© Oliver Wyman | NYC-CIX16001-001
SOUTHEAST AEROSPACE & DEFENSE CONFERENCE
OEM CONSOLIDATION PERSPECTIVES
Derek CostanzaPartner – Aviation, Aerospace & Defense
JUNE 26TH, 2018
CONFIDENTIALITY Our clients’ industries are extremely competitive, and the maintenance of confidentiality with respect to our clients’ plans and data is critical. Oliver Wyman rigorously applies internal confidentiality practices to protect the confidentiality of all client information.
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© Oliver Wyman
Future looks good1
3© Oliver Wyman | NYC-CIX16001-001
The future looks good…
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Global performance remains strong for OEM customers
Global Commercial Air Transport Industry Net ProfitBy year/US$ BN
0
5
-20
-15
-10
10
15
20
$25
-5
2007 20092008 2010 2011 2012 2013 2014 2015 2016 2017E 2018F
North America Rest of World
Source: Source: IATA
North American operators especially deliver strong performance
5© Oliver Wyman | NYC-CIX16001-001
Asia Air Transport Fleet ForecastBy Aircraft Class/number of Aircraft
The global fleet is estimated to grow at 3.7%; Asia at 6.4% and North America at 1.5%
7,314
10,452
13,576
9.2%
3.8%5.6%3.8%
6.4%
3.0%
4.9%
1.7%
7.8%
3.4%5.3%2.7%
7.4%
5.4%
6.4%
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
2018 18–'23CAGR
2023 23–'28CAGR
2028 18–'28CAGR
7,8308,430
9,047
3.0%
2.6%
-1.0%
-3.6%
2.7%
1.8%
-0.8%
-3.9%
2.8%
2.2%
-0.9%
-3.7%1.5%
1.4%1.5%
0
2,000
4,000
6,000
8,000
10,000
12,000
2018 ’18–’23CAGR
2023 ’23–’28CAGR
2028 ’18–’28CAGR
North America Commercial Fleet ForecastBy Aircraft Class/number of Aircraft
Global Commercial Fleet ForecastBy Aircraft Class/number of Aircraft
26,307
32,321
37,978
5.9%
4.1%
-0.3%
-0.6%
4.5%
2.8%
-0.6%
-1.2%
5.2%
3.4%
-0.5%
-0.9%4.2%
3.3%
3.7%
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
2018 18–'23CAGR
2023 23–'28CAGR
2028 18–'28CAGR
Wide-body
Narrow-body
Turbo Prop
Regional Jet
Source: Oliver Wyman Global Commercial Air Transport Fleet Forecast
6© Oliver Wyman | NYC-CIX16001-001
30% 20% 5%35% 15%25% 0%10%
E-Jet / E2
A320
777
CRJ
737
A330
DHC-8
ATR
Other
757
767
737s and A320s will continue to dominate the global fleet over the next decadeGlobal Commercial Air Transport Fleet ForecastBy Aircraft type
10% 35%5%0% 30%15% 20% 25%
777
Other
787
CRJ
A330
E-Jet / E2
A350
ATR
737
A320
DHC-8
1
2
3
4
5
6
7
8
9
10
2018 Top Platforms 2028 Top PlatformsSource: Oliver Wyman Global Commercial Air Transport Fleet Forecast
Top 10 = 83% of Global Fleet Top 10 = 89% of Global Fleet
A320 and 737 will comprise 61% of the global fleet by 2028
7© Oliver Wyman | NYC-CIX16001-001
Global Commercial Air Transport MRO ForecastBy year/US$ BN
All global MRO segments are expected to grow from 2 to 5% YOY
North America Commercial Air Transport MRO ForecastBy MRO Segment/US$ BN
$77
$92
$115
2.4%
3.3%
4.8%
4.3%
1.9%
6.5%
4.2%
3.2%
2.1%
4.9%
4.5%
3.8%3.5%
4.5%
4.0%
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
$110
$120
$130
2018 ’18–’23CAGR
2023 ’23–’28CAGR
2028 ’18–’28CAGR
$20 $19
$24
0.8%
-3.3%
1.2%
2.1%
-0.5%
9.2%
2.2%
1.9%
0.1%
2.7%
1.7%
2.0%-0.5%
4.2%1.8%
$0
$10
$20
$30
2018 ’18–’23CAGR
2023 ’23–’28CAGR
2028 ’18–’28CAGR
Source: Oliver Wyman Global Commercial Air Transport Fleet Forecast
EngineAirframe & Mods Component LineEngineAirframe &
Mods Component Line
8© Oliver Wyman | NYC-CIX16001-001
2 4 86 16 2018 301412 24 32100 282622
Other
767
787
320
747
777
A330
737
E-Jet / E2
ATR
A350
Top 10 = 84% of MRO
26 24 18 162030 22 142832 10 2612 48 0
787
747
737
A330
767
A320
757
Other
CRJ
E-Jet / E2
777
737s, A320s, 777, 787, A330 and A350 are estimated to drive the vast majority of MRO spending by 2028Global Commercial Air Transport MRO ForecastBy MRO segment (Billions of US Dollars)
Top 10 = 85% of MRO
Source: Oliver Wyman Global Commercial Air Transport Fleet Forecast
2018 Top Platforms 2028 Top Platforms
1
2
3
4
5
6
7
8
9
10
A320 and 737 will comprise 52%% of
the global MRO spend by 2028
9© Oliver Wyman | NYC-CIX16001-001
Again, the future looks great … if you have a seat
“Airlines in Asia are concerned that OEMs will monopolize engine aftermarket services, limiting their MRO choices and driving up costs” –Leithen Francis, MRO Network
“If the OEMs get more than their fair share [of profitability in the aviation complex], then someone else is giving up more than their fair share.”
