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PMA Market Outlook: When Will The Market Recover?. Presented by Tom Tran 7 - 9 April 2010 San Diego, California 12th Annual Gorham PMA-DER Conference. Ann Arbor, Michigan • Amersham, United Kingdom • Singapore www.AeroStrategy.com. MRO Market Outlook PMA Market Outlook. AGENDA.

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pma market outlook when will the market recover
PMA Market Outlook:When Will The Market Recover?

Presented by Tom Tran

7 - 9 April 2010

San Diego, California

12th Annual Gorham PMA-DER Conference

Ann Arbor, Michigan • Amersham, United Kingdom • Singapore

www.AeroStrategy.com

agenda
MRO Market Outlook

PMA Market Outlook

AGENDA
two major factors influence aircraft mro activity

MRO Market Outlook

Two Major Factors Influence Aircraft MRO Activity…

Simplified MRO Supply Chain

1. Fundamental Demand For Aircraft MRO

  • 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

2. MRO Supply Chain Practices

  • 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

Source: AeroStrategy

and the first factor fundamental air transport mro demand is 42 7 billion in 2009

MRO Market Outlook

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

2009 Air Transport MRO Market ($42.7B)

Eastern

Europe

3%

India

1%

Modifications

7%

Africa

4%

Latin

America

5%

North

America

34%

Engine

36%

Airframe

15%

Middle East

5%

China

5%

By Activity

By Region

Asia

Pacific

16%

Line

20%

Components

22%

Western

Europe

27%

Source: AeroStrategy/OAG Aviation

which is 2 3b lower than the 2007 peak

MRO Market Outlook

…Which Is $2.3B Lower Than The 2007 Peak

2003-2009 Global Air Transport MRO Market ($B)

50.0

$45B

$44.0B

$42.7B

Modifications

40.0

Airframe

30.0

Components

20.0

Line

10.0

Engine

0.0

2003

2004

2005

2006

2007

2008

2009

Recession = Three Years Of Lost Growth!

Source: AeroStrategy/OAG Aviation

fundamental mro demand is expected to recover and reach 58 billion by 2019

MRO Market Outlook

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

Air Transport MRO Market Growth By Segment ($B)*

  • 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

70

60

50

Line

40

30

20

Total = 3.2%

10

0

2009

2011

2013

2015

2017

2019

Source: AeroStrategy OAG Aviation

* Constant 2009 US$

india china and the middle east will be the fastest growing regions

MRO Market Outlook

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

Air Transport MRO Market Growth By Region ($B)*

  • India, China and the Middle East will be the fastest growing regions
  • North America and Western Europe , the largest markets, will be relatively flat

60

50

40

30

20

10

Total = 3.2%

0

2009

2011

2013

2015

2017

2019

Source: AeroStrategy OAG Aviation

* Constant 2009 US$

Asia pacific excludes China and India

Note:

* Excludes China and India

and absolute market growth will be driven by china and the rest of asia pacific

MRO Market Outlook

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

Air Transport MRO Market

2009-2019 Change in MRO Spend

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

Source: AeroStrategy OAG Aviation

* Constant 2009 US$

Asia pacific excludes China and India

Note:

* Excludes China and India

the second factor mro supply chain practices attenuate fundamental mro demand in times of crisis

MRO Market Outlook

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

Simplified MRO Supply Chain

1. Fundamental Demand For Aircraft MRO

  • 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

2. MRO Supply Chain Practices

  • 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

Source: AeroStrategy

and operators have numerous options for reducing maintenance spend in times of crisis

MRO Market Outlook

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

Options For Reducing Maintenance Spend

Engines

Components

Airframe Heavy

  • 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
  • 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
  • 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

one alternative is to destock some of the 47 b of inventory in the mro supply chain

MRO Market Outlook

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

MRO Supply Chain Inventory And Holding Cost

  • 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

50.0

$47B

45.0

14%

40.0

35.0

19%

Surplus

30.0

21.5%

Distributors

25.0

MROs

20.0

OEMs

Airlines

15.0

61%

$10.1B

10.0

5.0

0.0

Total Inventory

Holding Cost

Source: AeroStrategy/IATA 2009 Inventory & Logistics Survey,

Aerostrategy / OAG MRO model

and operators hold 60 of mro supply chain inventory 40 is aircraft rotables

MRO Market Outlook

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

Air Transport MRO Supply Chain Inventory* - $47B

Outside Parts

Repairs &

Processes

Airline

Operator

Overhaul

Shop

By Organization

Airlines: 61%

MRO suppliers: 14%

OEMs: 19%

Distributors 6%

By Type Of Inventory

Rotables (components): 41%

Consumables 24%

Spare engines 12%

Airframe parts 8%

Other (piece parts) 17%

Service

Parts

Casting, Forging & Raw Materials

Inventory

Inventory

Inventory

Source: AeroStrategy

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

slide13

MRO Market Outlook

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

2001 – 2008 US Maintenance Costs & Capacity (Indexed)

1.15

Capacity (indexed ASM)

1.10

1.05

Total Maintenance Spending (indexed)

- 4%

1.00

0.95

0.90

- 12 %

0.85

0.80

2001

2002

2003

2004

2005

2006

2007

2008

  • The last airline crisis was in the U.S. in 2002/2003
    • Post 9.11 shock = reduced demand and yields
    • Several airlines entered Chapter 11 and restructured
    • Airlines aggressively pursued cash conservation
    • 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

