episode 4: operating in the post pandemic

Wed. October 6, 20217:30-9:30am EDT

Episode 4: Operating in the post pandemic

Opening Remarks

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• Competition Law Guidelines

2Ep 4 - Operating in the post pandemic 6 October 2021

Chris MARKOU

Head, Operational Cost Management – IATA

[email protected]

mailto:[email protected]

Competition Law Guidelines

Do not discuss:

• Any element of prices, including fares or service charges

• Commissions

• Allocations of customers or markets

• Marketing plans, commercial terms or any other strategic decision

• Group boycotts

• Your relations with industry stakeholders

• Any other issue aimed at influencing the independent business decisions of competitors

6 October 2021Ep 4 - Operating in the post pandemic 3

Agenda

• Our speakers

• Maintenance costs: aircraft leasing in the post pandemic “new normal”

• MRO Outlook: COVID’s implications for airlines and MRO suppliers

• Navigating through the pandemic, an airline’s experience


Our Speakers


Jonas MURBY

Principal – AeroDynamic Advisory

[email protected]

Phil SEYMOUR

President and Head of Advisory –IBA

[email protected]

Swaran SIDHU

Head of Fleet Technical Management – easyJet

[email protected]




Maintenance Costs: aircraft leasing in the post pandemic “new normal”


Phil SEYMOUR


[email protected]


www.iba.aero October 21

IBA Presentation to IATA MCC

October 6th 2021

Phil SeymourCompany President

www.iba.aero 8

Maintenance Costs: Aircraft leasing in the post pandemic “new normal”, what can we expect?

1. High level fleet retirements/revised lease end date projection

2. How are maintenance costs and maintenance reserves being impacted (utilisation change)

3. What issues are we seeing between lessors and airlines (maintenance/lease end related)

4. Will we see changes to future lease contracts? (hell and/or high water clause and AD costs (not just pandemic but MAX related)

www.iba.aero

LEASE END FORECAST

Multiple Drivers

• Cons: (increased lease ends)

• We will see more early hand-backs

• More failures expected 3Q21

• Rising oil price

• Greener focus

• Pros: (reduced lease ends)

• Extensions

• 2020 increased Sale-Leaseback activity

• Re-fleeting process is a slow process

• OEM delivery & design pace

9

COVID FALLOUT & SLOW RE-FLEET

www.iba.aero

0

2000

4000

6000

8000

10000

12000

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Nu

mb

er O

f Sh

op

Vis

its

Engine Shop Visit Demand Impact - Summer 2021

Pre Covid

Revised Outlook

MAINTENANCE CONSIDERATIONS

Multiple Issues

• Long storage periods

• Where, how long?

• Regulator liaison regarding scheduled check deferrals

• Engines

• Green time usage versus shop visits

• A bow wave of shop visits emerging

• MRO Industry Capabilities

• Reduced resources

• Redundancies / retirements

• Logistical blockage

• Utilisation and Role Change

• Not just a regulatory MPD issue

• Check the lease – what were the assumptions?

10

THE BROADER MRO CHALLENGES

www.iba.aero

REDELIVERY ISSUES

The usual cyclical tug of war

• Lessee cash preservation v Lessor lack of new lessee pressure

The new issue

• Lessors were generally thinly resourced technically

• A whole new demand profile

• Multiple work-outs

• Additional aircraft on the market (finance failures)

• More competition for technical resource

• Lack of lessor engagement in some cases

• And Supply had been stifled due to mobility issues

11

SOMETHING OLD / SOMETHING NEW…….

www.iba.aero

LEASE CONTRACT CONSIDERATIONS

MAX related - extended grounding due to the design faults

• Already delivered - Warranty/AD position

• Impact on delayed maintenance and reserve funds

12

NOT JUST COVID RELATED BUT THE MAX TOOK US TO NEW CHALLENGES

DEFINITION of 'Hell or High Water Contract'. A hell or high water contract (also known as a promise-to-pay contract) is a noncancellable contract whereby the purchaser must make the specified payments to the seller, regardless of any difficulties they may encounter.

What if we see another pandemic – will we see provisions for it – built into leases?

• It will be requested

• Case by case?

• Step down/step up rates?0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

0

5,000

10,000

15,000

20,000

25,000

Park

ed &

Sto

red/A

ctive +

Park

ed +

Sto

red

Num

ber

of

Aircra

ft P

ark

ed/S

tore

d

Storage Projection - Revisited

All NB All WB All TP All RJ

All NB% All WB% All TP% All RJ%

All NB% All WB% All TP% All RJ%

www.iba.aero 13

• Understanding Scope 1, 2 and 3 aspects of the business

• Many MRO’s still behind understanding what to do

• Some are part of larger entities others stand alone

• Investors want and need to know the ESG strategy

• The Logistics challenges

• Direct – flying to the facility

• The parts in and parts out cycle

• Workshop processes

• JIT v bulk

• Waste

• New technology

• 3D printing

• Paperless processes

ESG - MRO CONSIDERATIONS

www.iba.aero

IBA’S CARBON EMISSIONS INDEX

14

IBA is proud to announce the launch of our new Aviation Carbon Emissions Index in association with KPMG. A new standard for aviation CO2 analysis.

www.iba.aero October 21

IBA Presentation to IATA MCC

October 6th 2021

Phil SeymourCompany President

Questions?


