WINDS OF CHANGE 2016-2026 GLOBAL FLEET & MRO MARKET FORECAST FEBRUARY 8, 2017 Dave Stewart AVIATION
Oliver Wyman s Aviation, Aerospace & Defense practice is the largest and most capable consulting team dedicated to the industry OUR EXPERIENCE 232 professionals across Europe and North America Deep aviation knowledge and capabilities allow the practice to deliver data-driven solutions and provide strategic, operational, and organizational advice OUR CLIENTS We have worked with more than ¾ of the industry s Fortune 500 companies, including: All major US airlines Leading airlines, MROs, OEMs, and independent parts manufacturers in the Americas, Europe, and Asia Dominant aerospace and defense firms OUR APPROACH Data-driven: unbiased benchmarking and forecasting tools to establish problems and identify solutions Innovative: ideas that are forwardthinking Actionable: results-oriented recommendations Collaborative: an emphasis on working with our clients, alongside executives, management, and support teams 1
This presentation incorporates the betterinsight 2016-2026 Global Fleet and MRO Market Forecast and the Oliver Wyman MRO Survey 2016 The betterinsight Global Fleet & MRO Market Forecast Commentary, and related market intelligence data is available at planestats.com/betterinsight 2
The future is now 3
Amid weakening economic conditions, the global airline industry is achieving record passenger volumes, record cargo volumes, and record net profits Global Air Transport Passenger Volume by Year Millions of Seats 5,000 4,000 3,000 2,000 1,000 0 Global Air Transport Cargo Volume by Year Millions of Tons 2010 2011 2012 2013 2014 2015F 2016F Available Available Seats Revenue Passengers Revenue Seats Passengers Global Air Transport Industry Financial Performance by Year Billions of US Dollars $800 $700 $600 $500 $400 $300 $200 $100 100 80 60 40 $0 2010 2011 2012 2013 2014 2015F 2016F Revenue Expenses Net Profit Revenue Expenses Net Profit 20 0 2010 2011 2012 2013 2014 2015F 2016F Available Available Freight Tons Freight Tons Freight Tons Freight Tons The North American operators are, by far, delivering the strongest financial performance 4
Record net profits are due in large part to the glut in the oil market. As oil prices are expected to remain low over the short term, many are concluding that operators will delay retirements, and defer new aircraft. Crude Oil and Jet Fuel Spot Prices per Gallon by Year US Dollars $4.0 $3.5 $3.0 $2.5 $2.0 $1.5 $1.0 New gen narrowbody aircraft are more profitable than current gen New gen widebody aircraft are more profitable than current gen $0.5 $0.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Brent Crude Oil WTI Crude Oil Jet Fuel Jet Fuel Brent Cone of Uncertainty WTI To date, operators have not shown signs of significantly altering fleet plans. OEM order backlogs continue to grow, and new aircraft deliveries are at an all time high. 5
In order to corroborate trends in deliveries and retirements, we asked operators how the price of fuel was impacting their fleet decisions in the Oliver Wyman MRO Survey 2016 Q: How much longer would oil prices need to stay below $50 to have a real impact on your fleet decisions? Already noticing a change 23% 12 Months 6% 18 Months or longer 71% Q: Below what sustained oil price would you consider adding older aircraft into your fleet? $60-$70 12% $40-$50 18% At no price 70% Delivery decisions are made many years in advance and make a very stable and predictable variable that runs independently of macro level factors 6
While the fleet is growing at a healthy rate, and the industry is reveling in historic net profits, uncertainties surrounding economic growth, interest rates, and oil prices could disrupt the delicate balance enjoyed today Global In-Service Fleet Forecast by Year Number of Aircraft 43,000 Brent 34,437 38,000 33,000 24,540 28,000 23,000 18,000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Historical Fleet betterinsight Forecast Fleet We forecast the fleet will increase by nearly 9,900 aircraft by 2026, representing an average annual growth rate of 3.4% 7
