ENGINE AFTERMARKET OUTLOOKMRO Asia Pacific 2020

David Stewart

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01

02

03

CONTENTS

Covid-19 in context

Fleet and MRO spend impact

Engine aftermarket

COVID-19 IN CONTEXT

01

THE IMPLICATIONS OF COVID-19 WILL BE PROFOUND AND PERSISTENT FOR OUR SOCIETY, OUR ECONOMY AND OUR INDUSTRY

We are in unchartered territory. Health concerns are resonating through the real economy. Public health and government actions matter more than ever

A widespread vaccine will not be available before mid-2021; timing and implications of other treatments are not yet clear

Containment efforts willbe successful…but… this means that the numbers of persons infected are well below those required for ‘herd immunity’

Areas which have contained the virus will need to impose ongoing measuresto mitigate this risk of future outbreaks

We are expecting at least 12–18 months of iterative and partially controlled cycles of outbreak and containment

The implications of this ‘new normal’ will be profound and persistent for certain sectors and notably aviation, aerospace and MRO

Recovery scenarios (illustrative)

Forecast

2000 2004 20082002 2010 20142006 20242012 2016 2018 2020 2022-6%

0%

-4%

-2%

2%

4%

6%

THE DEPTH AND SCALE OF COVID-19’S IMPACT ON THE GLOBAL ECONOMY WILL BE THE WORST SINCE THE GREAT DEPRESSION

0-1 1

100%

1132 64 5 7 8 109 12

25%

50%

75%

125%

150%

Months after event

9/11/01 (US only) SARS (US-HKG only) Covid-19 (Global)12008 Financial Crisis (US only)

Forecast in 2019 Latest forecast

• COVID-19 impact is the most profound global shock in modern civil aviation

• At a global level, the impact on ASMs will be worse than the hardest-hit regions for 9/11, SARS, and GFC, respectively

– 9/11 in the US

– SARS in HK

– GFC in the US

1. Month 0 for Covid-19 assumed to be Jan ’20, Wuhan shutdown; 2. Per IMF. Source: Economist intelligence Unit, Goldman Sachs, IATA Economics, Oxford Economics, Oliver Wyman PlaneStats, OW analysis

Global GDP growth ratesReal GDP growth per annum

Global Economy

• World GDP currently projected to shrink by 4.9 percent in 20202 – the worst downturn since the Great Depression

• Global rebound in 2021 to 5.4 percent growth assumes pandemic fades in second half of 2020

Aviation SectorImpact on aviation, year-over-year capacity change¹ASM, indexed to capacity in same month of prior year

9/11 2008 Financial Crisis

2020 AIRCRAFT DELIVERIES MAY DROP ALMOST 50 PERCENT, BY FAR THE LARGEST SINGLE-YEAR DECLINE IN RECENT HISTORY

Impact of recent crises on near-term commercial aircraft deliveries¹

262322 303 314

252 266295

326270

324

Q1 08Q3 07 Q1 09Q3 08 Q3 09

-5%

279 292 267313

267 261204

266211

Q1 02Q1 01 Q3 01 Q3 02 Q1 03

-4%

2001 (9/11) Terrorist Attacks 2002 SARS Epidemic • Throughout past crises, aircraft manufacturers have been able to adjust to declines in demand through gradual declines in deliveries while maintaining aircraft production

• Due to larger global scale, declines were greatest after 9/11 and GFC, with a 4–5% YoY decline in deliveries industry-wide

2008 Global Financial Crisis 2020 Covid-19 Pandemic• In response to the COVID-19 crisis, Boeing

and Airbus both suspended production in its facilities (e.g. Airbus reducing production by ~30%)

• Combined with a likely record drop in near-term aircraft demand and increasing delivery deferrals, we forecast a 46% YoY decline in deliveries in 2020

Airline industry recovery period2

224185

248219

256214 227 230

254

Q2 05Q2 03 Q4 04Q4 03 Q2 04

+3%

1,374

746

2020F2019

-46%

1. Boeing, Airbus only. 2. Based on YoY capacity change. Source: Chicago Tribune, Aviation Market Intelligence, Oliver Wyman analysis

