Untitled - Aeronautical Repair Station Association

86 Pages·2015·1.47 MB·English

by  John Smiley

TEAMSAI AND CAVOK JOIN FORCES

In 2013 the Aeronautical Repair Station Association (ARSA) announced a strategic partnership with TeamSAI,
an aviation consulting firm specializing in strategic, tactical and operational management solutions. The
relationship enabled the firms to combine ARSA’s industry knowledge and policy expertise with TeamSAI’s
betterinsight™ market intelligence service to create regular, high quality economic analyses of the global
aviation maintenance sector.

As of February 2, 2015, CAVOK, the aviation technical services and consulting division of international
consulting firm Oliver Wyman, has acquired and integrated TeamSAI into their business. The new CAVOK and
its betterinsight™ market intelligence service will continue to work with ARSA to provide critical information
to make its members more effective managers and leaders, and help lawmakers, regulators, journalists, and
voters better understand the economic consequences of policy decisions.

CONTENTS

EXECUTIVE SUMMARY ................................................................................................................................................... 3
STATE OF THE WORLD ................................................................................................................................................... 5
STATE OF THE AIRLINE INDUSTRY .................................................................................................................................. 7
GLOBAL AIR TRANSPORT FLEET FORECAST ................................................................................................................... 9
1. FLEET MIX ........................................................................................................................................................ 13
2. AIRCRAFT ORDERS IN 2014 ............................................................................................................................. 15
3. ORDER BACKLOG ............................................................................................................................................ 17
4. DELIVERIES AND RETIREMENTS ...................................................................................................................... 18
5. CARGO FLEET .................................................................................................................................................. 20
6. REGIONAL FLEET CHARACTERISTICS .............................................................................................................. 23
GLOBAL AIR TRANSPORT MRO MARKET FORECAST ..................................................................................................... 27
1. TOTAL MRO BY CLASS ..................................................................................................................................... 28
2. TOTAL MRO BY REGION .................................................................................................................................. 29
3. TOTAL MRO BY OEM ....................................................................................................................................... 31
4. TOTAL MRO BY AIRCRAFT FAMILY/MODEL ..................................................................................................... 33
5. IMPLICATIONS FOR MROS .............................................................................................................................. 35
AIRFRAME MAINTENANCE MARKET FORECAST AND STRUCTURE ............................................................................... 37
1. MARKET STRUCTURE ...................................................................................................................................... 39
2. COST STRUCTURE ........................................................................................................................................... 41
3. SUPPLY CHAIN ................................................................................................................................................ 42

1 Copyright © 2015 CAVOK, a division of Oliver Wyman
ENGINE MAINTENANCE MARKET FORECAST AND STRUCTURE ................................................................................... 43
1. MARKET STRUCTURE ...................................................................................................................................... 47
2. COST STRUCTURE ........................................................................................................................................... 49
3. SUPPLY CHAIN ................................................................................................................................................ 50
COMPONENT MAINTENANCE FORECAST AND STRUCTURE ........................................................................................ 51
1. MARKET STRUCTURE ...................................................................................................................................... 53
2. COST STRUCTURE ........................................................................................................................................... 55
3. SUPPLY CHAIN ................................................................................................................................................ 56
LINE MAINTENANCE MARKET FORECAST AND STRUCTURE ........................................................................................ 57
1. MARKET STRUCTURE ...................................................................................................................................... 59
2. COST STRUCTURE ........................................................................................................................................... 61
3. SUPPLY CHAIN ................................................................................................................................................ 62
GLOBAL MRO BALANCE OF TRADE .............................................................................................................................. 63
1. AIRFRAME MAINTENANCE (excluding modifications) ...................................................................................... 63
2. ENGINE MAINTENANCE .................................................................................................................................. 66
3. COMPONENT MAINTENANCE ........................................................................................................................ 68
GLOBAL BUSINESS AVIATION OUTLOOK FOR 2015 ..................................................................................................... 70
AVIATION MAINTENANCE INDUSTRY EMPLOYMENT & ECONOMIC IMPACT ............................................................... 74
1. AIRFRAME & LINE MAINTENANCE ................................................................................................................... 75
2. ENGINE MAINTENANCE .................................................................................................................................. 76
3. COMPONENT MAINTENANCE ........................................................................................................................ 77
4. U.S. EMPLOYMENT AND ECONOMIC IMPACT................................................................................................. 78
CONCLUSION .............................................................................................................................................................. 81

