ICF Insight

Presented by:
Jonathan M. Berger
Vice President  ICF International
[email protected]
MRO Market Forecast and Key Trends
October 15, 2014 – Panama City, Panama
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0
Latin America and Caribbean Engineering & MRO Summit
Panama City, Panama
Today’s Agenda:
MRO Market Forecast
Latin American MRO Industry Dynamics
MRO Trends to Watch
May 2010–May 2014
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© ICF International 2014
founded 2001,
joined ICF in 2011
founded 1963,
joined ICF in 2007
1
MRO Market Forecast
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2
MRO MARKET FORECAST
The current civil air transport fleet consists of
over 26K aircraft
2013 Global Air Transport Fleet
Regional Jet
17%
Turboprop
15%
26,772
Aircraft
Africa
Narrowbody
Jet
Latin
America
5% 5%
32%
8%
50%
26,772
Aircraft
Europe
Widebody
Jet
North
America
18%
25%
26%
By Aircraft Type
Asia Pacific
By Global Region
Source: FlightGlobal ACAS September 2013
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3
MRO MARKET FORECAST
The air transport fleet will grow at a 3.1% rate over
the coming decade
Commercial Fleet Growth 2013–2023
40,000
35,000
30,000
25,000
20,000
Africa
Middle East
Latin America
Europe
Asia Pacific
North America
26,800
8%
5,000
36,400
4.6%
5.6%
9%
24%
28%
4.2%
2.4%
 Fuel costs in
$80-100/bbl range
4.3%
 17,720 aircraft
deliveries
26%
31%
ICF Insight
 Air travel growth
of 3.9%
25%
15,000
10,000
CAGR
 8,128 aircraft
retirements
1.6%
27%
3.1% Average
0
2013
2023
Source: ICF, ACAS September 2013
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4
MRO MARKET FORECAST
The current civil air transport MRO market is valued at
$60.7 billion USD
2013 Global MRO Demand
Modifications
Latin
America
Engines
6%
Airframe
15%
Middle East
5% 4%
North
America
7%
31%
40%
$60.7B
Line
Africa
17%
26%
$60.7B
Europe
27%
22%
Asia Pacific
Components
By MRO Segment
By Global Region
Source: ICF analysis
Forecast in 2013 $USD, exclusive of inflation
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5
MRO MARKET FORECAST
The global MRO market is expected to grow to
$89B by 2023, at 3.9% per annum
Global MRO Spend 2013–2023
$100
$90
$80
$70
$60
$50
$40
$30
Modifications
Heavy Airframe
Line
Components
Engine
$60.7B
$60.7B
$89B
7%
6.4%
13%
2.8%
16%
3.4%
6%
15%
17%
23%
4.3%
22%
$20
$10
CAGR
40%
3.7%
40%
3.9% Average
$0
2013
2023
ICF Insight
 Average growth is forecast
to be 3.9% CAGR
 The strongest driver of growth
is expected to be the engine
market
 Reduced labor intensity of
airframe heavy checks as the
fleet renews and increased
intervals...offset in emerging
markets by increasing labor
rates
 Aircraft upgrades (e.g.
interiors, winglets) drive high
modifications growth
Source: ICF analysis
Forecast in 2013 $USD, exclusive of inflation
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6
MRO MARKET FORECAST
The Latin American MRO market is expected to grow to
approx. $6B by 2023, at 6.3% per annum
Latin American
MRO Spend 2013–2023 ($B)
$7
$6
Turboprop
Regional Jet
Widebody Jet
Narrowbody Jet
$5
$4
CAGR
$6.0B
8%
10%
21%
$3.2B
$3
12%
10%
$2
18%
$1
60%
2.7%
6.2%
7.6%
ICF Insight
 Latin American MRO
growth is driven by
continued narrowbody
aircraft deliveries
 Turboprop aircraft will see
a decrease in total share
61%
6.5%
6.3% Average
 Widebody and regional jet
deliveries will remain
stable
$0
2013
2023
Source: ICF Forecast
Forecast in 2013 USD, exclusive of inflation.
