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9th Annual Aircraft Maintenance Outsourcing Conference for the Americas November 2009
David A. Marcontell
Executive Vice President & Principal
© 2009 TeamSAI, Inc. 0
© 2009 TeamSAI, Inc.
MRO. 1 .Who We Are TeamSAI provides innovative solutions to the aviation industry – – – Specializing in strategic and tactical management & operations With six actively involved and experienced owners / executives Beginning our 20th year We serve all aspects of the aviation community worldwide including Strategic & Tactical Consulting • Airline. Corporate & Airport Management • Process & Performance Improvements • Accelerated Change Customized On-Going Airline Support • Technical Services • Maintenance Management • Technical Procurement Partners with the Aviation Week Group • Global MRO Forecasting • MRO Prospector Data Industry Leading Market Research © 2009 TeamSAI. Inc.
Certification & Compliance • Flight. 2 .TeamSAI’s Expertise Market Intelligence • • • • Business Strategy & Planning Market Segmentation & Analysis Global MRO Industry Forecasting Competitive Assessments • New Product Definition & Development • M& A Due Diligence & Transaction Support Operations Maintenance. Airport & Ground Operations • Crew scheduling utilization • Performance Improvement • Training programs • Cost Reduction / Efficiency • Lean Operations Benchmarking & Improvement Performance Systems • Lean/Six Sigma Implementation • Benchmarking & Best Practices Implementation • Cycle Time Improvement • Cost Reduction / Efficiency Improvement • Technical Operations Assistance • Asset Usage Optimization • Inventory Optimization • Inventory Management & Control • Lean Supply Chain • Safety Management & System Optimization • Post Merger Certificate & Aircraft Transaction Support • CASS & Reliability Program • Effective Sourcing & Vendor Management • Supply Chain Performance Development • Startup and Certification Support • Maintenance Program & Air Carrier Manual Development • Compliance Systems & Audits © 2009 TeamSAI. Inc. Repair & Overhaul Supply Chain Safety.
Inc.What’s in store Guiding Questions – – – – – – – – – How have outsourcing trends been affected by the recession? What has been the impact of currency value fluctuations? How does work move between markets and geographical regions? What are the key US companies that import outsourced work? Overview of outsourcing State of the market Currency trends North American MRO (engine and airframe) overseas volume estimates Regulatory environment Discussion Points © 2009 TeamSAI. 3 .
Outsourcing overview With very tight operating conditions. and fleet size Turnaround time Exchange rates Fuel costs for ferrying if required Major factors that influence the outsourcing decision remain the same: – – – – Effectiveness of an MRO’s LEAN execution is also having a strong influence on the outsourcing decision How will these conflicting approaches ultimately impact the industry? © 2009 TeamSAI. 4 . airlines are constantly evaluating their maintenance work – Market is seeing a mix of remarkably diverse RFPs – each driven by broad ranges of confidence ▪ ▪ Shorter and longer contract terms Smaller and larger work scopes – If there is one common denominator. but a ―first-look‖ is increasingly common OEM / MRO tension is on the rise. experience with fleet type(s). airlines are pushing MROs to maintain larger inventories—a capital intensive need that adds to the MROs’ costs Internal capabilities. with OEMs continuing to raise prices despite recession and continuing to exert their presence down the supply chain – – MROs’ poor position being exacerbated by added pressure from airlines wanting to avoid flight cancellations/interruptions and resultant costs Thus. it is lower prices are in demand Recession is putting pressure on operators to consider in-sourcing work first before bidding the work…if able – This does not mean that they will use that option. Inc.
estimates are made to determine trends in outsourcing Segment HMV (Check)1 Engines Components Line Total MRO $ (B) $2. 5 .9 Segment HMV (Check)1 Engines Components Line Total North America MRO Prospector keeps a listing of known contracts and relationships An industry unique feature Provides user with a means of seeing which operators have established relationships with MROs % Outsourced % Outsourced . so it is not all truly independent Of the work that is sent to an independent MRO.1 $2.4 Contract research suggests that a significant amount of HMV and engine work worldwide is done outside the operator Airlines increasingly wish to focus on their customer-facing roles and allow non-customer-facing tasks to others Of course some of that work is sent to the operators’ affiliated MROs.State of the market Work outsourced by segment World % Outsourced % Outsourced .1 $9.5 $19. Inc.3 $42.0 $8.% Outsourced Independent All Independent/OEMs Outside Region 85% 70% 22% 99% 81% 12% 86% 81% 7% 56% 40% 19% 85% 71% 15% Market share is estimated based on this research With an understanding of existing contracts.2 $6.9 $14.% Outsourced Independent All Independent/OEMs Outside Region 77% 58% 15% 95% 81% 24% 89% 84% 12% 33% 28% 15% 79% 67% 18% MRO $ (B) $6. less than a quarter leaves the region North America largely mirrors the overall worldwide behavior 1 – HMV (Check Only) excludes modification work in this analysis Note: values include turboprops © 2009 TeamSAI.3 $3.