–Aengus Kelly, CEO at Aercap
“The OEMs have taken over the aftermarket, and we do not support it. We’d rather maintain competition.”
–Heiko Holm, CTO at Wizz Air
“With the introduction of next-generation aircraft, there is a marked encroachment of OEMs in the aftermarket, providing more choice for the airlines and putting more pressure on MROs…With OEMs gaining ground in the MRO sector, MRO companies need to be vigilant.”
–Nick Rice, MRO Network
“Airlines and maintenance providers have grown increasingly wary of efforts by large OEMs to significantly expand their aviation services divisions and to capture huge swaths of the MRO industry.”
–Jon Hemmerdinger, FlightGlobal
“If airframe OEMs manage to gain control of a sizeable foothold in after-sales market as successfully as the engine OEMs have done, we will miss edges of competitiveness in the industry”
- Robert Gaag, Luthnasa Technik
“As OEMs increase presence in the aftermarket, airlines fear less competition and higher costs for MRO.”
–Victoria Moores, MRO Network
What’s going on and where might we be going?
2
11© Oliver Wyman | NYC-CIX16001-001
So how did we get here?1990s
“Mature” OEMs pursueVertical Disintegration
• OEM shakeout ends with merger of Boeing + MD, founding of EADS
• New OEM focus on core competencies (e.g. R&D, integration) and outsourcing
• OEMs divest core IP and facilities to suppliers
• Problem: many small and under-capitalized suppliers
• GE, Honeywell, others finding profits in the aftermarket
2000s
• “Divvying up” of work to strong T1 suppliers create new gate keepers
• Concurrent trend for airlines to outsource / consolidate MRO
• M&A scale begins to increase, e.g. Safran Group, Smiths, and Goodrich
• Led to Super Tier 1s having control of majority of IP on next generation aircraft components
Rise of Super Tier 1s to support NextGen Aircraft
TODAY
• Status quo continues for 777x, Max, Neo; no major platforms /tech. on horizon
• Super Tier 1s continue to separate from pack
• OEM counter moves• Both OEMs and Super Tier
1s seek greater share of profits and control
Super Tier 1s get bigger; OEMs push back
• Aftermarket as an immediate battleground (where the $$$ is)
• IP ownership and ramp rate support drive production strategies and positioning
12© Oliver Wyman | NYC-CIX16001-001
10%
16%
57%
37%
42%
38%
29%
56%
OW survey respondents indicated growth in in OEM aftermarket presence and industry consolidation as the top-2 disruptersTop disruptors that will warrant the greatest attention and challenge for respondents over the next five years% of participants who selected each response, 2018 and 2017 MRO surveys
3%
7%
14%
35%
36%
39%
47%
55%
60%
2018 survey 2017 survey
Growth in OEM aftermarket presence
Aftermarket industry consolidation
Game-changing advancements in technology
Labor shortage in the maintenance technician field
Labor/material cost management
Changes to fleet plans and strategies
Business impact from rising oil prices and interest rates
Lessors becoming more active in MRO
Other
• Growth in Airframers aftermarket • Digital enablement
• On condition & pay as your maintenance arrangements
These categories represent the largest +delta
since 2017
Respondent concern over fleet changes has dropped
by over 20 % pts since 2017
13© Oliver Wyman | NYC-CIX16001-001
Top disruptors that will warrant the greatest attention and challenge for respondents over the next five years% of participants who selected each response, 2018 and 2017 MRO surveys
Top disruptors that will warrant the greatest attention and challenge for respondents over the next five years% of participants who selected each response, 2018 and 2017 MRO surveys
75%+ of survey respondents see OEMs as credible in their aftermarket ambitions and expecting them to gain market shareDo you think OEMs’ growth targets for their aftermarket business units are achievable within the next decade?Distribution of total responses
Compared to the market growth, OEMs’ share of the aftermarket over the next 3 years will… Distribution of total responses
12%
63%
25%
Yes
No, but they will come close
No, they will miss their goal by a
wide margin 5%
10%
7%
40%
38%Increase significantlymore rapidly
Increase slightly less rapidly
Increase significantlyless rapidly
Increase about the same
Increase slightlymore rapidly
75% 78%
14© Oliver Wyman | NYC-CIX16001-001
Respondents expect OEMs to leverage the strength of their IP positions to increase their share of the aftermarket in the near term How will OEM grow their presence in the aftermarket?Weighted average of rankings (highest to lowest ranking, scale of 1–3)
Who is the (majority) owner of the IP your current aftermarket service offering depends on?Distribution of responses by segment
0.2
0.2
1.5
1.7
2.1
Other
New internal startups
M&A
Joint ventures with existing MROsand suppliers
Usage restrictions on existing IP and licensing
An OEM owns the IP
77%74%
33%76%
70%
My company owns the IP
