Key Battlegrounds in the Aftermarket

ICF International | icfi.com © ICF 2015 00
Key Battlegrounds in the Aftermarket
AISCT – 16 September 2015 – Toulouse, France
Presented by:
David Stewart
Global Lead, Aerospace & MRO Practice  ICF International

Agenda
Key Battlegrounds in the
Aftermarket
Context
Takeaways
The Battlegrounds

Agenda
Aftermarket
Context

The global air transport industry has been completely
transformed in the last thirty years
CONTEXT
Pre-1980s 1980 – 2000 Post-2000s
Airlines
 Largely state-owned
(except US)
 Regulated fares & routes
 Point-to-point routes
 Restrictive route rights
 Mix of state & privately
owned
 Increasing liberalization of
fares & routes
 Hub-and-spoke model
 First-generation LCCs
 Code-sharing leading to
launch of global alliances
 Private ownership
 Pricing transparency (Internet)
 Global spread of LCC’s
 Business model convergence
between LCC’s & legacies
 Alliances & immunized JV’s are
majority of global capacity
 More recently, significantly
increased focus on ROIC
Airlines have evolved from a regulated industry towards greater liberalization

The aftermarket evolved from being an afterthought to a market
of significant importance
CONTEXT
1980 – 2000 Post-2000s
Airlines
 Maintenance mainly a cost
centre
 LCC’s drive new approach to
managing maintenance
 Increased outsourcing
 US airline bankruptcies and
restructuring
 Limited focus on aftermarket;
Rolls-Royce ahead of the
game
 Significant growth of point-of-
aircraft sale MRO contracts by
engine OEMs
 Increasing economic imperative for
Component OEMs given design
investment on new programmes
OEMs
MROs  Supply mostly in-house – few
large airline MRO suppliers
and hugely fragmented
independent sector
 Growth of integrated services
 Globalization of demand
The aftermarket has evolved from a cost centre to a highly competitive market

Aftermarket is significant at $135B, equivalent to 75% of the
value of current production
CONTEXT
Source: ICF International
Air Transport,
61%
Business &
General
Aviation, 14%
Civil Rotary
Wing, 3%
Military, 12%
Military Rotary Wing,
10%
Production:
$180.3B
Air Transport,
48%
Business &
General
Aviation, 9%
Civil Rotary Wing,
3%
Military, 27%
Military Rotary Wing,
13%
Aftermarket:
$135.1B
Aftermarket and Production Market Size (2015 $B)

Across the air transport MRO supply chain, engine and
component parts drive almost 60% of total margin
CONTEXT
Engine & APU
Maintenance
26%
Engine Parts
17%
Component
Maintenance
14%
Line Maintenance
11%
Airframe Heavy
Maintenance
10%
Component Parts
8%
Others
14%
% of
Total Revenue
Engine Parts
42%
Component
Parts
16%
Component
Maintenance
11%
Engine & APU
Maintenance
11%
Line
Maintenance
4%
Airframe Parts
4%
Other
12%
% of
Total Margin
2014 Air Transport MRO Revenue by Segment
Total = $97.3B
2014 Margin By Main Activity
Total = $23.9B

Engine OEMs have the most mature and strongest OEM position
across the main air transport aftermarket segments
CONTEXT
55%
35%
2% 0%
20%
25%
44%
82%
25%
40%
54%
18%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Engine
overhaul
Component
O&R
Airframe
Heavy
Line
maintenance
Non-OEM
MRO
Airline in-
house
OEM
Highlights
 OEMs strongest share in the
more material intensive
markets
 Component OEM market share
lower than engine OEMs
 Aircraft OEMs have an almost
non-existent position in the
airframe-related aftermarket
Air Transport Supply (2015)

CONTEXT
The net result – aircraft OEMs are seeking to follow the engine
and component OEMs
-Source: ICF International
Relative Air Transport Market Margin and Leverage
EBIT %
Leverage
(ND/EBITDA)
0.0x
OEMs: Components
& Structures
-
OEMs: Engines
OEMs: Aircraft
MROs
MRO with mixed signals
from Integrators to
Independents
Airlines
(Size scaled down)

The ramp up and introduction of new generation aircraft creates
the opportunity to change the aftermarket supply chain
CONTEXT
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Aircraft deliveries (units)
Highlights
 New aircraft with higher
reliability, lower manhours and
complex technology change the
business case for establishing
MRO capability
 …especially with greater airline
focus on ROCE
 This is a catalyst to change the
MRO supply model….
 Creating new opportunity for
OEMs and aftermarket
providers
Mature Aircraft
New Generation
Aircraft

For 2015 onwards, the aftermarket will move to a new era based
on new battlegrounds
CONTEXT
2015 Onwards
Airlines
 Chance to change business model –
outsource cost, assets and risk to
aftermarket suppliers
 Airframe OEMs enter the fray - will
they succeed?
 Component OEMs increasing control
of data, manuals and parts choice
 More sole source engines on new
wide body platforms
OEMs
MROs
Evolving from a cost centre to a highly competitive market