FLEET AND MROSPEND IMPACT

2

World total

ASM -61%

Departures -47%

Seats -49%

North America

-61%-61%

Europe

-54%

Asia

-68%

Africa/Middle East

-85%Oceania

-75%Latin America

CURRENT GLOBAL CAPACITY IS DOWN 61% FROM 2019

Current snapshot: Airline capacity and by regionYOY change in August ASMs

Source: OAG schedules as of August 2020

FOUR PRIMARY FACTORS DRIVING DEMAND RECOVERY PROFILES

Epidemiological timeline Traveler sentiment Government restrictions Macro-economic impact

OW Epidemiological modeling (SIR models) predicting the number of cases by country and when the peak is expected to happen and downward curve

First trips are likely domestic/ regional for vacation or VFR

Dependence on government guidelines

Policy variations and uncertainties

International travel likely to return in phases – “corridors”

The level of recessionary impact/ damage affects return to travel

Recovery profilesAcceleratedSingle-wave outbreak with steady recovery & GDP bounce-back

NominalMulti-wave outbreaks, continual, gradual recovery

ProlongedLarge multi-wave outbreaks depress recovery and GDP

60

0

20

40

100

80

120

2019

DUE TO THE DEMAND CRUNCH, THE GLOBAL COMMERCIAL FLEET WILL STAGNATE THROUGH 2022

Forecasted in-service fleet size¹Number of in-service aircraft (K), 2018–2022F

• In-service fleet reduced by 20% in 2020–2021 from extensive fleet groundings

• Overall commercial fleet sees zero growth through 2022 as airlines recover

1.7%

-4.4%

-4.7%

-0.7%

CAGR2019–2022

2020

15.1 15.9 16.1

6.6

11.513.9

16.7

5.3 5.5 5.7

3.0

3.9

4.2

4.8

5.96.1 6.0

3.1

4.1

4.8

5.4

2018

19.5

2019 January 2022FApril July

26.3

2021F

27.5 27.8

12.7

22.9

26.9

Regional Jet/Turboprop Narrow-bodyWide-body

1. As of beginning of yearSource: Oliver Wyman Global Fleet and MRO Market Forecast, 2020–2030, Revised; Oliver Wyman analysis

Decline of 12% of 2030 fleet size (i.e. -4.7 K A/C) compared to initial forecast pre-Covid

2018–2030F Global in-service fleet size – incl. cargo and passenger fleet# thousands of aircraft, as of Jan 31 each year

2024

32.3

5.9

15.1

5.7

2018

5.95.5

37.9

6.1

2019

16.1

4.8

6.0

4.9

2022January

10.6

3.7

4.1

4.0

5.4

June

13.9

23.7

4.2

19.9

31.2

2021

16.7

5.4

2027

30.4

17.4

5.2

20282023

18.2

2029

4.9

6.1

4.2

6.0

19.0

4.7

33.4

6.3

2025

39.0

4.6

34.6

2026

6.6

20.9

6.2

4.4

32.4

22.8

6.4

21.9

35.7

15.9

4.1

5.3

36.8

26.3 27.5

2030

18.4

22.9

26.9 27.9 29.0 29.7 30.6 31.533.4 34.3

27.8

-18%

+1.2%

+3.0%

Total - Pre-Covid Forecast1NB TotalWB RJ/TP

CAGR’20–’23

-4.7%

-1.8%

CAGR’23–’30

-3.3%

+2.9%

+2.6% +4.5%

IN-SERVICE FLEET FORECASTFacing an 18% drop in 2021, the Global in-service Fleet will not recover before 2023 and By 2030, there will be ~4.7 K fewer aircraft than expected prior to COVID

1. Forecast as of July 2020 Source: Oliver Wyman analysis

Covid-19 pandemic crisis

2020

-20%

UNPRECEDENTED MISMATCH OF PRODUCTION AND DELIVERIES WILL CHALLENGE AEROSPACE SUPPLY CHAINSCommercial aircraft productionNumber of aircraft, 2018–2022F

