MRO AMERICAS 2019 APRIL 9, 2019 - Dave Marcontell Senior Vice President - Oliver Wyman
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MRO AMERICAS 2019 APRIL 9, 2019 Dave Marcontell Senior Vice President © Oliver Wyman
Oliver Wyman’s Aviation, Aerospace & Defense practice is the largest
and most capable consulting team dedicated to the industry
OUR EXPERIENCE OUR CLIENTS OUR APPROACH
• 400+ professionals across Europe We have worked with more than ¾ of Data-driven: Unbiased benchmarking
and North America the industry’s Fortune 500 companies, and forecasting tools to establish
• Deep aviation knowledge and including: problems and identify solutions
capabilities allow the practice to • All major US airlines Innovative: Ideas that are
deliver data-driven solutions and • Leading airlines, MROs, OEMs, and forward-thinking
provide strategic, operational, and independent parts manufacturers in Actionable: Results-oriented
organizational advice the Americas, Europe, and Asia recommendations
• Dominant aerospace and Collaborative: An emphasis on
defense firms working with our clients, alongside
executives, management, and
support teams
© Oliver Wyman 2
This presentation incorporates Oliver Wyman’s 2019–2029 Global Fleet & MRO Market Forecast and 2018 MRO Survey, both of which are available at oliverwyman.com © Oliver Wyman 3
1 State of the Industry
The global economy and aviation industry has come a long way from the
2008 Great Recession
A Look Back at the 2008 Financial Crisis Annual Fleet Size North America vs Rest of World
Count of Aircraft
30,000
Rest of World
North America 06-19 CAGR
Rest of World: 4.9%
25,000 North America: 0.3%
14-19 CAGR
20,000 4.7%
09-14 CAGR
15,000 06-09 CAGR
4.3%
6.5%
10,000
5,000 06-09 CAGR 09-14 CAGR 14-19 CAGR
0.4% -1.2% 1.9%
0
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Global gleet growth has fueled increasing MRO…but 10 years later without a
downturn, can this trend be sustained?
Source: Oliver Wyman Historical Analysis, The Balance, 2018
© Oliver Wyman 5
Global RPKs are forecast by Boeing to grow 4.7 percent annually over the
next two decades, outpacing global GDP growth of 2.8 percent over the
same period
2017-2037 Year RPK and GDP Growth Projections
Source: Boeing
Europe CIS
3.8% 3.9%
North America
1.7% 2.0%
RPK GDP RPK GDP
3.1%
2.0%
Middle East
RPK GDP
5.2% Asia
Latin America 3.5% 5.7%
5.9% 3.9%
RPK GDP
3.0%
RPK GDP
Africa
RPK GDP
6.0%
3.3%
RPK GROWTH
GDP GROWTH
6.0% 5.9% 5.7% 5.2% RPK GDP
3.9% 3.8% 3.1% 3.3% 3.9% 3.5%
3.0%
2.0% 1.7% 2.0%
Africa Latin Asia Middle CIS Europe North Africa Latin Asia Middle CIS Europe North
America East America America East America
Notwithstanding modest GDP growth, as the middle class increases its share of
GDP, total RPK’s will accelerate quickly
Source: IATA, Air Travel Demand Briefing, April 2018
© Oliver Wyman 6
The global middle class is expected to add over 1.8 billion people over the
next decade plus
Global Middle and Upper Class Population Growth
Billions of people
10
8
6 5.8% 3.3%
CAGR CAGR
Upper-class
4 Middle Class
Other
2
0
2015 2018 2030
RPKs 6.6T 7.7% CAGR 8.3T 5.2% CAGR 12.6T
Aircraft 23,600 3.7% CAGR 26,300 3.6% CAGR 40,000
By 2030, 40,000 aircraft will be needed to provide 12.6T RPKs annually
Source: Brookings, UN, IATA
© Oliver Wyman 7
North American operators saw a larger drop in 2018 profits than
the rest of the world as both fuel and labor costs increased
Global Commercial Air Transport Industry Net Profit and Fuel Prices
By year
Net Profit $B $USD per barrel
Jet Fuel N America Rest of World
$120
$30
$80
$20
$10 $40
$0 $-
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Representing of 35% of operating expenses, the global airline industry had an
estimated $180B in fuel costs during 2018. On a per barrel basis, fuel costs are
expected to dip in 2019, providing a boost to margins
Source: IATA, US Energy Information Administration
