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January 25-26, 2017

Cancun, Mexico

Presented by:
Jonathan M. Berger
Vice President ICF
jberger@icf.com

MRO Market Update & Industry Trends

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Todays Agenda

Fleet & MRO Forecast


2016: What a long strange trip
year its been
2017: The year aviation &
aerospace blinked

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MRO Forecast

2 2
The current
commercial 2016 Global Commercial Air Transport Fleet
air transport fleet Latin
consists of under America Africa
Regional
28K aircraft; over Jet Narrowbody 7% Asia
Jet 5% Pacific
half are narrowbody Turboprop
13%
North
aircraft America
28%
14% 27,957 54% 30% 27,957
Aircraft Aircraft
19%
Widebody 5%
Jet 25%
Middle East
Europe

By Aircraft Type By Global Region

Source: CAPA 2016 3 3


The combination of 10 Year Global Air Transport Fleet Growth
strong air travel
Africa
demand and the # Aircraft Middle East CAGR
Latin America
need to replace 40,000 Europe 38,100 4.1%

ageing aircraft will Asia Pacific


North America 5.0%
35,000 6%
drive fleet growth at 8% 3.4%
30,000 28,000
a healthy 3.2%
5% 23% 2.4%
annually 25,000
8%

20,000
25%

15,000
33% 4.8%

28%
10,000

5,000 25% 1.3%


30%

0 3.2% Avg.
2016 2026

Source: ICF analysis: CAPA 2016 4 4


Current commercial 2016 Commercial Air Transport Global MRO Demand
air transport MRO
demand is $67.6B;
Latin Africa
Asia is now larger Modifications
America
North
than North America Airframe 8%
Engines
Middle East
6% 4% America

and Europe in 14% 8% 27%


market size 40%
$67.6B $67.6B
17% 26%
Line Europe

30%
22%
Asia Pacific
Components

By MRO Segment By Global Region

Source: ICF analysis; Forecast in 2016 $USD, exclusive of inflation 5 5


The global MRO 10 Year Global Commercial Air Transport MRO Demand Growth
market is expected
to grow by 4.1% per $USD
Billions Modifications $100.6B
annum to over $100 Airframe
CAGR

$100B by 2026 $90


Line
Component
5.2%
12%
$80 Engine 2.8%

Engine and component MRO $70 $67.6B 16% 3.2%


markets remain the largest
segments $60
14%
22%
Modifications market will see $50
17% 4.2%
the strongest growth (e.g.
$40
interiors, connectivity)
22%
Airframe market slows due $30
to reduced man-hour
$20 41% 4.5%
intensity and increased
check intervals as new fleets 40%
$10
are introduced
$0 4.1% Avg.
2016 2026

Source: ICF analysis; Forecast in 2016 $USD, exclusive of inflation 6 6


The current Latin 2016 Latin American Commercial Air Transport Fleet
American fleet
consists of over
2,100 aircraft; with Regional
Jet
narrowbody aircraft Narrowbody
Jet
Other Brazil
making up more than 15% 20%
25%
50% of the installed
base
Turboprop 2,099 52%
Panama 5% 2,099
23%
Aircraft 6% Aircraft
6% 19%
Venezuela 8% Mexico
9% 11%
Widebody Chile
Colombia
Jet

By Aircraft Type By Country

Source: CAPA 2016 7 7


The Latin American 10-Year Global Latin American MRO Demand Growth
MRO market is
expected to grow $USD
Billions
to approx. $6.4B $7
Modifications CAGR
$6.4B
by 2026, at 5.5% per Airframe
8% 7.2%
$6 Line
annum Component 11% 4.0%
$5
Engine
Modifications is the fastest 16% 3.7%
growing MRO segment in $4 $3.8B
Latin America 7%
13% 23% 4.7%
MRO spend on widebodies $3
in Latin America will nearly 19%
double by 2026 as the fleet $2
increases by 56% 25%
42% 7.0%
$1
37%
$0 5.5% Avg.
2016 2026

Source: ICF analysis; Forecast in 2016 $USD, exclusive of inflation 8 8


2016: What a long strong trip
year its been

9 9
Driven by low fuel 2016 was a historic year for airline
costs and profitability
consolidation, the
global airline Global Airline Profitability, 1997 - 2017F
industry achieved $USD
Billions
$35.6B Africa, ($0.8B)
record profitability $40
Latin America, $0.2B
of over $35B USD in $30
Middle East, $0.3B
2016 $20 Asia Pacific, $6.3B

$10 Europe, $5.6B

$0 North America, $18.1B

-$10

-$20

-$30

Source: IATA, ICF analysis


10 10
However, record but many airlines continue to struggle
profitability has
been largely limited Global Airline EBIT Margin by Region
to carriers in North 14.0% 12.9%

America 12.0% 2008


10.0% 2012
8.0% 2017F
6.0% 4.7%
5.2%
4.5%
4.0% 3.4% 3.0%
2.9%
2.3%
2.0% 1.5%
0.7% 1.0% 0.7%
0.1%
0.0%
-0.4%
-2.0% -0.9%
-1.8%
-4.0% -3.6%
-6.0% -4.7%

Source: IATA, ICF Analysis 11 11


Follow the Money: Airline Profit Spend Analysis
Airlines are
spending their hard Stock Buy-
Debt Back &
earned profits in Dividends
Repayments
three primary areas 16% 26%

1. Labor ~ 20%:
Profit sharing
Investors,
Wage increases
42%
Other capex
2. Capex ~ 38%: 10%
Fleet renewal & cabin Labor,
upgrades 20% Profit Sharing
Facilities, offices, lounges Capex,
15%
Equity partner investments 38%
3. Investors ~ 42%:
Stock buy-backs Equity Wage
Dividends Investments Increases
Debt repayment 5% Fleet 5%
23%

