April 28, 2016

Montréal

Presented by:

Kevin Michaels
Vice President - Aerospace & MRO
ICF International
kmichaels@icfi.com

MRO Industry Outlook

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Today’s Agenda

MRO Forecast
New Technology Aircraft
Impact
The Mystery Of 2015
Explained

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MRO Forecast

2 2
The MRO Market is 2015 Global Aerospace Industry
worth $135B (US)
for all segments –
75% of the value of
current production
aircraft
$135.1 B $180.3 B
(US) (US)

MRO Spend Aircraft Production

Source: ICF International 3

The current 2015 Global Commercial Air Transport Fleet
commercial
air transport fleet
consists of over Regional Middle East North
27,000 aircraft Jet Narrowbody
Jet Latin America
America 5% 5%
14%
Turboprop 8% 31%

14% 27,110 53% 27,110

Aircraft Aircraft
25%
19% Europe
Widebody 27%
Jet
Asia Pacific

Aftermarket By Global Region

Source: CAPA 2015 4

19,600 aircraft 10 Year Global Air Transport Fleet Growth
deliveries are driven
Africa
by a combination of # Aircraft Middle East CAGR
Latin America
robust air travel 40 000 Europe 37,900 5.1%

demand and high Asia Pacific

North America 5.3%
35 000 6%
retirement volumes 8% 3.8%
30 000 27,100

Air traffic growth of ~4.1% 23% 2.5%

25 000 5%
8%

Fuel costs in $55/bbl range 20 000 25%

~19,600 aircraft deliveries 32% 5.2%
15 000

~8,800 aircraft retirements 27%

10 000

5 000 26% 1.6%

31%
0 3.4% Avg.
2015 2025

Source: ICF International, CAPA 2015 5

Current air transport 2015 Global MRO Demand
MRO demand is
$64.3B—Asia Pacific
is now equivalent to Modifications Latin Africa
America North
North America and Airframe 7%
Engines
Middle East 6%4%
America

Europe 14% 8% 29%

40%
$64.3B $64.3B
17% 26%
Line Europe

22% 28%
Asia Pacific

Components

By MRO Segment By Global Region

Source: ICF International 6

The global MRO 10 Year Global MRO Demand Growth
market is expected
to grow at 4.1% per
Modifications
annum to $96B by $100 Airframe $96.0B CAGR

2025 $90
Line
Component
5.3%

$80 Engine 13% 2.8%

Largest growth:
Engine MRO +$13.7B in $70 $64.3B 16% 3.6%
annual spend 2025 vs $60
2015 14%
$50 22% 4.3%

Strongest growth: 17%
$40
5.3% per annum in
Modifications $30
22%

$20 41% 4.4%

40%
$10

$0 4.1% Avg.
2015 2025

Source: ICF International; Forecast in 2015 $USD, exclusive of inflation 7

Modifications growth Air Transport Modifications Forecast, 2015–2025
is driven by airlines ($USD Billions)
seeking differentiation
in the cabin (now they $8
AD/SB**
CAGR
PTF Conversions* $7.4B
have profits to reinvest)
Painting $0,5 3.6%
$7
Avionics Upgrades $0,4 0.0%
Interiors $0,5
$6
MRO modification market 3.7%
$1,1
growth drivers include: $5 6.9%
$4.4B

Latest lie-flat seats are now
$0,3
the minimum standard $4
$0,4
$0,4

Premium economy 5.9%
$3 $0,6

Wi-fi, on-board connectivity $4,9
$2

Coming soon: ADS-B Mod
program $2,7
$1

Capacity (ASM/K) increase
$0 5.3% Avg.
Source: ICF Analysis, constant 2015 US$
2015 2025
Modifications demand includes labor and material spend
*Passenger-To-Freighter Conversions
**Airworthiness Directives / Service Bulletins
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Cabin modifications - Delta A320 Interior Modification 2015 - 2025 Capacity Bridge, by
including new slim line Program Overview Contributing Factor
seats and fixtures -
have enabled capacity Total =
2015 ASMs 6.2T
Total =
up-gauging & and 150 Seats 160 Seats
cabin “densification”, 12 Seats 16 Seats Fleet Growth 84%
driving lower unit cost 18 Seats 18 Seats
and facilitating bottom
Longer Stage
line growth Lengths 8%

