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© CAVOK
AVIATION, AEROSPACE & DEFENSE
The Financial Future of PMA: An Industry Forecast
October 29, 2015
Steve Douglas
Vice President
CAVOK, A DIVISION OF OLIVER WYMAN
720 Whitley Road | Keller, Texas 76248
Office: +1 817-380-2939 | [email protected]
Introduction to CAVOK 1
2 2 © CAVOK
Brand Strategy
Consulting
Economic
Consulting
Risk and Reinsurance
Risk and Insurance
Human Resources
Consulting
• Leading global management consulting firm
• $1.8 billion in revenue in 2014
• 3,700+ employees
• 50+ offices in 26 countries
• Four business units with several practices:
– Consumer & Industrial Value Transformation
– Financial Services
– Communication, Media & Technology
– Manufacturing, Transportation & Energy
(MTE)
• CAVOK is part of MTE’s Transportation Practice
CAVOK is a subsidiary of the Oliver Wyman group; a $1.8 billion consultancy within Marsh & McLennan Inc.
CAVOK serves as a highly specialized division within the Aviation, Aerospace &
Defense (AAD) practice
3 3 © CAVOK
• Customer relationship
management
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loyalty programs
• Product design
• Pricing strategy
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evaluation
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transition support
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scheduling optimization
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assessment, and
coaching
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development
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implementation
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management
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(e.g. fleet and other asset
negotiations)
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due diligence and
transaction support
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transaction support
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engineering, reliability
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and validation
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Together, Oliver Wyman and CAVOK form the world’s most respected aviation and aerospace management consulting and technical services practices
Maintenance (MRO) Restructuring Aircraft purchase
and lease support
Sourcing, supply
chain and materials
Operations Capital markets Organization Marketing
4 4 © CAVOK
A sampling of our clients include the most respected companies in each sector
Major airlines
Fle
et
Op
era
tors
Re
gio
na
ls
Airline
& fleet
operations
Airlines
Airports
OEMs
Fin
an
cia
l
Ind
ep
en
de
nt M
RO
s
Related
support
network
90% of our business comes from executives who either have been introduced to
CAVOK by a client or have experienced our work first-hand
Global Fleet and MRO
Market Outlook
2
6 6 © CAVOK
22,056
26,947
32,062
1,871
2,056
2,346
4.1%
1.9%
3.5%
2.7%
23,927
29,003
34,408
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2016 00-05 YRCAGR
2021 05-10 YRCAGR
2026
Passenger Cargo
13,124 16,949
21,089
4,686
5,753
7,181
3,396
3,222
2,906
2,721
3,079
3,232
5.2%
4.2%
-1.0%
2.5%
4.5%
4.5%
-2.0%
1.0%
23,927
29,003
34,408
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2016 00-05 YRCAGR
2021 05-10 YRCAGR
2026
NB WB RJ TP
The global air transport jet and turboprop fleet will grow 3.7% annually on average, adding more than 10,000 net new aircraft by 2025
Global In-Service Fleet Forecast
by Aircraft Class
Global In-Service Fleet Forecast
by Aircraft Usage
Nu
mb
er
of
Air
cra
ft
Nu
mb
er
of
Air
cra
ft
The growth outlook, however, varies widely from region to region Source: betterinsight™ by Oliver Wyman
7 7 © CAVOK
A 4.4 pt spread in regional growth rates leads to a significant share shift over the decade ahead
The Americas
█ Latin America
█ North America
The Middle East
& Africa
█ Africa
█ The Middle East
Europe
█ Eastern Europe
█ Western Europe
Asia
█ Asia/Pacific
█ China
█ India
Primary Region
█ Subregion
█ Subregion
1.7%
4.7%
6.1%
5.5%
Source: betterinsight™ by Oliver Wyman
8 8 © CAVOK
722
997
1,104
861
813
2,103
2,319
922
640
1,719 1,965
5,235
1,562
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
The Americas Europe Asia The MiddleEast & Africa
9,140 10,101 10,859
6,131 7,356
8,096
6,452
8,771
11,687 2,204
2,775
3,766
2.0%
3.7%
6.3%
4.7%
1.5%
1.9%
5.9%
6.3%
23,927
29,003
34,408
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2016 00-05 YRCAGR
2021 05-10 YRCAGR
2026
At one extreme of the regional growth outlook, North American airlines have created the highest demand for new aircraft. More than 4,100 new aircraft will be delivered to the region over the next ten years - 78% are slotted as replacements for older aircraft.
