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Market Outlook & Industry Trends
Presented by:Presented by:
Hal ChrismanVice President ICFhal.chrisman@icf.com
Hal ChrismanVice President ICFhal.chrisman@icf.com
Gorham PMA & DER ConferenceSan Diego, CA21 March 2017
Gorham PMA & DER ConferenceSan Diego, CA21 March 2017
11
Today’s Agenda
State of the Airline Industry
Fleet & MRO Market Overview
Alternative Materials
Key Industry Trends
22
Driven by low fuel costs and consolidation, the global airline industry achieved record profitability of over $35B USD in 2016
Source: IATA, ICF analysis
2016 was an historic year for airline profitability…
Global Airline Profitability, 1997 - 2017F
-$30
-$20
-$10
$0
$10
$20
$30
$40
$USD Billions
Asia Pacific, $6.3B
North America, $18.1B
Europe, $5.6B
Middle East, $0.3B
Latin America, $0.2B
Africa, ($0.8B)$35.6B
33
However, record profitability has been largely limited to carriers in North America
Source: IATA, ICF Analysis
-1.8%
-4.7%
0.1%
2.3%
1.0%
-0.9%
3.4%
4.7%
0.7%1.5%
3.0%
-0.4%
12.9%
5.2%4.5%
2.9%
0.7%
-3.6%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
2008
2012
2017F
Global Airline EBIT Margin by Region
…but many airlines continue to struggle
44
Four external macro-economic forces are creating headwinds for global airlines and the broader aerospace & MRO supply chain
Source: ICF analysis
Strengthening US Dollar
Growth of Populism/Nationalism& Impact to Global Trade
Increased airline costs:- Aircraft financing- Fuel- Labor- MRO flight hour agreements
Downward pressure on global GDP growth
Downward pressure on aircraft valuations
Potential for increase in aircraft delivery deferrals (backlog risk)
Middle East airline titans stressed
Advantage = Airbus
55
Today’s Agenda
State of the Airline Industry
Fleet & MRO Market Overview
Alternative Materials
Key Industry Trends
66
The current commercialair transport fleet consists of almost 28K aircraft; over half are narrowbodyaircraft
Source: CAPA 2016
NarrowbodyJet
WidebodyJet
Turboprop
Regional Jet
27,957Aircraft
13%
54%14%
19%
By Aircraft Type By Global Region
27,957Aircraft
5%
28%
25%5%
30%
7%
Latin America
Africa
NorthAmerica
Asia Pacific
EuropeMiddle East
2016 Global Commercial Air Transport Fleet
77
Commercial aircraft OEM production backlog remains at historical highs
Source: CAPA, ICF Analysis
0%
10%
20%
30%
40%
50%
60%
70%
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
Order Backlog
Backlog/% Active Fleet
Emerging market growth
Very low interest rates
Previously high oil and commodity prices
Introduction of new technology aircraft/engines
Commercial Aircraft OEM Production Backlog
88
Lower fuel costs appear to be reversing aircraft retirements trends
Source: CAPA, Airline Monitor, ICF analysis
Industry Impact:
MRO Suppliers - Positive: Increased spend on older airframes & engines
Surplus Market - Negative: Reduced part-out “feed stock”- OEMs: Improved new
part sales- Distributors: Improved
used part values / pricing
- Operators: Increased material costs
- PMA Suppliers: Very Positive
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
0
200
400
600
800
1,000
1,200
# Retirements
Retirement as % of installed fleet
% Installed Fleet
1991-1999 Average: 203
2000-2009 Average: 473
Commercial Air Transport Annual Aircraft Retirements
99
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2016 2026
AfricaMiddle EastLatin AmericaEuropeAsia PacificNorth America
The combination of strong air travel demand and the need to replace ageing aircraft will drive fleet growth at a healthy 3.2% annually
Source: ICF analysis: CAPA 2016
28,000
30% 25%
38,100
28%
25%
8%
33%
23%
8%
# Aircraft
3.4%
2.4%
1.3%
4.8%
5.0%
4.1%
CAGR
3.2% Avg.
