Key Battlegrounds in the Aftermarket

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Key Battlegrounds in the Aftermarket

AISCT – 16 September 2015 – Toulouse, France

Presented by:

David StewartGlobal Lead, Aerospace & MRO Practice ICF International


Agenda Key Battlegrounds in the Aftermarket

Context

Takeaways

The Battlegrounds



Context


The global air transport industry has been completely transformed in the last thirty years

CONTEXT

Pre-1980s 1980 – 2000 Post-2000s

Airlines

Largely state-owned (except US)

Regulated fares & routes

Point-to-point routes

Restrictive route rights

Mix of state & privately owned

Increasing liberalization of fares & routes

Hub-and-spoke model

First-generation LCCs

Code-sharing leading to launch of global alliances

Private ownership

Pricing transparency (Internet)

Global spread of LCC’s

Business model convergence between LCC’s & legacies

Alliances & immunized JV’s are majority of global capacity

More recently, significantly increased focus on ROIC

Airlines have evolved from a regulated industry towards greater liberalization

http://www.lexingtonlaw.com/blog/finance/ways-airline-travel-empty-bank-account.html/attachment/airliner-landing-in-stormy-weather



The aftermarket evolved from being an afterthought to a market of significant importance

CONTEXT

1980 – 2000 Post-2000s

Airlines

Maintenance mainly a cost centre

LCC’s drive new approach to managing maintenance

Increased outsourcing

US airline bankruptcies and restructuring

Limited focus on aftermarket; Rolls-Royce ahead of the game

Significant growth of point-of-aircraft sale MRO contracts by engine OEMs

Increasing economic imperative for Component OEMs given design investment on new programmes

OEMs

MROs Supply mostly in-house – few

large airline MRO suppliers and hugely fragmented independent sector

Growth of integrated services

Globalization of demand

The aftermarket has evolved from a cost centre to a highly competitive market




Aftermarket is significant at $135B, equivalent to 75% of the value of current production

CONTEXT

Source: ICF International

Air Transport, 61%

Business & General

Aviation, 14%

Civil Rotary Wing, 3%

Military, 12%

Military Rotary Wing, 10%

Production:

$180.3B

Air Transport, 48%

Business & General

Aviation, 9%

Civil Rotary Wing, 3%

Military, 27%

Military Rotary Wing, 13%

Aftermarket:

$135.1B

Aftermarket and Production Market Size (2015 $B)


Across the air transport MRO supply chain, engine and component parts drive almost 60% of total margin

CONTEXT

Engine & APU Maintenance

26%

Engine Parts17%

Component Maintenance

14%

Line Maintenance11%

Airframe Heavy Maintenance

10%

Component Parts8%

Others14%

% of Total Revenue

Engine Parts42%

Component Parts16%

Component Maintenance

11%

Engine & APU Maintenance

11%

Line Maintenance

4%

Airframe Parts4%

Other12%

% of Total Margin

2014 Air Transport MRO Revenue by SegmentTotal = $97.3B

2014 Margin By Main ActivityTotal = $23.9B



Engine OEMs have the most mature and strongest OEM position across the main air transport aftermarket segments

CONTEXT

55%

35%

2% 0%

20%

25%

44%

82%

25%

40%

54%

18%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Engineoverhaul

ComponentO&R

AirframeHeavy

Linemaintenance

Non-OEMMRO

Airline in-house

OEM


Highlights

OEMs strongest share in the more material intensive markets

Component OEM market share lower than engine OEMs

Aircraft OEMs have an almost non-existent position in the airframe-related aftermarket

Air Transport Supply (2015)


CONTEXT

The net result – aircraft OEMs are seeking to follow the engine and component OEMs

-Source: ICF International

Relative Air Transport Market Margin and LeverageEBIT %

Leverage(ND/EBITDA)

0.0x

OEMs: Components& Structures

-

OEMs: Engines

OEMs: Aircraft

MROs

MRO with mixed signals

from Integrators to

Independents

Airlines(Size scaled down)


The ramp up and introduction of new generation aircraft creates the opportunity to change the aftermarket supply chain

CONTEXT


-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Aircraft deliveries (units)Highlights

New aircraft with higher reliability, lower manhours and complex technology change the business case for establishing MRO capability

…especially with greater airline focus on ROCE

This is a catalyst to change the MRO supply model….

Creating new opportunity for OEMs and aftermarket providers

Mature Aircraft

New Generation Aircraft


For 2015 onwards, the aftermarket will move to a new era based on new battlegrounds

CONTEXT

2015 Onwards

Airlines Chance to change business model –

outsource cost, assets and risk to aftermarket suppliers

Airframe OEMs enter the fray - will they succeed?