Global In-Service Fleet Forecast
by Operator Primary Region
Global In-Service Fleet Net Growth
by Operator Primary Region and Subregion
Nu
mb
er
of
Air
cra
ft
Nu
mb
er
of
Air
cra
ft
China, on the other hand, is experiencing just the opposite phenomenon where 89%
of its 2,500 deliveries will support net growth
█ Latin America
█ North America
█ Eastern Europe
█ Western Europe
█ Asia/Pacific
█ China
█ India
█ Africa
█ The Middle East
Source: betterinsight™ by Oliver Wyman
9 9 © CAVOK
$42.2 $54.0
$66.7
$25.0
$29.2
$33.8
5.1%
3.2%
4.3%
2.9%
$67.1
$83.2
$100.4
$0.0
$20.0
$40.0
$60.0
$80.0
$100.0
$120.0
2016 00-05 YRCAGR
2021 05-10 YRCAGR
2026
Materials Labor
$14.5 $15.9 $16.7
$27.9 $37.1
$46.8
$12.4
$15.2
$19.2
$12.3
$15.0
$17.8
1.9%
5.9%
4.1%
4.0%
1.0%
4.8%
4.7%
3.5%
$67.1
$83.2
$100.4
$0.0
$20.0
$40.0
$60.0
$80.0
$100.0
$120.0
2016 00-05 YRCAGR
2021 05-10 YRCAGR
2026
Airframe Engine Component Line
The fleet dynamics of the period result in a forecast that tops $100 billion by 2025, a 4.1% average annual growth rate
Global MRO Market Forecast
by MRO Segment
Global MRO Market Forecast
by Expense Type
US
Do
llars
($U
SB
)
US
Do
llars
($U
SB
)
Materials will account for a larger share of the total spend in the coming years Source: betterinsight™ by Oliver Wyman
10 10 © CAVOK
Shadowing the fleet trends, large differences in regional growth rates will lead to a significant shift in MRO demand over the decade ahead
The Americas
█ Latin America
█ North America
The Middle East
& Africa
█ Africa
█ The Middle East
Europe
█ Eastern Europe
█ Western Europe
Asia
█ Asia/Pacific
█ China
█ India
Primary Region
█ Subregion
█ Subregion
1.8%
3.3%
6.6%
5.5%
Source: betterinsight™ by Oliver Wyman
11 11 © CAVOK
$1.3
$3.3 $5.1
$1.8
$1.8
$6.5
$8.2
$4.3
$1.0 $4.6
$7.0
$16.5
$5.3
$0.0
$5.0
$10.0
$15.0
$20.0
$25.0
The Americas Europe Asia The MiddleEast & Africa
$23.3 $24.0 $27.8
$18.0 $22.2
$24.9
$18.3
$26.6
$34.8
$7.6
$10.3
$12.9
0.7%
4.3%
7.8%
6.5%
3.0%
2.4%
5.5%
4.4%
$67.1
$83.2
$100.4
$0.0
$20.0
$40.0
$60.0
$80.0
$100.0
$120.0
2016 00-05 YRCAGR
2021 05-10 YRCAGR
2026
Asia, as has been the case for some years now, remains the growth engine for MRO
Global MRO Market Forecast
by Operator Primary Region
Global MRO Market Net Growth
by Operator Primary Region and Subregion
US
Do
llars
($U
SB
)
US
Do
llars
($U
SB
)
Asia/Pacific, China and India will be challenged to build the necessary infrastructure
capable of handling the volume of MRO the combined region will demand
█ Latin America
█ North America
█ Eastern Europe
█ Western Europe
█ Asia/Pacific
█ China
█ India
█ Africa
█ The Middle East
Source: betterinsight™ by Oliver Wyman
Global MRO Materials
Market Outlook
3
13 13 © CAVOK
DER &
PARTS REPAIR
COSTS
DER/PARTS REPAIR
LABOR
COSTS
Spares &
Availability
Based Demand
MRO Activity
Based Demand
The global materials market has two engines of demand…
LABOR
COSTS
SPARES
ON THE
SHELF
MATERIAL
COSTS
SPARES IN
TRANSIT
SCRAP
REPLACEMENT
DER/PARTS REPAIR
MATERIAL
COSTS
14 14 © CAVOK
$6.6 $7.4 $7.9
$25.4
$34.1
$43.1
$7.3
$8.9
$11.2
$2.9
$3.7
$4.5
$1.6
$2.0
$2.0
2.3%
6.0%
4.0%
5.0%
3.7%
1.4%
4.8%
4.8%
4.0%
0.5%
$43.8
$56.0
$68.7
$0.0
$10.0
$20.0
$30.0
$40.0
$50.0
$60.0
$70.0
$80.0
2015 00-05 YRCAGR
2020 05-10 YRCAGR
2025
Airframe Engine Component Line Spares
Spend on materials is expected to increase at 4.6% per year over the next ten years, outpacing labor growth as escalation rates continue to significantly exceed inflation
Global Materials Market Forecast
by MRO Segment
Global Materials Market Forecast
by Part Source
US
Do
llars
($U
SB
)
US
Do
llars
($U
SB
)
While global material prices are largely consistent, aftermarket repairs are moving
to emerging regions with lower relative labor rates