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7
MRO MARKET FORECAST
Over the next decade, Latin America will drive $2.8B
in absolute MRO spend growth
Difference in $ MRO Spend, 2022 vs. 2013 – By Global Region
US$ Billions
$8.0
$7.0
$6.0
$5.0
$4.0
$7.1
$3.0
$4.5
$2.0
$3.9
$2.9
$1.0
$2.9
$2.8
$2.0
$1.9
Western
Europe
Africa
$0.0
Asia/Pacific
Asia/Pacific
(ecl.
(exclChina)
China)
Middle
Middle
East
East
China
North
America
Eastern
Latin America
Europe (incl
CIS)
Source: ICF analysis
Forecast in 2013 $USD, exclusive of inflation
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8
Latin American Industry Dynamics
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9
LATIN AMERICAN INDUSTRY DYNAMICS
Brazil operates the largest fleet followed by Mexico and
Colombia; Venezuela and Bolivia operate the oldest fleets
Latin American Fleet Profile by Country
70
Brazil
706
Number of Operators
60
50
Mexico
40
Venezuela
155
418
Colombia
30
286
20
Argentina
133
Chile
161
59
10
82
55
101
El Salvador
0
0
5
49
10
Ecuador
Panama
15
Bolivia
Peru
20
25
30
35
Average Fleet Age
Source Data: ACAS September 2014
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10
LATIN AMERICAN INDUSTRY DYNAMICS
The top 5 Latin American airlines account for over 50%
of the total MRO spend in the region
2013 Latin American Operator MRO Spend
By Major Airline Group
ICF Insight
 While the aviation market
in Latin American remains
quite fragmented…
LATAM
26%
$3.2B
Other
46%
Avianca
9%
Aeromexico
8%
Gol
2%
Azul Aerolineas
2% Argentinas
4%
 ...the region has seen
significant airline
consolidation over the
past few years…
 Investment in MRO
infrastructure, however,
has been limited
COPA
4%
Source: ICF Forecast
Forecast in 2013 USD, exclusive of inflation. Includes turboprops
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11
LATIN AMERICAN INDUSTRY DYNAMICS
GDP growth, the key driver of aviation growth, has slowed
across the region, well below the trailing 5-year average
Argentina
5 Yr. GDP Avg: 6.0%
GDP 2014F: 0.5%
Chile
5 Yr. GDP Avg: 5.3%
GDP 2014F: 2.3%
Peru
5 Yr. GDP Avg: 6.7%
GDP 2014F: 4.2%
Brazil
5 Yr. GDP Avg: 3.4%
GDP 2014F: 1.3%
Colombia
5 Yr. GDP Avg: 4.8%
GDP 2014F: 5.0%
Brazil
Panama
5 Yr. GDP Avg: 9.3%
GDP 2014F: 7.2%
Note: GDP growth in local currency (real);
Source: IMF Economic
Database, April 2014; Brazil, Mexico and U.S.
2014F from IMF October 2014 update; Chile
and Peru 2014F from Central Bank,
September 2014; Colombia 2014F from
Central Bank, July 2014; Panama 2014F from
Ministry of Economy and Finance,
September 2014.
