Transcript Slide 1

Outlook For The Global Aerospace Maintenance,
Repair, And Overhaul Market
Implications For Wichita
Presented by
Kevin Michaels
AeroStrategy
Ann Arbor, Michigan • Amersham, United Kingdom
© 2008 AeroStrategy
www.AeroStrategy.com
1
Agenda
Why MRO Matters
The Global Aerospace MRO Market
Implications For Wichita
AeroStrategy
© 2008 AeroStrategy
2
Most Capital Goods Industries Are Shifting To A Greater
Emphasis Of Service Revenues
• American businesses and
consumers spend more than $1
trillion on aftermarket services
• Businesses earn 45% of gross
profits from the aftermarket,
although it accounts for just 24% of
revenues
AeroStrategy
© 2008 AeroStrategy
Source: Cohen, Agrawal,
Agrawal (HBR, May 2006)
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The IBM Journey Is An Excellent Example Of The
Shift To Services
Lou
Gerstner
IBM Revenue ($B)
• In 1991, services
accounted for 20% of
IBM’s revenue
• In 1993, Lou Gerstner
became CEO and
emphasized services as a
growth vehicle
Services
$13 B
AeroStrategy
© 2008 AeroStrategy
$42 B
• By 2004, services
comprised $42.6B in
revenue – 44% of IBM’s
revenue
Sources: CNET News.com, IBM
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Spending On Aerospace Maintenance, Repair &
Overhaul (MRO) Is Equivalent To Manufacturing
2007 Aircraft Production And MRO Markets ($B)
$116 B
AeroStrategy
© 2008 AeroStrategy
$117 B
Sources: OAGback/AeroStrategy, Teal Group
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Spending On Aerospace Maintenance, Repair &
Overhaul (MRO) Is Equivalent To Manufacturing
2007 Aerospace MRO Market
$117 $B
Service
Parts
• Service parts account for
more than 25% of more
spending – in excess of $30 B
• Service parts profitability is
extremely high, which
margins in excess of 100%
• For many OEMs, service parts
profits are the source of
profitability – and investment
in new products
AeroStrategy
© 2008 AeroStrategy
Sources: OAGback/AeroStrategy
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MRO Is Crucial To Safety And An Important
Determinant Of Customer Satisfaction
Safety
• Safety is the underpinning of the aerospace
industry , where standards are
uncompromising
• MRO has a direct bearing on aviation safety
Customer Satisfaction
• Product support and MRO services are
important determinants of customer
satisfaction for aerospace OEMs
• Customers want outstanding support and
choice; OEMs must avoid the temptation of
aftermarket monopolization
AeroStrategy
© 2008 AeroStrategy
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Agenda
Why MRO Matters
The Global Aerospace MRO Market
Implications For Wichita
AeroStrategy
© 2008 AeroStrategy
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The Global Aerospace MRO Market Is $117 B
2007 Global Aerospace MRO Market ($B)
Business & General
Aviation $12 B
10%
Military $60B
51%
39%
Air Transport $45 B
AeroStrategy
© 2008 AeroStrategy
Source: OAGback/AeroStrategy
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The Business And General Aviation Fleet
Includes More Than 42,000 Aircraft
Business
2007 Business & General Aviation Fleet
Total ~ 42,400 Aircraft
Civil Rotary
Wing
16,000
2007 Business & General Aviation
MRO Market - $11B
Rotary
Wing
37%
Fixed Wing
26,400
Fixed
Wing
63%
AeroStrategy
© 2008 AeroStrategy
Sources: AeroStrategy analysis
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Global Fixed Wing MRO Expenditures Are $7B;
North America Accounts For 70%
Business
2007 Fixed Wing Business Aviation MRO Market
Total = $7B
By Type of MRO
Modifications
22%
By Operator Region
Rest of World
9%
Component
30%
Latin America
8%
Europe
13%
Airframe
22%
AeroStrategy
Engine
26%
© 2008 AeroStrategy
North America
70%
Source: AeroStrategy/OAGback 11
One Key Trend Is Significant Growth In The NonWarranty Fleet….And Aging Aircraft
Business
2006 Business Jet Fleet
13,940
900
In
Warranty
800
Aircraft
In Sunset
Phase
700
600
500
400
300
200
100
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© 2008 AeroStrategy
Aircraft Age
39
37
35
33
31
29
27
25
23
21
19
17
