1600-1630 MTU Impact of Restrictive End of Lease Conditions

The impact of restrictive end of lease conditions on engine maintenance cost

Leo Koppers, SVP Marketing & Sales

IATA 7th Maintenance Cost Conference,

Singapore, October 19th, 2011

______ 19 October 2011 __ __________ ___ _________ __ ______ __ ___________ ___ __ _____ __________ __ ______ ____IATA 7th Maintenance Cost Conference - The impact of restrictive end of lease conditions on engine MRO cost 2

MTU Aero Engines business segments

MTU Group: Sales 2,707 M2

Commercial MRO

World's largest independent engine MRO provider

Global network

Integrated repair solutions

Key programs: V2500, PW2000, CFM56, CF34, CF6, GE90, PW&C engines & IGT

1,074 M (39%)11,178 M (43%)1

Commercial OEM

RRSP with all major OEMs

Complete thrust range; 30% of active fleet with MTU participation

Focus on LPT and HPC

Key programs: V2500, CF6, PW2000, PW1000G, GEnx, GP7000

486 M (18%)1

Military OEM/MRO

Capability to develop and manufacture entire engines

Participation in key European programs with systems design responsibility, and US market

Partner to the German Armed Forces for almost all engines

Key programs: EJ200, RB199, TP400, F414, GE38

1 Unconsolidated; 2 Consolidated

19 October 2011 IATA 7th Maintenance Cost Conference - The impact of restrictive end of lease conditions on engine MRO cost 3

MTU Maintenance business segments at a glance

Supporting services

Industrial gas turbine MRO

Small aero engine MRO

Large commercial engine MRO

V2500 CFM56-3/-5B/-7 CF6-50/-80C2 PW2000/PW6000 GE90-110B/-115B GP70001

CF34-3/-8/-10E PW 200/300/500 PT6A

LM2500/2500+ LM5000 LM6000 ASE Series2

TF Series2

Development of MTUPlus repairs; 3rd Party component/accessory/LRU repairs

AOG/on-wing services

Spare engines LRU management etc.

Integrated solutions: Total Engine Care (TEC) & Total Part Care (TPC)

1 LPT MRO; 2 Vericor Power Systems

Maintenance, Repair & Overhaul services


e.pool services

Service portfolio

Engine leasing

Dedicated engine operating lease

Financial support for spare engines

Engine stand-by agreements

CFM56-3/-5B/-7

CF34 LM Series

Engine types*

V2500-A1/A5/D5 PW2000 CF6-50/-80C2 GE90-115B

Pool solutions

Access to MTUs e.pool via membership

Guaranteed engine availability Solutions for planned and unplanned/

AOG needs

*All other engine types can be supported on request


Increasing share of engine OEM long-term

contracts and total care support packages

with new engine sales

Growing influence on spare parts supply, e.g.

Traditional long-term contracts

CFM56/CF6 TRUEngineTM concept

Engine upgrades included in total care

package (e.g. V2500 Select)

Aircraft OEMs aim to penetrate the aftermarket

(e.g. Boeing GoldCare, Airbus MRO Network)

Trends in engine MRO

Increasing role of OEMs (1/2)

Both engine and aircraft OEM aim at increasingly controlling the aftermarket


Increasing role of OEMs (2/2)

Source: Various estimates are forecast from MTU, The Canaan Group, Aerostrategy & PA Consulting; * Incl. Joint Ventures >50%

Commercial engine MRO accessibility market share by provider type

OEMs will further penetrate the aftermarket thanks to long-term service agreements

Airline 3rd Party/Service expanderOEM* Airline in-house Independents

0%

20%

40%

60%

80%

100%

1993/95 2005/07 2015/172010/12

13-16%

54-56%

13-15%

13-15%

20-26%

43-46%

14-16%

16-18%

18-20%

14-18%

48-50%

15-17%

50-55%

10-16%

14-20%

15-20%

14 September 2011 Reducing engine maintenance costs Airline Engineering & Maintenance Asia Pacific Conference 7

MRO cost breakdown

Engine MRO is largest MRO cost driver with material representing 63% of the total

