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The Surplus Parts Market
Washington DC - 16 June 2014
Presented by:
Richard Brown Principal
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Today’s Agenda
Aircraft Retirement Tsunami
Surplus Parts Market
Implications
joined ICF in 2011 joined ICF in 2007
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AIRCRAFT RETIREMENTS OUTLOOK
Source: ICF International Analysis; FlightGlobal ACAS 2013, ATA, US Federal Reserve
Fleet Demographics––the 1990 Bulge Historically Low Interest Rates (%)
New Technology & OEM Production Rates Exacerbate Retirements
Historically High Jet A Fuel Prices ($/BBL)
0
500
1,000
1,500
2,000
1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
Air transport deliveries 0
2
4
6
8
10
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
10-Year US Treasury Bond Yield – though cost of capital is now trending up
0
20
40
60
80
100
120
140
1991 1994 1997 2000 2003 2006 2009 2012
Four market factors are reshaping aircraft economics and MRO
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Historically, the aircraft retirements as percentage of active fleet has increased from one percent to 2.5% in 2012
AIRCRAFT RETIREMENTS OUTLOOK
Historical Air Transport Annual Aircraft Retirements
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
0
100
200
300
400
500
600
700
800
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
# Retirements
Retirement as % of active fleet
1990-99 Average 170
2000-09 Average 400
% Active Fleet
Includes Turboprops
Source: Airline Monitor Jun 2013, FlightGlobal ACAS Sept 2013
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# of annual
retirements
In 2013 ~80% of all retirements were aircraft of 1970/80s technology
Historical Air Transport Retirements By Technology
AIRCRAFT RETIREMENTS OUTLOOK
Source: FlightGlobal ACAS, ICF International Analysis
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AIRCRAFT RETIREMENTS OUTLOOK
In the last decade ~55% retired aircraft were narrowbodies
~4,750
A/C
17%
11%
9% 9%
11%
8%
5%
4%
26%
55%
18%
14%
8% 5%
2003-2013 Total retired aircraft (By aircraft category)
2003-2013 Total retired aircraft (By aircraft type)
~4,750
A/C
Source: FlightGlobal ACAS, ICF International Analysis
737-1/200
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Average retirement ages appear to be trending down slightly for certain aircraft…
AIRCRAFT RETIREMENTS OUTLOOK
0
5
10
15
20
25
30
35
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Ave
rag
e A
ge
of
Re
tire
me
nt
Year Retired
Narrowbody
Widebody
Trends in Average Age of Aircraft Retirements
Source: FlightGlobal ACAS, ICF International Analysis
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…and the impending arrival of aircraft with new technology engines will impact retirements for current models
AIRCRAFT RETIREMENTS OUTLOOK
Notes: (1) Survivor curves represent delivery-weighted curve fits. (2) Late A320-200 aircraft powered by CFM56-5B and V2500-A5 engines.
Source: ICF International Analysis; FlightGlobal ACAS 2013
A320-200 (CFM56-5B/V2500-A5) Survivor Curve Oldest aircraft
approaching 20 years
Median retirement age appears on track for less than 25 years
How will the A320neo affect retirements?
0
50
100
150
200
250
300
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0 5 10 15 20 25 30 35 40D
eliv
eri
es
In S
erv
ice
Pro
bab
ility
Deliveries (RHS)
Survivor Curve (LHS)
Average Narrowbody (LHS)
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For the first time, annual retirements are expected to reach over 1,000 aircraft by 2023
AIRCRAFT RETIREMENTS OUTLOOK
Air Transport Annual Aircraft Retirements
Includes Turboprops
Source: FlightGlobal ACAS Dec 2013, ICF International Analysis
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
0
200
400
600
800
1,000
1,200
# Retirements
Retirement as % of installed fleet
% Installed Fleet
ICF International forecast
1990-99 Average 171
2000-09 Average 410
2010-23 Average 751
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45-50% of new aircraft deliveries in the next decade will be for aircraft replacements, versus the historical norm of ~20 %
AIRCRAFT RETIREMENTS OUTLOOK
Source: ICF International Note: includes turboprops and regional jets
Air Transport Retirements 2014 – 2023
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
Composition of Demand 2014 – 2023
17,700 Deliveries…
…of which 8,100 to offset retirements
..and 9,600 for
new growth
Retirements historically drive 20% of deliveries
46%
54%
A320 Family
737 Classic
767
CRJ-200
737NG MD-80
ERJ-135 747-400
757-2/300
777-2/300
~ 8,100
17%
10%
6%
5%
6%
OTHERS
4% 6%
3% 3%
3%
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Turboprop
Regional Jet
The civil air transport fleet is almost 27,000 aircraft
SURPLUS PARTS MARKET
Source: FlightGlobal ACAS September 2013, ICF International Analysis
North America
Asia Pacific
Europe
South America
Africa
17%
50% 15%
18%
32%