5%
6%
10 Year Global Air Transport Fleet Growth
1010
Current commercial air transport MRO demand is $67.6B; Asia is now larger than North America and Europe in market size
Source: ICF analysis; Forecast in 2016 $USD, exclusive of inflation
Engines
Components
Line
Airframe
Modifications
14%
17%
22%
40%
8%North
America
Asia Pacific
Europe
Middle East
Latin America
Africa
27%
30%
26%
8%
6%4%
$67.6B$67.6B
By MRO Segment By Global Region
2016 Commercial Air Transport Global MRO Demand
1111
The global MRO market is expected to grow by 4.1% per annum to over $100B by 2026
Source: ICF analysis; Forecast in 2016 $USD, exclusive of inflation
Engine and component MRO markets remain the largest segments
Modifications market will see the strongest growth (e.g. interiors, connectivity)
Airframe market slows due to reduced man-hour intensity and increased check intervals as new fleets are introduced
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
2016 2026
Modifications
Airframe
Line
Component
Engine
40%
22%
14%
17%
$67.6B
$100.6B
2.8%
3.2%
4.2%
4.5%
CAGR
4.1% Avg.
5.2%
41%
22%
16%
12%
$USDBillions
10 Year Global Commercial Air Transport MRO Demand Growth
1212
Today’s Agenda
State of the Airline Industry
Fleet & MRO Market Overview
Alternative Materials
Key Industry Trends
1313
There two primary reasons operators are aggressively seeking non-OEM supplied parts …
… And we traditionally focus our discussion around three alternatives OEM-supplied parts:
1. Cost savings
2. Part availability
Source: ICF analysis
PMA
PMA (Parts Manufacturer Approval) is approval granted by the FAA to a non-OEM manufacturer of aircraft parts
Two types of PMA:
1. Licensed
2. Competitive
DER Repair
DER (Designated Engineering Representatives), FAA approved engineers who can approve technical data for repairs and modifications outside the CMM
Design Organization Approval (DOA), a blanket approval for an MRO organization to develop internal repairs
Surplus
Three types of surplus material:
1. Used Serviceable Material (USM)
2. New Material
3. Used, unserviceable material
Lower HigherPerceived Risk
1414
In 2016, operators spent almost $30B on OEM new parts and an additional $14B on alternatives
$0B
$5B
$10B
$15B
$20B
$25B
$30B
$35B
OEM new Alternatives
OEM ManualRepairs
DER Repairs
PMA ($0.58B)
Source: ICF analysis
~ $14.0B
~ $29.5B
$2.0B
$3.9B Surplus
$7.5B
48%
2016 OEM New Material Demand vs. Alternatives
1515
The volume of PMA approvals has been steadily growing since 1990, with over almost 525,000 new approvals granted since 2011 … however, the pace in 2016 and 2017 appears to have dropped significantly
Source: Federal Aviation Administration – PMA Database extract 19 March 2017
36,202
61,439
220,074
356,683
468,689
56,524
0
100,000
200,000
300,000
400,000
500,000
FAA Approved PMA Part Numbersby Year Approved
1616
There are over 1.2 million total PMA parts that are FAA approved, of which over 75% are for Boeing aircraft
Source: Federal Aviation Administration – PMA Database extract 19 March 2017
Boeing76%
Airbus15%
Bombardier3%
P&W1%
Other5%
1,209,415
FAA Approved PMA Part Numbersby OEM
1717
PMA growth is has declined from the “good old years” but is healthy at 4.7%
Source: ICFForecast in 2016 USD, exclusive of inflation
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
-
100
200
300
400
500
600
700
800
2016 2017 2018 2019 2020 2021
Component
Engine
Airframe
Total
Penetration (%)
2016 - 2021CAGR:
% of total MRO material
$ millions
6.0%
2.3%
5.4%
4.7%
Air Transport PMA Market Forecast In $ Millions (2016-2021)
1818
The DER method is an alternative repair process to the OEM component maintenance manual (CMM)
With over 500 Company and 1000+ Consultant DERs in the US, DER repairs are an increasingly important alternative
Broken Part
Repair
CMM
DER
Replace
New
Surplus
PMA
Source: FAA, Gorham
1,034 Consultant
DERs
502 Company
DERs
There are 502 Company and 1,034 Consultant certified DERs in the U.S., with some overlap due to
multiple certifications
1919
The parts repair market is projected to grow from $9.5B today to almost $13B in 2021
Forecast in 2016 USD, exclusive of inflation
Source: ICF analysis
-
2
4
6
8
10
12
14
2016 2017 2018 2019 2020 2021
US
$(B
) Component, 4.9%
Engine, 6.6%
Total CAGR = 6.1%
2016 – 2021CAGR
In aggregate, inside and outside parts repair activity is worth almost $10 billion, with 70% of the activity directed towards engines
Engine parts repair will remain the largest portion of the parts repair market, and will also be the fastest growing.