© Oliver Wyman 8
Most North American operators agreed to generous labor agreements since
2015, increasing employee costs by over 25 percent and driving labor to a
quarter of total operating costs
2018 Operating Costs by Type Annual
Carrier Union Year Expires
US Operators Increase
Other AA Pilot 2015 2020 4.6%
Fuel
AA AMT 2013 Expired
Labor
Mx 17% DL Pilot 2016 2020 7.5%
AS Pilot 2017 2020 9.3%
37% Initial 14.7%, 3%
5X Pilot 2016 2021
annually
Initial 10%, 3%
21% FX Pilot 2015 2021
annually
UA Pilot 2016 2022 4.2%
2% above top of
UA AMT 2016 2022
industry every two yrs
B6 Pilot 2018 2022 4.6%
25%
Initial 20%, 3%
WN AMT 20191 2024
annually
With fuel stable, but increasing labor costs, we can expect renewed pressure on the
single greatest lever that airlines have for controlling costs, maintenance spend
1. Tentative 03/04/2019
© Oliver Wyman 9
Over the past year, the global commercial in-service fleet grew 4.5 percent,
driven by a slowdown in aircraft removals
Year Over Year Changes to the Global Commercial Air 2019 Global Commercial Air Transport MRO
Transport Service Fleet Market Forecast
4.5%
$13.8
2,427 $81.9B
(1,242) Aircraft Additions $13.7 $33.4B
Aircraft Removals
27,492
2019 In-Service
Sent to Storage
26,307 (1,045)
New Aircraft
Delivery
Fleet
$21.1B
2018 In-Service
Fleet 1,687
Formally Retired
(130) Removed from
Involved in an
Storage
665
10 Year Forecast CAGR
accident
(37) Completed 1.7%
freighter Airframe & Modifications
Stored for conversion
Conversion
(25)
69
4.1%
Engine
Transferred from
Transferred to non non commercial
commercial operator 4.3%
operator/unknown 6 Component
(5)
3.9%
Line
Translating the global fleet dynamics into MRO spend, the 2019 market is expected
to be $81.9B, as engine MRO continues to be the single largest expense category
© Oliver Wyman 10The global fleet will grow by nearly 12,000 aircraft, pushing commercial
aircraft MRO spend up to $116B by 2029
Global Commercial Air Transport Fleet Forecast Global Commercial Air Transport MRO Forecast
By Aircraft Class/number of Aircraft By MRO Segment/US$ BN
40,000 39,175 $116
3.6% $120
3.5%
33,295 3.3% -2.4% 3.7%
$97 3.9%
$100 3.4%
3.9% -2.3% 3.5%
30,000 -0.4%
27,492 $82 4.3%
-2.6% -0.4% 4.2% 4.1%
3.9% $80
4.1%
-0.5% 4.6%
3.4% 4.6%
4.9%
20,000 $60 1.7%
4.4% 3.6%
4.4% 1.7%
5.5% $40 1.7%
10,000
$20
CAGR CAGR CAGR CAGR CAGR CAGR
2019-2024 2024-2029 2019-2029 2019-2024 2024-2029 2019-2029
0 $0
2019 2024 2029 2019 2024 2029
Narrowbody Widebody Regional Jet Turboprop Airframe Engine Component Line
By 2029, Next Generation1 aircraft will represent over half of total MRO spend, up from
13 percent today
Source: Oliver Wyman Global Commercial Air Transport Fleet Forecast; Scenario variables: Economic growth, passenger traffic, fuel prices and interest rates
1. Certificated in 2010 or later
© Oliver Wyman 11The North American fleet is forecasted to grow modestly at 1.4 percent
annually over the next 10 years, a slight improvement from the average
annual growth of 0.3 percent seen over the previous decade
N. America Global Commercial Air Transport FleetForecast N. America Global Commercial Air Transport MRO Forecast
By Aircraft Class/number of Aircraft By MRO Segment/US$ BN
10,000 9,247 $25.0 $24.5
1.4% 1.8%
8,550 $21.6 2.5%
1.6% -3.8%
8,033 $20.5 2.3%
8,000 1.3% -3.0% $20.0 1.1% 2.4%
-1.6%
1.5 %
-4.6% -1.9% 2.1% 1.7%
2.9%
6,000 2.8%
-1.3% $15.0 1.4%
3.0% 4.6%
2.7%
0.0%
2.8% 1.1%
2.8% -0.2%
4,000 $10.0
2.6% 0.1%
2,000 $5.0
CAGR CAGR CAGR CAGR CAGR CAGR
2019-2024 2024-2029 2019-2029 2019-2024 2024-2029 2019-2029
0 $0.0
2019 2024 2029 2019 2024 2029
Narrowbody Widebody Regional Jet Turboprop Airframe Engine Component Line
Almost 80% of North American deliveries in the next ten years will serve as
replacement aircraft. A best or worst case scenario can swing MRO growth from a
low of 0.1% to high of 2.7% CAGR
