pma market overview

PMA MARKET OVERVIEW
Executive Presentation
Presented by:
Jonathan M. Berger
[email protected]
Today‟s Discussion
1. Panelist Introduction
2. About SH&E
3. Global MRO Market Forecast
4.
PMA Market Overview
– Definition, history, and regulatory overview
– Market drivers, suppliers, and size forecast
– Recent SH&E PMA market survey results
5.
Summary
1
Today‟s Panelists
Aircraft
Operator
Perspective
Ahmed Zamany, Copa Airlines
Vice President – Technical Operations
Engine
OEM
Perspective
Jeff Conner, GE Aviation
Director – Alternate Materials Strategy
Aircraft
OEM
Perspective
PMA
Supplier
Perspective
Dale Wilkinson, Boeing
Vice President – Materials Services
Jason Dickstein, Aviation Suppliers
Association (ASA) – General Counsel
2
About SH&E
SH&E is one of the World‟s Largest and Most Experienced
Aviation and Aerospace Consulting Firms
 48 year history of delivering value to our clients
 More than 6,500 private sector and public sector
assignments
 Aviation professionals with in-depth experience and
aviation expertise in 3 major practices
Commercial
& Business
Aviation
 Proven strength in the Aviation Maintenance
& Engineering and MRO industry
Airports
 Unmatched resources, including proprietary
databases and intellectual capital
 Primary Offices in New York, London, and Boston
 SH&E is an ICF International company; ICF is
a global leader in transportation, energy and climate
change advisory services
Safety &
Security
SH&E is a proud member and sponsor of ALTA since 2005
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SH&E‟s Commercial and Business Aviation Practice
– Primary MRO Products and Services
Technical Consulting




MRO market research & analysis
Performance benchmarking & operations diagnostics
Supply Chain Management & Strategic Sourcing
Fleet maintenance planning & forecasting
Appraisal Services
 Tangible asset valuation
 Residual value forecasting
 Lease analysis
Asset Management




Investment Support
Sale, lease & assets remarketing
Lease management
Maintenance management
Technical inspections & records review




Business Plan Development
M&A commercial due diligence
Enterprise valuation
Securitization support
5
Global MRO Market Forecast
Currently valued at approximately $45B, the global MRO market is
expected to grow to over $64B by 2020
Global MRO Spend1 (2011 USD Billions)
Historic
Forecast
Sustained
Growth
CAGR: 2010- 2020
3.6%
1.8%
3.2%
3.5%
4.4%
3.6% Average
1/ Does not include Turboprops; Forecast in 2011 $USD, exclusive of inflation
Source: SH&E Analysis
7
The MRO spend is broadly distributed across the world
Global MRO Spend1 by Operator Region
(2011 USD Billions)
Historic
Forecast
Sustained
Growth
CAGR: 2010- 2020
4.9%
1.6%
4.2%
7.2%
3.7%
0.6%
6.3%
3.6% Avg.
1/ Does not include Turboprops; Forecast in 2011 $USD, exclusive of inflation
Source: SH&E Analysis
8
Today‟s fleet of nearly 1,900 active aircraft in Latin America is
dispersed among 285 operators and 30+ aircraft types
Top 20 Latin American Operators
TAM Linhas Aereas
144
Gol Transportes Aereos
70
Avianca
66
COPA Airlines
41
32
39
48
12
Aeromexico Connect
47
9
TACA International Airlines
35
224
ATR 42/72
35
Aeromexico
321
737NG
104
115
42
Azul Linhas Aereas
A320 Family
92
98
LAN Airlines
Top 20 Latin American Aircraft
139
E-170/190
98
L-410
94
737 Classic
91
737-200
87
EMB-110/120
73
767
19
24
27
J31/41
58
Volaris
26
18
ERJ-135/145
55
37
Aerolineas Argentinas
40
American Eagle (Executive)
39
6
DHC6
Fleet
Backlog
727
51
MD-80
45
DHC8
44
28
Aires
24
Beech 1900
44
WebJet Linhas Aereas
24
787
40
Metro III
39
SEARCA
22
VARIG - VRG Linhas Aereas
22
A350 37
Aeronaves TSM SA de CV
22
A330 287
0
50
100
150
200
250
44
42 12
Austral Lineas Aereas
9
155
37
60 7
Interjet (Mexico)
TRIP
208
0
Fleet
Backlog
100
Aircraft Fleet
200
300
400
500
600
Aircraft Fleet
The A320 and 737NG aircraft make up the largest fleets…
Note: Includes South America, Latin America, and Caribbean operators of jet and turboprop aircraft.
