MRO Asia 2012 Market Forecast and Key Trends Presented by: David Stewart Head of Aviation and Aerospace EMEA david.stewart@icfi.com AVIATION WEEK - MRO ASIA Singapore, November 2012 0
Today s Agenda Economic context MRO market long term MRO market short term Current challenges Critical issues 1
MRO MARKET PROFILE: CONTEXT Since 2010, global trade and GDP has slowed overall Change in World Trade Volumes 6.0% 4.0% 2.0% 0.0% 2000 2002 2004 2006 2008 2010 2012-2.0% -4.0% -6.0% Change in World Trade Volumes and GDP Growth GDP Growth Rate 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% 2 Change per. Mov. in Avg. World (Change Trade Volume in World Trade Moving Volume) Average 2 GDP per. Mov. Growth Avg. (GDP Rate Growth Moving Rate) Average -8.0% -3.0% Exacerbated by economic uncertainty in Europe, high fuel prices and turmoil in the financial markets Source: ICF SH&E analysis of CPB and World Bank data / World Economic Outlook October 2012 2
MRO MARKET PROFILE: CONTEXT Despite this difficult environment, airlines generally have managed to improve performance and traffic has grown Since 2010, airlines have improved capacity management and increased load factors and aircraft utilisation (without necessarily lowering yield) Passenger air travel has seen continued growth since 2010 Whilst freight traffic has struggled Airline losses have been lower than in previous recessionary dips Source: IATA Industry Financial Forecast 2012 3
MRO MARKET PROFILE: FLEET Today s active fleet is almost 27,000 aircraft with 57,500 engines 2012 Global Aircraft Fleet (total = 26,800) Regional Jets 15% Turboprop, 17% Single Aisle 50% Today s single aisle fleet of 13,300 aircraft account for almost exactly 50% of the fleet The twin aisle, regional jet and turboprop fleets are roughly the same size between 4,000-4,900 aircraft each Twin Aisle, 18% These aircraft carry ~57,500 engines i.e., the average engines per aircraft is 2.15 Source: ICF SH&E analysis excludes all Russian built aircraft 4
MRO MARKET PROFILE: FLEET The global fleet is expected to grow by almost 1,000 aircraft a year the APAC fleet will grow at over 6% CAGR Fleet Growth 2012-2021 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 Africa South America Asia / Pacific Middle East Europe North America 35,700 30% 10,900 24% 6,370 31% 23% 36,000 31,000 26,000 21,000 16,000 11,000 6,000 1,000 CAGR 3.9% 3.9% 6.2% 7.7% 1.9% 0.6% 0 2012 2021-4,000 3.3% Average Source: ICF SH&E analysis 5
MRO MARKET PROFILE: 2012 SIZE The 27,000 aircraft generate an MRO market of $53B with engine MRO accounting for almost 40%; Asia accounts for $14.2B (27%) Global MRO Spend (2012 USD Billions) Airframe Heavy Maintenance, $11.2, 21% Line Maintenance, $9.5, 18% Engine $20.6, 39% Middle East, 6% China, $4.6, 9% ROW *, 10% $53B $53B N. America, 31% Component MRO, $11.7, 22% A-Pac $9.6B, 18% Europe 26% Source: ICF SH&E; Rest of World = L. America, Africa 6
MRO MARKET PROFILE: LONG TERM FORECAST The global MRO market is expected to grow to $76B by 2021, at 4% per annum $80 $70 $60 $50 $40 $30 $20 $10 $0 Line Heavy Airframe Components Engine Global MRO Spend (2012 USD Billions) $53.0 18% 21% 22% 39% $75.6 17% 20% 23% 40% 2012 2021 CAGR 3.5% 3.3% 4.4% 4.4% 4.0% Average Average growth is forecast to be 4.0% CAGR to $76B in 2021 Growth outlook reflects the blended impact of: Fleet and utilisation growth Typically higher cost/event Improvements in reliability Fleet age demographics The strongest drivers of growth are expected to be the engine and component markets Despite reducing manhour intensity of airframe heavy checks as the fleet renews, upgrade and modification demand means airframe heavy MRO grows at 3.3% CAGR Source: ICF SH&E analysis Forecast in 2012 $USD, exclusive of inflation. Includes turboprops 7
MRO MARKET PROFILE: LONG TERM FORECAST MRO growth in Asia Pacific is estimated at 4.3% CAGR APAC (exc. China) MRO Spend (2012 USD Billions) 16 14 12 10 Line Heavy Airframe Components Engine $9.6 $14.0 16% 19% CAGR 3.1% 3.2% Asia Pacific accounts for $9.6B of spend today Asia Pacific spend is forecast to grow at 4.3% CAGR, above the global average 8 6 4 2 18% 21% 22% 40% 23% 43% 4.8% 5.0% Total spend in 2021 will be $14.0B Highest rate of growth is in engine MRO, driven primarily by the age demographics of the fleet in the region 0 2012 2021 4.3% Average Source: ICF SH&E analysis Forecast in 2012 $USD, exclusive of inflation. Includes turboprops 8
