MRO Market Forecast & Industry Dynamics

ICF International | icfi.com © ICF SH&E 2013
MRO Market Forecast & Industry Dynamics
October 15, 2013
Jonathan M. Berger
Vice President  ICF SH&E
jberger@icfi.com
Presented by:

ICF International | icfi.com © ICF SH&E 2013 1
Today’s Agenda:
1. MRO Market Forecast
2. MRO Industry Trends to Watch
joined ICF in 2011 joined ICF in 2012joined ICF in 2007
2013
Airline E&M
North America
Montreal, Canada

MRO Market Forecast

North
America
Europe
Asia
Pacific
Latin
America
Africa
Middle
East
Narrowbody
Jet
Widebody
Jet
Regional Jet
Turboprop
The current civil air transport fleet is in excess of 26K aircraft
MRO MARKET FORECAST
Source: Flightglobal ACAS, ICF Analysis
2012 Global Air Transport Fleet
26,156
Aircraft
17%
50%
15%
18%
~8,300
32%
26%
24%
8%
5% 5%
26,156
Aircraft

0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2012 2022
Africa
Middle East
Latin America
Asia / Pacific
Europe
North America
The air transport fleet will grow at a 3.1% rate to 2022
MRO MARKET FORECAST
Commercial Fleet Growth 2012–2022
(by Global Region)
Source: Flightglobal ACAS, ICF Analysis
4.3%
4.9%
2.0%
1.3%
5.8%
4.9%
26,200
35,600
CAGR
3.1% Average
 Air travel growth
of 3.9%
 Fuel costs
in $80–100/bbl range
 15,960 aircraft
deliveries
 6,560 aircraft
retirements
Key Assumptions
~8,300 (32%) ~9,500 (27%)
North
America
Europe
Asia

The North American MRO market size in 2012 was $17.9 billion
MRO MARKET FORECAST
2012 North American MRO Spend
$17.9B $17.9B
Source: ICF SH&E forecast
Forecast in 2012 USD, exclusive of inflation. Includes turboprops
Engines
Components
Airframe
Line
Modifications
16%
17%
21%
41%
5% Narrowbody
Jet
Widebody Jet
Regional Jet
Turboprop
50%
31%
15%
5%

$6.6
$4.6 $4.6
$2.9 $2.8
$2.2 $2.1 $2.0
$0.0
$1.0
$2.0
$3.0
$4.0
$5.0
$6.0
$7.0
Asia/Pacific
(excl China)
China Middle East Eastern
Europe (incl
CIS)
Latin America North
America
Western
Europe
Africa
Over the next decade, North American MRO absolute growth will
be the lowest of all major global regions
MRO MARKET FORECAST
Difference in $ MRO Spend, 2022 vs. 2012––By Region$ Billions
Source: ICF SH&E analysis
Forecast in 2012 $USD, exclusive of inflation,
Includes Turboprops
Latin
America

$0
$5
$10
$15
$20
$25
2012 2022
Turboprop
Regional Jet
Widebody Jet
Narrowbody Jet
The North American MRO market is expected to grow to approx.
$20B by 2022, at 1.2% per annum
MRO MARKET FORECAST
North American
MRO Spend 2012–2022 ($B)
-2.9%
-3.4%
3.4%
1.1%
Source: ICF SH&E forecast
Forecast in 2012 USD, exclusive of inflation. Includes turboprops
4%
15%
31%
50%
3%
9%
38%
50%
CAGR
1.2% Average
 The limited North American
MRO growth will be driven
by widebody aircraft
 Turboprops and regional jets
will see a decrease MRO
spend
 Narrowbody MRO spend
will hold steady
ICF SH&E Insight
$17.9B
$20.1B

MRO Industry Trends to Watch

Five key MRO industry trends to watch…
Source: ICF SH&E
MRO INDUSTRY TRENDS
Industry
Trends
M&A in
MRO
Surplus
Parts
3-D
Printing
Airframe
MRO
Energy &
Aviation
Convergence