Source: Oliver Wyman Global Commercial Air Transport Fleet Forecast
© Oliver Wyman 12Next Generation1 narrowbody aircraft will dominate deliveries over the next
decade with their improved fuel efficiency and greater operational flexibility
Three Decades of Narrowbody Growth
Share of global fleet, %
2002 2011 2019 2029
52% 52% 58% 66%
Narrowbody Widebody Regional Jet Turboprop
Cost Advantages Maintenance Advantages Operations Advantages
• Program synergies with previous models • Gate availability
• Fuel efficiency
– 737 Max and A320neo designed to – Most airport gates are built for wingspans
– Physics
incorporate maintenance programs with between 75ft (RJs) and 120ft (NBs) where
• Cost of acquisition and financing WB wingspans reach 220 ft
close similarities to previous generations
– Large block commitments of aircraft • Route density
– Large lessor inventory of NB jets • Maintenance base locations and capabilities
– Providers with previous NB capabilities to • Pilot familiarity
expand to newer generations – Previous models
– Wide range of available locations/regions
• Shrink or stretch models
to perform maintenance
– Seat ranges from 150-200+
1. Certificated in 2010 or later
© Oliver Wyman 132 Downturn on the Way?
In the short term, various global risks could impact the growth of the commercial fleet and MRO demand © Oliver Wyman 15
Passenger demand, fuel costs and supply chain capacity are the three
factors that survey respondents feel are going to determine the direction of
the MRO market moving forward
Over the next five years, which three factors are most likely to determine the direction of the MRO market?
% of participants who selected each response
Passenger Demand 54% MRO 71%
OEM
Operator
Jet Fuel Costs 53%
55%
Manufacturing and/or 53% 50%
supply chain capacity 45% 44% 46%
43%
Labor costs/labor
45% 35%
relations 33%
Political Conditions 29%
Trade Relations 18%
Other 14% Passenger Jet Fuel Costs Manufacturing
Demand and/or supply chain
capacity
Slowing or declining passenger demand would be a concern equally for OEMs,
operators and MROs
© Oliver Wyman 16Despite potential risks, more than 90 percent of survey respondents believe
the aftermarket will grow over the next five years, and 70 percent expect
growth to exceed five percent
Over the next five years, in the regions you operate, do you expect to see demand (spend) for MRO services to
Distribution of total responses
4% 2%
25%
North America
(only United States 44%
and Canada)
24% 29%
27% 16%
47%
Western Europe
29%
56%
Asia Pacific 22%
43% (excluding China and
India) 11%
Decrease Increase by less than 5% Increase by more than 10%
Remain flat Increase between 5% and 10%
Business confidence is not always a leading indicator of future growth, however…
© Oliver Wyman 17Out of 13 possible options, responses to a downturn were consolidated
amongst five options, with differing reactions for operators and non-operators
Please select the top three levers you will likely use in the event of an economic downturn
Distribution of total responses
R
e 68%
Reduce Headcount
d 17%
u…
I
Introduce Operational
n 64%
Efficiency Measurest 45%
r…
r
Re-negotiate existing
e 55%
agreements with vendors and-
32%
suppliers
n…
Reduce, postpone or cancelr 51%
e
planned expansions ord 47%
innovations
u…
p Non-operators
a 0%
Parking/Storing/Cannibalizationr Operators
43%
of Aircraft
k…
While non-operators would plan to reduce headcount, aircraft operators would
largely maintain staffing levels, choosing to improve efficiency and temporarily
decrease capacity through postponements and storing aircraft
© Oliver Wyman 18Operator responses align with historical actions during downturns; as the
amount of aircraft sent to storage saw large spikes in 2002 and 2009
Annual Fleet Removals from Service and New Deliveries
Number of Aircraft
US Recessions
Transfer/Accident
1,800
Deliveries
Formal Retirement
1,500
Sent to Storage
?