Copyright © 2015 CAVOK, a division of Oliver Wyman 2
EXECUTIVE SUMMARY

This report details CAVOK’s 2015 assessment and ten-year outlook of the air transport maintenance, repair, and overhaul
(MRO) market and a one year out look of the business aviation MRO market, starting with a review of global economic
conditions, a key driver for the health of the industry. The global economy is expected to improve in the coming years, but
concerns remain over the strength of the recovery. Generally, airlines operate with very thin margins with major cost
drivers such as labor, maintenance, and fuel, greatly influencing financial performance. Operators are increasingly
relentless in managing costs; with limited leverage over labor and fuel, airlines focus significant attention on managing
maintenance expenses.

The global commercial air transport fleet stands at nearly 24,000 aircraft. Approximately one-third is domiciled in North
America. Twenty percent is in Western Europe while Eastern Europe has five percent. Asia Pacific, China, and India
combined have slightly more than a quarter of the world’s fleet; however, the composition will be changing over the next
ten years. The North American share is expected to experience a decline of seven percent; any net growth is limited by the
large operators’ significant re-fleeting efforts. The Asian markets anticipate the highest growth rates, representing
opportunities for the MRO industry.

Globally, the 2015 air transport jet and turboprop MRO markets are expected to be $67.1B, piercing the $100B milestone
by 2025. This represents a healthy 4.1% compound annual growth rate (CAGR). The airframe, engine, component, and
line MRO market segments each have a different growth profile:

Airframe MRO 2015 forecast is $14.5B, increasing to $16.7B by 2025. This represents a 1.4% growth
rate, the slowest MRO segment during the forecast period. Airlines and their affiliated maintenance
providers maintain a solid hold on this market. The airframe MRO market is considered a low-margin,
labor intensive segment.

Engine MRO is expected to be $27.9B in 2015; growing at 5.3% annually it will reach $46.8B by 2025.
Unlike airframe MRO, the engine segment is largely contracted with the engine original equipment
manufacturers (OEMs) having a large share of the market. Engine MROs, recognizing the value of the
aftermarket, typically enjoy higher margin work.

Component MRO is forecast to be $12.4B in 2015, growing to $19.2B by 2025, representing a 4.4%
annual growth rate. Like the engine MRO business, much of the component segment is contracted,
though it varies greatly from one component type to the next. Similarly, the labor and material mix can
vary.

Line MRO is pegged at $12.3B in 2015 and forecast to grow at 3.7% annually to $17.8B by 2025. The
nature of line maintenance is less prone to contracting, and because the work is labor-intensive and
subject to limited ground times in a scheduled operation, the opportunities to take advantage of
economies of scale are limited.
3 Copyright © 2015 CAVOK, a division of Oliver Wyman
An examination of the flow of maintenance work among and between regions reveals that North America contracts more
airframe maintenance to the rest of the world than it provides to other regions. Engine maintenance, on the other hand, is
just the opposite. North America supports other regions with more capacity and throughput than its region demands.
Structural characteristics in the global economy such as labor rate differentials and complex supply chains have led to these
trends; however, as the differentiators between developed and developing regions narrow, North America will be ripe to
repatriate airframe maintenance currently contracted to other regions.

The business aviation fleet currently consists of nearly 31,400 aircraft requiring roughly $8.8B in MRO market activity in
2015. Nearly 67% (17,814) of the business aviation fleet is domiciled in North America.

In terms of economic activity, MRO plays a significant role. In the United States, approximately 4,023 firms with more than
218,000 employees operate in the civil MRO market (including airline employees). Small and medium-sized enterprises
(SME) account for 84% of these U.S. firms and 20% of all employees. There are 141,707 technicians in the U.S. and
approximately 37% are certificated.
Copyright © 2015 CAVOK, a division of Oliver Wyman 4
STATE OF THE WORLD

Seven years have passed since the last global financial crisis. Global recovery is weak and uneven, but economic
predictions for 2015 anticipate quickening economic growth. Emerging market and developing economies will continue
to be the largest portion of global growth, but output will remain below the levels seen in the 2010-2011 rebound. Led by
the United States and the United Kingdom, advanced economies are expected to pick up steam in 2015; however, the
spread between the growth rates of developed and developing economies is expected to widen slightly due to weakening
conditions that continue to linger in the advanced economies.