but now beginning to rise quickly 63% 28% 17% 16% 2007 2008 2009 2007 2008 2009 © 2009 TeamSAI. 6 . Inc.State of the market Work outsourced by segment. YOY trends Outsourced HMV (Check) MRO Outsourced Engine MRO 81% 70% 53% 53% 58% 75% Outsourcing continues to grow. especially in component and line maintenance HMV is about 50:50 but has been on the rise 2007 2008 2009 2007 2008 2009 Note: HMV (Check Only) excludes modification work in this analysis Outsourced Component MRO 84% 77% Outsourced Line MRO Line MRO is still mostly in-house.
. Inc.State of the market North America’s HMV (Check) MRO outsourced work by region HMV (Check Only)1 $1.5B 2% North America Western Europe Eastern Europe 64% stays in NA Latin America China Africa 5% 2% Asia Pacific 64% 25% 4% 5% Middle East 4% India 25% Most NA HMV work stays within NA (64%) 1 3 4 5 6 7 1 – HMV (Check Only) excludes modification work in this analysis Asia-Pac gets about a quarter of the outsourced business © 2009 TeamSAI.
1B 13% North America Western Europe Eastern Europe 84% stays in NA Latin America Africa 1% Middle East China Asia Pacific India 2% 84% 1% 13% 2% NA engine work is even more likely to remain in NA Western Europe also gets about 13% of NA’s business © 2009 TeamSAI. 8 .State of the market North America’s Engine MRO outsourced work by region Engine $5. Inc.
the prevailing model is event driven rather than hourly driven © 2009 TeamSAI. Inc.5B 2% 12% Unannounced Total Care / All Mx Heavy $5.C Checks 1 – HMV (Check Only) excludes modification work in this analysis 81% Bundled contracts (total care / all maintenance which extend beyond airframe work) make up about a third of the contracts in NA More than half focus only on heavy maintenance Dedicated shop visit contracts dominate the engine overhaul business Some 11% are part of bundled (total care or full engine maintenance) contracts All this suggests… Work requiring significant manhours or capital equipment (e. engine shop repairs) is more likely to be outsourced Airlines prefer doing their own light C checks due to short turn-times and less manhour intensive volume where cost differential adds up While most engine maintenance is locked up. 9 ..g.State of the market North America outsourced work by service type HMV (Check Only) Engine $1.1B 8% 11% Unannounced 32% Total Care / All Mx Shop Visit 54% Light .
Outsourcing Technical Support Services Note: MRO Outsourced includes work outsourced to independent MROs or to OEMs. total support) 16% 81% SR Technics TeamSAI 72% • Gulf Air (full fleet. total support) $12 $10 $8 • Khalifa Airways (A320. integrated airline solution) 42% $6 $4 58% $2 • World Airways • North American • Milcon Gulf Group • Air Malta 84% 95% 28% CAVOK Avisa Ltd $0 HMV (Check) Engines Components Line 5% Technical Support © 2009 TeamSAI. but not work done by operator-affiliated MROs Outsourced vs In-House MRO 2009 Outsourced % In-House % Technical Support market continues to grow Examples of recent contracts: $20 B $18 19% Provider Lufthansa Technik Airlines/Offering • Aeroflot (A320. Inc. 10 . total support) $16 $14 • AeroLogic (777F.
11 . 1500 before) • Escape SRT-Dublin fate by securing productivity improvements from labor Are we seeing the bottom…yet? © 2009 TeamSAI. • Avoiding closures for now • Largest MRO casualty of 2009 • Concentrating on basics • Low-cost sourcing • Suspending India JV • Stabilized decline by shifting to military work • Confident but cautious • Focus on efficiency and newer a/c types • Surviving thru LEAN • Closed MRO base in ORL • Shifting work to lower cost facilities by closing some • Moving forward with some strategic JVs • Replacing SRT-Dublin • Awarded key approval certificate • Expects to employ 50-150 EEs by end of first year (vs. Inc.A tough year for MRO providers MRO closures/declines 2008 Nov AAR 2009 Jan Chromalloy GE Dec Feb Mar SRT Dublin Apr AAR LHT May Jun Jul Aug Sep Comair P&W Oct Nov LHT-Shannon LTAI Dublin Aerospace TIMCO • Significant decline due to parking of UAL 737s • Closing their HOT facility • Closed Ft Walton Beach facility • Laid off works in NV • Transferred workers to San Antonio • Consolidated manufacturing & maint.