$28.5 $36.2
$44.2
$0.6
$0.7
$0.8
$5.5
$7.1
$9.0
$4.4
$5.9
$7.8
$4.9
$6.0
$6.8
4.9% 4.1%
5.4%
6.3%
4.2%
4.1%
3.1%
4.8%
5.7%
2.4%
$43.8
$56.0
$68.7
$0.0
$10.0
$20.0
$30.0
$40.0
$50.0
$60.0
$70.0
$80.0
2015 00-05 YRCAGR
2020 05-10 YRCAGR
2025
OEM PMA Surplus DER Parts Repair
Source: betterinsight™ by Oliver Wyman
Global PMA Parts
Market Outlook
4
16 16 © CAVOK
GLOBAL
MRO MARKET
$67.1B
GLOBAL
MRO MARKET
$67.1B
GLOBAL
MATERIALS MARKET
$43.8B
The PMA materials market is currently 1.3% of the global materials market
GLOBAL
MATERIALS MARKET
$43.8B
17 17 © CAVOK
$99.0 $126.9 $157.5
$289.1
$348.9
$400.7
$137.2
$163.5
$201.3
$27.9
$34.2
$39.5
$25.1
$34.8
$27.6
5.1%
3.8%
3.6%
4.1%
6.8%
4.4%
2.8%
4.3%
3.0%
-4.6%
$578.4
$708.3
$826.6
$0.0
$100.0
$200.0
$300.0
$400.0
$500.0
$600.0
$700.0
$800.0
$900.0
$1,000.0
2015 00-05 YRCAGR
2020 05-10 YRCAGR
2025
Airframe Engine Component Line Spares
Global PMA demand is expected to increase 3.6% per year to more than $0.8B by 2025, and is driven primarily by component and airframe materials
PMA Materials Market Forecast
by MRO Segment
PMA Materials Market Share
by Aircraft Vintage
US
Do
llars
($
US
M)
Mark
et
Sh
are
Slow engine growth is expected due to increased defensive tactics from the OEMs
and continued lessor aversion to PMA parts
1% 0.1%
24%
11% 6%
68%
70%
57%
7%
14%
19%
5%
17%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2015 2020 2025
1970's 1980's 1990's 2000's 2010's
Source: betterinsight™ by Oliver Wyman
18 18 © CAVOK
Increased acceptance of PMA parts usage in Asia, Europe and South America will more than counteract slowing demand in North America
Primary Region
█ Subregion
█ Subregion 2015 2020 2025 2015 2020 2025 2015 2020 2025 Source: betterinsight™ by Oliver Wyman
Market Dynamics 5
20 20 © CAVOK
There are several benefits to using PMA parts versus the OEM equivalents, with the potential for significant cost savings being the most relevant factor
• PMA parts can lead to
substantial savings for an
airline, with parts often 30% –
50% less than the OEM part
• The global economic
downturn resulted in a
significant increase in the
acceptance and adoption of
PMA parts
• As an aircraft ages,
availability of required parts
can be limited
• This is particularly true when
there isn’t a robust surplus
part market, a significant
source of components for
airlines
• PMA parts offer an
alternative supply of
components that can help
airlines and MROs lower
repair turn around time
• PMA parts are often
developed to improve on the
original OEM design
• This can lead to increased
reliability and, in turn, lower
material and labor cost
Lower cost Increased reliability Part availability
21 © CAVOK 21
Regulatory changes in China will be a key enabler of PMA market share growth in Asia
Asia
Regulatory approval
• Japan, Korea, Malaysia,
Singapore, Taiwan have
signed BASAs
• Chinese Civil Aviation
Authority beginning to
slowly accept PMAs
Future usage
• Expected growth in BASA
agreements to drive PMA
adoption
North America
Regulatory approval
• FAA declared PMA parts as
safe as OEM parts in 2008
• FAA and many countries
mutually accept standards of
airworthiness through Bilateral
Aviation Safety Agreements
(BASAs)
Future usage
• BASA proliferation expected to
stimulate PMA market growth
in emerging regions
Europe
Regulatory approval
• 2007 EASA Part 21 allows all non critical OEM-
licensed PMA parts to be used in all EU nations
• Also allows use of critical PMA parts from non-
licensed manufacturers, but only after testing and
approval
Future usage
• Expected increase in usage as PMAs become
more trusted and BASA agreements grow
Middle East and Africa
Future usage
• Africa Strategic Improvement
Action Plan to begin addressing