Phil SEYMOUR


[email protected]


MRO OutlookCOVID’s implications for airlines and MRO suppliers


Jonas MURBY


[email protected]


PREPARED FOR

MRO OutlookCOVID’s implications for airlines and MRO suppliers

Jonas Murby, Principal

6 October 2021

0

500

1000

1500

2000

2500

3000

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Pre-COVID

August 2021Forecast

2020 YearEnd Forecast

Actual

Lockdowns & Containment

Supply Side Constraints

“New Normal”

19

AeroDynamic forecasts air travel recovery by late 2023 or early 2024

Source: AeroDynamic analysis, IATA

AIR TRAVEL OUTLOOK

Nominal Scenario for Air Travel Recovery

Qu

art

erly R

PK

s (

bill

ion

s)

Pre-COVID

outlook

2020 2021 2022 2023 2024 2025

Business Travel Growth

Growth from Vaccinations

Impairment of 11%

from pre-COVID

forecast

Historical Projection

20

A large portion of the global population remains unvaccinated; the coming years will be a race between vaccines and new variants

Source: The Economist, Bernstein, AeroDynamic Advisory analysis

AIR TRAVEL OUTLOOK

Global Adult Population and Vaccination Status*

-

200

400

600

800

1 000

1 200

1 400

# Inhabitants

by S

tatu

s

Two doses (M) One dose (M) No dose (M)

Size of box

proportional to global

accumulated

confirmed cases of

corona as of 16

August: 206 Million

(2.6% of population)

(*) As of 1 August 2021; calculations assume two doses required per

person

21

For most regions, returns to 2019 traffic levels will take multiple years

Source: AeroDynamic Advisory analysis

AIR TRAVEL OUTLOOK

2019 Global RPK, Broken Down by Region (Intra / Inter) – Color Based on Estimated Return to 2019 Levels

2021

2022

2023

2024+

”Airports are full”

Three factors are preventing a full recovery during the coming few years

22

› 20 percent of adult global population fully vaccinated as of 1 Aug 2021

› Theoretical capacity of 15 Billion doses in 2022, but only 5 Billion mRNA

› Vaccine skepticism and distribution challenges linger

› Extremely difficult to coordinate a consistent global scheme of COVID-related travel restrictions

› As a result, a heavy layer of unpredictability may hamper international travel for a long time

Vaccines Variants

› Only 230 Million confirmed cases (3% of global population) → large feedstock for virus to work on & mutate

› Delta variant 4 times more infectious than original version

› Several vaccines provide less efficacy versus Delta variant

Government Responses

AIR TRAVEL OUTLOOK

Source: WHO, The Economist, Bernstein, AeroDynamic Advisory analysis

-

300

600

900

1,200

1,500

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

The recovery of air travel will be bifurcated between intra-region and inter-region travel

23Source: AeroDynamic analysis, IATA

RPK Forecast by Flow Type, Intra-Region and Inter-Region

AIR TRAVEL OUTLOOK

Qu

art

erl

y R

PK

s (

bil

lio

ns)

2020 2021 2022 2023 2024 2025

Historical Projection

= recovery to pre-COVID levels

?

Downside Risk:

bumpy recovery from

local lockdowns in

China

Downside Risk:

new variants

evade vaccines

Intra-region / domestic

Inter-region

However, shifting supply chains are driving long-term growth in air cargo

24

Conventional Retail Supply Chain

E-commerce Retail Supply Chain

AIR CARGO OUTLOOK

Source: LogCapStrat analysis

Factory

HKG

US Port Trainload

LAX ONT

Rail

Ramp

Distribution

Center

Store

Store

Store

≈ 125 days

Factory

HKG

Fulfillment by

Amazon

Forwarding Center

5kg

Weekly cycle

Structural

tailwind for

Air Cargo

Quarterly Airline MRO Expenditures* By Region

25

MRO spending remained resilient in China and nearly recovered in the US…elsewhere it remained well below pre-COVID levels

AIR TRAVEL OUTLOOK

Source: Airline financials, AeroDynamic Advisory analysis

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

1Q2020 2Q2020 3Q2020 4Q2020 1Q2021 2Q2021

(*) Versus same quarter 2019, 44 airlines covered

› Global MRO spending remains >30%

below pre-COVID levels

› China and the US are the most resilient

MRO markets

› Europe and APAC remain well below

pre-COVID spending levels

Total

Americas

China

APAC

Europe

2019-2021F Airline MRO Expenditures

2019 2020 2021F

26

High-level estimates point at a full-year increase of MRO expenditures of 5 percent in 2021

MRO FORECAST

Source: AeroDynamic Advisory

-35%

+5%

Region Q3 Q4 Commentary

China

• August outbreaks impacted airline utilization.