Component OEMs increasing control of data, manuals and parts choice

More sole source engines on new wide body platforms

OEMs

MROs

Evolving from a cost centre to a highly competitive market





The Battlegrounds


ICF believes there are three key battlegrounds that will determine the future of the Aftermarket

THE BATTLEGROUNDS

Who controls the operational data?

Who controls the workscope?

Who controls the assets?

• Critical to success in market participation and in gaining operational feedback for design and reliability improvement

• Critical to success in driving parts choice and aftermarket margins

• Critical to success in growing integrated service market


The role of traditional aviation players in the data value chain is still to be determined

THE BATTLEGROUNDS

Data ownership versus data access and use are of great concern to operators, and data processing business models are unproven (except at engine OEMs?)

DATA

Aircraft Generate Data…Airlines owns them

Airline Operations

Control Centers

… Which Can be Processed in Many Locations

Aircraft / Engine

OEM Networks

Component OEM

MRO

DATA

Data Service

Companies

OEM

Direct

Access


All stand to gain significantly from improved access to and control of operational data, which today is owned by the airlines

THE BATTLEGROUNDS DATA

Airlines

OEMs *

Airline MRO

Eng. OEMs


HOW MUCH DOES EACH PARTY GAIN?(example benefits)

* Airframe and component OEMs

Higher reliability (e.g.,

predictive maintenance)

Lower costs (fuel,

maintenance, inventory)

Operational data to feedback

into design loop

Higher performance products


into design loop


Reduce costs and improve

competitiveness

Market access





Aircraft OEMs are vying to use their leverage to become the arbiters of data for the connected airline…

THE BATTLEGROUNDS

• Boeing EDGE: “Information Services” , the

Digital Airline and Gold Care brands

• Notable Aircraft Health Management (AHM)

successes

• “Services by Airbus”: training/flight

operations, material management, E&M e-

solutions, upgrades, and FHS/TSP support

packages

• “Airbus Smarter Fleet” partnership with IBM -

integration of e-solutions

Boeing View of AHM System Architecture

Aircraft OEMs believe that their scale and position in the market make them a natural middleman for data aggregation

and analysis

DATA


Control of workscope is key to input decisions – hence the historic focus on this by engine OEMs and the former PMA “War”

THE BATTLEGROUNDS WORKSCOPE

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Engine

Materials80%

Labour20%

Airframe

Materials20%

Labour80%

Components

Materials55%

Labour45%

Line

Materials15%

Labour85%

Typ

ical

MR

O C

ost

Bre

akd

ow

n

Typical Aftermarket Cost Breakdown Insight

For engine and component activity “Whoever controls the workscope controls the parts decision” – this is a key driver behind related OEM aftermarket strategies

Use of PMA, repairs and surplus are important alternatives to OEM new parts

For airframe activity, labour unit cost (rates & productivity) drive the economics, hence the market is more open



Workscope control is most important for material intensive activity i.e., control over the parts decision

THE BATTLEGROUNDS

Airlines

OEMs *

Airline MRO

Eng. OEMs

Who controls the workscope ?



Cost control

Increased revenue and

margin


margin

Cost control, shorter turn-

times and improved

competitiveness


WORKSCOPE

Airframe Component




The share of integrated programmes in component support is set to increase

THE BATTLEGROUNDS: ASSETS

Component Support Buying Behaviour

Growth Drivers

Small fleet size

• Perceived technology risk

• Improved ROIC

• Maintenance no longer core activity

• Predictable outgoings

• Attractive value propositions

• Lower investment, less infrastructure


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2004 2014 2024

Integrated*

Traditional

Integrated Component Programs

Penetration

777 787/A350

~20% 55%-70%

9%

30%

45%


Control of assets enables aftermarket players to support integrated programmes more effectively

THE BATTLEGROUNDS: ASSETS

Insight

Component aftermarket support programmes are a driver of growth and of margin

Central to the economics of this offer is control and access to the inventory

The more inventory held by a supplier, the lower the inventory cost per aircraft supported

The “battle” for 787 / A350 component support has already been joined, with e.g., AFI/KLM E&M winning multiple 787-related contracts


Relative Inventory Requirements


Control of the rotable assets is a core feature driving the “winning business model” in integrated packages

THE BATTLEGROUNDS

Airlines

OEMs *

Airline MRO

Eng. OEMs

Who controls the assets ?