ICF SH&E estimates that commercial MRO industry spending on
surplus parts is approximately $3.0 billion
SURPLUS PARTS MARKET
Engine
Parts
Component
Airframe
5%
65%
30%
Air Transport Surplus Parts Market*
*Sales to end customers; excludes intra-dealer sales
$3.0B
 More innovative surplus
parts supplier base
 Vertical integration of
Lessors, Parts Traders &
Repair Vendors
 Increased aircraft part-
outs
 Increased engine
teardowns
ICF SH&E Insight

Aircraft retirements will average between 600 – 700 per year
over the forecast period…
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
0
100
200
300
400
500
600
700
800
Air Transport Annual Aircraft Retirements
# Retirements
Retirement as %
of installed fleet
% Installed Fleet
ICF SH&E
forecast
Source: ICF SH&E Analysis, Airline Monitor Feb 2013, ACAS Jan 2013,
1990-99 Average 171
2000-09 Average 410
2010-22 Average 629

Surplus dealers now obtain over 80% of their inventory from
parting-out aircraft…
54%
82%
26%
8%20%
10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2007 2012
Aircraft Part-Out
Direct Purchase From Airline
Purchase From Surplus Dealer
2007 & 2012 Supplier Channels for
Obtaining Surplus Materials
Source: ICFI SH&E Analysis
 Leaner airline
inventories
 Improved material
planning (and MRO IT
capabilities)
 Increased component
pooling agreements
 OEM after-market
material control
strategies
ICF SH&E Insight

Industry
Trends
M&A in
MRO
Energy &
Aviation
Convergence
Airframe
MRO
3-D
Printing
Surplus
Parts
Source: ICF SH&E
MRO INDUSTRY TRENDS

Growing interdependencies between Aviation, Energy, and the
Oil & Gas industries will continue to impact the MRO industry
ENERGY & AVIATION CONVERGENCE
AVIATION OIL & GAS
ENERGY
 Existing linkage aviation engines
(aero-derivatives) and industrial
gas turbines (IGTs)
 Cutting edge aviation engine
technologies transferable to
energy
 Energy sector growth creates
new opportunities for MRO
suppliers
 Aviation MRO safety, quality, and reliability best practices are transferable to O&G
 Cutting edge aerospace technologies are applicable (e.g. blow out preventers - BOPs)
 Major O&G growth creates new market opportunities for aerospace & MRO suppliers
 Delta Air Lines acquires oil refinery in Pennsylvania
 Rigs powered by industrial
gas turbines (IGTs)
 Demand for skilled
technicians
 Exotic alloys and materials
required in demanding
environments

ICF International | icfi.com © ICF SH&E 2013
Hydraulic fracturing (i.e. fracking) is leading to a significant shift
away from coal to natural gas power generation…
0
1
2
3
4
5
6
7
8
$/MMBtu
Commodity Fuel Prices
Illinois 4lb Pennsylvania 4lb
NYMEX Spec Henry Hub Gas
43% 35%
22% 30%
34% 34%
0
500
1,000
1,500
2,000
2,500
2011 Jan-Jun 2012 Jan-Jun
TWh
US Coal versus Gas Generation
Coal Generation Gas Generation Other Generation
-20% Coal
+34% Gas
-2% Other
-2% Total
Sources: ICF analysis, Bloomberg, EIA
 Tumbling natural gas prices
due to fracking have erased
coal’s cost advantage
 As a result, U.S. gas-
powered power generation
increased its market share
from 22% to 30% in one
year
 The result: Greater
industrial gas turbine (IGT)
demand and utilization
ICF SH&E Insight

…and should underpin expansion of the industrial gas turbine
(IGT) market, currently valued at approx. $20B
Source: ICF SH&E analysis, Forecast International
$0
$5
$10
$15
$20
$25
$30
Aeroengine IGT
2011 Global Gas Turbine
Engine Production ($B)
Military
Aeroderivative
Used for
Power
Generation
Used for O&G
and peak power
generation
 Lower natural gas prices
are increasing demand IGT
generation…and should
underpin production
market growth over the
next decade
 IGTs increasingly leverage
leading aviation engine
technologies developed for
the aeroengine segment
ICF SH&E Insight
Civil Frame

Source: ICF SH&E
Industry
Trends
MRO INDUSTRY TRENDS
Airframe
MRO
M&A in
MRO
3-D
Printing
Surplus
Parts
Energy &
Aviation
Convergence

