Navigating Turbulent Waters: Turbulent Times for North American MROs
15
Navigating Turbulent Waters: Turbulent Times for North American MROs Nathan K. Smith, Industry Analyst Aerospace & Defense October 15, 2009
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Transcript of Navigating Turbulent Waters: Turbulent Times for North American MROs
Navigating Turbulent Waters: Turbulent Times for
North American MROs
Nathan K. Smith, Industry Analyst
Aerospace & Defense
October 15, 2009
2
Focus Points
� Current Financial Crisis – Impact on North American MROs
� Market Dynamics – North American Commercial Aircraft MRO Market
� Aircraft MRO Market Analysis and Forecast
� Aircraft MRO Demand Analysis
� Conclusion
3
Current Financial Crisis – Impact on North American MROs
� Airline profitability is closely tied to economic growth and trade.
� In 2008, the airline industry was impaired by soaring fuel prices and an economic
crisis. In 2009, the industry continues to face a slow economy, weak travel
demands, and further reductions in aircraft capacity.
� Reductions in airline fleet capacity and the retiring of older, less efficient aircraft
across North America has resulted in fewer maintenance checks and decreased
revenues for MROs.
� When compared to 2008, the average aircraft utilization for the world's commercial
fleet in 2009 is expected to drop by an estimated four percent.
� Economic factors have pushed North American carriers to embrace outsourcing. These carriers continue to focus on total maintenance support as the most important factor in selecting an MRO provider.
� Despite the strong push towards outsourcing, the market has been in decline as a result of an industry-wide downturn effecting both airline in-house and third party MROs.
4
Market Engineering Measurements
StableHighPrice sensitivity
UpMore than 7,000Total potential customers (number of aircraft)
Stable2116Competitors (active market competitors in base year)
Up2116Companies entering the market (2008)
Stable0Companies exiting the market (2008)
Increasing6Degree of competition (scale from 1-10, 10 being the highest)
IncreasingHighDegree of technical change
Stable7Customer satisfaction (scale from 1-10, 10 being the highest)
Stable7Customer loyalty (scale from 1-10, 10 being the highest)
Increasing54.4%Engine market concentration (percent of market controlled by top three competitors)
Increasing30.9%HMV/Mod market concentration (percent of market controlled by top three competitors)
Commercial Aircraft MRO Market: Market Engineering Measurements (North America), 2009
Decreasing(0.1) %Forecast period market growth rate (CAGR)
Increasing2.38 %Base year market growth rate (2008)
Decreasing$16.26 billionPotential revenues (2014)
Increasing$16.40 billionRevenues (2008)
---Mature StageMarket age
TrendMeasurementMarket Dynamics
Note: All figures are rounded, the base year is 2008 Source: Frost & Sullivan
5
Commercial MRO Market Impact
ProjectedImpact on the
Commercial MRO
Industry
High Impact
Low Impact
Certainty
Low High
High Growth Impact
LowGrowthImpact
MediumGrowthImpact
Source: Frost & Sullivan.
Proliferation of Next Generation Aircraft
Outsourcing
Skilled-Labor Shortage
Increased Partnerships and M&A activity
The Use of Business Automation Tools (SaaS)
Geographic Expansion
6
Market Drivers and RestraintsR
estr
ain
tsD
rivers
High
Med
Low
Low
Med
High
Electronic
Technology
* Length of arrow indicates relative impact Source: Frost & Sullivan
Economic Slowdown Evolving Markets in
APAC, Latin America
and the Middle East
Financial Restraints Aircraft Capacity
Reduction
Aircraft Fleet GrowthNext Generation
Aircraft
North American Aircraft MRO: Market Drivers and Restraints
Total MaintenanceSupport
7
Competitive Differentiators
Commercial Aircraft MRO Market: OEM and 3rd Party MRO Competitive Differentiators (North America), 2009
• Significantly lower corporate overheads
• Requires lower operating margins
• Material costs may be higher if purchased from the OEM
• High corporate overheads
• Requires higher margins
• Lower material costs if supplied by the OEM
Cost
• A person answers your calls
• People with experience and expertise on your part are ready to talk with you immediately
• Customer support is usually through a complex technical phone support system
• Person answering the phone may have no technical experience or expertise
Customer Support
• Primary focus is maintenance and repair
• Expertise on mature systems deepens over time
• Primary focus is selling next generation products
• Expertise on mature systems lessens over time
Increasing Part Life
3rd Party MROOEM Category
Source: Frost & Sullivan.
8
Market Forecast and Analysis
Commercial Aircraft MRO Market: Summary of Market
Segments (North America), 2009
(0.8)6.50Engine MRO
16.79
3.12
3.37
3.80
2009Market Size($ Billion)
(0.8)Line Maintenance
(0.1)Total NA MRO
(1.0)Component MRO
2.5HMV / Mod
2009-2014CAGR
(%)Market Segment
From January 2008 to the first quarter of 2009, global commercial jet aircraft storage has increased
approximately 63 percent (or from 620 aircraft to 1,012). Currently, total global aircraft in storage
exceed 2350.
The current economic climate and airline losses are expected to diminish MRO revenue between 2009 and
2014. All MRO segments are expected to have negative growth other than HMV/Mod. This negative
growth can be attributed to a reduction in aircraft capacity, the retirement and storage of older aircraft
and engines, and the addition of next generation aircraft.