EXHIBIT 1: IMF World Economic Outlook Projections
Advanced Economies Emerging & Developing Economies World Output
6.0%
5.1% 5.0%
4.7%
5.0% 4.4%
3.8%
4.0% 3.4% 3.3% 3.3%
3.0%
2.3%
1.8%
2.0% 1.4%
1.2%
1.0%
0.0%
2012 2013 2014 2015

Source: IMF World Economic Outlook – October 2014

World gross domestic product (GDP) is expected to grow by 3.8% in 2015 according to the October 2014 International
Monetary Fund (IMF) World Economic Outlook with the factors underlying global economic activity continuing to improve.
Significant risks, including spillover effects of central bank policies, and escalating geopolitical tensions in Eastern Europe
still remain.

Advanced economies are expected to see a 2.3% increase in GDP for 2015, a half a point increase over 2014 and nearly a
full point over the growth experienced in 2013. Drivers of the predicted growth acceleration are efforts to stabilize debt to
GDP ratios by reducing deficit spending, and enduring loose credit monetary policies that will keep interest rates at or near
record lows.

The U.S. is forecast to experience 3.1% GDP growth in 2015 driven by an accommodative monetary policy, strengthened
household balance sheets, and a healthy housing market. Across the Pacific, with the Japanese economic revival remaining
problematic, expected growth in 2015 is only 1.5%.

The euro zone, moving slowly out of recession, is expected to grow by 1.3% in 2015; however, considerable financial,
economic, and political challenges remain. Unexpected weakness in Germany and worsening conditions in France creates
5 Copyright © 2015 CAVOK, a division of Oliver Wyman
concern. Policymakers face significant challenges in restoring confidence in the financial sector; high levels of private and
public debt and unemployment create political instability risks. The euro zone priority is to achieve strong growth and
increase inflation, which implies that the euro zone will continue to loosen monetary policy, and may go as far as
purchasing sovereign assets if economic conditions do not improve.

Emerging and developing economies, including China, are expected to grow at 5.0% in 2015. Exports – driven by stronger
growth in advanced economies and stronger domestic demand encouraged by low levels of unemployment – are expected
to support this growth. While the emerging and developing economies are expected to experience the strongest growth
since 2012, their output will remain below the growth rates achieved during the 2010-2011 rebound. This reflects the long
lasting structural factors affecting all economies. Even as residential investment continues to slow in China, GDP is
projected to sustain its high growth at 7.1% in 2015, down just 0.3% from 2014. China’s growth in both 2014 and 2015 is
primarily the result of new tax relief policies adopted in the first half of 2014, increased infrastructure spending, and cuts
in required reserve ratios.

Growth in India is expected to increase substantially to 6.4% as demand for exports and investments continue.

In contrast to the two aforementioned high growth countries, the Commonwealth of Independent States is projected to
grow a mere 1.6%, reflecting the region’s deteriorating economic and geopolitical conditions. The low growth is due in
part to the situation in Ukraine, resultant sanctions placed upon Russia, and currently low oil prices.

The weak and uneven growth in GDP along with rising geopolitical tensions also negatively impact trade. In 2015, the
World Trade Organization projects global trade growth at 4.0%. Exports are projected to increase by 3.8% in developed
economies and 4.5% in developing economies while imports are expected to rise by 3.7%% in developed economies and
4.5% in developing economies.

There are signs that growth is picking up in both developed and developing countries, but the world continues to face a
fragile recovery. Economic issues have significant impact on the airline and MRO industries. Business environments
become increasingly challenging when conditions worsen.

A bright spot that has developed in recent months is the price of crude oil. The price of oil went into free fall during the last
quarter of 2014 and it is not expected to recover in 2015. While the increased supply and reduced cost of oil has a positive
impact on the world’s regions, except the Middle East, in 2015, the World Bank is forecasting that oil prices will break $100
per barrel again within the decade. With this in mind, market participants should carefully consider hedging options once
the price of oil has stabilized and begins to trend higher.

Copyright © 2015 CAVOK, a division of Oliver Wyman 6
STATE OF THE AIRLINE INDUSTRY

The graph below depicts IATA’s estimate that 3.3 billion passengers and 51.3 million metric tons of cargo were carried in
2014. The growth in traffic together with airline capacity discipline created first-time passenger load factors of 80%,
allowing the industry to record an estimated $19.9 billion in post-tax profits.