Positive market forces are driving continued investment interest
in the MRO industry…
M&A TRENDS IN THE MRO INDUSTRY
GROWTH INDUSTRY
favorable market dynamics
D-E-F-E-N-S-E
Avoid competitor from
acquiring first
MARKET SHARE
Spread fixed costs
over a large base
COST REDUCTION
Leverage emerging
market labor rates
DIVERSIFICATION
Mitigate risk of industry
cyclicality
HORIZONTAL OR
VERTICAL INTEGRATION
Create synergies within
existing portfolio of
products, services, and
customers
“OFF-SET”
REQUIREMENT
Certain countries require
reciprocal investment
GEOGRAPHIC EXPANSION
increase global footprint &
customer base

While peaking in 2007, MRO-related M&A transactions have
shown steady growth…
Source: Jefferies’ Research
61
84 87
123
153
133
70
76
84
93
70
0
20
40
60
80
100
120
140
160
180
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
YTD
MRO-Related M&A Activity
Cumulative Annual Total Transactions

…also peaking in 2007, MRO related M&A EBITDA multiples
appear to have stabilized
Source: Jefferies’ Research
9.0x
8.5x
12.5x
10.6x
13.1x
10.0x
8.0x
10.0x
9.2x
8.5x
9.0x
0x
2x
4x
6x
8x
10x
12x
14x
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
YTD
MRO-Related M&A Activity
Average Transaction EBITDA Multiple

ICF SH&E anticipates strong growth in MRO related M&A activity
to continue over the next few years…
acquired
SAS Components
acquired Vought Aircraft Industries
and cabin repair specialist
Aviation Network Services
acquired Aviall
acquired The
Memphis Group
acquired DeCrane’s
bizjet interior production
and completes Microtecnica
acquisition
acquired
M&M Hardware
acquired
German galley
manufacturer Sell and
finalizes Contour
Acquisition
acquired aircraft
component
manufacturer South
Bend Controls
acquired Aero
Technology
acquired Goodrich
acquired UK-based
Airinmar
acquired
Aersospace Coatings
International (ACI), AMSafeacquired Satair
acquired safety
equipment supplier
AmSafe
acquired
Vector Aerospace
acquired Dansk Fly
Elektronikacquired Aero
Maintenance Group (AMG)
acquired Finnair
Engine shop
acquired Mechanical
Enterprises (MEI)
acquired Connector Maker
Switchcraft
Summary of active participants in MRO M&A
acquired
Aveos Components

Source: ICF SH&E
Industry
Trends
MRO INDUSTRY TRENDS
Surplus
Parts
Airframe
MRO
3-D
Printing
Energy &
Aviation
Convergence
M&A in
MRO

In-House
Independent
Airline Third
Party
OEM
Airframe MRO is very fragmented; no supplier has more than a
6% market share
Airframe Heavy Maintenance Market Share
AIRFRAME MRO TRENDS
ST Aerospace
LHT
AFI KLM E&M
TIMCO
HAECO
AAR
Ameco
EGAT
TAECO
AA-MRO
Others
By Supplier Type
2%
44%
18%
36%
6%
4%
4%
3%
3%
3%
2%
$9.1B
Includes Turboprops
Supplier Market Share
$9.1B

Three of the top four airframe MRO by man-hours are Asian
owned…
AIRFRAME MRO TRENDS
11.5
7.4
4.6
4.2
4.1
3.9
3.2
2.8
2.5
2.3
0 2 4 6 8 10 12 14
ST Aero
Haeco Group
AAR
SIAEC
Lufthansa Technik
AFI KLM E&M
Timco
Ameco Beijing
ADAT / SRT
Iberia
2012 Top Airframe MROs by Performed Man-Hours (millions)
Source: Aviation Week Overhaul and Maintenance June 2013
Note: Subsidiaries are included if they are majority owned/operated

$10
$20
$30
$40
$50
$60
$70
1990 1995 2000 2005 2010 2015 2020
North America
Mature Asian MROs
Emerging Asian MROs
Average Widebody Airframe Heavy Maintenance 3rd Party
Labor Rates In North America vs. Asia (USD per Man-Hour)
The cost advantage enjoyed by Asian MRO suppliers will continue
to erode due to the shortage of skilled labor and wage inflation
The convergence of global labor rates will require airlines to reconsider their
airframe sourcing strategies and create new opportunities for MRO suppliers
Labor Rate
Convergence
AIRFRAME MRO TRENDS