safety deficiencies by 2015
• Strengthened regulatory
standards and oversight to
facilitate FAA BASAs
South America
Regulatory approval
• Some countries allow use of certain
PMA parts, but market is still small
• Argentina, Brazil, and Mexico
currently only South American nations
with FAA BASAs for PMAs
Future usage
• More BASAs expected in future
Source: Oliver Wyman analysis, AviationToday, CAAC Cooperation Agreement text
22 22 © CAVOK
These regulatory changes can be seen in the PMA market forecast
Primary Region
█ Subregion
█ Subregion 2015 2020 2025 2015 2020 2025 2015 2020 2025 Source: betterinsight™ by Oliver Wyman
23 23 © CAVOK
Despite challenges, the PMA market can expect healthy growth into the future due to rising demand for air travel and increasing PMA market share
Headwinds Tailwinds
Greater proportion of leased aircraft
• Lessor restraints on PMA part usage in
critical components
Increase in defensive tactics
• Push for OEM direct maintenance
agreements with carriers, with a particular
focus on new engine technology
• Limited to no development for Engine
related PMAs expected
• Non engine OEM’s are attempting long term
agreements with operators and MRO’s
Surge in aircraft retirements by 2018
• A rise in the availability of surplus parts may
limit growth in PMA and OEM part markets
Strong demand for air travel
• Growing middle-class and increased
urbanization, particularly in emerging
markets, is driving passenger demand
• World wide fleet expansion will lead to
MRO and PMA spend growth
Growth in the component submarket
• Growing number of out of warranty aircraft
• New markets opening to PMA (APAC)
• Difficult for OEMs to defend against the
large volume of non-critical components
Airline profit squeeze
• With fixed input costs (Labor, Ownership,
Fuel) Airlines will continue to look for ways
to improve margins
A
B
C
D
E
F
24 24 © CAVOK
Air travel passenger demand has roughly doubled over the last 15 years, resulting in higher load factors as fleet supply catches up
Global air travel demand
# of passengers (billions)
Observations
Supply has increased to meet this demand
• Since 2003, supply and demand have had
average annual increase of 4.3% and 6.2%,
respectively
This demand will be driven by economic
prosperity and shifting demographic
dynamics
• Rapid growth of middle-class expected,
especially in emerging markets, driving
disposable incomes
• Urbanization will increase connectivity between
new, and drive density of existing, O&D pairs
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
3.0
2.5
2.0
1.5
1.0
0.5
0.0
3.5
+106%
+113%
15 years 15 years
A
Source: IATA
Increased demand for air travel leads to increased utilization and fleet size, which
drives MRO and PMA spend
25 25 © CAVOK
An aging global fleet will lead to higher components MRO spend, which will drive higher PMA spend in this growing submarket
PMA development activity over time Share of global fleet by aircraft age
11% 9% 9%
30%27% 26%
33%34% 37%
26%30% 28% 23+
13 - 22
5 - 12
100 100 100
2015 2020 2025
0 - 4
Source: betterinsight™ by Oliver Wyman
4 8 0 12 14 18 20 22 24 10 6 2
Years since new model introduction
Warranty expires
OEM LTAs being
expiring
Aircraft part-outs
begin picking up
PMA
sweet spot
B
26 © CAVOK 26
Many operational expenses are beyond the control of the airline; PMA part usage can help airline improve profitability relatively quickly
16%
15%
12%
3%
100%
0%
20%
40%
60%
80%
100%
Flight Ops Transport
Expenses
Fuel
24%
Revenue Operating
Profit
Depreciation
&
Amortization
4%
Mx Labor
4%
Mx Material
5%
Passenger
Services
5%
SG&A
11%
Aircraft
Services
Source: PlaneStats.com, average financial results for all Form 41 carriers from 2009-2012.