15
13
11
9
7
5
3
1
0
Sources: AeroStrategy analysis; Jetnet
Age is not identified for 600 aircraft
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Growth In The Non-North American Fleet Will
Also Shape The MRO Environment
Business
• Historically 75% of business jet
deliveries are to North American
operators
~ 50% Of
Future
Deliveries
• International demand is accelerating;
up to half of deliveries over the next
decade will be to non-North
American customers
• MRO networks, which are heavily
concentrated in North America and
Europe, will need to expand and
adapt to marketplace realities
AeroStrategy
© 2008 AeroStrategy
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The Business Aviation Fleet Grows From 26,400
Aircraft To 38,000 By 2015; A 4.6% CAGR
Business
2007 & 2015 Business Aviation Fixed Wing Fleet By Aircraft OEM
40,000
Other
35,000
Dassault
30,000
4.6%
CAGR
25,000
Gulfstream
Bombardier
20,000
Cessna
15,000
10,000
Hawker Beechcraft
5,000
0
2007
AeroStrategy
© 2008 AeroStrategy
2015
Source: AeroStrategy/OAGback 14
The International MRO Market Will Grow Rapidly
Business
2007 & 2015 Business Aviation MRO Market By Operator Region ($B)
10
11%
Rest of World
9%
Latin
America
16%
Europe
8
6
9%
8%
13%
North
America
4
70%
64%
2007
2015
2
0
AeroStrategy
© 2008 AeroStrategy
Source: AeroStrategy/OAGback 15
Business
OEMs And Large Independents Will Increase Their
Share Of The Market…
niches
Large Independent
Networks
niches
OEM Networks
• OEMs and large
independents are
expected to take a
growing share of the MRO
market
• Smaller independents will
need to target niches
where they have
competitive advantage
– Mature aircraft
– Niche aircraft
Opportunities for
smaller independents
– Underserved
regions/customer
segments
– VLJs
AeroStrategy
© 2008 AeroStrategy
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… Driven, In Part, By Supplier Consolidation…
Business
Recent MRO Supplier Consolidation Activity
The aim: develop global networks with MRO, FBO,
charter and aircraft management services
AeroStrategy
© 2008 AeroStrategy
Source: Secondary research
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…And Significant Investment By OEMs And Large
Independent Suppliers
Business
• OEMs are making significant in
maintenance infrastructure ,
service parts logistics, and
information technology
• Cessna’s new Citation Service
Center in Wichita is a good
example
• Large independents are also
investing heavy – particularly in
Europe, Asia and The Middle East
Source: Jet Aviation
AeroStrategy
© 2008 AeroStrategy
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Global Airline MRO Expenditures Are
A Whopping $45 Billion
Air
Transport
2007 Air Transport MRO Market
$45B
E. Europe 2%
• North America comprises 36%
of air transport MRO spending
Africa 3%
India 1%
China 4%
L. America 4%
N. America
36%
Middle East
5%
• Airlines are increasing
maintenance outsourcing as
they focus on core
transportation activity
• Like business aviation, OEMs
and large independents are
developing broad networks as
the market globalizes
Asia Pacific
17%
Europe
27%
AeroStrategy
© 2008 AeroStrategy
Source: AeroStrategy/OAGback
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MRO Work Increasingly Flows To Locations With
Comparative Advantage
Air
Transport
2007 North American Heavy Maintenance Labor Hours
50M
0.7M
7.0M
0.3M
1.7M
International Suppliers Capture 17% Of North
American Airframe Maintenance labor hours
AeroStrategy
Source: AeroStrategy
© 2008 AeroStrategy
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Military MRO Spending Exceeds $60 Billion; More
Than 50% Is In North America
Military
2007 Military MRO Market ($B)
35
30
Reset
25
20
15
10
5
North
America
AeroStrategy
Europe
© 2008 AeroStrategy
Asia Pacific
Middle East
Africa
Latin America
Source: AeroStrategy/OAGback
Figures are for western aircraft only
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Global MRO Spending Will Exceed $140B By 2017
Global Aerospace MRO Market ($B)
Business
& GA
140
120
100
Air
Transport
80
60
40
Military
20
0