120 Seats 130 Seats

Increased
Seat Density 8%

2025 ASMs 8.8T

0 2 4 6 8 10
Available Seat-Miles (ASMs), Trillions
New seats, outlets, Space-saving galleys
IFE, overhead bins to add a row of seats
Source: ICF Analysis, Delta 9
The North American North American MRO Demand by Major Segment
MRO market is ($USD Billions)
Modifications
expected to grow Airframe
$B USD
to ~$21.6B by 2025, 25
Line
Component
CAGR

at 1.6% per annum Engine $21.6B

7% 2.4%
20 $18.3B
14% 0.4%
6%
16% 18% 2.2%
15

16%
23% 2.6%
10
21%

1.2%
5
38%
40%

-
1.6% Avg.
2015 2025

Source: ICF International; Forecast in 2015 $USD, exclusive of inflation 10

Future growth is North American MRO Demand Forecast by Fleet Type
driven by the ($USD Billions)

narrow body fleet in Turboprop

$B USD Regional Jet
$ terms and by the $25 Widebody Jet
CAGR

wide body fleet by Narrowbody Jet $21.6B 0.4%

% growth rate $20 $18.3B 12% -1.6%

2.9%
16%
$15
34%
30%
$10
1.8%

$5
51%
50%

$0
1.6% Avg.
2015 2025

Source: ICF International, CAPA 2015 11

Impact of
New Technology Aircraft

12 12
In the next decade, 10-Year Fleet Forecast by Aircraft Generation
the fleet of new
generation aircraft -70%
Old Gen
fleet will grow by 533
-60%
approx. 530% to 18 487
Mid Gen 1330
nearly 19,000 aircraft -17%
4 314

globally, and by -28%

~400% in North 22 212 6 010

America 18 896
New Gen 4 876

+531% +404%
2 993 967

2015 2025 2015 2025

Global North America

Source: ICF International

Old Gen: 727, 737 Classic, 747 Classic, DC10, L1011, A300
Mid Gen: 757, 767, 747-400, A320 Family, A330/A340, 737NG, 777, ERJ, CRJ
New Gen:, 777X, 787, A350, A330neo, A380, E170/175/190/195, CRJ-7/9/1000, 737MAX 13
Over the next 10-Year MRO Spend for New Technology A350 and 787 Aircraft
decade, MRO spend $ USD Billions
on new technology
$11,1
Airbus A350 & RoW
Boeing 787 aircraft North America
$9,7
+2000%
will double every Europe
$8,4

three years Middle East $7,1

Asia Pacific $5,8

Airbus and Boeing focus
and interest should be $4,4
no surprise! $3,3
$2,3

Engine OEMs also
$1,6 $4,0
focused on big data $1,0 $2,6 $3,0 $3,4
$0,5 $1,6 $2,2
$1,1
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Source: ICF International; Forecast in 2015 $USD, exclusive of inflation, includes Boeing 787 and Airbus A350 14
New technology 12 Year Heavy Maintenance Schedule
aircraft challenge 767
traditional MRO A/C Age 1 2 3 4 5 6 7 8 9 10 11 12

sourcing strategies 787

= Light C-Check = Heavy C-Check

Impact
Return on investment
Volume Intensity Days
challenges: (C-checks) (man-hours) (Hangar)

767 8 95,000 136

Facilities

Tooling & Equipment 787 4 33,000 47

Training

IT Systems
Cost Savings: ~65% fewer routine airframe heavy maintenance
man-hours drives an estimated savings of ~$3.5M

