the surplus parts market - asa current air transport mro market is ~$61b; asia pacific has overtaken...

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The Surplus Parts Market

Washington DC - 16 June 2014

Presented by:

Richard Brown Principal


Today’s Agenda

Aircraft Retirement Tsunami

Surplus Parts Market

Implications

joined ICF in 2011 joined ICF in 2007


Aircraft Retirement Tsunami


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


Historically, the aircraft retirements as percentage of active fleet has increased from one percent to 2.5% in 2012


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


# of annual

retirements

In 2013 ~80% of all retirements were aircraft of 1970/80s technology

Historical Air Transport Retirements By Technology


Source: FlightGlobal ACAS, ICF International Analysis



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


737-1/200


Average retirement ages appear to be trending down slightly for certain aircraft…


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



…and the impending arrival of aircraft with new technology engines will impact retirements for current models


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)


For the first time, annual retirements are expected to reach over 1,000 aircraft by 2023


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


45-50% of new aircraft deliveries in the next decade will be for aircraft replacements, versus the historical norm of ~20 %


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%


Surplus Parts Market


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


15%

17%

22%

40%

6%

The current air transport MRO market is ~$61B; Asia Pacific has overtaken Europe for the #2 position


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


$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


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


Forecast in 2013 $USD, exclusive of inflation


Today, spending on air transport surplus parts is ~$3.5B


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



Surplus dealers now obtain over 80% of their inventory from parted-out aircraft


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



ICF forecasts the surplus market to grow to $6.2B by 2023 – a 5.5% CAGR


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)


Several trends are shaping the 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


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



Growing surplus usages means cost savings for operators and lumpy aftermarket demand for OEMs


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


The aircraft part-out and recycling business will continue to grow as a result of a confluence of several key factors


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


Implications


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



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


Key Surplus Parts Provider Implications


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



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


Key Independent MRO Implications


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


Key Airline Operator Implications


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:


Richard Brown Principal

Aerospace & MRO Advisory

+44 (0)7718 893 833 [email protected]

icfi.com/aviation

mailto:[email protected]

mailto:[email protected]

the surplus parts market - asa current air transport mro market is ~$61b; asia pacific has overtaken...

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