While the fleet is growing at a healthy rate, and the industry is reveling in historic net profits, uncertainties surrounding economic growth, interest rates, and oil prices could disrupt the delicate balance enjoyed today Global In-Service Fleet Forecast by Year Number of Aircraft 43,000 38,000 Fleet CLOUD NINE 33,000 28,000 24,540 GDP TRAFFIC 23,000 18,000 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Historical Fleet betterinsight Forecast Likely Alternate Scenarios Best/Worse Case Alternate Scenarios FUEL PRICES INTEREST RATES No matter which forecast scenario comes to fruition, the winds of change are blowing through our industry 8
While the fleet is growing at a healthy rate, and the industry is reveling in historic net profits, uncertainties surrounding economic growth, interest rates, and oil prices could disrupt the delicate balance enjoyed today Global In-Service Fleet Forecast by Year Number of Aircraft 43,000 38,000 Fleet BLACK SWAN 33,000 28,000 24,540 GDP TRAFFIC 23,000 18,000 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Historical Fleet betterinsight Forecast Likely Alternate Scenarios Best/Worse Case Alternate Scenarios FUEL PRICES INTEREST RATES No matter which forecast scenario comes to fruition, the winds of change are blowing through our industry 9
While the fleet is growing at a healthy rate, and the industry is reveling in historic net profits, uncertainties surrounding economic growth, interest rates, and oil prices could disrupt the delicate balance enjoyed today Global In-Service Fleet Forecast by Year Number of Aircraft 43,000 38,000 Fleet STRENGTHENED ECONOMY 33,000 28,000 24,540 GDP TRAFFIC 23,000 18,000 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Historical Fleet betterinsight Forecast Likely Alternate Scenarios Best/Worse Case Alternate Scenarios FUEL PRICES INTEREST RATES No matter which forecast scenario comes to fruition, the winds of change are blowing through our industry 10
While the fleet is growing at a healthy rate, and the industry is reveling in historic net profits, uncertainties surrounding economic growth, interest rates, and oil prices could disrupt the delicate balance enjoyed today Global In-Service Fleet Forecast by Year Number of Aircraft 43,000 38,000 Fleet WEAKENED ECONOMY 33,000 28,000 24,540 GDP TRAFFIC 23,000 18,000 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Historical Fleet betterinsight Forecast Likely Alternate Scenarios Best/Worse Case Alternate Scenarios FUEL PRICES INTEREST RATES No matter which forecast scenario comes to fruition, the winds of change are blowing through our industry 11
While the fleet is growing at a healthy rate, and the industry is reveling in historic net profits, uncertainties surrounding economic growth, interest rates, and oil prices could disrupt the delicate balance enjoyed today Global In-Service Fleet Forecast by Year Number of Aircraft 43,000 38,000 33,000 28,000 24,540 Fleet CLOUD NINE STRENGTHENED ECONOMY WEAKENED ECONOMY BLACK SWAN 23,000 18,000 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Historical Fleet Likely Alternate Scenarios betterinsight Forecast Best/Worse Case Alternate Scenarios No matter which forecast scenario comes to fruition, the winds of change are blowing through our industry 12
1 2 3 New Technology Regional Shift Aircraft Retirements 13
The increase in new technology will be the prevailing tailwind behind the changes in the global fleet and the airline industry over the next decade 1 2 3 2016-2025 Global New Aircraft Delivery Forecast Next Gen vs Legacy Number of Aircraft 2,500 2016-2026 Global In-Service Fleet Forecast Next Gen vs Legacy Number of Aircraft 35,000 2,000 30,000 25,000 10% 1,500 33% 20,000 54% 1,000 15,000 500 97% 0 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 10,000 5,000 0 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Legacy Legacy Next Next Gen Gen Legacy Legacy Next Next Gen Gen By the end of the forecast period, next generation aircraft will account for nearly all new deliveries and comprise over half of the global fleet 14
Next generation aircraft are equipped with new technologies enabling unprecedented collection and transmission of data at both the system and part level 1 2 3 Global In-Service Fleet Data Generation per Year by Year Billions of Gigabytes 120 100 Fleet 98 80 60 40 20 1 4 0 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 This surge of data, in the hands of a new breed of data scientists and innovative management teams, creates massive potential to change how aircraft are cared for 15
