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0 2009 TeamSAI, Inc.
Outsourcing Trends in the USA
9th Annual Aircraft Maintenance Outsourcing Conference for the Americas
November 2009
Presented by:
David A. MarcontellExecutive Vice President & Principal
2009 TeamSAI, Inc.
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1 2009 TeamSAI, Inc.
TeamSAI provides innovative solutions to the aviation industry
Specializing in strategic and tactical management & operations With six actively involved and experienced owners / executives
Beginning our 20th year
We serve all aspects of the aviation community worldwide including
Who We Are
Strategic & TacticalConsulting
Airline, MRO, Corporate& Airport Management
Process & PerformanceImprovements
Accelerated Change
Customized On-GoingAirline Support
Technical Services
MaintenanceManagement
Technical Procurement
Partners with theAviation Week Group
Global MROForecasting
MRO Prospector Data -Industry LeadingMarket Research
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TeamSAIs Expertise
Business Strategy & Planning
Market Segmentation & Analysis Global MRO Industry Forecasting
Competitive Assessments
New Product Definition &Development
M& A Due Diligence & TransactionSupport
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Performance Improvement
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Operations
Lean/Six Sigma Implementation
Benchmarking & Best PracticesImplementation
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Effective Sourcing & VendorManagement
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Supply
Chain
Safety Management & SystemOptimization
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Development
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Compliance Systems & Audits
Safety,Certification &
Compliance
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Whats in store
Guiding Questions
How have outsourcing trends been affected by the recession? What has been the impact of currency value fluctuations?
How does work move between markets and geographical regions?
What are the key US companies that import outsourced work?
Discussion Points Overview of outsourcing
State of the market
Currency trends North American MRO (engine and airframe) overseas volume estimates
Regulatory environment
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Outsourcing overview
With very tight operating conditions, airlines are constantly evaluating their maintenance work
Market is seeing a mix of remarkably diverse RFPs each driven by broad ranges of confidence Shorter and longer contract terms
Smaller and larger work scopes
If there is one common denominator, it is lower prices are in demand
Recession is putting pressure on operators to consider in-sourcing work first before bidding theworkif able
This does not mean that they will use that option, but a first-look is increasingly common
OEM / MRO tension is on the rise, with OEMs continuing to raise prices despite recession andcontinuing to exert their presence down the supply chain
MROs poor position being exacerbated by added pressure from airlines wanting to avoid flightcancellations/interruptions and resultant costs
Thus, airlines are pushing MROs to maintain larger inventoriesa capital intensive need that adds to theMROs costs
Major factors that influence the outsourcing decision remain the same:
Internal capabilities, experience with fleet type(s), and fleet size Turnaround time
Exchange rates
Fuel costs for ferrying if required
Effectiveness of an MROs LEAN execution is also having a strong influence on the outsourcingdecision
How will these conflicting approaches ultimately impact the industry?
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5 2009 TeamSAI, Inc.
MRO Prospector keeps a listing ofknown contracts and relationships An industry unique feature
Provides user with a means of seeing whichoperators have established relationshipswith MROs
Market share is estimated based onthis research
With an understanding of existingcontracts, estimates are made todetermine trends in outsourcing
State of the marketWork outsourced by segment
Contract research suggests that a significant amount of HMV and engine work worldwide is doneoutside the operator Airlines increasingly wish to focus on their customer-facing roles and allow non-customer-facing tasks to others
