aerostrategy - air transport pma market outlook - 8 april 2010...

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12th Annual Gorham PMA-DER Conference

Ann Arbor, Michigan • Amersham, United Kingdom • Singaporewww.AeroStrategy.com

Presented by Tom Tran7 - 9 April 2010

San Diego, California12th Annual Gorham PMA-DER Conference


AGENDA

¡ MRO Market Outlook

¡ PMA Market Outlook

2

2


Two Major Factors Influence Aircraft MRO Activity…

3Source: AeroStrategy

• 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

1. Fundamental Demand For Aircraft MRO

• Inventory stocking & destocking, use of surplus components, deferred and reduced scope maintenance

• All of the above act as a buffer between fundamental demand and realized revenue by OEMs and MRO suppliers

• Important in times of crisis

2. MRO Supply Chain Practices


...And The First Factor, Fundamental Air Transport MRO Demand Is $42.7 Billion In 2009…

4Source: AeroStrategy/OAG Aviation

By Activity

Engine36%

Components22%

Line20%

Airframe15%

Modifications7%

NorthAmerica

34%

WesternEurope27%

AsiaPacific

16%

Middle East5%

LatinAmerica

5%

China5%

Africa4%

EasternEurope

3%India1%

By Region

3


…Which Is $2.3B Lower Than The 2007 Peak


0.0

10.0

20.0

30.0

40.0

50.0

2003 2004 2005 2006 2007 2008

Engine

Line

Components

Airframe

Modifications

$45B$44.0B

2009

$42.7B

Recession = Three Years Of Lost Growth!Recession = Three Years Of Lost Growth!


Fundamental MRO Demand Is Expected To Recover And Reach $58 Billion By 2019

6Source: AeroStrategy OAG Aviation* Constant 2009 US$

Line

Total = 3.2%

0

10

20

30

40

50

60

70

2009 2011 2013 2015 2017 2019

CAGR

Mods 7.2%

Airframe 1.2%

Line 1.5%

Components 3.1%

Engine 4.0%

• The MRO market is expected to recover early next decade and reach $58B by 2018 –a 3.2% CAGR (excludes inflation)

• Airframe maintenance will have the lowest growth due to retirements and introduction of less maintenance intensive aircraft

• The MRO market is expected to recover early next decade and reach $58B by 2018 –a 3.2% CAGR (excludes inflation)

• Airframe maintenance will have the lowest growth due to retirements and introduction of less maintenance intensive aircraft

4


India, China And The Middle East Will Be The Fastest Growing Regions…

7

CAGR

India 10.7%

E. Europe 3.3%

Africa 2.3%

China 9.1%

Latin Am. 4.3%

Middle East 7.6%

Asia Pacific* 4.5%

W. Europe 1.9%

N. America 0.8%

Total = 3.2%0

10

20

30

40

50

60

2009 2011 2013 2015 2017 2019

Note :

* Excludes China and India

• India, China and the Middle East will be the fastest growing regions

• North America and Western Europe , the largest markets, will be relatively flat

• India, China and the Middle East will be the fastest growing regions

• North America and Western Europe , the largest markets, will be relatively flat

Source: AeroStrategy OAG Aviation* Constant 2009 US$Asia pacific excludes China and India


…And Absolute Market Growth Will Be Driven By China And The Rest Of Asia-Pacific

8Note :

* Excludes China and India

• Asia-Pacific (excluding China and India) will have the highest absolute increase in MRO spending

• MRO spending in China will increase by $3B

• Despite high growth, Indian MRO spending will increase by <$1B

• Asia-Pacific (excluding China and India) will have the highest absolute increase in MRO spending

• MRO spending in China will increase by $3B

• Despite high growth, Indian MRO spending will increase by <$1B

Source: AeroStrategy OAG Aviation* Constant 2009 US$Asia pacific excludes China and India

0.00.51.01.52.02.53.03.54.04.5

5


The Second Factor, MRO Supply Chain Practices Attenuate Fundamental MRO Demand In Times Of Crisis…


• Inventory stocking & destocking, use of surplus components, deferred and reduced scope maintenance

• All of the above act as a buffer between fundamental demand and realized revenue by OEMs and MRO suppliers

• Important in times of crisis

2. MRO Supply Chain Practices• 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

1. Fundamental Demand For Aircraft MRO


…And Operators Have Numerous Options For Reducing Maintenance Spend In Times Of Crisis

