2009-outsourcing trends in the usa

7/28/2019 2009-Outsourcing Trends in the USA

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0 2009 TeamSAI, Inc.

Outsourcing Trends in the USA

9th Annual Aircraft Maintenance Outsourcing Conference for the Americas

November 2009

Presented by:

David A. MarcontellExecutive Vice President & Principal

2009 TeamSAI, Inc.


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TeamSAI provides innovative solutions to the aviation industry

Specializing in strategic and tactical management & operations With six actively involved and experienced owners / executives

Beginning our 20th year

We serve all aspects of the aviation community worldwide including

Who We Are

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Process & PerformanceImprovements

Accelerated Change

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MaintenanceManagement

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Partners with theAviation Week Group

Global MROForecasting

MRO Prospector Data -Industry LeadingMarket Research


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Chain

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Development

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Compliance Systems & Audits

Safety,Certification &

Compliance


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Whats in store

Guiding Questions

How have outsourcing trends been affected by the recession? What has been the impact of currency value fluctuations?

How does work move between markets and geographical regions?

What are the key US companies that import outsourced work?

Discussion Points Overview of outsourcing

State of the market

Currency trends North American MRO (engine and airframe) overseas volume estimates

Regulatory environment


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Outsourcing overview

With very tight operating conditions, airlines are constantly evaluating their maintenance work

Market is seeing a mix of remarkably diverse RFPs each driven by broad ranges of confidence Shorter and longer contract terms

Smaller and larger work scopes

If there is one common denominator, it is lower prices are in demand

Recession is putting pressure on operators to consider in-sourcing work first before bidding theworkif able

This does not mean that they will use that option, but a first-look is increasingly common

OEM / MRO tension is on the rise, with OEMs continuing to raise prices despite recession andcontinuing to exert their presence down the supply chain

MROs poor position being exacerbated by added pressure from airlines wanting to avoid flightcancellations/interruptions and resultant costs

Thus, airlines are pushing MROs to maintain larger inventoriesa capital intensive need that adds to theMROs costs

Major factors that influence the outsourcing decision remain the same:

Internal capabilities, experience with fleet type(s), and fleet size Turnaround time

Exchange rates

Fuel costs for ferrying if required

Effectiveness of an MROs LEAN execution is also having a strong influence on the outsourcingdecision

How will these conflicting approaches ultimately impact the industry?


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MRO Prospector keeps a listing ofknown contracts and relationships An industry unique feature

Provides user with a means of seeing whichoperators have established relationshipswith MROs

Market share is estimated based onthis research

With an understanding of existingcontracts, estimates are made todetermine trends in outsourcing

State of the marketWork outsourced by segment

Contract research suggests that a significant amount of HMV and engine work worldwide is doneoutside the operator Airlines increasingly wish to focus on their customer-facing roles and allow non-customer-facing tasks to others

Of course some of that work is sent to the operators affiliated MROs, so it is not all trulyindependent

Of the work that is sent to an independent MRO, less than a quarter leaves the region

North America largely mirrors the overall worldwide behavior

World

Segment% Outsourced -

All% Outsourced -

Independent/OEMs

% Outsourced -

Independent -Outside Region MRO $ (B)

HMV (Check)1 77% 58% 15% $6.5

Engines 95% 81% 24% $19.1

Components 89% 84% 12% $9.0

Line 33% 28% 15% $8.3

Total 79% 67% 18% $42.9

North America

Segment% Outsourced -

All% Outsourced -

Independent/OEMs

% Outsourced -

Independent -Outside Region MRO $ (B)

HMV (Check)1 85% 70% 22% $2.2

Engines 99% 81% 12% $6.3

Components 86% 81% 7% $3.1

Line 56% 40% 19% $2.9

Total 85% 71% 15% $14.4

Note: values include turboprops

1 HMV (Check Only) excludes modification work in this analysis


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53% 53%58%

2007 2008 2009

Outsourced HMV (Check) MRO

State of the marketWork outsourced by segment, YOY trends

Note: HMV (Check Only) excludes modification work in this analysis

70%75%

81%

2007 2008 2009

Outsourced Engine MRO

63%

77%84%

2007 2008 2009

Outsourced Component MRO

17% 16%

28%

2007 2008 2009

Outsourced Line MRO

Outsourcing continues

to grow, especially incomponent and linemaintenance

HMV is about 50:50but has been on therise

Line MRO is stillmostly in-house, butnow beginning to risequickly



North America

Latin America

Western Europe Eastern Europe

Middle East

India

Asia Pacific

China

Africa

State of the marketNorth Americas HMV (Check) MRO outsourced work by region

Most NA HMV work stays within NA(64%)