Of course some of that work is sent to the operators affiliated MROs, so it is not all trulyindependent
Of the work that is sent to an independent MRO, less than a quarter leaves the region
North America largely mirrors the overall worldwide behavior
World
Segment% Outsourced -
All% Outsourced -
Independent/OEMs
% Outsourced -
Independent -Outside Region MRO $ (B)
HMV (Check)1 77% 58% 15% $6.5
Engines 95% 81% 24% $19.1
Components 89% 84% 12% $9.0
Line 33% 28% 15% $8.3
Total 79% 67% 18% $42.9
North America
Segment% Outsourced -
All% Outsourced -
Independent/OEMs
% Outsourced -
Independent -Outside Region MRO $ (B)
HMV (Check)1 85% 70% 22% $2.2
Engines 99% 81% 12% $6.3
Components 86% 81% 7% $3.1
Line 56% 40% 19% $2.9
Total 85% 71% 15% $14.4
Note: values include turboprops
1 HMV (Check Only) excludes modification work in this analysis
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53% 53%58%
2007 2008 2009
Outsourced HMV (Check) MRO
State of the marketWork outsourced by segment, YOY trends
Note: HMV (Check Only) excludes modification work in this analysis
70%75%
81%
2007 2008 2009
Outsourced Engine MRO
63%
77%84%
2007 2008 2009
Outsourced Component MRO
17% 16%
28%
2007 2008 2009
Outsourced Line MRO
Outsourcing continues
to grow, especially incomponent and linemaintenance
HMV is about 50:50but has been on therise
Line MRO is stillmostly in-house, butnow beginning to risequickly
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North America
Latin America
Western Europe Eastern Europe
Middle East
India
Asia Pacific
China
Africa
State of the marketNorth Americas HMV (Check) MRO outsourced work by region
Most NA HMV work stays within NA(64%)
Asia-Pac gets about a quarter of theoutsourced business
HMV
(Check Only)1
1 HMV (Check Only) excludes modification work in this analysis
$1.5B
2%
64%stays in NA
5%
25%
4%
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North America
Latin America
Western Europe Eastern Europe
Middle East
India
Asia Pacific
China
Africa
State of the marketNorth Americas Engine MRO outsourced work by region
NA engine work is even more likely toremain in NA
Western Europe also gets about 13% ofNAs business
Engine
$5.1B
13%
84%stays in NA
1%
2%
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State of the marketNorth America outsourced work by service type
Bundled contracts (total care / all maintenancewhich extend beyond airframe work) make upabout a third of the contracts in NA
More than half focus only on heavy maintenance
Dedicated shop visit contracts dominate theengine overhaul business
Some 11% are part of bundled (total care or fullengine maintenance) contracts
$1.5B
1 HMV (Check Only) excludes modification work in this analysis
$5.1B
All this suggestsWork requiring significant manhours or capital equipment (e.g., engine shop repairs) is more likely to
be outsourced
Airlines prefer doing their own light C checks due to short turn-times and less manhour intensivevolume where cost differential adds up
While most engine maintenance is locked up, the prevailing model is event driven rather than hourly
driven
12%
32%
54%
2%
HMV(Check Only)
Unannounced
Total Care / AllMx
Heavy
Light - C
Checks
8%
11%
81%
Engine
Unannounced
Total Care /All Mx
Shop Visit
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Outsourcing Technical Support Services
Technical Support market continues to
grow Examples of recent contracts:
58%
81%
84%
28%
5%
42%
19%
16%
72%
95%
$0
$2
$4
$6
$8
$10
$12
$14
$16
$18
$20
HMV(Check)
Engines Components Line TechnicalSupport
Outsourced vs In-House MRO
2009
Note: MRO Outsourced includes work outsourced toindepe ndent MROs or to OEMs, but not work d one byoperator-affi liated MROs
BOutsourced % In-House %
Provider Airlines/Offering
LufthansaTechnik
Aeroflot(A320, total support)
AeroLogic(777F, total support)Khalifa Airways
(A320, total support)
SR Technics Gulf Air(full fleet, integrated airline solution)
TeamSAI World Airways
North American
CAVOK Milcon Gulf Group
Avisa Ltd Air Malta
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A tough year for MRO providersMRO closures/declines
2008 2009
Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov
Are we seeing the bottomyet?