Commercial aircraft deliveriesNumber of aircraft, 2018–2022F

+11%

-13%

-9%

2%

CAGR2019–2022

-4%

-13%

-9%

-6%

CAGR2019–2022

1,207

785 750 766

1,060

359

190252

256

223

389

165

152

200

1,789

2018

1,468

406

2022F2019 2020F 2021F

1,034

1,780

1,183

94

Narrow-body Wide-bodyMax, 2019 Vintage Regional Jet

1,207

785

344

766

1,060

359

389

256

223

200

190

252

152

94

165

2018

118

2019 2022F2020F

288

1,789

2021F

1,374

746

1,471 1,468

• Dramatic decrease in 2020 aircraft production (-42%) and deliveries (-46%)

• 3-year production levels (2020–2022) will not return to the scale of 2019, particularly in widebody

• ~18% of future deliveries will be 737MAX A/C produced in prior years

Source: Oliver Wyman Global Fleet and MRO Market Forecast, 2020–2030, Revised; Oliver Wyman analysis

EARLY RETIREMENTS IN AGED FLEETS WILL EXACERBATE THE DROP IN FORECASTED AFTERMARKET SPENDING

Early vs. Scheduled Retirements, 2020By class

Early Retirements, 2020By platform

533287

1,459

609

420291

139

RJTotal TPNB

74

WB

896

1,992

494370

232

79 93

X2.7

184

136

123115

109 108 103

90

Additional Early Retirements Scheduled Retirements

Aircraft platform

A320 737 NG 777 CRJ 767 ERJ 757 737 CL

Average age

21.8 18.1 19.7 16.7 22.7 17.1 22.8 24.3

NB WB Other

Source: Oliver Wyman analysis

WITH A REDUCED GLOBAL FLEET IN 2020, EXPECTED MRO SPEND DROPS BY 45%

Number of aircraft (K) in storage, 2020 base caseBy month

2020 MRO spend forecast Pre- and post-COVID-19

2020 2021

0

5

10

15

JulJanJan Apr Jul Oct Apr

Turboprop Regional Jet NarrowbodyWidebody

$43.5

$23.2

$17.9

$7.9

$16.3

$10.1

$13.5

$9.1

Pre-COVID Post-COVID

$91.2

$50.3

LineEngine Airframe Component

2020 MRO SPEND BY SEGMENT FORECASTS REDUCTIONS ACROSS ALL SEGMENTS AND AIRCRAFT CLASSES

2020 MRO Spend by Segment, $BNInitial Forecast vs. COVID Forecast

2020 MRO Spend by Class, $BNInitial Forecast vs. COVID Forecast

Component

$10

Engine Aiframe Line

$14

$8

$44

$23

$18$17

$9

-47%

-56%-39%

-33%

Initial Forecast COVID Forecast

TPWB NB RJ

$38

$20

$44

$25

$6$3 $3

$2

-46%

-44%

-46%-42%

Source: Oliver Wyman analysis

2018–2030F MRO SpendUS$ BN, by year

$0 BN

$75 BN

$25 BN

$50 BN

$150 BN

$125 BN

$100 BN

54.5

31.6

17.6

2027

17.9

19.2

53.1

14.0

14.1

12.1

2018

15.314.8

37.3

10.1

18.1

2019

23.2

7.9

9.1

47.3

2020

16.6

13.8

11.320.1

2021

56.345.1

14.4

20.1

18.6

13.3

2023

16.9 18.2

12.8

20252022

111.9

46.6 49.845.6

19.119.4

18.9

19.413.6

19.6

2028

18.7

19.2

18.9

2026

19.8

15.7

14.6

55.4

20.9

20.2

16.2

2030

35.1

2024

12.879.3

2029

50.3

73.2

93.5 96.6 96.4 99.6 102.3107.2 108.6

112.7

82.9

-39%

AirframePre-COVID Forecast Total ComponentEngine Line

MRO FORECASTFacing a ~45% drop in 2020, MRO spend will not recover until 2022 and over the next ten years $184 BN in MRO spend will be erased by COVID-19