Source: ACAS March 2011
9
Currently, Mexican and Brazilian operators have the largest fleets,
followed by Venezuela, Colombia, Chile and Argentina
Largest Latin American Fleets by Country
60
Brazil, 498
50
Venezuela, 167
Operators
40
Mexico, 260
30
Colombia, 201
20
Argenttina, 124
Chile, 108
10
Peru, 46
Ecuador, 49
Bolivia, 36
Panama, 60
Puerto Rico, 49
0
0
5
10
15
20
25
30
35
Average Age
Copa in Panama and LAN in Chile have the youngest
fleets of substantial size, while Venezuela has the oldest fleet
Source Data: ACAS March 2011.
10
Today, engines account for 30% of the $2.2 billion total annual
Latin America material spend
Latin America Commercial Jet 2011 MRO Material Spend by Aircraft / Engine Type
CFM56-7 4%
Engine
30%
V2500-A5 3%
Airframe/
Component
70%
A320 Family 11%
767-2/3/400 7%
CF6-80C2B*F 2%
737NG 7%
CFM56-5B 2%
CFM56-5C 2%
JT8D-BABY
AE3007A
CFM56-3B
PW40000-94
PT6A
737-1/200 5%
1%
1%
1%
1%
1%
EMB-110/120 4%
727-1/200 4%
MD-80 3%
737 Classic 3%
Other Engines
11%
Other Aircraft
26%
Source: SH&E Analysis
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PMA Market Overview
PMA parts have a history extending back for more than 50 years…
 The PMA industry was created following World War II
to address the shortage of replacement parts for older
military equipment
 The market gradually expanded into commercial
aircraft and engine models and, in the past, were
mostly low value, non-airworthy related material where
the OEM‟s no longer provided satisfactory operator
support
 As year after year operator losses continued to mount and OEM material prices
continued to escalate, airlines began to seek cost savings solutions which led to
the development of alternate part strategies; primarily focused on high dollar (nonengine hot section) parts
 “Early adopter” operators who were the to first realize significant cost savings
from a robust alternate parts strategy were the so-called legacy North American
and European Airlines who possessed substantial in-house technical resources
and expertise, including American, Delta, Lufthansa, & United
13
PMA parts are subject to certain limitations, which vary according
to jurisdiction outside the United States
 The use of FAA approved non-critical PMA parts in other countries are subject
to certain Bilateral Aviation Safety Agreements (“BASA”), including the
following Latin American countries: Brazil, Mexico, Argentina.
 An EASA BASA has been drafted but implementation delayed. The draft would
automatically approve three types of FAA-PMA parts:
– PMAs approved by identicality with licensing agreements
– Non-critical parts (those which do not have a replacement time, inspection interval, or
related procedure specified in the Airworthiness Limitations section of the PMA ICAs)
– PMAs approved by identicality with EASA STC approval
 Regulations vary in other jurisdictions and require independent review
– Air carriers may be able to work with their national aviation authority to amend
maintenance manuals to permit the use of PMA parts based on an engineering finding
that the PMA parts return the aircraft to a condition equivalent to type design; e.g. RAC
43.13(c) (Costa Rica).
– PMA parts may be permitted based on (1) the airworthiness authorization (8130-3 tag),
and (2) a finding that the PMA parts meet appropriate regulations; e.g. RAC 9.4.1.4.
(Republic of Colombia)
Note: The aforementioned discussion does not represent legal advice;
readers should consult with their legal counsel.