United States
5 Yr. GDP Avg: 2.3%
GDP 2014F: 1.7%
GDP Avg. 2009-2013: CAGR (%)
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Mexico
5 Yr. GDP Avg: 3.5%
GDP 2014F: 2.4%
United States
12
LATIN AMERICAN INDUSTRY DYNAMICS
Most Latin American airlines remain profitable – led once
again by Copa; LATAM appears to be turning a corner
Latin American Carriers
2013 Net Profit:
$0.4 billion
LAN & TAM (LATAM)
2013 Net Profits: ($281M)
2013 Net Margins: -2.1%
GOL
Avianca
2013 Net Profits: ($332M)
2013 Net Margins: -8.1%
2013 Net Profit: $249M
2013 Net Margin: 5.4%
Brazil
Copa
2013 Net Profit: $427M
2013 Net Margin: 16.4%
AeroMexico
2013 Net Profit: $84M
2013 Net Margin: 2.7%
North American Carriers
Source: Flight Global- October
2014, IATA for regions in 2013
Note: All values expressed in USD
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2013 Net Profit:
$6.8 billion
United States
© ICF International 2014
13
LATIN AMERICAN INDUSTRY DYNAMICS
The Brazilian Real, Argentine Peso, and Chilean Peso have
depreciated significantly vs. the US dollar over the last 4 years
Foreign Currency Exchange Rate vs. US Dollar
20%
10%
Colombia
0%
Peru
-10%
Mexico
-20%
Chile
-30%
Brazil
-40%
-50%
Argentina
-60%
Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14
Weaker national currencies make purchases of dollar-denominated
goods and services (i.e. aircraft parts) more expensive
Source: OANDA.com
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14
LATIN AMERICAN INDUSTRY DYNAMICS
Change is in the air in the Latin American skies
 New generation widebodies are replacing
current generation aircraft
– LAN is operating 9 B787s with 23 more on order
– Aeromexico is operating 5 B787s with 10 more on
order
– Avianca has 15 B787s on order, and is expecting to
commence scheduled flights in 2015
– TAM has orders for 27 A350s, with entry into service
as early as 2015
 Low Cost Carriers (LCCs) are making inroads
in the region, signaling significant growth
in the future
– Grupo Viva was recently created by the owners of
Mexico’s VivaAerobus and Colombia’s VivaColombia
– Based in Panama City, the group seeks to expand the
Viva airlines footprint across the continent
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MRO Industry Trends to Watch – Airframe MRO
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AIRFRAME MRO
The global airframe MRO is very fragmented; no supplier
has more than a 6% market share
Airframe Heavy Maintenance Market Share
OEM
2%
Airline Third
Party
HAECO*
ST Aerospace
In-House
6%
18%
$9.0B
$9.0B
44%
36%
Independent
6%
LHT
4%
AFI KLM E&M
4%
AAR
3%
2% Ameco
2% EGAT
TAECO
AA-MRO
Others
SIAEC
* Includes TIMCO’s share
By Supplier Type
Supplier Market Share
Source: ICF analysis
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AIRFRAME MRO
Three of the top four airframe MRO are Asian owned;
Haeco’s acquisition of Timco makes it a solid #2
2012 Top Airframe MROs by Performed Man-Hours (millions)
0
2
4
STAero
Aero
ST
10
12
14
10.6
7.4
AAR
4.6
SIAEC
4.2
Lufthansa Technik
4.1
AFI KLM E&M
3.9
Ameco Beijing
8
11.5
HaecoGroup
Group
Haeco
Timco
6
October 2013
Haeco acquires Timco
3.2
2.8
ADAT / SRT
2.5
Iberia
2.3
Source: Aviation Week Overhaul and Maintenance June 2013
Note: Subsidiaries are included if they are majority owned/operated
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AIRFRAME MRO
The cost advantage enjoyed by Asian MRO suppliers will continue
to erode due to the shortage of skilled labor and wage inflation
$70
$60
Labor Rate
Convergence
Average Widebody Airframe Heavy Maintenance 3rd Party
Labor Rates In North America vs. Asia (USD per Man-Hour)
$50
$40
$30
North America
Mature Asian MROs
$20
Emerging Asian MROs
$10
1990
1995
2000
2005
2010
2015
2020
The convergence of global labor rates will require airlines to reconsider their
airframe sourcing strategies and create new opportunities for MRO suppliers
Source: ICF analysis
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AIRFRAME MRO
Widebody airframe heavy check migration from
North America to Asia has peaked…
Shifting Heavy Airframe MRO Migration Patterns