1,200
900
600
300
-
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
With an average age of 18 years, aircraft sent to storage would not incur scheduled
maintenance events, negatively impact MRO demand in the short term
© Oliver Wyman 193 An OEM Centric Aftermarket
In the 2018 survey, there was an expectation that OEM’s would see an
increase in aftermarket share, primarily through usage restrictions on existing
IP, joint ventures and M&A
Compared to the market growth, OEMs’ share of How will OEM grow their presence in the aftermarket?
the aftermarket over the next 3 years will… Weighted average of rankings (scale of 1-3)
Increase
increase significantly
significantly more 2.1
more rapidly 38%
rapidly
1.7
Increase slightly 1.5
increase slightly more rapdily 40%
more rapidly
Increase
increase about the same 7%
about the same
Increase slightly
increase slightly less 10%
less rapidly
0.2 0.2
Increase
increase significantly
significantly less 5% Usage
usage Joint jvs
ventures mM&A
and a Newinternal
new internal Other
other
less rapidly
restrictions
restrictionson with existing startups
startups
existing IP and MROs and
licensing suppliers
It’s far too early to tell if the recent CFM/IATA agreement will materially modify OEM
aftermarket strategies or competitive actions
© Oliver Wyman 21Respondents continue to believe that OEMs will continue to grow in the
aftermarket space
Q: Over the next couple of years, what is the likelihood of the following events happening in aftermarket services?
Distribution of total responses
Airframe OEMs will develop more North America
capabilities (internally or through joint 67% 25% 7%
ventures) in the aftermarket service space
Airframe OEMs will develop more
Airframe OEMs will develop more capabilities (internally or through joint ventures) in the aftermarket
56% 30%
capabilities internally or through JV’s
service space
Airframe OEMs will develop more
capabilities through acquisitions of Tier 1 or 39% 44% 14%
2 OEMs Airframe OEMs will develop more capabilities
Airframe OEMs will develop more capabilities through acquisitions of Tier 1 or 2 OEMs
40% 38%
through acquisitions of Tier 1 or 2 OEMs
Consolidation within distributors 37% 51% 11%
Western Europe
Consolidation with service providers Airframe OEMs will develop more
32% 53% 13% 74% 20%
(MROs)
Airframe OEMs will develop more capabilities (internally or through joint ventures) in the aftermarket
capabilities internally or through JV’s
service space
Airframe OEMs will develop more capabilities
Consolidation within Tier 1 players
Airframe OEMs will develop more capabilities through acquisitions of Tier 1 or 2 OEMs
37% 40%
30% 55% 13% through acquisitions of Tier 1 or 2 OEMs
Consolidation across different types of Asia Pacific
players (Airframe / Engine / Tier 1 OEMs / 25% 43% 24%
service providers – MROs / etc.)
Airframe OEMs will develop more
Airframe OEMs will develop more capabilities (internally or through joint ventures) in the aftermarket
71% 14%
capabilities internally or through JV’s
service space
Engine OEMs will develop more capabilities
18% 56% 25%
through acquisitions of Tier 1 or 2 OEMs
Airframe OEMs will develop more capabilities
14%
Airframe OEMs will develop more capabilities through acquisitions of Tier 1 or 2 OEMs
57%
through acquisitions of Tier 1 or 2 OEMs
Highly likely Likely Unlikely Highly unlikely
95 percent of respondents believe that Airframe OEMs will develop more
capabilities either internally, through joint ventures or acquisitions of Tier 1/2 OEMs
© Oliver Wyman 22Growing demand for USM offerings is changing the spare parts aftermarket
and helping improve penetration rates
As older vintages in North America and Western Total Engine Materials Demand by Source
Europe are retired over the next five years, what will be
the most important result of this for the aftermarket?
$50 USM
PMA USM DER/PRP OEM
Billions
PMA
Pivot to new DER/PRP
$20.1B
aircraft types for 39%
MRO $40 5.3%
CAGR
USM
PMA
Surplus of new DER/PRP
$30 $12.0B
parts from 37%
aircraft tear-down
$20
Reduced short
term MRO 14%
Demand
$10
Reduced short
term MRO $0
6%
Demand
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
Operators are not waiting for the market to meet their materials needs, as cost
advantages for PMA parts are driving increased demand in the segment. By 2029,
USM, PMA and DER/PRP will represent close to 50 percent of all engine materials
© Oliver Wyman 233 A Digital Evolution
For survey respondents, cost ranked as the most important factor when
choosing an MRO provider, with almost 90 percent of respondents ranking it
in their top 5
What are the most important factors when an operator is choosing an MRO service provider?