Commodity pricing
determined by
market
Labor unions make
it difficult for carriers
influence wage rates
PMA pricing can be as
much as 50% lower
than OEM equivalent
Some influence in the
long-term, but carriers
largely price-takers
C
Partially uncontrollable costs
Cost-savings targets
Uncontrollable costs
27 © CAVOK 27
Note: Includes Western built jet and turboprop aircraft in-service with commercial operators
Source: betterinsight™ by Oliver Wyman
A higher proportion of leased aircraft will place downward pressure on PMA market share due to restraints on PMA part usage
• Falling interest rates helped leasing companies
emerge relatively unscathed from the frozen
credit markets during the 2008 crisis
• A growing trend toward leased aircraft as
carriers look to preserve capital
• Lessors continue to oppose critical high-value
PMA part usage to maximize resale value and
aircraft valuations
• However, lessors will generally accept non-
critical components that have already been
approved by the relevant civil aviation authority
• Rising fuel prices and thin carrier margins will
place increasing pressure on lessors to accept
PMA parts
Aircraft Lease Share Forecast
by Forecast Year Observations
D
Leased
Owned
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
In-S
erv
ice F
leet
Sh
are
28 © CAVOK 28
Source: Oliver Wyman MRO Survey
To preserve market share, OEM defensive tactics will continue to hinder high-value PMA part growth, particularly in the engine submarket
PMA/DER mitigation
OEM competitive strategy
Effective commercial and technical strategies deployed to grow and protect share
Engine OEM competitors have become less aggressive
Formerly aggressive alternative engine material suppliers have pulled back significantly
OEMs have been systematically working to eliminate current and future PMA/ DERs
Technology upgrades, lessor strategies, and regulatory strategies limit alternate part / repair development
Independent MROs have entered license agreements with OEMs (“join them” strategy)
OEM license agreements limit the ability of independent MROs to offer cost-saving materials strategies
OEM strategic control
Engine OEM competition
OEM competitive strategy
MRO license agreements
E
Components Engine Components Engine
Components Engine Components Engine
29 29 © CAVOK
A surge in aircraft retirements will drive up surplus part supply, placing pressure on PMA and OEM material markets
Observations
• Aircraft retirements will spike in the next five
years as a result of the production surge in the
early 1990s
• As these retired aircraft are scrapped, part-outs
will lead to a supply imbalance in the surplus
market
• A rise in the availability of surplus parts may
limit growth in PMA and OEM part markets;
however, PMAs may still have an advantage in
certain areas such as consumable parts
• Older aircraft tend to have more robust PMA
markets as technology has been available
longer, increasing the opportunity for PMA
adoption to occur
• However, surplus market favors higher value,
lower volume components; PMA markets are
more suited for low value, high volume parts
F
698 740 744 768
839 869 914 891
785 762
0
100
200
300
400
500
600
700
800
900
1,000
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Global Fleet Retirement Forecast
by Forecast Year
Nu
mb
er
of
Air
cra
ft
Source: betterinsight™ by Oliver Wyman
30 © CAVOK 30
In summary
• Global PMA demand is expected to increase 4.6% per year to nearly $0.8B by 2025, driven
primarily by component and airframe MRO
• Fleet expansion and an increase in regulatory endorsement of PMAs in emerging markets will
drive PMA growth, most predominantly in Asia
• But an expected increased in OEM defensive strategies and a higher proportion of leased
aircraft will place downward pressure on this growth
• But despite these headwinds, significant opportunities exist, particularly for high demand and
low complexity parts such as expandable components
31 31 © CAVOK
CAVOK and Oliver Wyman insights come directly from the industry, and we value your insights
as they help shape the future.
If you are interested in shaping our 2016 MRO Survey in January, send an email to
Include a subject line with the phrase “count me in” and you’ll receive the survey upon its release
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