10

Engines

• Reduced scope of maintenance – more “repair” and less “replace”

• Defer replacement of expensive life limited parts until they reach absolute cycle limits(e.g. short-stub engines)

• Greater leverage of spare engines in lieu of overhauls

• Acquisition of surplus engines for mature aircraft

• Renegotiate MRO contracts

Components

• Burn down rotable inventory in lieu of component MRO repair

• Reduced scope maintenance – more “repair” and less “replace”

• Acquisition of surplus rotables for mature aircraft

• Renegotiate MRO contracts

Airframe Heavy

• Reduce utilization and rotate in-service aircraft to minimize heavy maintenance checks required by hour/cycle limits

• Park older aircraft approaching expensive heavy checks

• Reduce discretionary modifications (e.g. Interior upgrades, painting)

Source: AeroStrategy

6


One Alternative Is To “Destock” Some Of The $47 B Of Inventory In The MRO Supply Chain…

§ About $47B in inventory

§ The weighted average holding cost of 21.5% implies a cost $10.1B for the industry

§ Airlines bear the brunt of this burden - $6.3B per annum or 62% of the total

§ About $47B in inventory

§ The weighted average holding cost of 21.5% implies a cost $10.1B for the industry

§ Airlines bear the brunt of this burden - $6.3B per annum or 62% of the total

$10.1B

21.5%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

Total Inventory Holding Cost

Surplus

Distributors

MROs

OEMs

Airlines

$47B

61%

19%

14%

Source: AeroStrategy/IATA 2009 Inventory & Logistics Survey,Aerostrategy / OAG MRO model 11


…And Operators Hold 60% Of MRO Supply Chain Inventory; ~40% Is Aircraft Rotables

12

Source: AeroStrategy

* Inventory estimates based on a 2009 global supply chain survey conducted by AeroStrategy and IATA

By OrganizationAirlines: 61%MRO suppliers: 14%OEMs: 19%Distributors 6%

By Type Of InventoryRotables (components): 41%Consumables 24%Spare engines 12%Airframe parts 8%Other (piece parts) 17%

AirlineOperator

OverhaulShop

Outside Parts

Repairs &Processes

ServiceParts

Inventory InventoryCasting, Forging &

Raw MaterialsInventory

7


The 2002/2003 U.S. Airline Industry Crisis Highlights The Impact Of Destocking And Deferred Maintenance

13

Capacity (indexed ASM)

Total Maintenance Spending (indexed)- 4%

- 12 %

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

2001 2002 2003 2004 2005 2006 2007 2008

• The last airline crisis was in the U.S. in 2002/2003Ø Post 9.11 shock = reduced demand and yieldsØ Several airlines entered Chapter 11 and restructuredØ Airlines aggressively pursued cash conservationØ US capacity reduced by 4%

• Airlines reacted by burning off inventory, deferring non-essential maintenance, increasing outsourcing, and parking older aircraft

• The net result was a 12% decrease in maintenance spend – three times the level of ASM reduction

Source: Air Transport Association, AeroStrategy analysis


The Near-Term Impact Of Destocking Will Be Greatest For Downstream Suppliers


AirlineOperator

OverhaulShop

Outside Parts

Repairs &Processes

ServiceParts

Casting, Forging &

Raw Materials

Inventory Inventory

Inventory

Moderate Significant Very SignificantNear-term impact of inventory reduction on MRO demand

8


...Resulting In Larger Swings In Parts Demand Than Overhaul & Repair Services


2001 2002 2003 2004 2005 2006 2007 2008 2009

Airline Capacity

Overhaul & Repair Services

Service Parts


Most OEMs Experienced A 10-20% Reduction In Aftermarket Revenue In 2009…


AirlineOperator

OverhaulShop

Outside Parts

Repairs &Processes

ServiceParts

Casting, Forging &

Raw Materials

(10 – 15%) (15 – 30%) (20 – 40%)Near-term reduction in supplier revenues

Fundamental MRO demand down in 2009

• AeroStrategy estimates that OEMs and MRO suppliers will see between a 10 and 40% reduction in 2009 due to the industry crisis – depending on the position in the supply chain and on the supplier’s portfolio

• Most OEMs had a 10 – 20% reduction in aftermarket revenue in 2009 – based on a blend of service parts and overhaul services

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…As Evident By The 9% Decline In Revenue For HEICO’s Flight Support Group In 2009