$1. 12yrs OnPoint Solutions partnership) • Delta TechOps wins first 747 component MRO contract since NWA merger by teaming with Evergreen Aviation Technologies Corp. Delta will provide component services for EVA’s 747s and MD-90s operated by EVA subsidiary UNI Air • LHT-Shannon Aerospace picking up easyJet 737NG checks that formerly were to go to SRT-Dublin • Intense LEAN focus to survive downturn • In 4/09. GE Engine Services (Celma) landed 15-yr. 12 . OnPoint contract for Delta Air Lines (GE90) • Outsourcing now. GE Engine Services landed $1. GEnx) • Gulf remains relatively bright spot in economic downturn • In 6/09. despite the fact that DAL carried out >$300M in engine work for other airlines in 2008 • In 10/09. Delta TechOps contracted with Hawaiian Airlines for $500M OnPoint (Total Care) for PW4000-94 and CF6-80A Large Players Making Strategic Moves © 2009 TeamSAI. (EGAT) • EGAT will continue providing comprehensive maintenance solutions to EVA Airways. but through the new contract. GE Engine Services landed $100M PBTH engine overhaul contract for Gulf Air’s CFM56-5Bs for its 15 new A320s • In 6/09.2009 Contract Highlights MROs GE / ADAT / SR Technics / Standard Aero DTO / EGAT Contract Description • Multi-faceted aviation agreement • Abu Dhabi Aircraft Technologies (ADAT) to become first MRO Network provider of GEnx engines and acquire GE90 capabilities • GE and Snecma to provide ADAT and SR Technics with engine overhaul and technical support • GE designates CFM56-7B work for WestJet to StandardAero ($850M.0B OnPoint contract for Azul (CF34-10E for E190/195) • In 6/09. Inc. LHT secured long-term Total Component Support contract for Scandinavian Airlines System LHT-Shannon Aerospace GE Engine Services Pratt & Whitney Lufthansa Technik DTO • In 7/09.7B OnPoint contract for Ethihad (GE90. P&W secured long-term $75M contract covering all JAL components for all fleets • In 6/09. GE Engine Services landed 10-yr.
keeping interest rates low to spur the economy) has. etc.70 ￥ 7. many contracts are long-term in nature and cannot be renegotiated to take advantage of the weaker dollar €0. the USD/EUR exchange rate has fallen – Dollar is currently at its lowest point relative to the Euro since August 2008 EUR to USD Exchange Rate €0.50 ￥ 7.75 €0. raw materials sourced overseas in foreign currency are more expensive – Oil.65 However. driven the US dollar’s devaluation Since the beginning of 2008.10 ￥ 7.00 ￥ 6. this wisdom holds – Weak dollar is making US MROs very cost-competitive €0. if it triggers inflation (though Feds are still more concerned about deflation) Apr-08 Dec-08 Sep-08 Sep-07 Apr-09 Nov-08 Nov-07 Dec-07 Dec-08 Sep-09 Jun-07 Jun-08 Oct-07 Oct-08 Jun-09 Sep-09 May-08 May-09 Mar-08 Mar-09 Feb-08 Anecdotal evidence suggest NA MROs are doing better in EU © 2009 TeamSAI. in part.40 ￥ 7.85 €0.90 ￥ 6. – Tight credit terms can prevent US companies from getting funds to front these costs – Higher raw material costs are bad for everyone – Higher fuel costs (due to devalued dollar) impact ferry flight breakeven distances – Furthermore.70 Conventional wisdom: weak dollar benefits US exports – And to the extent that MROs are enjoying increased sales in Europe.20 ￥ 7. Inc.Currency fluctuations have mixed impact on NA MROs Contract data does not bear out significant trends but weak USD favors NA MROs to some extent US Federal Reserve loose monetary policy (i..60 Nov-07 Nov-08 Oct-07 Oct-08 May-08 May-09 Mar-08 Mar-09 Feb-08 Feb-09 Aug-07 Aug-08 Aug-09 Apr-08 Sep-07 Sep-08 Apr-09 Dec-07 CYN to USD Exchange Rate ￥ 7. 13 Feb-09 Oct-09 Jan-09 Jan-08 Jul-07 Jul-09 Jul-08 Oct-09 Jan-08 Jan-09 Jul-07 Jul-08 Jun-07 Jun-08 Jun-09 Jul-09 . component parts.80 €0.60 ￥ 7.80 Aug-07 Aug-08 Aug-09 US economy could also ultimately be harmed by devalued dollar. metals.e.30 ￥ 7.
on the other hand. NA operators contribute nearly twothirds of the business LA&C. and Asia-Pac customers do make up one-quarter of the NA MROs’ work 1 – HMV (Check Only) excludes modification work in this analysis © 2009 TeamSAI. Inc.North American MROs service all regions of the world Of course. is much more geographically diverse in terms of the home region of the customer Still.890M Engine work. WE. 14 . most work does come from the World’s largest market (NA) HMV (Check Only) 1% 0% 0% 0% 2% North America Latin America & Caribbean Western Europe Eastern Europe Asia Pacific 1% Engine 1%1% 4% 4% North America 0% 7% Latin America & Caribbean Western Europe Eastern Europe Asia Pacific 11% 7% 65% China China India Africa Middle East India Africa Middle East 96% $871M The vast majority of NA MROs get their airframe maintenance work from NA operators WE contributes just 2% of the NA MROs’ work $5.