EXHIBIT 2: IATA Global Passenger and Freight Traffic Growth Forecasts

Post-Tax Profits Passenger Traffic Freight Traffic
$30 8.0%
S
N
O
IL 7.0%
L
IB $25
6.0%
S
E
STIFO $20 5.0% TAR H
R TW
P
X $15 4.0% O
A R
T G
T C
SO 3.0% IF
P $10 FA
R
T
2.0%
$5
1.0%
$- 0.0%
2013 2014 2015F

Source: IATA Industry Financial Forecast – June 2014

IATA believes the key elements for the best financial performance since 2010 are the development of ancillary revenue
sources, industry restructuring, falling fuel prices and the strong cyclical economic upturn. IATA also understands that the
upturn in advanced economies is a result of loose monetary policies, reduced budgetary tightening, and improving
balance sheets for households and banking.

Despite the presence of adverse developments in Ukraine, the stuttering euro area recovery, and growing terrorist and
militant actions in the Middle East, with low fuel prices expected throughout the year, the industry is forecast to improve
upon last year’s performance.

In 2015, passenger traffic is expected to be up 7.0%, well above the 20 year average of 5%, and cargo volumes are expected
to grow by 4.5%. The anticipated 7.3% passenger capacity growth will slightly exceed traffic growth, pushing the expected
load factor down a few tenths.
7 Copyright © 2015 CAVOK, a division of Oliver Wyman
In addition to the strong traffic growth, airlines are expected to return a net profit of $25.0B in 2015, creating back-to-back
years of record profits. This increase in financial performance will be driven by marginally higher economic growth
expected in 2015, continued increases in revenue from ancillary services, improvements to industry structure and
efficiency, and substantially lower fuel prices.

EXHIBIT 3: Spot Prices of Crude Oil and Jet Fuel per Gallon
WTI Crude Oil Brent Crude Oil Kerosene-Type Jet Fuel
$4.00
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$-
44445555666677778888999900001111222233334444
00000000000000000000000011111111111111111111
-naJ-rpA-luJ-tcO-naJ-rpA-luJ-tcO-naJ-rpA-luJ-tcO-naJ-rpA-luJ-tcO-naJ-rpA-luJ-tcO-naJ-rpA-luJ-tcO-naJ-rpA-luJ-tcO-naJ-rpA-luJ-tcO-naJ-rpA-luJ-tcO-naJ-rpA-luJ-tcO-naJ-rpA-luJ-tcO

Source: U.S. Energy Information Administration

IATA is forecasting the price of jet fuel to average $2.38 per gallon in 2015, down from $2.78 per gallon in 2014, and thus
fuel costs are expected to decrease in 2015 as a percentage of airline operating costs to 26%. For the past several years,
fuel costs as a percent of total airline expenses have been hovering around 30%. Notwithstanding current low fuel prices,
improving fuel efficiency will continue to be a priority for airlines in 2015, and for the foreseeable future.

IATA’s 2015 forecast represents the most upbeat outlook the industry has seen in several years as traffic and profitability
are forecast to continue to improve; however, the airline industry remains a comparatively low margin business, and the
balance between profit and loss remains delicate. Net margins are expected to remain weak at 3.2% in 2015, and as such,
the industry remains highly susceptible to negative shocks.

Copyright © 2015 CAVOK, a division of Oliver Wyman 8
GLOBAL AIR TRANSPORT
FLEET FORECAST

The global commercial air transport fleet currently stands at nearly 24,000 aircraft and is expected to grow 3.9% annually
from 2015-2020 to 29,003 aircraft. Growth is expected to slow to 3.5% per year during the second five year period, bring
the total number of in service aircraft up to 34,408 by 2025.

EXHIBIT 4: 2015-2025 Global Fleet Forecast by Aircraft Class
Narrowbody Widebody Regional Jet Turboprop
40,000
34,408
35,000
3,232
1.0%
29,003
30,000 2,906
-2.0%
3,079
2.5%
25,000 23,927 4.5% 7,181
3,222
-1.0%
2,721
20,000 3,396 4.2% 5,753
4.5%
4,686
15,000 5.2%
21,089
10,000
16,949
13,124
5,000
0
2015 2015-2020 2020 2020-2025 2025
CAGR CAGR

Source: betterinsight™ and PlaneStats

9 Copyright © 2015 CAVOK, a division of Oliver Wyman