Ranking each factor from 1 (most important) to 13 (least important) - % of respondents
Cost 38% 20% 11%
Quality and consistency in service 31% 21%
On-time performance 9% 26%
Expertise 8%
Turnaround time 5% 21%
Long-term Relationship 4% 5%
Digital/data Ranked 1
Geographic proximity
analytics factors
Ranked 2
Access to data 3%
Bundling product purchase and
Ranked 3
aftermarket services with single provider • Ability to influence
Breadth of offering aircraft availability
• Flexibility (non-OEM)
Technology/access to OEM • Slot availability
Data and analytics services provided by
1%
an MRO
Turnaround time 40%
Currently, digital and data analytics offerings are not a differentiator when choosing
an MRO service provider
© Oliver Wyman 25While not considered critical or the most important aspect of an OEM/MRO’s
services, digital offerings have evolved over the past decade
What digital offerings have evolved the most? When is each digital offering likely to benefit your
% of participants who selected each response business the most?
Distribution of total responses
Maintenance planning Maintenance planning
and predictive
1 66% and predictive 76% 21%
maintenance maintenance
Aircraft health Aircraft health
2 65% 65% 29%
management management
Business intelligence Business intelligence
3 51% 61% 35%
and data analytics and data analytics
Data and services Data and services
4 29% 41% 49%
platform creation platform creation
Flight operations
Flight operations
efficiency and decision 53% 31%
5
efficiency and decision 28%
making support
making support
In the near term (3 years) In the long term (10 years) Unlikely to benefit
Predictive maintenance and AHM implementation have grown over the past few
years, and will benefit companies that have taken advantage of this new technology
© Oliver Wyman 26AHM technology has evolved over the past two decades, driving increased
adoption rates among operators
2017
2002 2014 Airbus launches
Boeing begins development Southwest Skywise in 2018
2001 of AHM system implements collaboration
with Palantir WestJet becomes
Airbus Boeing AHM
100th customer for
launches 2003 on existing
Boeing launches Boeing AHM
AIRMAN Air France, Japan 2007 737 NG fleet
software AnalytX
Airlines and US Airways
tool American Airlines
Adoption
becomes largest
test Boeing user of AIRMAN
Airplane Health with over 200 2019
Management aircraft
2004
Singapore Airlines 2015
becomes first
customer of 600,000 data occurrences
Boeing AHM 2011 within 0.1s
Connectivity Contextualize sensor data
2005 systems against PFRs
2002
Graphical User
Automated monitoring Worldwide maintenance
Interface
of fuel consumption and engineering data
Continuous data
Technology
ACARS & ACMS and CO2 emissions Engine Indicating available for benchmarking
streams and Crew Alerting
Troubleshooting Performance System Machine learning and
Predictive
monitoring module neural networks
Preventative capabilities
Predictive
maintenance tasks
Portable enhancements
Fault data reporting Maintenance Aid
DESCRIPTIVE PREDICTIVE PRESCRIPTIVE
© Oliver Wyman 27The AHM/PM field has become increasingly crowded over the past two decades © Oliver Wyman 28
Disagreements exist about who should provide these digital services like
AHM and predictive maintenance planning
Who should be responsible for providing digital and data analytics services?
Distribution of total responses by company type
MRO OEM Operator
17%
17%
26%
13%
49%
4%
67%
42%
33%
33%
33%
12%
8% 8%
5% 5%
BI & Data MX AHM Data and Flight ops BI & Data MX AHM Data and Flight ops BI & Data MX AHM Data and Flight ops
analytics planning services efficiency & analytics planning services efficiency & analytics planning services efficiency &
and PM platform decision and PM platform decision and PM platform decision
creation making creation making creation making
support support support
MRO service providers OEMs Aircraft operators in-house All options are possible
© Oliver Wyman 294 Conclusions
Conclusions
Despite near term global risks,
Fleet and MRO growth is the industry is bullish about
supported by strong both short and long-term
underlying metrics growth potential
• An expanding global middle • Tightening labor conditions, fuel
class will drive demand for air prices, global trade wars and
travel over the next decade plus political instability are all
• Emerging markets will see the external factors that could
largest growth on a relative negatively affect market growth
basis • Future sentiment is largely
• The global fleet will exceed positive, with plans in place to
39,000 aircraft by 2029, driving deal with a potential downturn
$116B in MRO demand
Aftermarket battles will
intensify, driven by an Digital offerings will continue
expanded OEM presence along to evolve and positively
with the increasing popularity impact the bottom line
and availability of USM and • Mx planning, AHM and
PMA materials predictive maintenance have
• An acceleration of aircraft evolved the most
retirements in developed regions • As these offerings begin to
will replenish the shrinking impact cost more substantially,
supply of used parts they will become important
• Industry acceptance of alternate factors considered by operators
materials sources will increase when choosing an MRO
competition in the aftermarket
© Oliver Wyman 31Recent and upcoming publications available on www.oliverwyman.com.
Reports, Studies & Journals Articles
© Oliver Wyman 32You can also read
