revenge of the engine pmapmaparts.org/annualconference/2018flpresentations/berger.pdf · source:...

Jonathan M. Berger

2018 MARPA Annual Conference

Orlando, Florida

October 25, 2018

Revenge of the Engine PMA

1

Agile. Global. Independent.

COMPANY INTRODUCTION

Alton Aviation Consultancy is a boutique aviation consulting firm

with deep domain expertise across the aviation value chain

Aircraft Leasing &

Financing Advisory Airlines

Aviation &

Aerospace Investors

Business &

General Aviation

Aerospace Manufacturers

& Supply Chain MRO & Aftermarket Airports Specialty Projects

In China, Alton Aviation Consultancy is known as 德世国际航空咨询（北京）有限公司, or De Shi.

Alton supports a global client base from offices in the U.S., Europe,

China, Hong Kong, and Tokyo with additional associates worldwide

COMPANY INTRODUCTION

411 Fifth Avenue

Suite 801

New York, New York

10016

USA

+1 212 256 8488 [email protected]

New York

8 Guanghua Dongli

China Overseas Plaza

South Tower, Floor 11,

Suite A053

Chaoyang, Beijing 100020

China


Beijing

136 Des Voeux Road

Suite 1202

Central

Hong Kong

+852 8191 3028 [email protected]

Hong Kong

Taiyo Seimei

Shinagawa building

28th Floor, 2-16-2 Konan,

Minato-ku, Tokyo 108-0075,

Japan


Tokyo

No. 1 Grants Row

Lower Mount Street

Dublin, Ireland


Dublin

3

TODAY’S AGENDA

Alton Fleet & MRO Forecast

MRO Industry Trends

Revenge of the Engine PMA

4

ALTON FLEET & MRO FORECAST

Historically, fleet growth has been directly correlated to GDP…

COMMERCIAL AIR TRANSPORT FLEET FORECAST

5 Source: CAPA, USDA ERS, Alton analysis

Fleet and GDP Growth by Region (1997 – 2017)

10%

7% 7%

6%

5%

3%

3.8%

4.4% 4.2%

2.5%

1.8%

2.2%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

0%

2%

4%

6%

8%

10%

12%

14%

Middle East Asia-Pacific Africa Latin America Europe North America

% Fleet growthGDP

Avg. GDP

Growth/yr

Avg. Fleet

Growth/yr

…perhaps a better determinant of future fleet growth is the so-called

“Disneyland factor”; the growth rate of a country’s middle class


6 Source: Airbus Global Market Forecast 2017-2036, Alton analysis

103%

6%

51%

2%

149%

41%

75%

0%

20%

40%

60%

80%

100%

120%

140%

160%

-

500

1,000

1,500

2,000

2,500

3,000

20

Ye

ar

Gro

wth

Rate

Ho

us

eh

old

s (

mil

lio

ns

)

2016203620 yr % growth

Middle Class Growth by Region (2016 – 2036)

7 Source: CAPA, Alton analysis

Today’s commercial air transport fleet consists of approximately 28,000

aircraft, with Asia Pacific now equal in size to North America


Narrowbody Jet

Regional Jet

Turboprop

Widebody Jet

51%

24%

9%

16%

8,400

61%

11%

10%

18%

6,600

63%

5%

10%

22%

8,400

59%

17%

14%

10%

2,100 41%

17%

28%

14%

1,300

39%

7%

3%

51% 2,100

Growing to 44,000 aircraft by 2028

3.8% CAGR

2028

2018

8 Source: Alton Analysis, all figures constant dollars ($2018 USD)

Today’s commercial air transport MRO market demand is approx. $69B,

growing to $103B by 2028 – an annualized growth rate of 4.1%

COMMERCIAL AIR TRANSPORT MRO FORECAST

$0 $20 $40 $60 $80 $100 $120

World Total

Asia Pacific

North America

Europe

Middle East

Latin America

Africa

$103B

10yr CAGR

5.0%

5.0%

6.5%

2.2%

1.6%

5.7%

$0 $20 $40 $60 $80 $100 $120

World Total

Engine

Components

Line

Airframe Heavy

Modifications

10yr CAGR

$103B

6.1%

2.9%

3.9%

3.1%

4.4%

$0 $20 $40 $60 $80 $100 $120

World Total

Asia Pacific

North America

Europe

Middle East

Latin America

Africa

$69B

$3.8B

$7.4B

$16.4B

$16.9B

$22.6B

$2.4B

$0 $20 $40 $60 $80 $100 $120

World Total

Engine

Components

Line

Airframe Heavy

Modifications

$69B

$6B

$8B

$13B

$14B

$29B

9

THE CIRCLE OF LIFE

10

The circle of life…

2018 REFLECTIONS

Source: Alton Aviation Consultancy

“Farewell to the Queen” “The C Series

Resurrection…the A220”

C Series Aircraft Limited Partnership (CSALP)

11

THE YEAR AVIATION BLINKED

12 Source: IATA, Alton analysis

Is the airline industry really post-cyclical?