Asia-Pac gets about a quarter of theoutsourced business

HMV

(Check Only)1


$1.5B

2%

64%stays in NA

5%

25%

4%



North America

Latin America

Western Europe Eastern Europe

Middle East

India

Asia Pacific

China

Africa

State of the marketNorth Americas Engine MRO outsourced work by region

NA engine work is even more likely toremain in NA

Western Europe also gets about 13% ofNAs business

Engine

$5.1B

13%

84%stays in NA

1%

2%



State of the marketNorth America outsourced work by service type

Bundled contracts (total care / all maintenancewhich extend beyond airframe work) make upabout a third of the contracts in NA

More than half focus only on heavy maintenance

Dedicated shop visit contracts dominate theengine overhaul business

Some 11% are part of bundled (total care or fullengine maintenance) contracts

$1.5B


$5.1B

All this suggestsWork requiring significant manhours or capital equipment (e.g., engine shop repairs) is more likely to

be outsourced

Airlines prefer doing their own light C checks due to short turn-times and less manhour intensivevolume where cost differential adds up

While most engine maintenance is locked up, the prevailing model is event driven rather than hourly

driven

12%

32%

54%

2%

HMV(Check Only)

Unannounced

Total Care / AllMx

Heavy

Light - C

Checks

8%

11%

81%

Engine

Unannounced

Total Care /All Mx

Shop Visit


11/1910 2009 TeamSAI, Inc.

Outsourcing Technical Support Services

Technical Support market continues to

grow Examples of recent contracts:

58%

81%

84%

28%

5%

42%

19%

16%

72%

95%

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

$20

HMV(Check)

Engines Components Line TechnicalSupport

Outsourced vs In-House MRO

2009

Note: MRO Outsourced includes work outsourced toindepe ndent MROs or to OEMs, but not work d one byoperator-affi liated MROs

BOutsourced % In-House %

Provider Airlines/Offering

LufthansaTechnik

Aeroflot(A320, total support)

AeroLogic(777F, total support)Khalifa Airways

(A320, total support)

SR Technics Gulf Air(full fleet, integrated airline solution)

TeamSAI World Airways

North American

CAVOK Milcon Gulf Group

Avisa Ltd Air Malta


12/1911 2009 TeamSAI, Inc.

A tough year for MRO providersMRO closures/declines

2008 2009

Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

Are we seeing the bottomyet?

AAR Chromalloy SRT Dublin AAR Comair

GE LHT

LHT-Shannon

LTAI

TIMCO

P&W

Dublin Aerospace

Closed Ft Walton Beach facility

Laid off works in NV Transferred workers to San Antonio

Consolidated manufacturing & maint. Avoiding closures for now

Significant decline due to parking ofUAL 737s

Closing their HOT facility

Largest MRO casualty of 2009

Stabilized decline by shifting tomilitary work

Confident but cautious Focus on efficiency and newer a/c

types

Concentrating on basics Low-cost sourcing Suspending India JV

Escape SRT-Dublin fate by securingproductivity improvements from labor

Surviving thru LEAN

Shifting work to lower cost facilities by

closing some Moving forward with some strategicJVs

Replacing SRT-Dublin Awarded key approval certificate Expects to employ 50-150 EEs by

end of first year (vs. 1500 before)

Closed MRO base in ORL


13/1912 2009 TeamSAI, Inc.