1 2 3 Without a clear plan for its collection and application, big data can bring distractions for resource-constrained operators, leading to squandered efforts or abandoned intentions to integrate advanced analytics into MRO Q: Due to aircraft health management we have experienced a noticeable... Increased need for data analysis skills 65% Increased need for internal IT skills 45% Increased need for data storage 27% Increased interaction with third parties to interpret data Increased guidance from third parties to plan and schedule maintenance 22% 10% The pathway to a high-impact, productive big data platform will begin with targeted successes on modest improvement initiatives, such as statistically reliability analysis on high-failure parts 16
1 2 3 As the mature North American and Western European markets continue to undergo significant re-fleeting efforts and tightly control capacity, there will be a continuing shift to the East 2016 In-Service Fleet by Region North America 7,491 Western Europe 4,942 Middle East 1,234 Eastern Europe 1,209 China 2,460 Latin America 1,762 Africa 1,048 India 408 Asia Pacific 3,986 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 17
1 2 3 As the mature North American and Western European markets continue to undergo significant re-fleeting efforts and tightly control capacity, there will be a continuing shift to the East 2026 In-Service Fleet by Region North America 8,067 Western Europe 5,820 Middle East 2,313 Eastern Europe 1,453 China 5,771 3,000 2,000 1,000 Latin America 2,614 Africa 1,213 India 706 Asia Pacific 6,477 0 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 18
1 2 3 Nearly half of the current global fleet is forecast to retire by 2026 with the majority of those being of 1990s vintage. In light of this, we asked operators about their retirement planning 2016-2025 Global Aircraft Retirement Forecast by Aircraft Vintage Q: When does your organization start planning for a fleet retirement? Number of Aircraft 1,400 1,200 1 Year 16% 1,000 800 2 Years 5% 600 400 200 3-5 Years 47% 0 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 1970 s 1970's 1980's 1980 s 1990's 2000's 1990 s 2010's 2000 s 2010 s 5+ Years 32% Nearly 80% reported that retirements are planned at least three years in advance, indicating that short-term industry events are not influencing retirement schedules 19
1 2 3 Record increases in retirements are expected to have a significant impact on the availability and use of used serviceable material over the next decade 2016-2026 Global Materials Market Forecast USM vs All Other Materials Billions of US Dollars $70 $65 $60 $55 5.9% CAGR 4.3% CAGR $50 $45 $40 $35 $30 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 All Other Materials USM All Other Materials USM Greater utilization of USM material, particularly in 1990 s vintage aircraft, will impact material pricing, and may reduce the cost of an engine shop visit by 10%-20% 20
Translating the fleet and market dynamics into MRO, we estimate the 2016 global commercial MRO market was about $68B 2016 Global MRO Market Forecast by MRO Segment AIRFRAME & MODS $16.0B ENGINE $25.6B COMPONENT $13.1B LINE $12.8B Engine MRO continues to be the driver of growth in the market 21
As MRO is a product of the size, mix, and utilization of the fleet, the market should continue to grow at a robust pace, weathering all but the most traumatic economic shifts Global MRO Market Forecast by Year Billions of US Dollars $120 $110 Fleet $98.9 $100 $90 $67.7 $80 $70 $60 $50 $40 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Historical MRO betterinsight Forecast Fleet We forecast total MRO spend to increase by over $31 billion by 2026, which would represent a year-over-year increase of 3.9% 22
As MRO is a product of the size, complexion, and utilization of the fleet, the market should continue to grow at a robust pace, weathering all but the most traumatic economic shifts Global MRO Market Forecast by Year Billions of US Dollars $120 $110 $100 $67.7 $90 $80 $70 $60 $50 Fleet CLOUD NINE STRENGTHENED ECONOMY WEAKENED ECONOMY BLACK SWAN $40 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Historical MRO Likely Alternate Scenarios betterinsight Forecast Best/Worse Case Alternate Scenarios The uncertainty surrounding global economic conditions, while adversely impacting the size of the global fleet, could benefit the MRO Market 23