Widebody airframe heavy check migration from
North America to Asia will peak…
Source: ICFI SH&E
Shifting Heavy Airframe MRO Migration Patterns
AIRFRAME MRO TRENDS
 Average labor hours per heavy
maintenance check is declining
 High fuel prices increase
maintenance ferry flight costs
 Skilled labor shortages in Asia
driving up labor rates
 South-eastern US labor rates
now comparable to leading
emerging market MRO rates
 Excess facility supply in North
America increasing local
competitiveness
ICF SH&E Insight
Less Trans-Pacific
Heavy Check
Migration
More Heavy
Maintenance
Stays in Americas
“Right-shoring is the
new Outsourcing”

….and as a result, we will see continued investment activity in
the airframe MRO sector
AIRFRAME MRO TRENDS

Source: ICF SH&E
Industry
Trends
MRO INDUSTRY TRENDS
3-D
Printing
Energy &
Aviation
Convergence
M&A in
MRO
Surplus
Parts
Airframe
MRO

Additive manufacturing, also known as 3-D printing, has the
potential the be the next disruptive technology in aviation
3-D PRINTING
Source: ICF SH&E Research & analysis
The GE Aviation-Parker Aerospace
joint venture will 3-D print more
than 30,000 LEAP-X fuel nozzles
per year by 2017

3-D PRINTING
HEICO is using 3-D printers to
produce PMA part prototypes
as well as tooling fixtures

3-D PRINTING
Boeing is using 3-D printing to
fabricate plastic interior parts for
prototypes and test evaluation
units

3-D PRINTING
NASA has certified a 3-D printer to
be used on the International Space
Station in 2014

3-D PRINTING
China’s AVIC heavy machinery is
using large 3-D printed titanium
parts for landing gear and other
structural related parts.

3-D PRINTING
Pratt & Whitney will feature 25
different 3-D printed parts in its
next generation GTF engine family

3-D PRINTING
Industry “experts” predict that
3-D printing technology could lower
the cost of structural parts
by up to 90%
Not surprisingly, GE plans to invest
$3.5B in 3-D printing technology…
within the next 5 years!

ICF International | icfi.com 36© ICF SH&E 2013 36
Thank you!
 MRO Market Research & Analysis
 M&A Commercial Due Diligence
 Aerospace Manufacturing Strategy
 Aviation Asset Valuations & Appraisals
 MRO Cost & Performance Benchmarking
 MRO Information Technology (IT) Assessment
 MRO Strategic Sourcing Support
 Supply Chain Management
 LEAN Continuous Process Improvement
 Military Aircraft Sustainment
ICF SH&E’s MRO advisory services include
the following:

ICF SH&E is one of the most experienced global aviation and
aerospace consultancies
 50 years in business (founded1963)
 100+ professional staff
− Dedicated exclusivelyto aviation and aerospace
− Recruited from the industry
 Specialized,focused expertiseand proprietary knowledge
 Broad functionalcapabilities
 More than 8,000 privatesector and publicsector assignments
 Backed by parent company ICF International ($937M revenue)
 Globalpresence –– seven major offices
New York • Boston • Ann Arbor • London • Singapore • Beijing • Hong Kong
Airports • Airlines • Aerospace & MRO • Asset Advisory • Safety & Security

ICF International delivers professional services and technology solutions
in three focus areas, which ICF SH&E draws upon, further expanding its
service offerings and technology solutions
One of ICF's founders and its first president was a Tuskegee Airman.
C.D. "Lucky" Lester flew more than 90 missions and earned the
Distinguished Flying Cross. In 1969, "Lucky" and 3 DoD analysts
founded the organization that is now ICF International.
$937M Revenues
4,500+ Employees
ICFI NASDAQ
Energy Environment
Transportation
Health, Social Programs,
and Consumer/Financial
Public Safety
and Defense

Jonathan M. Berger
Vice President
jberger@icfi.com
icfi.com

MRO Market Forecast & Industry Dynamics

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