ICF Insight
 Average labor hours per heavy
maintenance check is declining
Less Trans-Pacific
Heavy Check
Migration
 Skilled labor shortages in Asia
driving up labor rates
More Heavy
Maintenance
Stays in Americas
“Right-shoring is the
new Outsourcing”
 High fuel prices increase
maintenance ferry flight costs
 North American labor rates now
comparable to leading emerging
market MRO rates
 Excess facility supply in North
America is increasing regional
competitiveness
Source: ICF Analysis
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AIRFRAME MRO
….and as a result, we see continued investment
activity in the airframe MRO sector in the Americas
AAR to build an
additional widebody
MRO facility in its
hometown – Chicago, IL
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21
AIRFRAME MRO
Today, more than half of the $306M Latin American
airline airframe MRO spend is performed in-house
2013 Latin American Airframe
MRO Sourcing Behavior
100%
$306M
12%
ICF Insight
Outsourced (Out of Region)
Outsourced (In-Region)
80%
28%
In-House
60%
 Competitive labor costs and
high quality skilled labor make
Latin America a net importer
of airframe heavy
maintenance
 Virtually all engine MRO and
the majority of component
MRO are outsourced by Latin
American carriers
40%
60%
20%
 Very limited widebody
capacity in the region
0%
Source: ICF Analysis
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22
AIRFRAME MRO
North American carriers account for over 90% of
“imported” airframe maintenance to Latin America
2013 Global Airframe Heavy maintenance flows into Latin America: $130M
$4.2M
$121M
$1.8M
Other
4%
Europe
3%
$0.5M
$130M
$130M
$2.2M
North
America
93%
*Note: AHM spend includes modifications / Source: ICF International, based on publicly announced contracts
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23
MRO Industry Trends to Watch – Material
Strategies
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MATERIAL STRATEGIES
Total commercial aircraft material demand is estimated to
be $37.5B with OEM new accounting for approx. 67% of
material spend
2013 Air Transport Material Demand
PMA Parts,
1%
Surplus
Parts
ICF Insight
9%
$37.5B
Parts repair,
incl. DER
67%
OEM
New
22%
 Alternative parts choices
are now ~50% of the size
of OEM new part revenue
 Parts repair spend,
including DER repairs, is
valued at ~$8.5B
 Surplus parts market is
now 9 times greater than
PMA
Source: ICF analysis
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25
MATERIAL STRATEGIES
The dramatic increase in annual aircraft retirements create
significant cost reduction opportunities for airlines & MROs
Air Transport Annual Aircraft Retirements
# Retirements
1,200
% Installed Fleet
ICF
forecast
1,000
800
2.5%
Retirement as %
of installed fleet
2.0%
600
1.5%
2010-23 Average 751
400
200
0
3.0%
2000-09 Average 410
1990-99 Average 171
1.0%
0.5%
0.0%
Includes Turboprops
Source: Airline Monitor Jun 2013, ACAS Sept 2013, ICF
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MATERIAL STRATEGIES
ICF estimates that commercial MRO industry spending on
surplus parts is approximately $3.5 billion
Air Transport Surplus Parts Market*
Engine
Parts
Airframe
5%
 Increased aircraft part-outs
and engine teardowns
65%
 More innovative surplus
parts supplier base
$3.5B
Component
ICF Insight
 Airlines’ M&E divisions
executing sophisticated
aircraft retirement “stagger”
programs
30%
 Increased vertical
integration of lessors, parts
traders & repair vendors
Source: ICF analysis
*Sales to end customers; excludes intra-dealer sales
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27
PMA MARKET
Today’s PMA market size is approximately $500M,
increasing to $740M by 2023
Commercial Air Transport PMA Market Forecast
$USD Millions (2013-2023)
% of total
$ millions
800
MRO material
2.0%
700
1.8%
1.6%
600
1.4%
500
1.2%
CAGR: 4%
400
1.0%
300
0.8%
0.6%
200
0.4%
100
0.2%
-
0.0%
2013
2015
2017
2019
2021
2023
ICF Insight
 Over the next 10 years, the
PMA market will grow at an
estimated 4% per annum
 The current PMA penetration
rate (of total MRO material
spend) will be virtually flat...