MRO Market Outlook

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

Simplified MRO Supply Chain – Impact Of MRO Demand Buffers

Outside Parts

Repairs &

Processes

Airline

Operator

Overhaul

Shop

Service

Parts

Casting, Forging & Raw Materials

Inventory

Inventory

Inventory

Near-term impact of inventory reduction on MRO demand

Moderate

Significant

Very Significant

Source: AeroStrategy

resulting in larger swings in parts demand than overhaul repair services

MRO Market Outlook

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

O&R And Parts Expenditure Versus Airline Capacity (Conceptual)

Airline Capacity

Overhaul & Repair Services

Service Parts

2009

2001

2002

2003

2004

2005

2006

2007

2008

Source: AeroStrategy

most oems experienced a 10 20 reduction in aftermarket revenue in 2009

MRO Market Outlook

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

Near Term Reduction In MRO Supply Chain Revenues Due To Industry Crisis

Fundamental MRO demand down in 2009

Outside Parts

Repairs &

Processes

Airline

Operator

Overhaul

Shop

Service

Parts

Casting, Forging & Raw Materials

Near-term reduction in supplier revenues

(10 – 15%)

(15 – 30%)

(20 – 40%)

  • 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

Source: AeroStrategy

as evident by the 9 decline in revenue for heico s flight support group in 2009
…As Evident By The 9% Decline In Revenue For HEICO’s Flight Support Group In 2009

1997-2009 HEICO Flight Support Group* Revenue ($M USD)

2009: Down 9%

2002: Down 9%

1997-2008 CAGR = 24%**

Note:

* Flight support group includes distribution, repair and PMA business

** Growth rate includes organic growth and acquisitions

Source: HEICO 10-K

there is still room for continued destocking particularly in the middle east and asia pacific

MRO Market Outlook

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

2009 Airline Inventory Per Aircraft

US$ - Millions*

Airline Average = $1.9 M USD per aircraft

* Book Value

Source: AeroStrategy/IATA 2009 Inventory & Logistics Survey

aerostrategy anticipates a return to mro growth in 2010 with the makeup for destocking in 2011 2012

MRO Market Outlook

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

Air Transport MRO Market – Realized Supplier Revenue($B) *

Realized supplier

revenue

60

Fundamental MRO demand

50

2012: Low double digit growth

40

30

2011: Mid Single digit growth

2009: Down 15-20%

20

2010: Low Single

digit growth

10

0

2008

2010

2012

2014

2016

2018

Source: AeroStrategy/OAG Aviation

* Constant 2009$

agenda1
MRO Market Outlook

PMA Market Outlook

AGENDA
the 2009 pma market contracted by an estimated 8

PMA Market Outlook

The 2009 PMA Market Contracted By An Estimated 8%

Air Transport PMA Market ($M)

  • 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 contraction
    • Airline use of buffers
    • Deferred maintenance
    • Work scopes (e.g. more repair and less replace)
    • Cannibalization of surplus aircraft and engines
    • Lack of airline resources devoted to PMA approval process
    • OEM defensive measures

PMA Penetration

(%)

($M)

$416 M

$381 M

$353 M

Source: AeroStrategy/IATA 2009 Inventory & Logistics Survey,

Aerostrategy / OAG MRO model

slide22
AeroStrategy Conducted The Survey In Conjunction With IATA; Respondents Include More Than 70 Companies

2008 MRO Inventory and Supply Chain Logistics Survey

Survey Objectives

MRO Inventory and Supply Chain Logistics Survey Respondents

OEMs

13%

(10)

Distributors

14%

(11)

Airlines

47%

(36)

  • Sent survey instrument to more than 200 airlines via IATA and 100+ airlines, OEMs and distributors via AeroStrategy
  • Survey questions included
    • Current inventory value and type
    • Location of inventory
    • Inventory turns and costs
    • Anticipated changes in inventory levels
    • Use of pooling, vendor-owned inventory, and PMA parts

MROs

25%

(19)

  • 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
the majority of airlines and mros feel that oem pricing policy significantly drive the usage of pma

PMA Market Outlook

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

Extent Of Which OEM Pricing Policy Drive The Use Of PMA

% of Respondents

Source: AeroStrategy/IATA 2009 Inventory & Logistics Survey

and have seen price increase from the oems of at least 3 in recent years

PMA Market Outlook

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

Annual Material Price Increases Seen From OEMs In Recent Years

% of Respondents

Source: AeroStrategy/IATA 2009 Inventory & Logistics Survey

while the perception is that pma offers at least 20 discount compared to oem parts

PMA Market Outlook

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

Typical Price Discount For PMA Parts Versus OEM

% of Respondents

Source: AeroStrategy/IATA 2009 Inventory & Logistics Survey

over 90 of the airlines in the survey have authority to use pma parts

PMA Market Outlook

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

PMA Usage – Airline & MRO Perspective

% of Respondents

Source: AeroStrategy/IATA 2009 Inventory & Logistics Survey

but many airlines believe that leasing companies are the largest barrier to greater pma penetration

PMA Market Outlook

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

Barriers to PMA – Airline Perspective

18

16

14

12

# of

Respondents

10

Regulatory

8

OEM Agreements

6

Leasing Companies

Culture

4

Other

2

0

5

Very Significant

4

2

1

Insignificant

3

“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

Source: AeroStrategy/IATA 2009 Inventory & Logistics Survey

the air transport pma market is expected to reach 618m within the next five years

PMA Market Outlook

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

2009-2014 Air Transport PMA Forecast*

  • 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

2012-2014: 12% Growth

2011: 15% Growth

2010: 7% Growth

  • * Constant 2009 US$

Source: AeroStrategy analysis, AeroStrategy Engine Overhaul Survey

key messages
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
thank you for your attention
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.com or 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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