MRO MARKET PROFILE: LONG TERM FORECAST Compared to China MRO growth at 9.7% CAGR China MRO Spend (2012 USD Billions) Line 14 12 Heavy Airframe Components Engine $10.5 CAGR China MRO spend is $4.6B today (9% of total) and is forecast to grow at 9.7% CAGR i.e., market more than doubles in size 10 21% 10.4% Total spend in 2021 will be $10.5B 8 6 4 2 0 $4.6 20% 19% 22% 39% 17% 23% 39% 2012 2021 8.4% 10.3% 9.6% 9.7% Average The drivers of this high growth are: Relatively stronger economic (GDP) outlook driving fleet expansion Age demographics of today s installed base Source: ICF SH&E analysis Forecast in 2012 $USD, exclusive of inflation. Includes turboprops 9
MRO MARKET PROFILE: LONG TERM FORECAST Absolute MRO growth in $ terms is emphatically in Asia $7.0 $6.0 $5.0 Difference in $ MRO Spend, 2021 vs. 2012, By Region (USD Billions) In 2021, Asia MRO demand will be higher than either N. America or Europe $4.0 $3.0 $6.0 $2.0 $4.4 $3.8 $1.0 $2.5 $2.0 $1.5 $1.3 $1.1 $0.0 China Asia/Pacific (excl China) Middle East Eastern Europe (incl CIS) Latin America Africa Western Europe North America Source: ICF SH&E analysis Forecast in 2012 $USD, exclusive of inflation. Includes turboprops 10
MRO MARKET PROFILE: SHORT TERM PROSPECTS However, in the short-term, prospects for airlines appear poor Worldwide Growth in Air Travel and Business Confidence Falling business confidence in many major economies has caused markets to flatten with very little growth at all over the mid-year months. Most economic assessments are that the slowdown in world economic growth and world trade will hit its low point in the last part of this year. Worldwide Air Travel and Air Freight Volumes seasonally adjusted We expected that passenger and cargo volumes will see little growth until that point is reached. This will make for a difficult third and fourth quarter for the airlines industry IATA Industry Financial Forecast, September 2012 Source: IATA Financial Forecast Sep 2012 11
MRO MARKET PROFILE: SHORT TERM PROSPECTS Europe is the weakest market; Asia s airlines have fared better 14 Europe 980 147 576-1011 Airline Net Post-Tax Profit Margins Q2 2012 saw a massive drop in European airline operating and net profits* European airlines have had the lowest margins compared to the other main regions since 2009 By contrast, Asia carriers in the sample saw a small increase on operating profit Q2 2012 versus 2011*, and have enjoyed the strongest margins * Based on IATA survey of 60 airlines Source: IATA Airlines Financial Monitor Aug-Sep 2012 12
MRO MARKET PROFILE: SHORT TERM PROSPECTS In such times, airlines change spending behaviour the long term fundamental forecast model no longer applies! Simplified MRO Supply Chain Airline Operator Overhaul Shop Service Parts & Parts Repair 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 Airline changes in purchasing and cost management in times of crisis such as Inventory destocking, use of surplus, deferred and reduced scope maintenance All act as a buffer between fundamental demand and realized revenue by OEMs and MRO suppliers 13
MRO MARKET PROFILE: SHORT TERM PROSPECTS At the same time, due to unique market circumstances, an increase in retirements is impacting parts purchasing The number of aircraft retirements has risen rapidly due to high fuel prices and ready accessibility of new aircraft As a result, the average retirement age of certain aircraft types are falling short of previous experience e.g., the old A320 fleet (22 yrs) And examples exist of parting out of young A320s and 737NG Air Transport Aircraft Retirements 600 500 400 300 Retirements 200 100 0 1991 1996 2001 2006 2011 This parting out has resulted in Significant growth in surplus Reduced parts sales at OEMs for mature and sunset platforms 14
MRO MARKET PROFILE: SHORT TERM PROSPECTS Asked about expectation for 2H 2012, 50 MRO suppliers showed limited confidence in the outlook Current Quarter MRO Sales and Parts Purchasing 4Q 2009 2Q 2012 The July Imperial Capital survey of 50 MROs shows that expected growth in MRO sales and parts buying lower than at any time since 3Q 2010 Parts purchases is being impacted by availability of surplus materials on mature aircraft, especially on engines Source: Imperial Capital Survey, July 2012 15
MRO MARKET PROFILE: SHORT TERM PROSPECTS So the outlook for 2012/2013 YoY growth is mixed; Europe is the toughest environment MRO Spend By Airlines Realized Revenue (YoY %) 2012 will see low-to-negative growth in: Europe due to economic pain and focus on austerity Latin America primarily due to problems in Brazil economy North America due to financial pressure on airlines Middle East and China behaving as per fundamental demand No massive rebound in 2013 2013 return to fundamental demand likely in N. America, L. America and Asia 2012 2013 16
Today s Agenda Economic context MRO market long term MRO market short term Current challenges Critical issues 17