26%
25%
8% 5% 5%
2013 Global Air Transport Fleet (Total = 26,770)
Aircraft Type
Region
Narrowbody Jet
Widebody Jet
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15%
17%
22%
40%
6%
The current air transport MRO market is ~$61B; Asia Pacific has overtaken Europe for the #2 position
SURPLUS PARTS MARKET
31%
27%
26%
7%
5% 4%
2013 Global MRO Demand
(Total = $60.7B)
Source: ICF International
Forecast in 2013 $USD, exclusive of inflation
MRO Segment
Region
Line
Modifications
Airframe
Components
Engine North
America
Asia/ Pacific
Europe
Middle East
South America
Africa
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$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
2013 2023
Modifications
Heavy Airframe
Line
Components
Engine
Air transport MRO spend is expected to grow to $89B by 2023, at 3.9% per annum
SURPLUS PARTS MARKET
Global Air Transport MRO Spend
2013–2023
2.8%
3.4%
4.3%
3.7%
15%
17%
22%
40%
13%
16%
23%
40%
6.4%
6%
7%
CAGR
3.9% Average
Highlights
Average growth is forecast to be 3.9% CAGR to $89B in 2023
The strongest driver of growth is expected to be the engine market
MRO growth is greater than fleet growth – driven primarily by fleet demographics
Upgrade demand drives high modifications growth
Source: ICF International
Forecast in 2013 $USD, exclusive of inflation
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Today, spending on air transport surplus parts is ~$3.5B
SURPLUS PARTS MARKET
Engine
Components
Airframe
5%
65%
30%
Air Transport Surplus Parts Market* ~$3.5 Billion
* Sales to end customers; excludes intra-dealer sales
Surplus material for engines predominantly consist of piece parts (e.g., LLPs)
Component surplus are primarily rotables LRUs; Demand is driven by AOGs, BER and provisioning
Typically slow moving
structural parts
Source: ICF International
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Surplus dealers now obtain over 80% of their inventory from parted-out aircraft
SURPLUS PARTS MARKET
54%
82%
26%
8% 20% 10%
0%10%20%30%40%50%60%70%80%90%
100%
2007 2013
Aircraft Part-Out
Direct Purchase From Airline
Purchase From Surplus Dealer
Supplier Channels for Obtaining Surplus Materials
Leaner airline inventories
Improved material planning (and MRO IT capabilities)
Increased component pooling agreements
OEM after-market material control strategies
ICF International Insight
Source: ICF International
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ICF forecasts the surplus market to grow to $6.2B by 2023 – a 5.5% CAGR
SURPLUS PARTS MARKET
1.1
2.2
3.8 0.8
1.3
2.2
0.1
0.1
0.1
2007 2013 2023
$3.5B
Engine
Component
Airframe
$2.0B
$6.2B
• Significant increase in interest rates • Decrease in fuel price • Delays in new aircraft introduction • Successful OEM surplus strategies
• Moderate increase in interest rates • Fuel prices slightly lower than current • Minor delays to new aircraft programs • OEM have limited impact on surplus
• Ultra low interest rates • Fuel price remains high • Increased retirements • On time aircraft delivery • No OEM counter measure
Low Growth Scenario
Nominal - Assumed
High Growth Scenario
Source: ICF International. Forecast in 2013 constant $
ICF International Air Transport Surplus Market Growth Forecast ($B)
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Several trends are shaping the surplus parts market
SURPLUS PARTS MARKET
Growing demand for integrated Component
MRO Solutions (Including Asset Mgt)
Proportion of fleet owned by lessors
is increasing
Market penetration & volume of surplus is
increasing
Leasing & surplus trading businesses are converging; Businesses are integrating
across the value chain
Aircraft Retirements (Including younger
models)
Growing capital market interest
Surplus Parts
Market
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There are many changes in the surplus parts value chain as suppliers pursue broader offerings for their customers
Aircraft & Engine Leasing
Aircraft & Engine
Disassembly
Surplus Parts
Trading
Asset Management
Component & Engine
Repair
AJ Walter acquires ex-Aveos component facility moving into component repair and asset management
GA Telesis acquires Finnair Engine Services moving from disassembly / trading into component & engine repair
ILFC acquires AeroTurbine (aircraft & engine disassembly and surplus trading)
Former Aveos component
facility
GECAS acquires Memphis Group adding disassembly and surplus trading capabilities
Lufthansa acquires 15% holding in AeroTurbine
Finnair Engine Services
Upstream Downstream
Kellstrom acquires AirLiance, merging surplus operations
Source: ICF International Research
SURPLUS PARTS MARKET
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Growing surplus usages means cost savings for operators and lumpy aftermarket demand for OEMs
SURPLUS PARTS MARKET
Industry MRO Historical Growth (year-over-year)
Surplus is one of several factors contributing to “lumpy” aftermarket demand