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0

50

100

150

200

250

300

350

400

450

500

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

2009: Down 9%

2002: Down 9%

1997-2008 CAGR = 24%**

Source: HEICO 10-K

Note: * Flight support group includes distribution, repair and PMA business** Growth rate includes organic growth and acquisitions


There Is Still Room For Continued Destocking – Particularly In The Middle East And Asia-Pacific

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Airline Average = $1.9 M USD per aircraft

US

$ -M

illio

ns*

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

Middle East Asia Pacific Latin America

North America

Africa Europe

* Book Value

Source: AeroStrategy/IATA 2009 Inventory & Logistics Survey

10


AeroStrategy Anticipates A Return To MRO Growth In 2010 With The Makeup For “Destocking” In 2011/2012


* Constant 2009$

0

10

20

30

40

50

60

2008 2010 2012 2014 2016 2018

2009: Down 15-20%

Fundamental MRO demand

Realized supplier

revenue

2010: Low Singledigit growth

2011: Mid Single digit growth

2012: Low double digit growth


AGENDA

¡ MRO Market Outlook

¡ PMA Market Outlook

20

11


The 2009 PMA Market Contracted By An Estimated 8%

§ 2009 PMA market is down 8% versus 2008, from $381M to $353M

§ Since the peak in 2007, the PMA market has fallen by 17%

§ Several factors drove the PMA market contractionØ Airline use of buffers

Ø Deferred maintenance

Ø Work scopes (e.g. more repair and less replace)

Ø Cannibalization of surplus aircraft and engines

Ø Lack of airline resources devoted to PMA approval process

Ø OEM defensive measures

§ 2009 PMA market is down 8% versus 2008, from $381M to $353M

§ Since the peak in 2007, the PMA market has fallen by 17%

§ Several factors drove the PMA market contractionØ Airline use of buffers

Ø Deferred maintenance

Ø Work scopes (e.g. more repair and less replace)

Ø Cannibalization of surplus aircraft and engines

Ø Lack of airline resources devoted to PMA approval process

Ø OEM defensive measures

Source: AeroStrategy/IATA 2009 Inventory & Logistics Survey,Aerostrategy / OAG MRO model 21

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

-50

100 150 200 250 300 350 400 450

2007 2008 2009

($M) PMA Penetration(%)

$381 M$416 M

$353 M


AeroStrategy Conducted The Survey In Conjunction With IATA; Respondents Include More Than 70 Companies

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• Sent survey instrument to more than 200 airlines via IATA and 100+ airlines, OEMs and distributors via AeroStrategy

• Survey questions included

Ø Current inventory value and type

Ø Location of inventory

Ø Inventory turns and costs

Ø Anticipated changes in inventory levels

Ø Use of pooling, vendor-owned inventory, and PMA parts

Survey Objectives

Airlines47%(36)

MROs25%(19)

Distributors14%(11)

OEMs13%(10)

MRO Inventory and Supply Chain Logistics Survey Respondents

• 36 airlines with over 3,800 aircraft in total

• 19 MROs with over $11B in MRO revenue

• 11 distributors and surplus dealers with inventory valued at $2.6B

• 10 OEMs with nearly $3.5B in spare parts sales volume

12


The Majority Of Airlines And MROs Feel That OEM Pricing Policy Significantly Drive The Usage Of PMA…

23Source: AeroStrategy/IATA 2009 Inventory & Logistics Survey

0%

10%

20%

30%

40%

50%

60%

(1) Not Significant (2) (3) Moderately (4) (5) Significant

MRO Airline%

of R

espo

nden

ts


…And Have Seen Price Increase From The OEMs Of At Least 3% In Recent Years…


0%

10%

20%

30%

40%

50%

60%

Decline Remain Same Increase <2% Increase 3%-5% Increase >5%

MRO Airline

% o

f Res

pond

ents

13


…While The Perception Is That PMA Offers At Least 20% Discount Compared To OEM Parts


0%

10%

20%

30%

40%

50%

60%

70%

80%

0%-10% 11-20% 21%-30% 31%-40% >40%

MRO Airline

% o

f Res

pond

ents


Over 90% Of The Airlines In The Survey Have Authority To Use PMA Parts…


% of Respondents0% 10% 20% 30% 40% 50% 60% 70% 80% 90%100%

Do you know if your authority has a general policy of accepting/endorsing the FAA PMA

approval of parts?

