirelessly send to technicians Once the video has been analyzed, the robots will be able to carry out certain repairs All at the gate - between flights! Source: The Economist, September 2017 18
Jonathan M. Berger +1 212 301 0573 jonathan.berger@altonaviation.com ALTONAVIATION.COM NEW YORK HONG KONG BEIJING TOKYO
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