The Middle East and Africa regions will experience robust MRO growth over the next ten years at an average annual rate of 6.9% and 4.8%, respectively 2016-2026 Middle East and Africa MRO Market Forecast by MRO Segment Billions of US Dollars $16 $14 $12 2016-2026 Middle East and Africa MRO Market Forecast Middle East vs Africa Billions of US Dollars $16 $14 $12 $10 $8 $10 $8 4.8% p.a. $6 $4 $2 21% 18% $6 $4 $2 6.9% p.a $0 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Airframe Engine Airframe Engine Component Line Component Line $0 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Middle East Middle East Africa Africa Engine MRO spend more than doubles during the forecast period while airframe maintenance remains relatively stagnant 24
2015 US Dollars ($USB) Across the Middle East and Africa; spend is concentrated in certain countries, else it s highly fragmented 2016 Middle East and Africa MRO Market Forecast by Operator Country $2.8 $2.0 $1.8 $1.6 $1.4 $1.2 $1.0 $0.8 $0.6 $0.4 $0.2 $0.0 Middle East Africa 25
In the Middle East, the MRO spend generated by the next generation fleet will grow at more than 28% per annum 2016-2026 Middle East MRO Market Forecast by MRO Segment Billions of US Dollars $12 2016-2026 Middle East MRO Market Forecast New Gen vs Legacy Billions of US Dollars $12 $10 $10 $8 $8 $6 $6 9% 28.4% p.a. 59% $4 $2 18% 18% $4 $2-1.3% p.a $0 $0 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Airframe Airframe Engine Engine Component Line Legacy New Gen Legacy New Gen Component Line A cautionary note: not all this growth in spend is available to third party suppliers 26
Saudi Peninsula Fleet Size: 290 MRO Market: $1.0B While oil prices have stabilized, the area s economy is still dependent on this commodity. Growth opportunities exist but are limited and/or focused it s critical to get the business case right and do appropriate due diligence before investing capital Iran, Iraq, Jordan, Lebanon, Syria Fleet Size: 333 MRO Market: $1.0B Geopolitical uncertainty still abounds and constrains ability to grow. Lifting of economic sanctions on Iran should allow the gradual improvement in the outlook of economies across the region North Africa Fleet Size: 314 MRO Market: $0.7B The fleet consists of mostly aging turboprops, regional jets and narrow body aircraft. Outsourced MRO market is relatively small. This combined with the political uncertainties makes the sub-region less attractive for those not already operating there Sub-Saharan Africa Fleet Size: 734 MRO Market: $1.2B Declining commodities prices and lower demand from the sub region s largest importer China currently hamper the economic outlook of the region. Despite on going political turbulence, many look to the long-term prospects of this commodityrich, high population region United Arab Emirates/Qatar Fleet Size: 611 MRO Market: $3.6B Significant growth is concentrated in Dubai, Abu Dhabi and Doha, but not all MRO supply chain activities are or will be outsourced. OEMs have the most to gain from the large operators as the average fleet age is low. Other MRO supply chain participants must have strong value propositions and the right market entry strategy to convince such large airlines to outsource.
Take the controls and make strategic investments now: New technology aircraft growth is creating unprecedented change across the value chain The mature markets are stagnating, and the nexus of MRO is shifting Eastwards Increased retirements will lead to greater availability and use of USM, which will significantly impact MRO costs Growth in the Middle East region is highly concentrated; opportunities exist but may be tougher to access than the growth rates imply Middle East airlines are among the leading operators of new technology aircraft (scale and experience); this represents a business opportunity 28
Oliver Wyman s annual MRO Survey For over a decade, we ve synthesized key trends and issues in the MRO marketplace via a global survey; all participants get detailed feedback To participate in our annual 2017 MRO Survey, please email: MROsurvey@oliverwyman.com 2012 2013 2014 2015 2016 29
Thank You and Questions? David Stewart Oliver Wyman/Cavok 55 Baker Street London W1U 8EW Tel: + 44 (0) 20 7852 7083 Mob: + 44 (0) 7770 410011 david.stewart@oliverwyman.com