Surplus has the largest impact on engines and rotables for mature aircraft
-4%
-2%
0%
2%
4%
6%
8%
10%
4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13
Source: Canaccord Genuity 3Q13, based on a survey of over 100 operators and MROs
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The aircraft part-out and recycling business will continue to grow as a result of a confluence of several key factors
SURPLUS PARTS MARKET
1. Continued increase in aircraft retirements
2. Strong global demand for surplus material
3. Growth and expertise of global parts distribution firms
4. Low cost of capital (low interest rates)
5. Increased demand for raw material (recycled metal)
(former Memphis Group)
Example Part-Out Players
Indianapolis
Arizona
France
U.K. Florida
Victorville
Oklahoma
Source: ICF International Research
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IMPLICATIONS
Independent MROs How to secure access to new
aircraft IP, data, manuals? Partnerships? JVs? Surplus/PMA/DER usage?
Integrators Increasing
competition from all OEMs
JV opportunities? Repair vs. replace
based strategies? Data access?
Component OEMs Continued focus
of aftermarket Increased
support in growth regions via licensed service centers
Competing with integrators for component contracts
Airframe OEMs Drive to grow services revenue Competing with integrators Key challenge is to demonstrate value/success
Relations between suppliers such as OEMs, integrators and independent MROs continue to evolve
Source: ICF International
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Surplus players are evaluating how to grow beyond ‘trading’ to offer more value added services
IMPLICATIONS
• The oversupply of sunset and some mature products is causing downward pricing pressure
• Whether to add additional services such as MRO (airframe / engine or component) or services such as component leasing / asset management
• Growth opportunities in emerging regions such as Asia
• Consider aligning with OEMs
Source: ICF International
Key Surplus Parts Provider Implications
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IMPLICATIONS
• New parts sales reduced by surplus for affected mature aircraft
• Engine OEMs have been the main OEM participants in the surplus market; System OEMs are so far limited - only Honeywell and Rockwell Collins have active surplus trading divisions
• MRO and spares activity for vulnerable aircraft/engines reduced by short-term leases, inventory burn-down and consumption of spares
• New aftermarket opportunity for OEMs – sell surplus / pre-owned parts. Will more system OEMs actively participate in surplus parts?
Aftermarket revenue streams of Engine and Component OEMs will continue to be challenged by surplus
Key Engine / Component OEM Implications
Source: ICF International
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IMPLICATIONS
• Adapt capabilities to align with shifting aircraft utilization patterns and demographics
• Migration of fleet to new technology aircraft strengthens position of OEMs
• Downward MRO pricing pressure where in competition with surplus aircraft, components and engines
• Leverage availability of surplus parts to reduce maintenance costs…and prices
• Develop value propositions to help airlines cope with sunset aircraft
Independent MROs face challenges and opportunities from the new environment
Source: ICF International
Key Independent MRO Implications
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IMPLICATIONS
Airlines are well-positioned to capitalize on the low interest rates and maintenance cost savings opportunities
• Historically low interest rates and easy access to capital resulted in record breaking aircraft orders by airlines in recent years
• New and more fuel efficient aircraft reduces aircraft operating cost
• Airlines can also lower maintenance burden with new aircraft maintenance honeymoon and retirement of older aircraft with higher maintenance requirements
• High retirement rates and the subsequent availability of surplus parts provide airlines with substantial maintenance cost savings opportunities
• Airlines can save 30% or more by acquiring parts, rotables and aeroengines from surplus dealers that salvage components from retired aircraft
Source: ICF International
Key Airline Operator Implications
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Thank You!
M&A Commercial Due Diligence
MRO Market Research & Analysis
Aerospace Manufacturing Strategy
Aviation Asset Valuations & Appraisals
MRO Cost & Performance Benchmarking
MRO Information Technology (IT) Assessment
MRO Strategic Sourcing Support
Supply Chain Management
LEAN Continuous Process Improvement
Military Aircraft Sustainment
ICF International’s Aerospace & MRO advisory services include the following:
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Richard Brown Principal
Aerospace & MRO Advisory
+44 (0)7718 893 833 [email protected]
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