2009 Contract Highlights

MROs Contract Description

GE / ADAT / SRTechnics /Standard Aero

Multi-faceted aviation agreementAbu Dhabi Aircraft Technologies (ADAT) to become first MRO Network provider of GEnx engines and acquire GE90capabilities

GE and Snecma to provide ADAT and SR Technics with engine overhaul and technical supportGE designates CFM56-7B work for WestJet to StandardAero ($850M, 12yrs OnPoint Solutions partnership)

DTO / EGAT Delta TechOps wins first 747 component MRO contract since NWA merger by teaming with Evergreen Aviation TechnologiesCorp. (EGAT)

EGAT will continue providing comprehensive maintenance solutions to EVA Airways, but through the new contract, Delta willprovide component services for EVAs 747s and MD-90s operated by EVA subsidiary UNI Air

LHT-ShannonAerospace

LHT-Shannon Aerospace picking up easyJet 737NG checks that formerly were to go to SRT-Dublin Intense LEAN focus to survive downturn

GE EngineServices

In 4/09, GE Engine Services landed $100M PBTH engine overhaul contract for Gulf Airs CFM56-5Bs for its 15 new A320s In 6/09, GE Engine Services landed $1.7B OnPoint contract for Ethihad (GE90, GEnx)

Gulf remains relatively bright spot in economic downturn In 6/09, GE Engine Services landed 10-yr, OnPoint contract for Delta Air Lines (GE90)

Outsourcing now, despite the fact that DAL carried out >$300M in engine work for other airlines in 2008 In 10/09, GE Engine Services (Celma) landed 15-yr, $1.0B OnPoint contract for Azul (CF34-10E for E190/195)

Pratt & Whitney In 6/09, P&W secured long-term $75M contract covering all JAL components for all fleets

Lufthansa Technik In 6/09, LHT secured long-term Total Component Support contract for Scandinavian Airlines System

DTO In 7/09, Delta TechOps contracted with Hawaiian Airlines for $500M OnPoint (Total Care) for PW4000-94 and CF6-80A

Large Players Making Strategic Moves


14/1913 2009 TeamSAI, Inc.

Currency fluctuations have mixed impact on NA MROsContract data does not bear out significant trends but weak USD favors NA MROs to some extent

US Federal Reserve loose monetary policy (i.e.,keeping interest rates low to spur the economy) has, in

part, driven the US dollars devaluation

Since the beginning of 2008, the USD/EUR exchangerate has fallen Dollar is currently at its lowest point relative to the Euro since August

2008

Conventional wisdom: weak dollar benefits US exportsAnd to the extent that MROs are enjoying increased sales in Europe,

this wisdom holds

Weak dollar is making US MROs very cost-competitive

However, raw materials sourced overseas in foreigncurrency are more expensive Oil, metals, component parts, etc.

Tight credit terms can prevent US companies from getting funds tofront these costs

Higher raw material costs are bad for everyone

Higher fuel costs (due to devalued dollar) impact ferry flight

breakeven distances Furthermore, many contracts are long-term in nature and cannot berenegotiated to take advantage of the weaker dollar

US economy could also ultimately be harmed bydevalued dollar, if it triggers inflation (though Feds arestill more concerned about deflation)

0.60

0.65

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EUR to USD Exchange Rate

6.80

6.90

7.00

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7.70

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CYN to USD Exchange Rate

Anecdotal evidence suggest NA MROs are doing better in EU


15/1914 2009 TeamSAI, Inc.

North American MROs service all regions of the worldOf course, most work does come from the Worlds largest market (NA)

The vast majority of NA MROs get theirairframe maintenance work from NAoperators

WE contributes just 2% of the NA MROswork

Engine work, on the other hand, is muchmore geographically diverse in terms of thehome region of the customer

Still, NA operators contribute nearly two-thirds of the business

LA&C, WE, and Asia-Pac customers domake up one-quarter of the NA MROswork

$871M


$5,890M

96%

1%

2%

0% 0% 0% 1%HMV(Check Only)

North America

Latin America &Caribbean

Western Europe

Eastern Europe

Asia Pacific

China

India

Africa

Middle East

65%7%

11%

0% 7%

4%

1%1%

4%

Engine

North America

Latin America &Caribbean

Western Europe

Eastern Europe

Asia Pacific

China

India

Africa

Middle East


16/1915 2009 TeamSAI, Inc.