 …due to engine PMA parts
continuing to make up an ever
decreasing share of overall
PMA spend
 Engine OEM material
strategies have indeed been
very effective
Forecast in 2013 USD, exclusive of inflation
Source: ICF
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28
MATERIAL STRATEGIES
Surplus dealers now obtain over 80% of their inventory
from parting-out aircraft…
2007 & 2013 Supplier Channels for
Obtaining Surplus Materials
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
20%
10%
8%
26%
 Leaner airline
inventories
82%
54%
2007
ICF Insight
2013
Aircraft Part-Out
Direct Purchase From Airline
Purchase From Surplus Dealer
 Improved material
planning & forecasting
(and MRO IT
capabilities)
 Increased component
pooling agreements
 OEM after-market
material control
strategies
Source: ICFI Analysis
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29
MATERIAL STRATEGIES
ICF recently performed a global engine parts repair
assessment to quantify impact of recent trends in
engine overhaul material usage
% Material
Cost
100%
90%
Engine Overhaul Material Breakdown
2%
10%
1%
14%
PMA
Used Surplus
80%
70%
27%
21%
New OEM LLP
New OEM (non-LLP)
61%
 Use of surplus parts for engine
overhaul material increased by
4%
 Use of new LLPs decreased by
6% as new gen engines replace
aging fleets
60%
50%
ICF Insight
64%
 The 3% growth in non-LLP
related new parts can be
attributed to the OEM engine
MRO market share growth
40%
30%
20%
 Engine OEM aftermarket
material strategies resulted in a
significant reduction in PMA
usage
10%
0%
2009
2014
Source: ICF International. Includes in-house engine parts repair
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30
MATERIAL STRATEGIES
The impact of surplus parts will continue to create new
opportunities and challenges for industry players
Opportunities
 Continued increase in
aircraft retirements and partouts (growing to over 1,000
aircraft per year)
 Strong global demand for
surplus material
 Growth and innovation of global
parts trading & distribution
firms
 Aircraft lessors vertically
integrating to effectively
managing total lifecycle costs
Challenges
 Increased competition for
candidate aircraft acquisition
 Interest rates can only go up from
here…
 What will be the OEM’s next
move?
 How will resource constrained
airlines handle the complexity of
managing aircraft lifecycle costs?
 How will non-OEM MRO
suppliers compete on new
generation aircraft platforms?
Source: ICF Analysis
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31
Thank you!
ICF’s MRO advisory services include
the following:
 MRO Market Research & Analysis
 Airline Maintenance Benchmarking
 M&A Commercial Due Diligence
 Aerospace Manufacturing Strategy
 Aviation Asset Valuations & Appraisals
 MRO Information Technology (IT) Assessment
 MRO Strategic Sourcing Support
 Supply Chain Management
 LEAN Continuous Process Improvement
 Military Aircraft Sustainment
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32
ICF is one of the world’s largest and most experienced aviation
and aerospace consulting firms
Airports • Airlines • Aerospace & MRO • Asset Advisory
 51 years in business (founded 1963)
 100+ professional staff
− Dedicated exclusively to aviation and aerospace
− Blend of consulting professionals and experienced aviation executives
 Specialized, focused expertise and proprietary knowledge
 Broad functional capabilities
joined ICF in 2007
 More than 10,000 private sector and public sector assignments
 Backed by parent company ICF International ($945M 2012 revenue)
joined ICF in 2011
 Global presence –– offices around the world
New York • Boston • Ann Arbor • London • Singapore • Beijing • Hong Kong
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joined ICF in 2012
33
ICF delivers professional services and technology solutions in three focus
areas, which the aviation group draws upon, further enhancing its service
offerings and technology solutions to the aviation community
Energy Environment
Transportation
$937M Revenues
4,500+ Employees
ICFI
NASDAQ
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Health, Social Programs,
and Consumer/Financial
Public Safety
and Defense
One of ICF's founders and its first president was a Tuskegee Airman. C.D.
"Lucky" Lester flew more than 90 missions and earned the Distinguished Flying
Cross. In 1969, "Lucky" and 3 DoD analysts founded the organization that is
now ICF International.
© ICF International 2014
34
Jonathan M. Berger
Vice President
Aerospace & MRO Advisory
[email protected]
icfi.com/aviation
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