Source: Frost & SullivanSource: Frost & Sullivan
Commercial Aircraft MRO Market: Aircraft Status
(North America), 2009
6457
964
1570
2,869
1,054
In Service
956
77
66
515
298
On Order
31Bombardier
56Embraer
353Total
222Boeing
44Airbus
StoredAircraft Mfg
9
Market Forecast and Analysis (Contd.)
1.73
7.43
2.34 2.04 2.23 2.47
12.27
16.79
0.714
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
Africa
Asia P
acifi
c
China
Easte
rn E
urop
e
Indi
a
Latin
Am
erica &
Car
ibbe
an
Mid
dle
East
North A
mer
ica
West
ernE
urop
e
Mark
et
Siz
e (
$ B
illio
n)
Commercial Aircraft MRO Market: Aircraft MRO Market Size (Global), 2009
Source: Frost & Sullivan
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Major Industry Participants
3Pemco
3AAR – Indianapolis
3AAR – Miami
3Aveos
3ExelTech Aerospace
2Aviation Technical Services
2ST Mobile Aerospace
2TIMCO
2Delta Tech Ops
1American Airlines
Market Tier Company
Commercial Aircraft MRO Market: HMV Third Party Vendor Tiered Market Share (North America), 2009
3IAE
3United Services
3Texas Aero Engine
3Aveos
3Rolls Royce, PLC.
2Pratt & Whitney
2American Airlines
2Delta Tech Ops
1Rolls-Royce Canada
1GE Engine Services
Market Tier Company
Commercial Aircraft MRO Market: Engine MRO Vendor Tiered Market Share (North America), 2009
The tables below provide a tiered market share overview for the commercial MRO market segmented by participants in
the HMV space and the engine MRO space. Tier one participants hold more than 15 percent of the market, Tier two
participants hold 5-10 percent of the market, and Tier Three participants hold less than 5 percent.
Source: Frost & Sullivan. Source: Frost & Sullivan.
11
Demand Analysis
0
500
1000
1500
2000
2500
3000
3500
Airbus
WB
A319
A320
B737
B757
B767
B747
B777
MD
80
RJ/
TP
Aircra
ft (
Units
)
0
0.5
1
1.5
2
2.5
3
3.5
MR
O M
ark
et S
ize (
$ M
illio
n)
Aircraft
Market Size
0
500
1000
1500
2000
2500
3000
3500
Airbus
WB
A319
A320
B737
B757
B767
B747
B777
MD
80
RJ/
TP
Aircra
ft (
Units
)
0
0.5
1
1.5
2
2.5
3
3.5
MR
O M
ark
et S
ize (
$ M
illio
n)
Aircraft
Market Size
The greatest demand for aircraft maintenance in North America will be from the narrowbody aircraft fleet.
The Boeing B737 is the largest aircraft fleet in North America, and will produce the most MRO revenue
for aircraft greater than 100,000 pounds. Demand for the Boeing B747 and MD80 will diminish for the
forecast as they are replaced by next generation aircraft.
Demand for widebody HMV/Mod is not expected to increase for this forecast. It is likely a large percentage
of HMV/Mod work will continue to be outsourced to foreign destinations.
Demand for regional jets and turbo prop aircraft is expected to remain steady for this forecast.
Commercial Aircraft MRO Market: Aircraft MRO Demand (North America), 2009
Note: All figures are rounded, the base year is 2009. Source: Frost & Sullivan Note: All figures are rounded, the base year is 2009. Source: Frost & Sullivan
Commercial Aircraft MRO Market: Aircraft MRO Demand (North America), 2014
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Conclusion
� Market participants will have to keep their
competitive position to maintain a viable
business. Strategically, the providers' intent
should be to provide reliable and cost-effective
maintenance services. North American MRO
vendors should rethink and respond to foreign
competition. They should revaluate their
organizational structure at present and continue
to seek improvements. Traditional cost cutting
and productivity measures will not enable the
MRO vendor to bridge the gap between wage
and productivity. The availability of skilled labor
will be a challenge for the industry. Therefore,
MRO providers must be prepared for the rise in
labor cost.
� North America is forecasted to lose three
percent of its market share during the forecast
because of growing competition. MRO growth is
forecasted at a CAGR of (0.1) percent or a
decrease of $0.14 billion.
� Global MRO growth from 2009 to 2014 is
expected to increase at a CAGR of 2.3 percent
with 2009-2011 expected to be relatively flat.
Beyond this period, the MRO market is
expected to accelerate at a CAGR of 2.9
percent.
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Next Steps
� Register for the next Chairman’s Series on Growth:
The Growth Excellence Model: Competitive Benchmarking & Growth
Investing (November 3, 2009) (http://www.frost.com/growth)
� Register for Frost & Sullivan’s Growth Opportunity Newsletter and keep abreast of innovative growth opportunities(www.frost.com/news)
14
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For Additional Information
Johanna Haynes
Senior Corporate Communications ExecutiveCorporate Communications(210) 247-3870
Gary Leikin
VP Business Development
Aerospace & Defense
(310) 318-8551
Wayne Plucker
Industry Manager
Aerospace & Defense
(210) 247-3869
Nathan K. Smith
Industry Analyst
Aerospace & Defense
(512) 276-5162