2007
AeroStrategy
© 2008 AeroStrategy
2017
Source: AeroStrategy/OAGback
Figures are in 2007 USD
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Agenda
Why MRO Matters
The Global Aerospace MRO Market
Implications For Wichita
AeroStrategy
© 2008 AeroStrategy
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Aerospace Manufacturing Is A Critical Element Of The
Wichita Economy…
Aerospace Product & Parts Manufacturing – Greater Wichita Area
By Number Of Employees
By Payroll
13.1%
26.5%
AeroStrategy
© 2008 AeroStrategy
Kansas Department Of Labor
Includes Butler, Harvey, Sedgwick and Sumner Counties)
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…However, The Aftermarket Supply Chain Is
Fundamentally Different From Manufacturing
PARAMETER
MANUFACTURING
SUPPLY CHAIN
AFTER-SALES SERVICES
SUPPLY CHAIN
Nature of demand
Predictable, can be
forecast
Always unpredictable,
sporadic
Required response
Standard, can be
scheduled
ASAP
Product portfolio
Largely homogeneous
Always heterogeneous
Delivery network
Multiple networks
Single network
Inventory
management aim
Maximize velocity of
resources
Pre-position resources
Reverse logistics
Doesn’t handle
Handles return, repair, and
disposal
Performance metric Fill rate
Inventory turns
AeroStrategy
6 – 50 / year
© 2008 AeroStrategy
Product availability
(uptime)
1 – 4 / year
Source: Cohen, Agrawal,
Agrawal (HBR, May 2006)
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Wichita Participates In The Central US Aerospace MRO
Hub…However Many New Hubs Are Emerging
Global Aerospace MRO Hubs
UNITED
KINGDOM
GERMANY
CENTRAL US
EASTERN EUROPE
EASTERN CHINA
FRANCE
MIAMI
MEXICO
DUBAI
SINGAPORE
CENTRAL
AMERICA
Established Hubs
Emerging Hubs
AeroStrategy
© 2008 AeroStrategy
Source: AeroStrategy
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The Competitiveness Of An MRO Hub Is A
Function Of Three Key Factors
MRO Hub
Competitiveness
Business Environment
• Factor conditions that
drive attractiveness for
inward investment and
create comparative
advantage
• E.g. advantageous tax
and tariff rates
AeroStrategy
© 2008 AeroStrategy
Firm Competitiveness
• The quantity and
quality of firms in the
MRO cluster
• Includes related and
supporting industries
Advantage By Segment
• Factors unique to the
business segment that
create the opportunity
to build comparative
advantage
• E.g., labor cost is a
source of advantage
in airframe heavy
maintenance
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By Focusing On These Factors, Wichita Can Participate
In Significant MRO Growth
Global Aerospace MRO Market ($B)
• MRO spending will continue to
grow – particularly in civil aviation
– to nearly $140b by 2017
Business
• The state and its suppliers must
& GA
140
continually improve Wichita’s
competitiveness
120
100
Air
Transport
80
60
40
Military
20
0
2007
AeroStrategy
2017
© 2008 AeroStrategy
– Improving the business
environment – a key role for
state government
– Strengthening firm
competitiveness in light of
growing global competition
– Reinforcing segment specific
factors – particularly human
resources
Source: AeroStrategy/OAGback
Figures are in 2007 USD
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Key Messages
• Capital goods industries,
including aerospace, are shifting
to a greater emphasis on service
revenues
• Aerospace MRO is worth $117B –
the same as aerospace
manufacturing
• Wichita is part of an MRO hub in
the central US…however new
hubs are emerging as the industry
globalizes
AeroStrategy
© 2008 AeroStrategy
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Thanks For Your Attention!
• AeroStrategy is a specialist management consulting firm
devoted to aviation and aerospace sectors with offices in Ann
Arbor and Amersham, U.K.
• To learn more about AeroStrategy please contact:
David Stewart, Principal
Ph: + 44 1494 431 600
[email protected]
Kevin Michaels, Principal
Ph: +1 734 821 0220
[email protected]
Hal Chrisman, Principal
Ph: +1 734 821 0227
[email protected]
AeroStrategy
© 2008 AeroStrategy
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