AAR Chromalloy SRT Dublin AAR Comair
GE LHT
LHT-Shannon
LTAI
TIMCO
P&W
Dublin Aerospace
Closed Ft Walton Beach facility
Laid off works in NV Transferred workers to San Antonio
Consolidated manufacturing & maint. Avoiding closures for now
Significant decline due to parking ofUAL 737s
Closing their HOT facility
Largest MRO casualty of 2009
Stabilized decline by shifting tomilitary work
Confident but cautious Focus on efficiency and newer a/c
types
Concentrating on basics Low-cost sourcing Suspending India JV
Escape SRT-Dublin fate by securingproductivity improvements from labor
Surviving thru LEAN
Shifting work to lower cost facilities by
closing some Moving forward with some strategicJVs
Replacing SRT-Dublin Awarded key approval certificate Expects to employ 50-150 EEs by
end of first year (vs. 1500 before)
Closed MRO base in ORL
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2009 Contract Highlights
MROs Contract Description
GE / ADAT / SRTechnics /Standard Aero
Multi-faceted aviation agreementAbu Dhabi Aircraft Technologies (ADAT) to become first MRO Network provider of GEnx engines and acquire GE90capabilities
GE and Snecma to provide ADAT and SR Technics with engine overhaul and technical supportGE designates CFM56-7B work for WestJet to StandardAero ($850M, 12yrs OnPoint Solutions partnership)
DTO / EGAT Delta TechOps wins first 747 component MRO contract since NWA merger by teaming with Evergreen Aviation TechnologiesCorp. (EGAT)
EGAT will continue providing comprehensive maintenance solutions to EVA Airways, but through the new contract, Delta willprovide component services for EVAs 747s and MD-90s operated by EVA subsidiary UNI Air
LHT-ShannonAerospace
LHT-Shannon Aerospace picking up easyJet 737NG checks that formerly were to go to SRT-Dublin Intense LEAN focus to survive downturn
GE EngineServices
In 4/09, GE Engine Services landed $100M PBTH engine overhaul contract for Gulf Airs CFM56-5Bs for its 15 new A320s In 6/09, GE Engine Services landed $1.7B OnPoint contract for Ethihad (GE90, GEnx)
Gulf remains relatively bright spot in economic downturn In 6/09, GE Engine Services landed 10-yr, OnPoint contract for Delta Air Lines (GE90)
Outsourcing now, despite the fact that DAL carried out >$300M in engine work for other airlines in 2008 In 10/09, GE Engine Services (Celma) landed 15-yr, $1.0B OnPoint contract for Azul (CF34-10E for E190/195)
Pratt & Whitney In 6/09, P&W secured long-term $75M contract covering all JAL components for all fleets
Lufthansa Technik In 6/09, LHT secured long-term Total Component Support contract for Scandinavian Airlines System
DTO In 7/09, Delta TechOps contracted with Hawaiian Airlines for $500M OnPoint (Total Care) for PW4000-94 and CF6-80A
Large Players Making Strategic Moves
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Currency fluctuations have mixed impact on NA MROsContract data does not bear out significant trends but weak USD favors NA MROs to some extent
US Federal Reserve loose monetary policy (i.e.,keeping interest rates low to spur the economy) has, in
part, driven the US dollars devaluation
Since the beginning of 2008, the USD/EUR exchangerate has fallen Dollar is currently at its lowest point relative to the Euro since August
2008
Conventional wisdom: weak dollar benefits US exportsAnd to the extent that MROs are enjoying increased sales in Europe,
this wisdom holds
Weak dollar is making US MROs very cost-competitive
However, raw materials sourced overseas in foreigncurrency are more expensive Oil, metals, component parts, etc.
Tight credit terms can prevent US companies from getting funds tofront these costs
Higher raw material costs are bad for everyone
Higher fuel costs (due to devalued dollar) impact ferry flight
breakeven distances Furthermore, many contracts are long-term in nature and cannot berenegotiated to take advantage of the weaker dollar
US economy could also ultimately be harmed bydevalued dollar, if it triggers inflation (though Feds arestill more concerned about deflation)
0.60
0.65
0.70
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0.85
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EUR to USD Exchange Rate
6.80
6.90
7.00
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7.60
7.70
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CYN to USD Exchange Rate
Anecdotal evidence suggest NA MROs are doing better in EU
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North American MROs service all regions of the worldOf course, most work does come from the Worlds largest market (NA)
The vast majority of NA MROs get theirairframe maintenance work from NAoperators
WE contributes just 2% of the NA MROswork