Agenda
Aftermarket
The
Battlegrounds

ICF believes there are three key battlegrounds that will
determine the future of the Aftermarket
THE BATTLEGROUNDS
Who controls the
operational data?
Who controls
the workscope?
Who controls
the assets?
• Critical to success in
market participation
and in gaining
operational feedback
for design and
reliability improvement
driving parts choice and
aftermarket margins
growing integrated
service market

The role of traditional aviation players in the data value chain is
still to be determined
THE BATTLEGROUNDS
Data ownership versus data access and use are of great concern to operators, and data
processing business models are unproven (except at engine OEMs?)
DATA
Aircraft Generate Data…
Airlines owns them
Airline Operations
Control Centers
… Which Can be Processed in
Many Locations
Aircraft / Engine
OEM Networks
Component OEM
MRO
DATA
Data Service
Companies
OEM
Direct
Access

All stand to gain significantly from improved access to and
control of operational data, which today is owned by the airlines
THE BATTLEGROUNDS DATA
Airlines
OEMs *
Airline MRO
Eng. OEMs
Who controls the
operational data?
HOW MUCH DOES EACH PARTY GAIN?
(example benefits)
* Airframe and component OEMs
 Higher reliability (e.g.,
predictive maintenance)
 Lower costs (fuel,
maintenance, inventory)
 Operational data to feedback
into design loop
 Higher performance products
into design loop
 Reduce costs and improve
competitiveness
 Market access

Aircraft OEMs are vying to use their leverage to become the
arbiters of data for the connected airline…
THE BATTLEGROUNDS
• Boeing EDGE: “Information Services” , the
Digital Airline and Gold Care brands
• Notable Aircraft Health Management (AHM)
successes
• “Services by Airbus”: training/flight
operations, material management, E&M e-
solutions, upgrades, and FHS/TSP support
packages
• “Airbus Smarter Fleet” partnership with IBM -
integration of e-solutions
Boeing View of AHM System Architecture
Aircraft OEMs believe that their scale
and position in the market make them a
natural middleman for data aggregation
and analysis
DATA

Control of workscope is key to input decisions – hence the
historic focus on this by engine OEMs and the former PMA “War”
THE BATTLEGROUNDS WORKSCOPE
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Engine
Materials
80%
Labour
20%
Airframe
Materials
20%
Labour
80%
Components
Materials
55%
Labour
45%
Line
Materials
15%
Labour
85%
TypicalMROCostBreakdown
Typical Aftermarket Cost Breakdown Insight
 For engine and component
activity “Whoever controls the
workscope controls the parts
decision” – this is a key driver
behind related OEM aftermarket
strategies
 Use of PMA, repairs and surplus
are important alternatives to
OEM new parts
 For airframe activity, labour unit
cost (rates & productivity) drive
the economics, hence the market
is more open

Workscope control is most important for material intensive
activity i.e., control over the parts decision
THE BATTLEGROUNDS
Airlines
OEMs *
Airline MRO
Eng. OEMs
Who controls the
workscope ?
(example benefits)
 Cost control
 Increased revenue and
margin
margin
 Cost control, shorter turn-
times and improved
competitiveness
WORKSCOPE
Airframe Component

The share of integrated programmes in component support is set
to increase
THE BATTLEGROUNDS: ASSETS
Component Support Buying Behaviour
Growth Drivers
 Small fleet size
• Perceived technology risk
• Improved ROIC
• Maintenance no longer core
activity
• Predictable outgoings
• Attractive value propositions
• Lower investment, less
infrastructure
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2004 2014 2024
Integrated*
Traditional
Integrated Component Programs
Penetration
777 787/A350
~20% 55%-70%
9%
30%
45%

Control of assets enables aftermarket players to support
integrated programmes more effectively
THE BATTLEGROUNDS: ASSETS
Insight
 Component aftermarket support
programmes are a driver of growth
and of margin
 Central to the economics of this
offer is control and access to the
inventory
 The more inventory held by a
supplier, the lower the inventory
cost per aircraft supported
 The “battle” for 787 / A350
component support has already
been joined, with e.g., AFI/KLM
E&M winning multiple 787-related
contracts
Relative Inventory Requirements

Control of the rotable assets is a core feature driving the
“winning business model” in integrated packages
THE BATTLEGROUNDS
Airlines
OEMs *
Airline MRO
Eng. OEMs
Who controls the
assets ?
(example benefits)
 Inventory cost reduction and
parts availability (if scale
sufficient)
 Parts pool critical to
(profitable) component
aftermarket packages
 Spare engine pool already
part of total support
programmes
 Vital to competitiveness and
profitability of integrated
Airframe Component
ASSETS