$66B -6%

-4%

-2%

0%

2%

4%

6%

8%

Financial Crisis Sept. 11 1st Gulf War Oil Crisis

Global Airline Net Profit Margin

8 years 6 years 2 years 7+ years

13

“Policy matters…”: The United States is one of only two of the global

destinations to see a decline in long-haul travel


Canada 21.2%

Thailand 13.9%

Italy 2.2% China 9.3%

Saudi Arabia 20.3%

United Arab Emirates 16.5%

Germany 8%

United Kingdom 17.5%

France 4% Turkey (-6.7%)

United States (-6%)

Australia 22%

Percent Change in Arrivals from 2015 to 2017

Source: US Travel Association, Bloomberg

Estimated economic impact:

$4.6B in lost spending

40,000 lost jobs

“Policy matters…”: US in-bound market share fell in 9 out the top 10

international source markets


China (2%)

United Kingdom (14%)

Japan (5%)

South Korea 0%

Brazil (25%) Australia (14%)

India (14%)

France (21%)

Italy (11%)

Source: US Travel Association

Germany (15%)

Percent Decrease in US International In-Bound Market Share from 2015 to 2017

14

15 Source: Federal Reserve, Alton analysis

Are interest rates the new fuel price?


Alton Insight

OEMs – Negative: Customer financing costs

increase; more difficult to sell new aircraft

MROs - Positive: Used aircraft stay in

service longer so volumes increase

Airlines - Neutral: Inclined to retain more

used aircraft; aircraft overall cost more to

own and lease, so incremental less capacity

Lessors – Neutral: Cost of financing

increases; value of new aircraft incrementally

less, value of used aircraft incrementally

more

Parts Traders – Negative: More difficult to

source used aircraft

Financial Investors - Negative: Value of

outstanding bonds decline

US Interest Rates: 2007 thru 2020

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Historic Forecast

THE POWER OF LITTLE DATA & THE EVOLUTION OF MRO

Source: Alton analysis

The MRO industry and aerospace supply chain continues to

evolve driven by technological, commercial, and geopolitical

events


Source: Alton Aviation Consultancy

Pre-Globalization Era of Self-Sufficiency

Manufacturers

with fully

integrated supply

chains

Limited

international

airline

networks

Aircraft and inventory

owned, limited leasing

Airlines build/operate

own maintenance

facilities

Rise of LCCs

and PBH

agreements

Globalization 1.0 Era of Labor Cost Arbitrage

NAFTA

Airline

bankruptcies &

consolidation

Open skies

agreements

Rise of

the BRICS

End of cold

war

Global Financial

Crisis

Outsourcing non-core

competencies New oil/gas drilling

technology

Growth of the internet &

advanced

communications

Globalization 2.0 Era of Machine Learning

Blockchain

Technology

Global labor rate

convergence

Advanced manufacturing

technology (robotics,

automation, 3D printing)

U.S. energy

revolution

Cloud

computing

Advanced

prognostics & big

data analytics

1985 2010

Source: Alton analysis


lit·tle da·ta

Noun: Little Data

Definition: Life before “Big Data”…

Traditional, old school engineering design,

innovation, entrepreneurship, and leadership

Source: Alton analysis, Safety - ICAO 1977 vs 2016, MTBR – Old gen vs new gen narrowbody jet engine, Productivity – 15 years FAA Licensed

Technicians, PMA – 25 years FAA approved parts, Cost – 25 years FAA Form 41 Maintenance Cost per ASM, TDR – Old Gen vs New Gen Aircraft

The aviation & MRO industry benefits of “Little Data” have

been substantive and impressive


$66B

Then Now

Safety: 1,700 59 97%

Engine

MTBR: 6,000 25,000 416%

Productivity: 380,000 320,000 16%

PMA Parts: 10,900 1,350,000 12,000%

Cost: 0.020 0.008 60%

Alton Insight

Engineering design and maintenance

program development

Business model structure and strategy

(e.g. creation of LCC)

Supply chain innovation (e.g. use of

surplus material and PMA, strategic

sourcing, consignment programs, etc.)

Commercial innovation (e.g. cost per

flight hour programs for engines and

components)

Creative financing (e.g. sale-leaseback

programs) Technical

Dispatch Rate: 99.20 99.80 0.6%

20

INDUSTRY CONSOLIDATION

21

“A new golden age of aircraft cabin interiors”

- J. Berger: https://www.linkedin.com/pulse/new-golden-age-aircraft-cabin-interiors-jonathan-berger/

MRO INDUSTRY TRENDS

Source: Alton Analysis

Airbus Interiors

Services (AIS)

Three business lines:

1. Tailored equipment

(SFE and BFE)

2. Upgrade solutions

(cabin & connectivity)

3. Innovative solutions

Airbus launches new

subsidiary

Joint venture with car

seat manufacturer

Adient

Focus on reducing

production delivery

delays and aftermarket

growth

Boeing forms aircraft seat

joint venture

$6.4bn transaction (and

subsequent $30B UTC

acquisition)