Asset Utilization: ~90 additional available flying days enables
increased revenue generation potential
*Based on 4,000 FH/yr utilization
767 C-check = 18mo, 4C = 72mo; 787 C-check = 36mo, 4C = 144mo
Assumed industry standard labor man-hour rate
Aircraft out of Service (AooS) calculated for C/4C/8C checks assuming industry standard MRO hangar productivity
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Challenge: How best Aircraft Health Monitoring and Data Generation Outlook
to realize value from
~ 28MB
the disparate terabytes 767: 10,000
~ 137TB
of data generated by
new technology
aircraft A320: 15,000

Stakeholder Battle: ~1,100%

Who will control and gain
most from the operating
data IP? B787: 100,000

Operators ~11TB
< 1MB

Lessors
777 787 Yr 1 Yr 10

OEMs

MRO Suppliers
Number of AHM Transmittable Data A/C Data Generated
Parameters (MB/Flt) (TB/Year)

Source: ICF Analysis

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For New Technology Implications of New Technology Aircraft
Aircraft MRO, there
are three key
battlegrounds Control of Control of
operational data the Workscope

This new world is already Critical to success in Critical to

rapidly changing the market participation success in
competitive landscape and in gaining driving parts

The outcomes and operational feedback choice and
winners in these battles for design and aftermarket
will define the future reliability margins
“winning business improvement
Control of
models” the Assets

Critical to success in
growing integrated
service market

Source: IATA 17
The Mystery Of 2015
Explained…

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In 2015, Air
Air Transport MRO Demand Growth vs Global Capacity (ASK) Growth
Transport MRO
demand growth was
considerably lower
than global capacity
growth

Source: Canacord Genuity, IATA 19

ICF believes that Factors Contributing To The 2015 Air Transport MRO Shortfall
four major trends are
behind the
aftermarket shortfall

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 RONA-DRIVEN AIRLINES

Historically, airlines
have not generated 2004-2013 Global Airline ROIC vs. WACC
investor returns,
and some airlines
are intent to improve
this…

RONA =
Return On Net Assets

Source: McKinsey / IATA 21

 RONA-DRIVEN AIRLINES

…and for these

2004-2014 Global Airline Scheduled Passengers
airlines, capacity
management and
asset utilization are
replacing market
share as key metrics

The airlines have historically been run by operationally-minded

people, who tended to throw planes onto routes in a fight for market
share. The name of the game is now capacity management, and the
decision makers are the finance people.

Derek Kerr, CFO, American Airlines

Source: ICF Research / IATA 22
 RONA-DRIVEN AIRLINES

Delta Airlines is at Delta Airlines – Corporate Goals

the vanguard of this
sea-change in airline
management
philosophy…

It’s been about changing the mindset

and the approach to the industry, and
really treating the airline industry like
any other industrial business. For that
reason, we target 15% ROIC just like
other high-quality industrial transports.

Richard Anderson, Former CEO

Delta Airlines Source: Delta Airlines 23
 RONA-DRIVEN AIRLINES

Delta’s approach to Delta Airlines – Domestic Fleet Trends

up-gauging results
in the same capacity
with 14% fewer
aircraft…

“Historically in this industry,

management teams became infatuated
with new airplanes. Instead, we look at
airplanes not as emotional decisions but
as investment decisions. Each asset has
to have a return on capital”

Richard Anderson, Former CEO,

Delta Airlines
Source: Delta Airlnies 24
 RONA-DRIVEN AIRLINES

…Delta’s philosophy
results in reduced Delta Airlines – Maintenance Cost Savings
maintenance Delta 2012 & 2015 Results ($B)

expenditures with 2012 2015 ∆ • Group dedicated to parting out

aircraft has purchased aircraft
reduced emphasis Revenue 36.67 40.70 + 11% from other operators to
on OEM purchases Mx Materials &
cannibalize (e.g. SAS MD80s)
1.96 1.85 - 6%
Outside Repair
• Actively cannibalizes its own
retired aircraft, including MD80,
757, 767 and 747-400
“Opportunities to acquire older airplanes and
harvest them for parts has provided significant
savings for us going forward in terms of a
• Leverages its internal
lower-cost basis for the overhauls that we engineering capability to
have” develop DER repairs and
modified repair scopes (e.g.
hard time  on condition)
Paul Jacobson
CFO - Delta Airlines • Buys from OEMs only as last
resort