Top 15 MRO providers in NATop NA MROs service have regionally-diverse client base, but still focus mainly on NA operators

Looking at the major airframe and engineMRO providers in North America, weestimate the portion of their business thatoriginates from other regions

Delta TechOps has wide expanse in theairframe MRO market

Just over half of their work comes from NA

LAN Airlines (LA&C), Star Air (WE), and

Royal Air Maroc (AF) make up some oftheir major customers overseas

Engine overhaul providers have a widerreach than airframe MRO providers

P&W, AeroThrust, Delta TechOps, andUnited Services are some of the mostregionally diverse

These providers service operators outsideNA, with P&W having the broadest reach inthe engine overhaul space

Note: All in-house work is excluded from this analysis. So, for example, United Airlines workexcludes the work that United Services does for the UAL parent

HMV (Check Only)

Top 15 MRO NA LA&C WE EE AP CH IN AF ME Total

1 TIMCO Aviation Services, Inc. 96% 4% 100%

2 AAR Corp. 100% 100%

3 Aviation Technical Services, Inc. 100% 100%

4 Pemco World Air Services 100% 100%

5 ST Mobile Aerospace Engineering, Inc. 100% 100%

6 Aveos Fleet Performance 99% 1% 100%

7 ExelTech Aerospace 93% 6% 1% 100%

8 Goodrich Corporation 100% 100%

9 Empire Aero Center 89% 11% 100%

10 Cascade Aerospace, Inc. 100% 100%

11 Bombardier Services Corp. 100% 100%

12 Delta Air Lines/DTO 52% 11% 29% 8% 100%13 Tucson Air Center 100% 100%

14 Flightstar Aircraft Services, Inc. 100% 100%

15 American Airlines, Inc. 100% 100%

Engine

Top 15 MRO NA LA&C WE EE AP CH IN AF ME Total

1 GE 64% 6% 14% 0% 6% 2% 0% 0% 8% 100%

2 Pratt & Whitney Global Service Partners 46% 4% 10% 0% 20% 11% 3% 2% 2% 100%

3 Rolls-Royce plc, Aero Repair & Overhaul 85% 5% 8% 1% 1% 100%

4 IAE International Aero Engines AG 37% 14% 10% 4% 13% 16% 6% 100%

5 Delta Air Lines/DTO 67% 26% 6% 0% 1% 100%

6 Texas Aero Engine Services Ltd. LLC 100% 100%

7 Aveos Fleet Performance 100% 100%

8 Standard Aero, Inc. 99% 1% 100%

9 MTU 83% 17% 100%

10 AeroThrust Corp. 57% 43% 100%

11 United Airlines, Inc. 0% 15% 85% 100%

12 Chromalloy Gas Turbine Corp. 100% 100%

13 Eagle Aviation Services, Inc. 66% 34% 100%

14 Vector Aerospace Engine Services - Atlantic 100% 100%

15 Honeywell Aerospace Services 100% 100%


17/1916 2009 TeamSAI, Inc.

Outsourcing and regulation

Outsourcing to low cost regions has again come to the forefront of the publics attention with some

high profile maintenance mishaps and media coverage In this age of government involvement, protectionist measures are a very real concern

But now that we are beginning to see the end of the recession, globalization will likely continue itsgrowth (though perhaps not as fast as that in the past)

Increased pressure from the FAA on airlines will likely be felt by both US-based and foreign MROproviders

This is a new era of regulation where increased scrutiny of maintenance will be the norm


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Summary

Despite the recession, or perhaps because of it, outsourcing work continues to be a persistent

trend in MRO market Over 65% of all MRO is outsourced to third parties

Largely due to either complex nature of the work , or the shear volume of manhours required

MRO providers have had to take a long, hard look at their operations and adjust to the changes inutilization and capacity

2008 was the year of airline capacity reduction

2009 may prove to be the year of the MRO providers response to capacity reduction

Less business form older aircraft and engines that are not coming back

Turning focus toward new aircraft with an understanding that they will (at least for the near future) require lessmaintenance

Recession has made the market place more competitive though Weak USD makes for a temporary bright spot for North American MROs, but long-term implications must

not be forgotten

All this said, cost remains king LEAN remains the answer


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18 2009 TeamSAI Inc 2009 TeamSAI, Inc.

THANKYOU

2009-outsourcing trends in the usa

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