Sources: AeroStrategy CAMRO 2009 / Aeroengine Parts Repair & Material Forecast (2009 values)

Total MRO

Fees

2%

In-

house

repairs11%

DAT**

11%

OV*

13%

Material

63%

Engine MRO

LLP

27%

New

60%

Used/

serviceable

11%

PMA

2%

Material costs

Line 20%

Components22%

Modifications7%

Airframe15%

Engine

36%

* Outside vendor (outsourced repairs); ** Disassembly, Assembly & Test (other labor)


Parts repair trends

2009 2018

DAT1: 11%

Repairs 23%

Material

64%

DAT1: 12%

Repairs

26%

Material

61%

Engine MRO15.9 b$

Engine MRO21.4 b$

Key growth drivers

New parts CLP escalation

Airline cost pressure

Parts availability issues

In-depth engineering know-how at reputable MRO providers and specialist repair companies

Repair certification process

(regulatory environment)

DER ~25%

DER ?

Source: 2009 AeroStrategy Aeroengine Parts Repair & Material Forecast (2009 values); MTU analysis

1 Disassembly, Assembly & Test

Key barriers

New highly-complexmaterials & technology

Phase-out of older repair-

intensive platforms

New engine models with

limited repair (access)

DER counter-strategies

- OEM-LTSA penetration

- Upgrades (new hardware)

- protectionism (TRUEngine)

- network of licensed shops

Lease company DER repair

acceptance

Increase in parts repair anticipated, but how large will the DER portion be?


0

5.000

10.000

15.000

20.000

25.000

30.000

35.000

40.000

45.000

50.000

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

New Mature Sunset

Active engine fleet 2010

World market development

Strong shift to new engine models

Active fleet development 2000-2010

Source: ACAS as per 26.11.2010 @ 31st December each year except 11/2010 (WB/NB/RJ >20 seats)

New: +17.9%

V2500-A5

8%

JT8D-all

8%

Other

35%

CFM56-7

16%

CFM56

-5B

8%

CF34-8

4%

CF34-3

4%

PW4000-94

4%AE3007

5%

CFM56-3

7%

# eng

Mature: 1.3%

Sunset: -8.4%

20

00

20

10

eg. CFM56-5B/-7, V2500-A5, CF34-8/-10

eg. CFM56-3CF6-80C2,CF34-3,AE3007

eg. JT8D, TAY

Matu

re/s

unset

11%

42%

47%

38%

47%

15%

CAGR 2000-2010: 2.3% eng.: 44,516


Amount of non-OEM competition including repairs decreasing with each generation

Engine cost levers by technology generations

Acquisition cost

Fuel consumption

Maintenance cost

SV cost vs. OWT

Repair % of material

DER/PMA availability

Surplus/used parts

MRO competition

Engine complexity

Co

st

ove

rvie

w1

CFM56-3* PW1000G*V2500-A5

CFM56-5B/-7*

Sunset NewMature Future

+ + + ++ + + +

+ + + ++ + + ++ + + +

+ + + ++ + + ++ + + ++ + + +

Repair status

JT8D*

+ + + ++ + + +

+ + + ++ + + ++ + + +

+ + + ++ + + ++ + + ++ + + +

+ + + ++ + + +

+ + + ++ + + ++ + + ++ + + ++ + + ++ + + ++ + + +

+ + + +

+ + + ++ + + +

+ + + ++ + + ++ + + +

+ + + ++ + + ++ + + ++ + + +

* Illustrative narrow-body examples

Repair substitutionby used material

Strong repair capa-bility & alternativematerials

Existing (DER)repairs counteredby OEM measures

Ltd. competition and complexity;only OEM repairs?


Best engine

maintenance

strategy ?