Source: Delta Airlines 25

 RONA-DRIVEN AIRLINES

A group of RONA-
Driven airlines are Examples Of RONA-Driven Airlines
following Delta’s
lead and holding the FedEx
• Cannibalizes parked aircraft, burns green-time from
line on maintenance engines, parks aircraft to avoid maintenance events
• Aggressive user of USM to substitute for repairs
expenditures
British Airways
• Retiring 737 Classics, 747-400s and 767s
• Utilizing cannibalized USM to support remaining fleets
• Preference to use own USM rather than purchasing

Southwest
• ROIC = 18.3% • Retiring 737 Classics, utilizing cannibalized USM to support
remaining fleets and engines
• Operating margin = 10.3%
• Partnering with Avioserv

• ROIC = 15.3%
Others
• Operating margin = 14.1%

RONA-driven airlines operate ~ 25% of the air transport fleet

Source: ICF International 26

 New Age Provisioning
New aircraft provide
Evolution Of Component Support Buying Behavior
airlines with the
opportunity to
change their
747-400 A380 767 787
maintenance buying
behavior to include
asset pools
In-house / Outsourced: In-house / Outsourced:
Traditional Airbus FHS Traditional Lufthansa Technik TCS
Purchasing Purchasing UTAS CARE

767 787 767 787

The upshot: operators enter In-house / Outsourced: In-house / Outsourced:

rotable pools rather than Traditional Boeing GoldCare Traditional Boeing GoldCare
Purchasing Purchasing
traditional spares provisioning
from component OEMs

Source: ICF research 27

 New Age Provisioning
The share of
integrated programs Integrated Component Programs Penetration
in component
support is
100%
increasing, which is 90%
Growth Drivers
limiting initial 80%
Small fleet size
provisioning sales 70% Traditional • Perceived technology risk
60% • Improved ROIC
50% • Maintenance no longer core
40% activity
30% Integrated* • Predictable outgoings
20% • Attractive value propositions
45 -
35% • Lower investment, less
10% 50%
9% infrastructure
Integrated programs shift rotable 0%
assets to suppliers; the more 2004 2014 2024
inventory held by a supplier, the
lower the inventory cost per
aircraft supported

Source: ICF International 28

 New Age Provisioning
Pooling results in
greater asset
productivity…and Notional Inventory Holding Curve
less demand for
initial provisioning

Required Inventory ($ per aircraft)

Traditional In-House
Inventory
Management

Large Scale Inventory

Management Programs
Number of aircraft

Source; ICF International 29

 New Age Provisioning
Four types of
suppliers are Integrated MRO Suppliers

pursuing integrated Aircraft OEMs • Airbus has ~12 Flight Hour Services contracts covering
MRO programs…and A330, A380, and A350XWB; A320neo is a key target
• Boeing recently signed GoldCare 787 contracts with
rotable pooling BA, United and Oman; is also gaining ground on 777

Component OEMs • UTAS and Collins offer integrated MRO programs covering
their own products; Moog recently developed its own
program and signed several customers
• OEM services is a JV providing A380 pooling with four
partners

MRO Integrators • LHT is the market leader in integrated component

maintenance and is gaining momentum in new generation
aircraft
• Other key players include SR Technics, Air France/KLM,
AAR, and ST Aerospace

Asset Mgmt. Firms

• Asset management specialists have added MRO
capabilities to their core businesses
• Hedge funds and UHNWI investors are providing capital for
growth
Source: ICF International 30
 Used & Serviceable Material