MRO CRITICAL ISSUES AND CHALLENGES There are multiple current challenges for MRO market suppliers; two important ones are Customers have become ever-more demanding on costs and service Cost reduction imperative: tough when materials = 65% of an overhaul cost Investment or financial support: inventory buy-back or spare engine support Additional services not enough any more to simply turn the wrench. Airlines seek low cost and added value services e.g., aircraft health management 18
MRO CRITICAL ISSUES AND CHALLENGES There are multiple current challenges for MRO market suppliers; two important ones are The MRO (and aerospace OEM) supply chain is globalizing There are several drivers of this globalization: Market growth in developing economies Local presence enhances market access Get behind customs barriers Excellence in (or access to excellent) logistics has become a critical success factor 19
MRO CRITICAL ISSUES AND CHALLENGES The next year will likely provide early insights to three critical and current market issues (#1) #1 How will relations between airframe OEMs, component OEMs, airline MROs and independent MROs evolve? The next decade sees a significant build up of new aircraft platforms in the fleet ICF SH&E Air Transport Production Forecast Introduction and rapid build up of A320neo, 737 Max New CSeries and MRJ Introduction and build up of A350XWB and 787 New aircraft introduction = Opportunity for new MRO supply chain model 20
MRO CRITICAL ISSUES AND CHALLENGES The next year will likely provide early insights to three critical and current market issues (#1) #1 How will relations between airframe OEMs, component OEMs, airline MROs and independent MROs evolve? Focus of Airbus (FHS/TSP) and Boeing (GoldCare) on services is strategic Focus of component OEMs on aftermarket is an economic imperative Component management is a driver of portfolio profitability for airline/broad based MROs Component OEMs Airframe OEMs Independent MROs Airline MROs New relations and partnerships should be based on: The value add for airlines Sustainability 21
MRO CRITICAL ISSUES AND CHALLENGES The next year will likely provide early insights to three critical and current market issues (#2) #2 How will the supply chain react and evolve to increasing retirement volumes and support mature/sunset platforms? The next decade will see a structural shift to higher volumes of retirements that has ALREADY: Increased part-out volumes Grown the surplus market Impacted component OEM parts revenues Suppressed PMA..and 22
MRO CRITICAL ISSUES AND CHALLENGES The next year will likely provide early insights to three critical and current market issues (#2) #2 How will the supply chain react and evolve to increasing retirement volumes and support mature/sunset platforms? has led to changes in the supply chain e.g., participants seeking to assure supply and capture value Parts traders move into engine/parts repair & asset management e.g. GA Telesis, AJ Walter Lessors add surplus domain knowledge to optimize life cycle management e.g. ILFC and AeroTurbine Surplus Parts Parts and repair providers move upstream to assure supply e.g., VAS and others into disassembly AAR and others into aircraft / engine leasing 23
MRO CRITICAL ISSUES AND CHALLENGES The next year will likely provide early insights to three critical and current market issues (#3) #3 Is the economic life of aircraft undergoing structural change and shortening? The average retirement age of certain aircraft types are falling short of previous experience e.g., the old A320 fleet (22 yrs) and the CRJ100/200 (15 yrs) And examples exist of parting out of young A320s and 737NG 24
MRO CRITICAL ISSUES AND CHALLENGES The next year will likely provide early insights to three critical and current market issues (#3) #3 Is the economic life of aircraft undergoing structural change and shortening? However, ICF SH&E believes that whilst a unique set of circumstances has reduced the economic live of certain aircraft models Factors Influencing Aircraft Economic Lives High fuel prices Low cost of capital Arrival of new technology aircraft Elimination of scope clauses Production ramp-up by OEMs More sophisticated surplus traders The most ubiquitous airframes are likely to behave as expected 25
Thanks and Questions Airports Airlines Aerospace & MRO Asset Advisory Safety & Security ~100 professional staff, dedicated exclusively to aerospace and aviation Specialized, focused expertise and proprietary knowledge Global presence six major offices Ann Arbor Boston New York London Singapore Beijing David Stewart Head of Aviation and Aerospace - Europe, Middle East and Asia +44 (0) 7770 410011 david.stewart@icfi.com 26