AeroStrategy - Air Transport PMA Market Outlook - 8 April 2010...
Transcript of 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
12th Annual Gorham PMA-DER Conference
AGENDA
¡ MRO Market Outlook
¡ PMA Market Outlook
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12th Annual Gorham PMA-DER Conference
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
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...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
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…Which Is $2.3B Lower Than The 2007 Peak
5Source: AeroStrategy/OAG Aviation
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!
12th Annual Gorham PMA-DER Conference
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 $58B by 2018 –a 3.2% CAGR (excludes inflation)
• Airframe maintenance will have the lowest growth due to retirements and introduction of less maintenance intensive aircraft
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12th Annual Gorham PMA-DER Conference
India, China And The Middle East Will Be The Fastest Growing Regions…
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CAGR
India 10.7%
E. Europe 3.3%
Africa 2.3%
China 9.1%
Latin Am. 4.3%
Middle East 7.6%
Asia Pacific* 4.5%
W. Europe 1.9%
N. America 0.8%
Total = 3.2%0
10
20
30
40
50
60
2009 2011 2013 2015 2017 2019
Note :
* Excludes China and India
• India, China and the Middle East will be the fastest growing regions
• North America and Western Europe , the largest markets, will be relatively flat
• India, China and the Middle East will be the fastest growing regions
• North America and Western Europe , the largest markets, will be relatively flat
Source: AeroStrategy OAG Aviation* Constant 2009 US$Asia pacific excludes China and India
12th Annual Gorham PMA-DER Conference
…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
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The Second Factor, MRO Supply Chain Practices Attenuate Fundamental MRO Demand In Times Of Crisis…
9Source: AeroStrategy
• 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
12th Annual Gorham PMA-DER Conference
…And Operators Have Numerous Options For Reducing Maintenance Spend In Times Of Crisis
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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
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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
12th Annual Gorham PMA-DER Conference
…And Operators Hold 60% Of MRO Supply Chain Inventory; ~40% Is Aircraft Rotables
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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
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12th Annual Gorham PMA-DER Conference
The 2002/2003 U.S. Airline Industry Crisis Highlights The Impact Of Destocking And Deferred Maintenance
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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
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The Near-Term Impact Of Destocking Will Be Greatest For Downstream Suppliers
14Source: AeroStrategy
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
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12th Annual Gorham PMA-DER Conference
...Resulting In Larger Swings In Parts Demand Than Overhaul & Repair Services
15Source: AeroStrategy
2001 2002 2003 2004 2005 2006 2007 2008 2009
Airline Capacity
Overhaul & Repair Services
Service Parts
12th Annual Gorham PMA-DER Conference
Most OEMs Experienced A 10-20% Reduction In Aftermarket Revenue In 2009…
16Source: AeroStrategy
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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12th Annual Gorham PMA-DER Conference
…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
12th Annual Gorham PMA-DER Conference
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
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12th Annual Gorham PMA-DER Conference
AeroStrategy Anticipates A Return To MRO Growth In 2010 With The Makeup For “Destocking” In 2011/2012
19Source: AeroStrategy/OAG Aviation
* 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
12th Annual Gorham PMA-DER Conference
AGENDA
¡ MRO Market Outlook
¡ PMA Market Outlook
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12th Annual Gorham PMA-DER Conference
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
12th Annual Gorham PMA-DER Conference
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
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12th Annual Gorham PMA-DER Conference
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
12th Annual Gorham PMA-DER Conference
…And Have Seen Price Increase From The OEMs Of At Least 3% In Recent Years…
24Source: AeroStrategy/IATA 2009 Inventory & Logistics Survey
0%
10%
20%
30%
40%
50%
60%
Decline Remain Same Increase <2% Increase 3%-5% Increase >5%
MRO Airline
% o
f Res
pond
ents
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12th Annual Gorham PMA-DER Conference
…While The Perception Is That PMA Offers At Least 20% Discount Compared To OEM Parts
25Source: AeroStrategy/IATA 2009 Inventory & Logistics Survey
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
12th Annual Gorham PMA-DER Conference
Over 90% Of The Airlines In The Survey Have Authority To Use PMA Parts…
26Source: AeroStrategy/IATA 2009 Inventory & Logistics Survey
% 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
27Source: AeroStrategy/IATA 2009 Inventory & Logistics Survey
# 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
12th Annual Gorham PMA-DER Conference
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 $618M in 2014, a 12% CAGR
§ PMA penetration expected to reach 3.3% of total material consumption
28Source: AeroStrategy analysis, AeroStrategy Engine Overhaul Survey
Penetration (%) 2.3% 2.4% 2.7% 2.9% 3.1% 3.3%
-
100
200
300
400
500
600
700
2009 2010 2011 2012 2013 2014
Engine
Components
Airframe
2010: 7% Growth
2011: 15% Growth
2012-2014: 12% Growth
* Constant 2009 US$
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12th Annual Gorham PMA-DER Conference
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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12th Annual Gorham PMA-DER Conference
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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