Operator / MRO provider perspective: Influencing factors towards value-optimized maintenance cost

DER acceptance

Lease return conditions

Lessor

Noise restrictions

Emission requirements

Local authorities

AD requirements

Regulator

Operations

Maintenance philosophy

Contract type

Fleet age

Airline

Experience

Flexibility

Repair vs, replace

Technology

MRO provider

Repair/material availability

Engine upgrade policy

Design

OEMValuators

Perception towards high-

tech repair solutions

Lessors & valuators can have a strong influence on engine MRO philosophy/strategy

14 September 2011 Reducing engine maintenance costs Airline Engineering & Maintenance Asia Pacific Conference 12

Goal Measures

MRO influence: Maintenance policy/strategy

1 Reduce # of engine removals1

Build-up for optimized cost-effective OWT

Predictive maintenance (ECM)

On-site/on-wing maintenance

In-house repair s (repair vs. replace)

Used material availability (used vs. new)

LLP optimization (return conditions)

DER usage/approval

Reduce shopvisit costs

4

Optimize workscope

2 Customized workscope-to-cost

Balance cost vs. operational performance

Fleet management solutions

1 Mature/new engines only vs. sunset

3 Reduce fuel burn

SFC reduction programs (e.g. HPC coatings)

Engine on-wing cleaning


Leasing trends

Leased fleet increasing in both absolute and relative numbers

Collaboration between all involved parties therefore growing in importance

Engine is most important aspect of aircraftresidual value

Residual value concerns need to be alignedwith cost pressure on operator side

Source: Airfinance Journal 09/2008

30%

0%

25%

50%

75%

100%

New Mature

Micro level: Engine share of asset value

Engine value as % of total a/c asset valuedepending on a/c age

90%

Macro level: Share of leased fleet

Source: Frost & Sullivan 2010

2008

owned69%

2015

owned64%

leased31%

leased36%


Typical end of lease conditions & related issues

Same condition at redelivery as at

delivery - less wear and tear

Minimum hours & cycles remaining

since new last shop visit

Engine condition Engine performance

General Material & parts

EGT margin in line with the lessees

or world fleet deterioration

Full serviceability

Full documentation incl.

back to birth*

No carry over items like re-

inspections etc.

No/limited DER content

(uncritical parts)

Residual value concerns

Re-marketability issues

* Wherever applicable

AD & SB compliance


Lessor

MRO

Lessor

Operator

Potential areas of conflict

Maintaining residual value, often driven by owners/investors, insurers and valuators

Manage and optimize maintenance reserves

Influence on shop visit and timing(e.g. workscoping, material, )

Driven by re-marketability and residual value concerns (e.g. DER acceptance)

Improved cooperation will require concepts beyond traditional thinking

Shop visit cost containment

Avoid double-payment (impact: rise of Payment-per-Event contracts)

Contractual relationship withoperator only (caught in between)

Drive repairs as added value


Potential fields of cooperation (1/2)

LessorMRO

Provider

Operator

Workscope optimization(RoL requirements; technical considerations)

Repair acceptance

Payment coordination

Exchange of technical know-how

Workscope optimization

Agreement on RoL

conditions, workscoping, payment terms etc.


Potential fields of cooperation (2/2)

Tripartite arrangements between lessor,

MRO provider and operator:

Agreements on workscopes (levels,

SBs, repairs, etc.)

Possibility for next operator/lessee to

take over the maintenance/total support

agreement

Credits from MRO provider to lessor

against next engine refurbishment at

lease termination

etc.

LessorMRO

Provider

Operator

Improved cooperation will require concepts beyond traditional thinking


OEMs will continue to penetrate the market on engine MRO

Leasing has an increasing importance and has a large impact

on maintenance practices, especially lease return conditions.

Lessors want to maintain the asset value: no DERs?

MROs wish to repair rather than replace, however this is

restricted by the OEM and/or lessor regarding DER

Each of the parties involved (lessor, lessee, MRO) has

differing interests

An improved cooperation will require concepts beyond

traditional thinking to manage maintenance reserves and

preserve residual values. New products are being designed by

MROs to address the tri-party relationship and accommodate

the needs of each of the other parties

Summary

Thank you for your attention!

Documents

1600-1630 MTU Impact of Restrictive End of Lease Conditions