23%22%
56%14%
24%
A non-OEM company owns
the IP
0%4%
11%10%
6%
OtherOperatorsOEMsMROsOverall
15© Oliver Wyman | NYC-CIX16001-001
Where might we be going?1990s 2000s TODAY
• Problem: many small and under-capitalized suppliers
• GE, Honeywell, others finding profits in the aftermarket
“Mature” OEMs pursueVertical Disintegration
• OEM shakeout ends with merger of Boeing + MD, founding of EADS
• New OEM focus on core competencies (e.g. R&D, integration) an outsourcing
• OEMs divest core IP and facilities to suppliers
• “Divvying up” of work to strong T1 suppliers create new gate keepers
• Concurrent trend for airlines to outsource / consolidate MRO
• M&A scale begins to increase, e.g. Safran Group, Smiths, and Goodrich
• Led to Super Tier 1s having control of majority of IP of next generation aircraft components
Rise of Super Tier 1s to support NextGen Aircraft
• Status quo continues for 777x, Max, Neo; no major platforms / tech. on horizon
• Super Tier 1s continue to separate from pack
• OEM counter moves• Both OEMs and Super
Tier 1s seek greatershare of profits and control
Super Tier 1s get bigger; OEMs push back
• Aftermarket as an immediate battleground (where the $$$ is)
• IP ownership and ramp rate support drive production strategies and positioning
FUTURE
• Unclear, but here are topics that the aircraft manufactures and Super Tier 1 are talking about:
?????
• Suppliers should be thinking about each of these dimensions to improve their current opportunities and ensure a place on platforms
1. Aftermarket ambitions
2. Production rates3. Intellectual
Property4. Digital
Collaboration
16© Oliver Wyman | NYC-CIX16001-001
Aftermarket Ambitions
With stable technology, lifecycle economics are driving aerospace strategies and investments• Super Tier 1’s adopting business models
from Engine OEMs to ring-fence aftermarket revenues & profits
• Aircraft manufacturers also want to participate as the “platform owner”
• Smaller suppliers and MROs increasingly turning to OEM friendly and contrarian strategies
• Who owns your customer relationships? How do you provide value to airlines?
• What are your points of control in the aftermarket? Do you own underlying IP?
• Is an OEM-contrarian strategy viable? How does it impact your position on future platforms?
• Would open partnering with major OEs be a significant hurdle or shift?
Context Considerations / Thought Starters
17© Oliver Wyman | NYC-CIX16001-001
Production Rates
Airlines are at record levels of profitability, with Boeing, Airbus looking to raise single aisle production rates
• Rate increases will put significant pressure on suppliers to perform
• Ability to dive deep supply chains, evaluate readiness, make investments (time and dollars) is limited
• OEMs are making multiple moves to reduce risk from rate increases
• What are you telling the OEMs in terms of production rate readiness?
• Have you simulated rate increases on the factory floor and in your supply chains?
• Are you vulnerable to a dual-sourcing or vertical integration play?
• Do you have flexibility to scale down in the event of an economic jolt or “temporary” rate reductions?
Context Considerations / Thought Starters
18© Oliver Wyman | NYC-CIX16001-001
Intellectual Property
Intellectual property (IP) has become more important in today’s “digital” world than ever before • OEMs are increasing their IP control,
monetizing IP access/use by 3rd parties
• IP comes in many forms
• More and more, IP is important beyond just producing and maintaining aircraft
• Is your IP vital / replicable / replaceable?
• How much IP does your company own/control? Where do you rely on 3rd parties?
• Could your IP and/or place on a platform be superseded / re-spec’ed / “upgraded”?
• What IP safeguards has your company put in place?
• How does additive manufacturing and other emerging technologies change your IP safeguards and strategies?
Context Considerations / Thought Starters
19© Oliver Wyman | NYC-CIX16001-001
Digital Collaboration
Industry 4.0 (“Smart Factory”) is here; airlines, OEMs and other industry participants expect seamless, automated processes• Digital collaboration is now a requirement of
doing business
• Key levers for digital collaboration include:– Real-time data– Predictive (vs reactive) analytics– Dynamic planning and decision making– Transparency and common standards
• OEMs and 3rd parties developing competing platforms for digital collaboration
• Who will own the data related to your products?
• How innovative has your company been creating digital hooks for partners and customers?
• What extended value could you offer to the major OEs via increased digitalization?
• Does your company have a Digital Roadmap?
• How well is your company positioned against cyber attacks?
Context Considerations / Thought Starters
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Derek [email protected]
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