Does your authority allow your airline to use PMA parts?

NOYES

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…But Many Airlines Believe That Leasing Companies Are The Largest Barrier To Greater PMA Penetration


# o

fR

esp

on

den

ts

0

2

4

6

8

10

12

14

16

18

5Very Significant

4 3 2 1Insignificant

Regulatory

OEM Agreements

Leasing Companies

Culture

Other

“It is not even possible to arrive at a reasonable financial formula to allow a lessee to use substitute materials in return for a higher rent.” – Chief Technical Officer of A Leasing Company“It is not even possible to arrive at a reasonable financial formula to allow a lessee to use substitute materials in return for a higher rent.” – Chief Technical Officer of A Leasing Company


The Air Transport PMA Market Is Expected To Reach $618M Within The Next Five Years

§ The PMA market will begin to recover in 2010 with an estimated 7% growth rate

§ In 2011, the PMA market is forecasted to spring-back with a robust growth rate of 15%

§ Overall, the PMA market is estimated to grow from $353M in 2009 to $618M in 2014, a 12% CAGR

§ PMA penetration expected to reach 3.3% of total material consumption

§ The PMA market will begin to recover in 2010 with an estimated 7% growth rate

§ In 2011, the PMA market is forecasted to spring-back with a robust growth rate of 15%

§ Overall, the PMA market is estimated to grow from $353M in 2009 to $618M in 2014, a 12% CAGR

§ PMA penetration expected to reach 3.3% of total material consumption

28Source: AeroStrategy analysis, AeroStrategy Engine Overhaul Survey

Penetration (%) 2.3% 2.4% 2.7% 2.9% 3.1% 3.3%

-

100

200

300

400

500

600

700

2009 2010 2011 2012 2013 2014

Engine

Components

Airframe

2010: 7% Growth

2011: 15% Growth

2012-2014: 12% Growth

* Constant 2009 US$

15


Key Messages

§ Fundamental air transport MRO demand is $42.7 billion in 2009, which is $2.3B lower than the 2007 peak§ In the near-term, use of MRO demand buffers will magnify

the recession; most OEMs experienced a 10-20% reduction in aftermarket revenue in 2009§ AeroStrategy anticipates a return to MRO growth in 2010

with the makeup for “destocking” in 2011/2012§ Airlines and MROs in the survey feel that OEM pricing

policy drive the usage of PMA and have seen price increase of at least 3% in recent years§ While over 90% of the airlines surveyed have authority to

use PMA parts, many airlines believe that leasing companies are the largest barrier to greater PMA usage§ The 2009 PMA market contracted by an estimated 8%, but

is expected to reach $618M within the next five years

§ Fundamental air transport MRO demand is $42.7 billion in 2009, which is $2.3B lower than the 2007 peak§ In the near-term, use of MRO demand buffers will magnify

the recession; most OEMs experienced a 10-20% reduction in aftermarket revenue in 2009§ AeroStrategy anticipates a return to MRO growth in 2010

with the makeup for “destocking” in 2011/2012§ Airlines and MROs in the survey feel that OEM pricing

policy drive the usage of PMA and have seen price increase of at least 3% in recent years§ While over 90% of the airlines surveyed have authority to

use PMA parts, many airlines believe that leasing companies are the largest barrier to greater PMA usage§ The 2009 PMA market contracted by an estimated 8%, but

is expected to reach $618M within the next five years

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Thank You For Your Attention!

§ AeroStrategy is a specialist management consulting firm devoted to aviation and aerospace sectors with offices in Ann Arbor , Amersham, U.K., and Singapore

§ To learn more about AeroStrategy visit www.aerostrategy.comor contact:

§ David Stewart, PartnerPh: + 44 1494 431 [email protected]

§ Kevin Michaels, PartnerPh: +1 734 821 [email protected]

§ Hal Chrisman, PrincipalPh: +1 734 821 [email protected]

§ AeroStrategy is a specialist management consulting firm devoted to aviation and aerospace sectors with offices in Ann Arbor , Amersham, U.K., and Singapore

§ To learn more about AeroStrategy visit www.aerostrategy.comor contact:

§ David Stewart, PartnerPh: + 44 1494 431 [email protected]

§ Kevin Michaels, PartnerPh: +1 734 821 [email protected]

§ Hal Chrisman, PrincipalPh: +1 734 821 [email protected]

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aerostrategy - air transport pma market outlook - 8 april 2010...

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