Capacity could come back in Q4, but road is

bumpy

APAC• Little improvement in utilization expected due to

high case loads

Americas

• Close-to-full domestic capacity towards

summer

• However, outbreaks of Delta variant in August

meant fewer-than-expected paying passengers.

• No meaningful growth expected in winter MRO

activity beyond typical peak

Europe

• A few airlines may embark on ambitious

preparations for next summer, but most will

need to manage costs carefully

MRO Outlook for Second Half of 2021

(Trajectory Versus Similar Quarter 2019)

27

Airlines post-COVID will be very focused on cost, and simultaneously more dependent on the supply base

AIRLINE MRO POST-COVID


Slimmer airline organizations

Greater dependency on

suppliers

Inventory burn & green-time

management

Alternative materials & repairs

Need for supplier flexibility

Modifications -including

Passenger-to-Freighter

conversions

› LCC growth, while traditional airline

business models under threat

› Short planning horizons

› Staffing challenges

› Strict cost regime and cash-out restrictions

› Greater focus on cargo

› Market uncertainty

› Reduction in business travel

› Leisure travel is new center-of-gravity

Airline Business Impact

Air Travel Post-COVID Implications for Airline MRO & Suppliers Requirements

28

Passenger-to-freighter conversions are expected to reach historical levels - many facilities are fully booked through ~2024


MRO IMPLICATIONS: CARGO

2020-2025 Estimated Global Freighter Conversion Capacity (# aircraft)

Winners: larger variants &

ample feedstock

Losers: smaller variants &

declining feedstock

A321, 737-800, A330-300,

767-300, 777-300ER

A330-200, A320, 757,

737 Classic, 737-700

30 3648 54 54 57

0

20

40

60

80

100

120

140

160

180

200

2020 2021 2022 2023 2024 2025

Africa

C. America

Asia Pacific

Europe

China

N. America

4 quarters

During

COVID

4 quarters

Pre-COVID

US Airline Quarterly MRO Expenditures

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Network

Cargo

LCC

Regional

National

Charter

US MRO Expenditures 4 Quarters Pre- and During COVID

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

WB NB RJ

29

US airline MRO numbers show the significance of cargo operators in a post-COVID environment, and how this alters MRO demand composition

MRO IMPLICATIONS: CARGO

Source: Form 41 data, AeroDynamic Advisory analysis

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

New Mature Old

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Network Cargo

LCC Regional

National

($ Billion)

Fleet demographics coupled with COVID-induced fleet removals will result in record retirements

30

727

1,186

1,425

0

200

400

600

800

1000

1200

1400

1600

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Historical Pre-Covid Post-Covid

Historical, Pre-Covid, and Post-Covid Retirements

MRO IMPLICATIONS: AIRCRAFT RETIREMENTS & USM

Source: AeroDynamic Advisory, Alton Aviation, CAPA

2010-2015:

3,481

2020-2025:

Post-Covid Forecast: 6,054

Pre-COVID Forecast: 3,690

› Not all retirements turn into

part-outs

› Aircraft part-outs to reach

700-800 per annum

› Surplus parts market to

grow from $2.2 Billion pre-

COVID to $4.3 Billion

› A320, 737, 777 and

A330parts will contribute

the most to USM growth

Suppliers of integrated component support are being asked to provide greater flexibility

31

› Greater need for supplier to cover operative risk

• Smaller airline engineering / purchasing organization

• Dispatch reliability still important - EU261 claims need to be avoided

› Greater need for flexibility

• Pandemic-specific regulations in contract

• Remove rule for minimum flying hours

• Flexible contract periods?

• Need to conserve cash → updated payment terms

• Less-inclusive contracts

› Cost still of utmost importance

› Becomes very important to build USM acquisition & management capabilities

› Need to closely monitor market developments which customers will make it through the crisis?

› New contracts need to carry financial securities due to the risk involved

› Changed cash flow

› How make business case for customer-related investments?