Engine work, on the other hand, is muchmore geographically diverse in terms of thehome region of the customer
Still, NA operators contribute nearly two-thirds of the business
LA&C, WE, and Asia-Pac customers domake up one-quarter of the NA MROswork
$871M
1 HMV (Check Only) excludes modification work in this analysis
$5,890M
96%
1%
2%
0% 0% 0% 1%HMV(Check Only)
North America
Latin America &Caribbean
Western Europe
Eastern Europe
Asia Pacific
China
India
Africa
Middle East
65%7%
11%
0% 7%
4%
1%1%
4%
Engine
North America
Latin America &Caribbean
Western Europe
Eastern Europe
Asia Pacific
China
India
Africa
Middle East
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Top 15 MRO providers in NATop NA MROs service have regionally-diverse client base, but still focus mainly on NA operators
Looking at the major airframe and engineMRO providers in North America, weestimate the portion of their business thatoriginates from other regions
Delta TechOps has wide expanse in theairframe MRO market
Just over half of their work comes from NA
LAN Airlines (LA&C), Star Air (WE), and
Royal Air Maroc (AF) make up some oftheir major customers overseas
Engine overhaul providers have a widerreach than airframe MRO providers
P&W, AeroThrust, Delta TechOps, andUnited Services are some of the mostregionally diverse
These providers service operators outsideNA, with P&W having the broadest reach inthe engine overhaul space
Note: All in-house work is excluded from this analysis. So, for example, United Airlines workexcludes the work that United Services does for the UAL parent
HMV (Check Only)
Top 15 MRO NA LA&C WE EE AP CH IN AF ME Total
1 TIMCO Aviation Services, Inc. 96% 4% 100%
2 AAR Corp. 100% 100%
3 Aviation Technical Services, Inc. 100% 100%
4 Pemco World Air Services 100% 100%
5 ST Mobile Aerospace Engineering, Inc. 100% 100%
6 Aveos Fleet Performance 99% 1% 100%
7 ExelTech Aerospace 93% 6% 1% 100%
8 Goodrich Corporation 100% 100%
9 Empire Aero Center 89% 11% 100%
10 Cascade Aerospace, Inc. 100% 100%
11 Bombardier Services Corp. 100% 100%
12 Delta Air Lines/DTO 52% 11% 29% 8% 100%13 Tucson Air Center 100% 100%
14 Flightstar Aircraft Services, Inc. 100% 100%
15 American Airlines, Inc. 100% 100%
Engine
Top 15 MRO NA LA&C WE EE AP CH IN AF ME Total
1 GE 64% 6% 14% 0% 6% 2% 0% 0% 8% 100%
2 Pratt & Whitney Global Service Partners 46% 4% 10% 0% 20% 11% 3% 2% 2% 100%
3 Rolls-Royce plc, Aero Repair & Overhaul 85% 5% 8% 1% 1% 100%
4 IAE International Aero Engines AG 37% 14% 10% 4% 13% 16% 6% 100%
5 Delta Air Lines/DTO 67% 26% 6% 0% 1% 100%
6 Texas Aero Engine Services Ltd. LLC 100% 100%
7 Aveos Fleet Performance 100% 100%
8 Standard Aero, Inc. 99% 1% 100%
9 MTU 83% 17% 100%
10 AeroThrust Corp. 57% 43% 100%
11 United Airlines, Inc. 0% 15% 85% 100%
12 Chromalloy Gas Turbine Corp. 100% 100%
13 Eagle Aviation Services, Inc. 66% 34% 100%
14 Vector Aerospace Engine Services - Atlantic 100% 100%
15 Honeywell Aerospace Services 100% 100%
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Outsourcing and regulation
Outsourcing to low cost regions has again come to the forefront of the publics attention with some
high profile maintenance mishaps and media coverage In this age of government involvement, protectionist measures are a very real concern
But now that we are beginning to see the end of the recession, globalization will likely continue itsgrowth (though perhaps not as fast as that in the past)
Increased pressure from the FAA on airlines will likely be felt by both US-based and foreign MROproviders
This is a new era of regulation where increased scrutiny of maintenance will be the norm
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Summary
Despite the recession, or perhaps because of it, outsourcing work continues to be a persistent
trend in MRO market Over 65% of all MRO is outsourced to third parties
Largely due to either complex nature of the work , or the shear volume of manhours required
MRO providers have had to take a long, hard look at their operations and adjust to the changes inutilization and capacity
2008 was the year of airline capacity reduction
2009 may prove to be the year of the MRO providers response to capacity reduction
Less business form older aircraft and engines that are not coming back
Turning focus toward new aircraft with an understanding that they will (at least for the near future) require lessmaintenance
Recession has made the market place more competitive though Weak USD makes for a temporary bright spot for North American MROs, but long-term implications must
not be forgotten
All this said, cost remains king LEAN remains the answer
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