Source: Company Reports, ICF Analysis 12 12


Aviation is Commercial Air Transport Modifications Forecast
experiencing a
new golden age $USD
Billions
Cabin Connectivity
AD/SB**
CAGR
of aircraft cabin $10
PTF Conversions*
$8.5B 5.1%
interiors $9 Painting
Avionics Upgrades $0.4 2.9%
$8 $0.4
Interiors
$0.5 3.6%
MRO modification market $7
$0.9
growth drivers include: $6
4.2%
$5.1B $1.4
Latest lie-flat seats are now 5.9%
$5 $0.2
the minimum standard $0.3
$0.3
Premium economy $4 $0.6 5.6%

Wi-fi, on-board connectivity $3 $0.8


$4.8
Capacity (ASM/K) increase $2
(Cabin Densification) $2.8
$1
Coming soon: ADS-B Mod
program $0 5.2% Avg.
2016 2026
Modifications demand includes labor and material spend
*Passenger-To-Freighter Conversions
**Airworthiness Directives / Service Bulletins
Source: ICF analysis, constant 2016 US$ 13 13
Amazon is very well
positioned to lead a
major disruption of Amazons Growing Revenue & Shipping Costs
the air cargo industry Shipping Costs as a
$B
USD Amazon Quarterly Revenue Percentage of Revenue
$40 14%

$35 12%
$30
10%
$25
8%
$20
6%
$15
4%
$10

$5 2%

$0 0%

Source: Amazon SEC Filings 14 14


Latin American
Aviation Outlook

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The good news
Latin American GDP Growth
After a half decade
of economic decline, 5.0%

Latin America is 4.0%


once again poised
for growth in 2017 3.0%

2.0%

1.0%

0.0%

-1.0%

Note: All GDP Growth are calculated based on constant price (nation currency)
Source: IMF Economic Outlook April 2016, ICF analysis 16 16
In 2017, while most 6.0%
4.0%

countries in Latin 4.0%


2.0%
0.0%

America will see 2.0%

0.0%
modest, but steady -2.0%
10.0%

economic growth, -4.0%


2013 2014 2015 2016F 2017F
5.0%

0.0%
10.0%

the big increases will 5.0%

0.0%

come from Brazil


and Argentina 10.0%

4.0% Brazil 5.0%


2.0% 0.0%
0.0%
-2.0%
-4.0%
4.0%
-6.0%
2.0%
0.0%

4.0%

2.0%

0.0%

United States
Note: All GDP Growth are calculated based on constant price (nation currency)
Source: IMF Economic Outlook April 2016, ICF analysis 17 17
Latin America is in
the midst of an LCC Market Share (seats offered) by Global Region
LCC Renaissance
60%

49% Domestic
50%
Intra-regional
Copa restructuring Copa International 40%
40% 38%
Colombia into new ultra-LCC
called Wingo 30%
30%
VivaColombia launches 24%
21% 20% 20%
subsidiary Viva Air in Peru
20%
Flybondi plans to launch 13%
ultra-LCC in Argentina in 2017 9%
10% 7% 6% 6%
4% 3%
Chilean based Sky Airline
switching its business model 0%
to ultra-LCC
Mexican LCC Volaris
announces new subsidiary in
San Jose, Cost Rica

Source: OAG, Airbus, ICF Analysis 18 18


There continues to be
significant interest
and external financial
investment in Latin
American carriers

Brazil

United States

Source: ICF analysis 19 19


2017: The year aviation &
aerospace blinked

20 20
Commercial aircraft
OEM production Commercial Aircraft OEM Production Backlog
backlog remains at
historical highs Order Backlog/
Backlog % Active Fleet

16,000 70%

Emerging market growth 14,000 60%

Very low interest rates 12,000


50%
Previously high oil and 10,000
commodity prices 40%
8,000
Introduction of new 30%
technology aircraft/engines 6,000
20%
4,000

2,000 10%

0 0%

Source: CAPA, ICF Analysis 21 21


Lower fuel costs
Commercial Air Transport Annual Aircraft Retirements
appear to be
reversing aircraft # Retirements
% Installed
Fleet
retirements trends 1,200 3.5%

Industry Impact: 3.0%


1,000
MRO Suppliers - Positive: Retirement as %
Increased spend on older 2.5%
800 of installed fleet
airframes & engines
2.0%
Surplus Market - Negative:
600
Reduced part-out feed
stock 1.5%
- OEMs: Improved new 400
part sales 1.0%
- Distributors: Improved 2000-2009 Average: 473
used part values / 200 0.5%
pricing 1991-1999 Average: 203
- Operators: Increased 0 0.0%
material costs
- PMA Suppliers: Very
Positive
Source: CAPA, Airline Monitor, ICF analysis 22 22
Four external macro- Growth of Populism/Nationalism
& Impact to Global Trade
economic forces are
creating headwinds
for global airlines
and the broader
aerospace & MRO
supply chain
Increased airline costs:
- Aircraft financing
- Fuel
- Labor Strengthening US Dollar
- MRO flight hour agreements

Downward pressure on global GDP


growth

Downward pressure on aircraft


valuations

Potential for increase in aircraft


delivery deferrals (backlog risk)

Middle East airline titans stressed

Advantage = Airbus
Source: ICF analysis 23 23
January 25-26, 2017
Cancun, Mexico

THANK YOU!
For questions regarding this Jonathan M. Berger
presentation, please contact: Vice President Aerospace & MRO Advisory
jberger@icf.com +1 404.819.7669

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