1. Forecast as of July 2020Source: Oliver Wyman analysis

IN 2020, EVERY REGION WILL EXPERIENCE A SIGNIFICANT DECREASE IN MRO DEMAND

2020 demand: Pre-COVID-19 vs. post-COVID-19US$ BN

India: -47%

Rest of World: -46%

China: -26%

Western Europe: -53%

North America: -43%

Asia Pacific: -48%

20.3

9.7

Initial Forecast COVID Forecast

22.8

12.9

22.3

12.1

8.76.4

15.9

8.21.7

0.9

ENGINE AFTERMARKET

3

THE GLOBAL ENGINE FLEET IS FORECAST TO GROW AT JUST 1.1% OVER THE NEXT FIVE YEARS BEFORE ACCELERATING TO 2.8% ANNUALLY FROM 2025 TO 2030

2019–2030 Global Engine In-Service FleetBy Class

• The in-service engine fleet will be reduced by nearly 11,000 in 2021 …

• …with more than 7,500 engines on aircraft in storage

• Through 2019–2030, the engine fleet will grow by more than 12,000, an average annual rate of 1.9%

0

10,000

50,000

20,000

30,000

40,000

60,000

70,000

20212019 20302020 2025

Storage WB NBTP RJ

3.7%

-4.3%-2.9%1.9%

CAGR2019–2030

1.0%

Actual

Note: Annual fleet counts are as of the beginning of each year

2019–2030 Global Engine MROBy Class

• After the MRO market stabilizes post-crisis, engine MRO is forecast to grow 3.2% annually from 2025–2030

• In the same period, narrow body engine MRO will quicken to 5.6% annual growth while wide body MRO will grow at just 1.5% annually

• By 2030 engine MRO is forecast to reach $55 BN, a 48% increase from 2019

$25

$10

$30

$35

$0

$5

$20

$15

$40

$45

$50

$55

$60

2019 2020 2021 2025 2030

TP WBRJ NB

GLOBAL ENGINE MRO IS FORECAST TO DROP FROM $37 BN IN 2019 TO JUST $23 BN IN 2020, A DECREASE OF 38%The market is not expected to surpass 2019 MRO levels until 2022

Note: Annual fleet counts are as of the beginning of each year

Actual

5.6%

0.6%-1.2%3.6%

CAGR2019–2030

2.3%

ENGINES FOR NARROWBODY AIRCRAFT WILL ACCOUNT FOR 73% OF GLOBAL DELIVERIES OVER THE NEXT DECADE

2020–2029 Annual Engine DeliveriesBy Class

2020–2029 Annual Engine DeliveriesBy Manufacturer

0

500

1,000

3,500

3,000

1,500

2,500

2,000

4,000

4,500

20242020 2021 2022 2023 2025 2026 2027 2028 2029

4,500

1,000

3,500

0

2,000

500

3,000

1,500

2,500

4,000

20282020 2021 2022 2023 2024 2025 2026 2027 2029

TP RJ NBWB

CFM International engines will comprise 53% of global engine deliveries over the next decade

Safran

Rolls-Royce

General Electric CFM International

Pratt & Whitney

GLOBAL SHOP VISITS ARE NOW EXPECTED TO NUMBER JUST OVER 5,000 FOR 2020, A 45% DECLINE FROM ORIGINAL EXPECTATIONS

2019–2030 Global Shop Visit ForecastBy Class

2020–2030 Global Shop Visit ForecastTotal Shop Visits

4,000

0

2,000

6,000

10,000

8,000

12,000

20202019 2021 2025 2030

TP RJ WB NB

13%

87%

Shop visit volumes will grow at 6.4% CAGR from 2019 through 2030; over this period, the COVID crisis will result in 16,000 fewer forecasted shop visits

Shop Visits COVID Loss

6.4%

-2.1%-2.2%2.9%

CAGR2019–2030

-0.5%

2020–2030Shop Visits:

109,300

AVAILABILITY AND USE OF GREEN TIME ENGINES TO REPLACE OR DEFER WORK WILL REDUCE THE NUMBER OF SHOP VISITS BY A FURTHER 5% THROUGH 2024

Shop Visits Displaced by Greentime EnginesNumber of Shop Visits, 2020–2024

MRO Spend Displaced by Greentime EnginesMRO Engine Spend, 2020–2024

Greentime engines usage will decrease engine spend by a total of $1.5 BN over the next two years

0

20,000

10,000

30,000

40,000

50,000

60,000

Original SV Forecast

(2020–2024)