Integration of seats, IFE,

and onboard

connectivity

Expand cabin IoT

capabilities

Rockwell Collins acquires

B/E Aerospace

$9bn transaction

Create the world’s No.3

aerospace supplier

Improve Zodiac’s

production efficiency

and customer

satisfaction

Safran acquires Zodiac

https://www.linkedin.com/pulse/new-golden-age-aircraft-cabin-interiors-jonathan-berger/















22

Major aircraft OEMs and tier 1 suppliers continue to consolidate, vertically

integrate, and partner/JV

MRO INDUSTRY TRENDS

Source: Alton Analysis

C Series Aircraft Limited Partnership (CSALP)

Airbus Interiors Services (AIS)

(Pending)

(Pending)

Boeing Avionics

(Pending)

Boeing / SAFRAN APU

23

A RISING TIDE LIFTS ALL CARGO AIRCRAFT

24 Source: CAPA, IATA, Alton Analysis

A rising tide lifts all cargo aircraft…

MRO INDUSTRY TRENDS

25

A rising tide lifts all cargo aircraft (con’t)

MRO INDUSTRY TRENDS

Source: Source: Boeing, US Dept. of Commerce, FTI Consulting, Internet Retailer, China Daily, GB Times, China Xinhua, Alton Analyses

“Amazon Air”, recently renamed from

Amazon “Prime Air” to better distinguish

the airline from its new drone-based

delivery service

The virtual cargo carrier’s current fleet

consists of 40 Boeing 767s; in talks for

additional P2F conversions and new

freighters

Amazon Air’s new $1.5B hub in Cincinnati

International Airport (CVG) is projected to

have capacity to handle approx. 100

freighters

In Europe, Amazon utilizes a single Boeing

737-400(F) operated by ASL Airlines France

in the UK, France, Spain, and Italy

Alton Insight

26

REVENGE OF THE ENGINE PMA

27

Alton Insight

From emissions, to noise, to time-

on-wing & MTBR, the CFM56-5/7 and

V2500 exceeded expectations on

virtually every performance metric

Many would argue the engines were

too durable (shop visits driven by

LLP, not EGT)

Much to the delight of the MRO

supply chain, the infamous shop

visit “bow wave” has finally arrived,

creating competition for shop visit

slots

Source: Alton forecast

Current generation of narrowbody engines propelled the industry to new

heights in aero-engine performance and reliability


Cumulative Engines by

Year of Delivery

0

5,000

10,000

15,000

20,000

25,000

30,000

CFM56-7B

CFM56-5B

V2500 7,522

12,922

6,138

28 Source: Alton forecast

Annual deliveries of new technology engines will see dramatic increases,

testing the scalability of the production supply chain


Annual Deliveries of New

Technology Engines

0

500

1,000

1,500

2,000

2,500

3,000

3,500CFM LEAP

PW1000G

Trent 1000

2,098

914

149

Alton Insight

Historically consistent, several new

technology engines are

experiencing operational “teething

pains”, resulting in significant

volume of unscheduled shop visits

CFM LEAP - turbine blade issues

Pratt & Whitney PW1000G Geared

Turbo Fan - knife-edge seals and

cooling issues

Rolls Royce Trent 1000 - fan blade

issues

29 Source: CAPA, Alton analysis

Fleet retirements are down from peak levels


$66B

Alton Insight

Typical aircraft life is approx. 25

years; there was a large spike in

aircraft deliveries in the late 1980’s

Airline retirement decisions are

primarily driven by fuel prices and

airline financial health

Surge in aircraft retirements spawned

the aircraft tear-down/part-out

industry; was very disruptive to OEM

new parts sales

Growth of the used surplus material

(USM) market had a significant impact

on PMA growth

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

0

500

1000

1500

2000

2500

3000

3500

Aircraft Retired

% Fleet

Avg. 464

Avg. 144

Avg. 601

Avg. 294

% Fleet Total Aircraft

30 Source: Alton analysis

Jonathan M. Berger: https://www.linkedin.com/pulse/revenge-engine-pma-jonathan-m-berger/

Revenge of the Engine PMA: “The perfect storm”


New engine teething pains driving high

volume of unscheduled shop visits

1

Mature engine routine shop visits at

an all time high

2

Reduced retirements and part-outs

limiting surplus part availability

3

Engine piece part supply chain unable

to meet demand to support production

and MRO

4

1. Engine piece parts shortages

(MRO and production)

2. Limited MRO slot availability

3. Engine shop visit TAT delays

4. New aircraft delivery delays

5. Lack of surplus engine material

6. Higher shop visit costs

7. Higher spare engine lease

costs

8. Grounded aircraft (gliders)

Industry Impact

https://www.linkedin.com/pulse/revenge-engine-pma-jonathan-m-berger/











ALTONAVIATION.COM

NEW YORK | HONG KONG | BEIJING | TOKYO

Jonathan M. Berger

+1 212 301 0573

[email protected]

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