› Concentration of supply base of integrated providers

› Virtual pools

› Partnerships

Airline Needs Supply Side Implications

MRO IMPLICATIONS: INTEGRATED CONTRACT


Changing Nature of Integrated Component Support Contracts

COVID Recovery – Implications for MRO Suppliers

OEMs

• Aircraft OEMs revising aftermarket goals and narrowing offerings, including broad support

• Component OEMs to position offerings to a more price-sensitive customer, including USM

• Engine OEMs need to watch supply chain to handle coming ramp-up. Need to carefully manage their supply chain to prepare for the ramp-up

MROs

• Integrators prepare for more flexible contracting

• Independents poised to a period of growth - well-positioned to support the freighter fleet

• Must cope with human capital constraints, preparing for ramp-up

• MRO consolidation (incl partial sell-off of Lufthansa Technik?)

USM Suppliers*

• $2 Billion pre-COVID, growing to $4.5 Billion in a few years

• A320ceo, 737NG, A330, 777 key platforms

• Will impact airline sourcing, OEM aftermarket revenue streams and become central in most support contracts

Passenger-to-Freighter Conversions

• Structural trends favoring long-term cargo growth

• Cargo important piece of airlines' revenue mix

• Majority of supply of freighters to come from PTF conversions

• Significant ramp-up in PTF conversion capacity

• Over-supply mid-decade?

32

A dynamic time awaits the MRO industry on multiple fronts

MRO IMPLICATIONS: SUPPLIERS

Source: AeroDynamic Advisory (*) Used Serviceable Material

+1 (734) 773-3899

121 W Washington Street, Suite 400Ann Arbor, MI 48104

www.aerodynamicadvisory.com

Thank You!

Jonas Murby

Principal

[email protected]

AeroDynamic2019 Winner of Choice

Outstanding Academic

Title Award

AeroDynamic2019 Winner

Choice Outstanding

Academic Title Award

Questions?


Jonas MURBY


[email protected]


Navigating through the pandemic


Swaran SIDHU


[email protected]


36

Navigating through the pandemic

SWARAN SIDHUHead Of Fleet Technical Management

37

The pandemic path reminder

• Lockdown lifted March 21

• Resumption of some flying

• Lack of coordination within EU & UK

• PCR test still costly and discouraging people to book

• Pandemic declared by WHO

• World Fleet grounded

• Airlines trying to make sense of parking/storing aircraft

March 2020

March to June 2021

• International travel limited to repatriation flying.

• Business travel outlook gloomy

• Entering into 2nd

lockdown

• Re-negotiating suppler contracts

• Heavy EOL activity

• Cash preservation

• Bombardment of comms within the industry

• Airlines coming to terms with all the different directives.

• TCH/OEM taking the lead to help operators

• Retrenchment & Furloughs

March to June 2020

• EU & Swiss AOCs full flying

• UK AOC 65 % of flying due to restrictive government bio-security measures

June 2021 to date

• Some resumption of flying

• Strict bio-security measures

• Confusion of bio-security regulations i.e. PCR test

• Cost of PCR test

• Internal cost review

• Re-negotiated aircraft purchase agreement with Airbus

June to November 2020

Nov 2020 to Mar 2021 ARE WE OUT OF THE

WOODS/VARIANTS YET ??

38

Our airlines' operation

A321 NEO

A320 NEO

A320 CEO

A319

39

Our Maintenance activity

Older MSNs rested to

delay HVM/Costly

Inputs

40

EOL Activity/MRO

Cost/HMV Visits

Our Cash Preservation strategies

Reviewed Parking Location / Fees /

MRO Consideration

SupplyChain/Re-negotiated

Contract

Engine SVStrategy

HumanResources

• Furlough Scheme• Redundancies

New supplier for our records

management services

Automation/Innovation at the forefront

Pro

cess review o

f all wo

rk activities

• C’ check optimisation review

• EOL clearance by individual task review

41

Our Technical operations KPI

42

The new normal

43

Signs of Recovery??

44

Summary

• Embracing/Embedding the new normal

• View the crisis as an opportunity

• Show good leadership and take your people through this journey

• Learn the lessons, document them and store them safely for the future…………………..(tell your grandchildren this story)

Grounded Phase

Survival Phase

Recovery Phase

Growth Phase

We need to get to a Sustainable Growth Phase

We are now in a Recovery Phase

45

THANKS!

Questions?


Swaran SIDHU


[email protected]


Useful links

• Maintenance Cost Technical Group www.iata.org/mctg

• Technical Operations Working Group www.iata.org/tog

• Safely Restarting the Aviation Industry


http://www.iata.org/mctg

http://www.iata.org/tog

https://www.iata.org/en/programs/covid-19-resources-guidelines/safely-restarting/

Thank you!

For more information on MCC 2021, please visit www.iata.org/mcc

Contacts

• Chris Markou, [email protected]

• Geraldine Cros, [email protected]

See you next year for MCC 2022!


http://www.iata.org/mcc



episode 4: operating in the post pandemic

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