3 Aviation Technical Services. and Royal Air Maroc (AF) make up some of their major customers overseas Engine overhaul providers have a wider reach than airframe MRO providers – P&W. for example. Inc. and United Services are some of the most regionally diverse These providers service operators outside NA. Inc. 14 Vector Aerospace Engine Services . 6 Aveos Fleet Performance 7 ExelTech Aerospace 8 Goodrich Corporation 9 Empire Aero Center 10 Cascade Aerospace. LLC 7 Aveos Fleet Performance 8 Standard Aero. United Airlines work excludes the work that United Services does for the UAL parent © 2009 TeamSAI. Engine Top 15 MRO 1 GE 2 Pratt & Whitney Global Service Partners 3 Rolls-Royce plc. 13 Eagle Aviation Services.Top 15 MRO providers in NA Top NA MROs service have regionally-diverse client base. Aero Repair & Overhaul 4 IAE International Aero Engines AG 5 Delta Air Lines/DTO 6 Texas Aero Engine Services Ltd. with P&W having the broadest reach in the engine overhaul space HMV (Check Only) Top 15 MRO 1 TIMCO Aviation Services. Inc. 12 Delta Air Lines/DTO 13 Tucson Air Center 14 Flightstar Aircraft Services. 12 Chromalloy Gas Turbine Corp. but still focus mainly on NA operators Looking at the major airframe and engine MRO providers in North America. we estimate the portion of their business that originates from other regions Delta TechOps has wide expanse in the airframe MRO market – – Just over half of their work comes from NA LAN Airlines (LA&C). 2 AAR Corp. AeroThrust. 9 MTU 10 AeroThrust Corp. Inc. 15 . 15 American Airlines. Inc. Inc. 4 Pemco World Air Services 5 ST Mobile Aerospace Engineering. Inc. So. 11 Bombardier Services Corp.Atlantic 15 Honeywell Aerospace Services NA LA&C WE EE AP CH IN AF ME Total 96% 4% 100% 100% 100% 100% 100% 100% 100% 100% 100% 99% 1% 100% 93% 6% 1% 100% 100% 100% 89% 11% 100% 100% 100% 100% 100% 52% 11% 29% 8% 100% 100% 100% 100% 100% 100% 100% NA LA&C WE EE AP CH IN AF ME Total 64% 6% 14% 0% 6% 2% 0% 0% 8% 100% 46% 4% 10% 0% 20% 11% 3% 2% 2% 100% 85% 5% 8% 1% 1% 100% 37% 14% 10% 4% 13% 16% 6% 100% 67% 26% 6% 0% 1% 100% 100% 100% 100% 100% 99% 1% 100% 83% 17% 100% 57% 43% 100% 0% 15% 85% 100% 100% 100% 66% 34% 100% 100% 100% 100% 100% – Note: All in-house work is excluded from this analysis. Delta TechOps. Inc. Inc. Inc. Star Air (WE). 11 United Airlines.
16 . Inc.Outsourcing and regulation Outsourcing to low cost regions has again come to the forefront of the public’s attention with some high profile maintenance mishaps and media coverage In this age of government involvement. protectionist measures are a very real concern But now that we are beginning to see the end of the recession. globalization will likely continue its growth (though perhaps not as fast as that in the past) Increased pressure from the FAA on airlines will likely be felt by both US-based and foreign MRO providers – This is a new era of regulation where increased scrutiny of maintenance will be the norm © 2009 TeamSAI.
Summary Despite the recession. Inc. 17 . outsourcing work continues to be a persistent trend in MRO market Over 65% of all MRO is outsourced to third parties – Largely due to either complex nature of the work . hard look at their operations and adjust to the changes in utilization and capacity – – 2008 was the year of airline capacity reduction 2009 may prove to be the year of the MRO providers’ response to capacity reduction ▪ ▪ Less business form older aircraft and engines that are not coming back Turning focus toward new aircraft with an understanding that they will (at least for the near future) require less maintenance Recession has made the market place more competitive though – Weak USD makes for a temporary bright spot for North American MROs. cost remains king – © 2009 TeamSAI. or perhaps because of it. or the shear volume of manhours required MRO providers have had to take a long. but long-term implications must not be forgotten LEAN remains the answer All this said.
Inc. Inc. © 2009 TeamSAI.THANK YOU © 2009 TeamSAI. 18 .