The availability of Commercial Air Transport Annual Aircraft Retirements

used and serviceable
material (USM) has # Retirements
% Installed
Fleet
grown with aircraft 1 200 3,5%
retirements in recent
1 000 3,0%
years…
Retirement as % 2,5%
800
of installed fleet
Potential Impact:
2,0%

Airline capacity increases 600

Reduced part-out feed 1,5%
stock for surplus market 400

Increase in airframe and engine 1,0%
2000-09 Average: 473
MRO spend on
200 0,5%
older airframes 1990-99 Average: 191

Less pressure OEM new parts
0 0,0%
sales

Higher used part values /
pricing
Source: Flight Global ACAS June 2015, CAPA, Airline Monitor, ICF Analysis
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 Used & Serviceable Material
…and fueling the USM Parts Supply Chain Evolution
growth is a new
breed of suppliers
with access to
capital and newer
generation aircraft

Source: ICF International 32

 Used & Serviceable Material
Total commercial
aircraft material Air Transport MRO Material Related Spend

related spend is
estimated to be
$37.5B with OEM PMA OEM New
Alternative (to OEM
Parts, 1% new) parts choices
new parts today account for one-
USM
accounting for about Parts third of total material
9% spend
two-thirds $37.5B 67%
USM parts market is
Parts $3.5B – and nine times
repair,
incl. DER 22% greater than PMA

Parts repair, including
DER, is even higher

Source: ICF International 33

ICF forecasts the
Used & Serviceable Air Transport USM Market Growth Forecast (Constant 2014 $B)
Material to grow to
$6.3B by 2024 – a
5.5% CAGR

Engine USM is
expected to be the
$6.3B main driver of
growth with
anticipated CAGR of
5.9% over the next
$3.7B decade

Low fuel prices, if
sustained for
$2.0B multiple years,
Airframe could reduce part-
Component outs and the project
Engine
growth of USM

2007 2014 2024

Source: ICF International; 2024 figures in 2014 constant $ 34

 Currency Fluctuations

Finally, the dramatic Global Currency Exchange Rates vs USD

strengthening of the % Value Change, Jan. 2014 – Jan. 2016

USD is weakening 10%

aftermarket results Russian Ruble Brazilian Real S. African Rand
-34,1%
Can Dollars
-23,1%
Aus Dollars
-20,8%
Euro
-20,0%
British Pound
-12,8%
Japanese Yen
-11,9%
Indian Rupee
-7,8%
Chinese Yuan
-7,2%
-55,1% -41,1%

from some regions – 0%

including Canada -10%

-20%
FOREX Impact
• Most MRO materials and -30%
many services priced in
USD -40%

• Airlines react by
conserving cash and -50%
maintenance expenditures

• Air Canada’s 2015 -60%

maintenance cost
increased $95M from 2014,
mainly due to unfavourable
currency impact of $108M

Source: Oanda historical exchange rates, ICF International Analysis 35

 RONA-DRIVEN AIRLINES
Canaccord Genuity New Age Provisioning
estimates a ~$1B Used & Serviceable Material
under-performance Currency Fluctuations
in 2015 aftermarket Sources Of Air Transport MRO parts sales
part sales underperformance of $1B in 2015

Lower initial provisioning

on B787 ~35%

Airline MRO cost

management ~45% ∆ = $1.0B

Aircraft cannibalization / USM

usage ~20%

Source: Canacccrd Genuity 36

 April 28, 2016
Montréal

THANK YOU!
For questions regarding this Kevin Michaels
presentation, please contact: Vice President - Aerospace & MRO Practice
kmichaels@icfi.com  +1.734.717.5011

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LEAN Continuous Process Improvement

Military Aircraft Sustainment

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Aerospace

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& MRO
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Advisory
Specialized, focused expertise and
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joined ICF in 2007

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