Agenda
Aftermarket
Takeaways

Today, airlines have strong ownership/control of their destiny but
do they make the most of it?
TAKEAWAYS
Category
Who Owns The
Workscope?
Who Owns The
Assets?
Airlines
Airframe OEMs
Engine OEMs
Component
OEMs
Airline MROs
Independent
MROs
StrongKeyWeak ImprovingWorsening
Eng Comp Airframe
Who controls the
operational data?
Who controls the
workscope?
Who controls the
assets?
Airlines, as a buyer
of aircraft and the
owner of the
operational data,
should push the
aftermarket supply
chain....to benefit
from better, more
cost efficient
solutions

Expect strong focus on these battlegrounds – achieving a winning
position is key to the aftermarket participants meeting their goals
TAKEAWAYS
• Safe and reliable operation of aircraft
• Operational feedback
• Increased revenue, margin and RONA
• Delivery of promised cost and
performance
Airframe & Component OEM Goals
Importance To Achieving Goals
Data
Workscope
Assets
Strong
Key
Weak
/
• Safe and reliable operation of aircraft
• Operational feedback
• Increased revenue and margin
• Delivery of low/competitive (total) cost
to customers
Airline and Independent MRO Goals
Importance To Achieving Goals
Data
Workscope
Assets

Airlines
OEMs *
Airline MRO
Eng.OEMs
Whocontrols the
operational data?
WHO HAS THE MOSTTO GAIN?
(example benefits)
 Higher reliability (e.g.,
predictive maintenance)
 Lower costs (fuel,
maintenance, inventory)
into design loop
into design loop
 Reduce costs and improve
competitiveness
 Market access
Especially from the Airframe and Component OEMs who have the
most to gain…
TAKEAWAYS
Airlines
OEMs *
Airline MRO
Eng.OEMs
Who controls the
workscope ?
(example benefits)
 Cost control
margin
margin
 Cost control, shorter turn-
times and improved
competitiveness
Airframe Component
Airlines
OEMs *
Airline MRO
Eng.OEMs
Who controls the
assets ?
(example benefits)
 Inventory cost reduction and
parts availability (if scale
sufficient)
 Parts pool critical to
(profitable) component
 Spare engine pool already
part of total support
programmes
 Vital to competitiveness and
profitability of integrated
Airframe Component
…and therefore expect to
see more investments
from these OEMs in these
aspects of the aftermarket

Large airline MROs are well positioned in contrast to
independent MROs
TAKEAWAYS
Category
Who Owns The
Data?
Who Owns The
Workscope?
Who Owns The
Assets?
Airline MROs
Independent MROs
StrongKeyWeak ImprovingWorsening
Who controls the
operational data?
Who controls the
workscope?
Who controls the
assets?
Takeaways
 For Airline MROs, significant scale is a must for engine and component
markets– to leverage their fleet and inventory under management, and
build the scope of data and intelligence captured
 The business case for small airline MROs will erode significantly moving
forward
 Independent MROs have to become the lowest cost producer and/or
align with the large airlines or OEMs

Control of assets facilitates data access - so supplier scale and
scope of product will drive the winning business model
TAKEAWAYS
DATA Takeaways
 Those managing the component and
engine assets have the access to the
operational (reliability and cost) data
 Some large airlines may elect to keep this
driver of performance in-house
 Others will not because of the negative
impact of inventory on ROIC / RONA
 Large airline MROs or OEMs with broad
packages to offer have a competitive
advantage via scale and scope
 But do they want the inventory on their
books?
ASSETS

In summary...
TAKEAWAYS
Engine OEM aftermarket business model a
harbinger for the future
Airframe and Component OEMs will invest
more and increase their focus on aftermarket
especially on integrated component packages
(Large) Airline MROs can and need to protect
their market position versus the OEMs
Airlines have the opportunity to drive efficient
solutions and competition into the aftermarket
Scale and scope of assets under management
is vital – growing need for financial community?

Appendix
 LCCs – Low Cost Carriers
 ROIC – Return on Invested Capital
 MRO – Maintenance, Repair and Operations
 OEMs – Original Equipment Manufacturers
 ND/EBITDA – Net Debt to EBITDA Ratio
 ROCE – Return on Capital Employed
 E&M e-solutions – Engineering and Maintenance e-solutions
 FHS/TSP support packages – Flight Hour Services/Tailored Support Packages
 PMA – Parts Manufacturer Approval
 AFI/KLM E&M – Air France Industries/KLM Engineering & Maintenance
 ROIC / RONA – Return on Invested Capital/ Return on Net Assets

David Stewart
Head of Aerospace and MRO
Watling House
33 Cannon Street
London EC4M 5SB
United Kingdom
+44 (0)20 3096 4931
david.stewart@icfi.com
Thank You!

Key Battlegrounds in the Aftermarket

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