Reduction due to COVID-19

Post-COVID SV Forecast

(2020–2024)

Available engines to

displace SVs

Post-COVID SV Forecast

(2020–2024)

82%

17%

1%

COVID LossMRO Greentime EffectSVs displaced by retired motors Full SHVs

THE ASIA FLEET IS FORECAST TO GROW AT AN ANNUAL RATE OF 4.3% THROUGH 2030 WITH A SIGNIFICANT AMOUNT CONCENTRATED IN NARROWBODIES

2019–2030 APAC, India and China Engine In-Service FleetBy Class

• The mature regions of North America and Western Europe will experience flat or negative growth over the next ten years while China and India are forecast to growth at annual rates of 5.9% and 11.2%, respectively

• There remain in storage more than 2,200 installed engines on aircraft in 2021

• The combined Asia region is forecast to grow by nearly 10,000 aircraft from 2020 to 2030

0

10,000

20,000

5,000

15,000

25,000

30,000

20252019 2020 2021 2030

Storage NBWBTP RJ

5.6%

-1.7%

0.4%

4.3%

CAGR2019–2030

2.7%

Note: Annual fleet counts are as of the beginning of each year

Actual

ENGINE MRO IN ASIA IS FORECAST TO GROW AT AN ANNUAL RATE OF 6.2% THROUGH 2030 COMPARED TO 2.4% GROWTH FOR THE REST OF THE WORLD

2019–2030 Global Engine MROBy Region

• Engine MRO is expected to return to pre-COVID levels by end 2022. Over the second half of the forecast period, Asia engine MRO is forecast to grow at an annual rate of 4.2%

• Asia Pacific, China and India combined are forecast to comprise 39% of global engine MRO by 2030, up from less than 30% in 2019

• Engine MRO in Asia is expected to nearly double by 2030, growing from $11 BN in 2019 to more than $21 BN in 2030

$30

$50

$0

$5

$35

$10

$25

$15

$20

$40

$45

$55

$60

2019 2020 2021 2025 2030

2.4%

11.0%

7.5%

3.6%

CAGR2019–2030

3.0%

Rest of WorldAsia PacificIndia China

Actual

Note: Annual fleet counts are as of the beginning of each year

THE TOP 10 ENGINE PLATFORMS COMPRISE 88% OF ALL ENGINES IN 2020 – IN 2030 THIS SHARE WILL BE JUST 67% DUE ALMOST TO LEAP ENGINE GROWTH

Largest Engine Fleets by Platform2020–2030

Largest Engine Fleets by Platform2030, Fleet vs. MRO Percentage

10,0000 15,0005,000 20,000 25,000

GE90

CFM56

LEAP

PW1000G

GEnx

PW4000

CF6

Trent

PW100

CF34

V2500

2020 2030

0%

10%

20%

5%

30%

15%

25%

GEn

x

CFM

56

CF6

LEA

P

PW

10

00

G

Tren

t

V2

50

0

PW

10

0

CF3

4

GE9

0

PW

40

00

Fleet MRO

In 2030, LEAP engines will account for 28% of the global engine fleet but just 16% of MRO. In contrast, Trent engines will comprise 21% of MRO with just 8% of the engine fleet

ENGINES POWERING THE 737 AND A320 WILL COMPRISE 57% OF ALL SHOP VISITS IN ASIA OVER THE NEXT TEN YEARS

2020–2030 Asia Shop Visit ForecastBy Engine Platform

2020–2030 Asia Shop Visit ForecastBy Engine Platform

Shop visits for the LEAP are forecast to number fewer than half the CFM56 in 2025 before accelerating to 50% more than the platform by 2030

1,400400 1,2000 200 600 800 1,000

CFM56

LEAP

PW1000G

GE90

Trent

PW100

V2500

Other

2020 2025 2030

16%23%

5%

14%

10%

13%

8%

12%

Other

PW100

PW1000G

GE90 CFM56

V2500

Trent

LEAP

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Oliver Wyman and our parent company Marsh & McLennan (MMC) have been monitoring the latest events and are putting forth our perspectives to support you clients and the industries you serve around the world. The Coronavirus Hub will be updated daily as the situation evolves.

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