Inventory cost reduction and

parts availability (if scale

sufficient)

Parts pool critical to

(profitable) component

aftermarket packages

Spare engine pool already

part of total support

programmes

Vital to competitiveness and

profitability of integrated



Airframe Component

ASSETS





Takeaways


Today, airlines have strong ownership/control of their destiny but do they make the most of it?

TAKEAWAYS

CategoryWho Owns The

Workscope?Who Owns The

Assets?

Airlines

Airframe OEMs

Engine OEMs

ComponentOEMs

Airline MROs

Independent MROs

StrongKey Weak ImprovingWorsening

Eng Comp Airframe





Airlines, as a buyer of aircraft and the

owner of the operational data, should push the

aftermarket supply chain....to benefit from better, more

cost efficient solutions


Expect strong focus on these battlegrounds – achieving a winning position is key to the aftermarket participants meeting their goals

TAKEAWAYS

• Safe and reliable operation of aircraft

• Operational feedback

• Increased revenue, margin and RONA

• Delivery of promised cost and

performance

Airframe & Component OEM Goals

Importance To Achieving Goals

Data

Workscope

Assets

Strong

KeyWeak

/

• Safe and reliable operation of aircraft

• Operational feedback

• Increased revenue and margin

• Delivery of low/competitive (total) cost

to customers

Airline and Independent MRO Goals

Importance To Achieving Goals

Data

Workscope

Assets



Airlines

OEMs *

Airline MRO

Eng. OEMs


WHO HAS THE MOST TO GAIN?(example benefits)

Higher reliability (e.g.,

predictive maintenance)

Lower costs (fuel,

maintenance, inventory)


into design loop



into design loop


Reduce costs and improve

competitiveness

Market access

Especially from the Airframe and Component OEMs who have the most to gain…

TAKEAWAYS

Airlines

OEMs *

Airline MRO

Eng. OEMs

Who controls the workscope ?


Cost control


margin


margin

Cost control, shorter turn-

times and improved

competitiveness

Airframe Component

Airlines

OEMs *

Airline MRO

Eng. OEMs

Who controls the assets ?


Inventory cost reduction and

parts availability (if scale

sufficient)

Parts pool critical to

(profitable) component


Spare engine pool already

part of total support

programmes

Vital to competitiveness and

profitability of integrated


Airframe Component

…and therefore expect to see more investments

from these OEMs in these aspects of the aftermarket


Large airline MROs are well positioned in contrast to independent MROs

TAKEAWAYS

CategoryWho Owns The

Data?Who Owns The

Workscope?Who Owns The

Assets?

Airline MROs

Independent MROs

StrongKey Weak ImprovingWorsening




Takeaways

For Airline MROs, significant scale is a must for engine and component markets– to leverage their fleet and inventory under management, and build the scope of data and intelligence captured

The business case for small airline MROs will erode significantly moving forward

Independent MROs have to become the lowest cost producer and/or align with the large airlines or OEMs


Control of assets facilitates data access - so supplier scale and scope of product will drive the winning business model

TAKEAWAYS

DATA Takeaways

Those managing the component and engine assets have the access to the operational (reliability and cost) data

Some large airlines may elect to keep this driver of performance in-house

Others will not because of the negative impact of inventory on ROIC / RONA

Large airline MROs or OEMs with broad packages to offer have a competitive advantage via scale and scope

But do they want the inventory on their books?

ASSETS


In summary...

TAKEAWAYS

Engine OEM aftermarket business model a

harbinger for the future

Airframe and Component OEMs will invest

more and increase their focus on aftermarket

especially on integrated component packages

(Large) Airline MROs can and need to protect

their market position versus the OEMs

Airlines have the opportunity to drive efficient

solutions and competition into the aftermarket

Scale and scope of assets under management

is vital – growing need for financial community?


Appendix

LCCs – Low Cost Carriers

ROIC – Return on Invested Capital

MRO – Maintenance, Repair and Operations

OEMs – Original Equipment Manufacturers

ND/EBITDA – Net Debt to EBITDA Ratio

ROCE – Return on Capital Employed

E&M e-solutions – Engineering and Maintenance e-solutions

FHS/TSP support packages – Flight Hour Services/Tailored Support Packages

PMA – Parts Manufacturer Approval

AFI/KLM E&M – Air France Industries/KLM Engineering & Maintenance

ROIC / RONA – Return on Invested Capital/ Return on Net Assets


David StewartHead of Aerospace and MRO

Watling House33 Cannon Street

London EC4M 5SBUnited Kingdom

+44 (0)20 3096 4931

[email protected]

Thank You!