The engine parts repair market will grow from $6.6B to $9.1B, while the component repair market will grow from $3.0B to $3.8B by 2021.
Air Transport Parts Repair Market In $ Billions (2016-2021)
2020
ICF forecasts the air transport DER market to grow 4.5% annually over the 2016-2021 period to $2.5B
Forecast in 2013 USD, exclusive of inflation
Source: ICF analysis
0
0.5
1
1.5
2
2.5
3
2016 2017 2018 2019 2020 2021
US
$ (
B)
DER Repairs, 4.5%
“Surplus have increased the demand for component DER -because the unserviceable surplus parts needs to be repaired. Biggest customer for DER is ourselves.
- Major PMA / DER Supplier
The DER market will grow from $2.0B today to $2.5B by 2021, representing 4.5% annual growth
Growing OEM market share of the aftermarket for engines and components compounded by the growing used serviceable part availability will slow DER market growth
Component DER will grow faster driven by continued growth in surplus market which generates increased demand for repairs of unserviceable units
Air Transport DER Market Forecast In $ Billions (2016-2021)
2121
While we often focus on PMA, Surplus & DER; we need to keep the full spectrum of alternatives in mind
Source: ICF Research
Operators & MROs can choose from at least eight alternatives to fulfill their material demand
Surplus
DER
PMA
Licensed PMA
EASA EPA
CAAC PMA
CRM Repairs
OEM New Parts
Air Transport Material Demand
2222
Today’s Agenda
State of the Airline Industry
Fleet & MRO Market Overview
Alternative Materials
Key Industry Trends
2323
There are four key constraints to PMA/DER market growth
Source: ICF analysis
Operator Technical
Capability & Capacity Availability of
Surplus Parts
Lessor Restrictions
1. Lessor Restrictions
2. OEM Strategies
3. Availability of surplus parts
4. Operator’s technical capability & capacity
OEM
Strategies
2424
While airlines are performing well as a whole, profits are focused primarily on North American operators, so cost reduction remains a priority
In order to control and reduce material spend, airlines must have a comprehensive OEM alternative strategy
PMA parts, DER repairs, and surplus material are valuable material sourcing solutions that drive tangible cost savings and improve part availability
As long as certain airlines continue to have restrictive PMA policies, Lessors will continue to include conservative language in their lease agreements
Education is the only solution
In Summary…
25
For questions regarding this presentation, please contact:
Hal ChrismanVice President Aerospace & MRO Advisory
hal.chrisman@icf.com +1 734.277.6710
THANK YOU!
Gorham PMA & DER ConferenceSan Diego, CA21 March 2017
Gorham PMA & DER ConferenceSan Diego, CA21 March 2017
2626
Market Research & Analysis
Airline Maintenance Benchmarking, Operational Improvement, and MRO Strategy
M&A Commercial and Operational Due Diligence
OEM Aftermarket Strategy
Aviation Asset Valuations & Appraisals
MRO Information Technology (IT) Advisory
Strategic Sourcing & Supply Chain Mgt.
LEAN Continuous Process Improvement
Military Aircraft Sustainment Market Analysis and Strategy
ICF provides a full range of Aerospace & MRO advisory services
2727
ICF is one of the world’s largest and most experienced aviation and aerospace consulting firms
Airports • Airlines • Aerospace & MRO • Aircraft Finance
53 years in business (founded 1963)
80+ 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
More than 10,000 private sector and public sector assignments
Backed by parent ICF International (2016 revenue: 1.2 billion USD)
Global presence –– offices around the world
joined in 2011joined in 2007 joined in 2012 joined in 2014
New York • Boston • Washington DC • London • Singapore • Beijing
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