Source: MARPA
14
PMA parts usage has become a primary topic of discussion
at industry conferences
Commercial Aviation PMAs by Year of Approval
by Part Number Count
Growth Drivers
 Cost: Globalization
120,000
requires all airlines remain
cost competitive
100,000
 OEM price escalation, part
60,000
availability & service level
 Global alliances & industry
groups (IATA Mtc. Cost
Task Force) have led to
increased sharing of
technical expertise and
cost reduction strategies
 Emerging market carriers
are aggressively seeking
best practice guidance
from their more
established counterparts
Source: FAA Database; SH&E Analysis
80,000
40,000
20,000
0
'90
'92
'94
'96
'08
'00
'04
'06
CFMI
1%
Rolls-Royce
1%
Commercial
Aviation
PMAs by OEM
by Unique Part
Number Count
'02
'08
'10 ‟11
YTD
Boeing
60%
Pratt & Whitney
2%
Embraer
2%
GE
2%
McDonnell
Douglas
11%
Airbus
21%
15
The major PMA suppliers have strong affiliations and
penetration with many of the world‟s largest operators
 Chromalloy, a major provider of engine PMA parts, has a
major subsidiary BELAC (focused on engine HPT blades),
which is partially owned by a number of airlines:
– Chromalloy 53%
– Lufthansa Technik 21%
– United 21%
– Alitalia 5%
 HEICO Aerospace is 20% owned by Lufthansa Technik and
has a subsidiary which is 16% owned by American Airline‟s
parent company (AMR). HEICO has partnerships or similar
agreements with many other airlines:
– Air Canada
– British Airways
– Japan Air Lines
– United Airlines
– Delta Air Lines
– ExpressJet
 Wencor indicates that it has sold PMA parts to all of the top
10 airlines in the world, and 46 out of the top 50 airlines
 Fokker Services recently signed a 5 year deal to supply
Lufthansa Technik with PMA parts
16
SH&E estimates that the Latin American PMA market size is
approximately $25-30MM per annum
($M)
$450
Historical PMA Market Size
2007 - 2010
PMA
Penetration (%)
3.0%
$416
$400
$381
$353
$367
2.5%
($M)
700
PMA Market Size Forecast
2009 - 2015
Engine
Components
Airframe
600
2011:
15%
Growth
$350
500
$300
2012-15:
12%
Growth
2.0%
2010:
4%
Growth
400
$250
1.5%
$200
300
$150
1.0%
200
$100
0.5%
$50
$0
100
0.0%
2007
2008
PMA Market
Source: Aerostrategy
2009
2010
Penetration
0
Penetration
(%)
2009
2009
2010
2010
2011
2011
2012
2012
2013
2013
2014
2015
2.3%
2.4%
2.7%
2.9%
3.1%
3.3%
3.4%
Source: Aerostrategy
17
Penetration of PMA parts does vary according to the type of
maintenance
0%
% of Materials
Spend on PMA
Parts
10%
20%
30%
50%
60%
70%
80%
67%
Airframe
17%
17%
71%
29%
67%
Engine Accessory
17%
17%
71%
APU
100%
11%
34%
67%
IFE
90%
33%
55%
Engine
Avionics
Components
40%
29%
Air Conditioning/Pneumatic
67%
17%
17%
Electrical Power
57%
14%
14%
Fuel Systems / Control
67%
17%
17%
Interiors
30%
0%
20%
1-2%
3-4%
5-6%
10%
7-10%
10%
11-15%
20%
10%
15%+
The penetration of PMA parts into the interiors segment is highest as
measured by percentage of spend within a category, while, engines
and accessories are the largest market in terms of absolute spend
Source: 2009 IATA Commercial Air Transport MRO Logistics Survey
18
A major deterrent to the growth of engine PMAs is the sale of
long-term MRO contracts by OEMs
Maintenance Provider Type for Selected Latin American Engine Fleets
0%
10%
20%
30%
40%
V2500-A5
70%
80%
90%
16
102
CF6-80C2
20
74
28
78
71
OEM
2
30
60
22
100%
14
216
CF34-10
JT8D-200
60%
328
CFM56-5B
CFM56-3
50%
40
Independent
Unknown
In Latin America, this OEM strategy has been very effective for the Airbus
A320 family engine programs such as the V2500-A5 and CFM56-5B
Source: ACAS June 2010; SH&E Analysis
19
Recent SH&E PMA Market
Survey Results
Increased Use of PMA Parts Is Another Trend to Watch in the
Latin American MRO Market
 Airlines unanimously agree that
safety, reliability, or „bogus parts‟
is no longer an issue
– However, limited desire to be early
adopters of engine hot section PMA
parts
 OEM/MRO and Lessor contract
restrictions are cited to be major
factors limiting PMA use
 Other factors limiting PMA use:
– OEM technical support and warranty
issues
Operator Top Concerns with
Use of PMA/DER Parts
OEM Agreement
5.0
Lessor Resrictions
5.0
4.6
Warranty Concerns
4.0
Asset Value Concerns
2.8
Regulatory Issues
Not worth Cost Savings
2.5
Technical Perception
2.5
– Asset value concerns
– Limited technical expertise or staff to
properly evaluate & accept the parts
– Configuration management
complexity
Don't Understand the
Technology
1.0
1
2
3
4
5
Source: SH&E Survey
21
Lessors own more than half of all aircraft operated in South
America, and as such, play a large role in setting PMA policies
Percentage of Active Fleet on Operating Lease
60%
World Average % of
Fleet on Operating
Lease: 39%
50%
40%
30%
59%
51%
20%
42%
38%
39%
26%
10%
0%
Africa
Asia / Pacific
Europe
Middle East
North
America
Latin
America
Operating leases have grown from 2,100 in
1994 to over 6,900 in 2010, a CAGR of 7.8%
Source: ACAS, Jun-10
22
SH&E‟s survey confirmed lessor resistance to PMA parts,
primarily due to concerns about remarketability
Lessor Top Concerns
with Use of PMA Parts
Insight
 Remarketability (both lease
and sale) concerns are the
leading factor that drives the
leasing community‟s aversion
to PMA parts
 Residual value impacts,
regulatory concerns, and
operator restrictions were also
cited as being important, but
mostly in respect to how they
potentially affect the ability of
the lessor to place or sell their
aircraft
Remarketability
4.8
Value
Degredation
4.5
Market
Perception
3.8
Technical
Perception
3.5
Government
Regulation
2.8
Operator
Policies
2.1
0
1
2
Note: Weighted average response of all lessor respondents. Rank 1 (not important) - 5 (very important).
Source: SH&E Survey
3
4
5
23
Most lessor‟s default policy (formal or informal) is to not permit
PMA parts
Lessor Policies Regarding
PMA Parts
Insight
 Approximately 40% of lessors
surveyed had an actual formal
policy toward PMA parts;
however most respondents
have an informal policy
precluding the use of PMAs
 The majority of formal policies
distinguish between airframe
and engine parts
No Policy
33%
Informal / Try
Not to Allow
28%
Formal / No
PMA
6%
Formal /
Airframe PMA
Allowed
11%
Formal / No
Engine PMA
22%
 With the default policy being to
not permit PMA parts, only
airlines that ask (and negotiate)
for relief will be granted relief
24
Summary
In summary, as the ultimate customers of the OEMs and Lessors, airlines
must drive the demand for greater material cost reduction options
Factors Promoting Growth
 Increasing cost reduction pressures
Factors Inhibiting Growth
 OEM Defensive Tactics
 Continued OEM price escalations
– Locking up operators in long term MRO
 Development of higher value PMA
– JV’s with independent MRO shops
parts and DER Repairs
 Improved regulatory consistency
 Strong brand reputation and product
reliability of the major PMA providers
 Improved awareness and education
 Alternate material strategy considered
prior to lessor negotiations
contracts
– Reduced product support & warranty
– Qualifying shop visits to remove PMA
 Lessor restrictions
 Lack of universal regulatory
acceptance
 Slow adaptation by LCC‟s and
carriers with limited technical
expertise and/or resources
 Growth of used part market (e.g.
more quality suppliers and aircraft
part-outs)
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Thank You
SH&E’s dedicated Maintenance & Engineering practice is staffed with
highly skilled former airline maintenance and MRO executives.
Specific consulting services include the following:
 MRO Market Research & Analysis
 MRO Cost & Performance Benchmarking
 MRO Information Technology (IT) Assessment
 M&A Commercial Due Diligence
 MRO Strategic Sourcing Support
 Supply Chain Management
 LEAN Continuous Process Improvement
 Safety & Compliance Audits
 Cabin Interior Reconfiguration Program Management
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