episode 4: operating in the post pandemic
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Opening Remarks
Our host today: • This session is recorded.
• Your mic is automatically muted.
• Use the Q&A feature on the right side of your screen to submit your questions to our speakers
• Competition Law Guidelines
2Ep 4 - Operating in the post pandemic 6 October 2021
Chris MARKOU
Head, Operational Cost Management – IATA
markouc@iata.org
Competition Law Guidelines
Do not discuss:
• Any element of prices, including fares or service charges
• Commissions
• Allocations of customers or markets
• Marketing plans, commercial terms or any other strategic decision
• Group boycotts
• Your relations with industry stakeholders
• Any other issue aimed at influencing the independent business decisions of competitors
6 October 2021Ep 4 - Operating in the post pandemic 3
Agenda
• Our speakers
• Maintenance costs: aircraft leasing in the post pandemic “new normal”
• MRO Outlook: COVID’s implications for airlines and MRO suppliers
• Navigating through the pandemic, an airline’s experience
4Ep 4 - Operating in the post pandemic 6 October 2021
Our Speakers
5Ep 4 - Operating in the post pandemic 6 October 2021
Jonas MURBY
Principal – AeroDynamic Advisory
jmurby@aerodynamicadvisory.com
Phil SEYMOUR
President and Head of Advisory –IBA
phil.seymour@iba.aero
Swaran SIDHU
Head of Fleet Technical Management – easyJet
swaran.sidhu@easyjet.com
Maintenance Costs: aircraft leasing in the post pandemic “new normal”
6Ep 4 - Operating in the post pandemic 6 October 2021
Phil SEYMOUR
President and Head of Advisory –IBA
phil.seymour@ibagroup.com
www.iba.aero 8
Maintenance Costs: Aircraft leasing in the post pandemic “new normal”, what can we expect?
1. High level fleet retirements/revised lease end date projection
2. How are maintenance costs and maintenance reserves being impacted (utilisation change)
3. What issues are we seeing between lessors and airlines (maintenance/lease end related)
4. Will we see changes to future lease contracts? (hell and/or high water clause and AD costs (not just pandemic but MAX related)
www.iba.aero
LEASE END FORECAST
Multiple Drivers
• Cons: (increased lease ends)
• We will see more early hand-backs
• More failures expected 3Q21
• Rising oil price
• Greener focus
• Pros: (reduced lease ends)
• Extensions
• 2020 increased Sale-Leaseback activity
• Re-fleeting process is a slow process
• OEM delivery & design pace
9
COVID FALLOUT & SLOW RE-FLEET
www.iba.aero
0
2000
4000
6000
8000
10000
12000
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Nu
mb
er O
f Sh
op
Vis
its
Engine Shop Visit Demand Impact - Summer 2021
Pre Covid
Revised Outlook
MAINTENANCE CONSIDERATIONS
Multiple Issues
• Long storage periods
• Where, how long?
• Regulator liaison regarding scheduled check deferrals
• Engines
• Green time usage versus shop visits
• A bow wave of shop visits emerging
• MRO Industry Capabilities
• Reduced resources
• Redundancies / retirements
• Logistical blockage
• Utilisation and Role Change
• Not just a regulatory MPD issue
• Check the lease – what were the assumptions?
10
THE BROADER MRO CHALLENGES
www.iba.aero
REDELIVERY ISSUES
The usual cyclical tug of war
• Lessee cash preservation v Lessor lack of new lessee pressure
The new issue
• Lessors were generally thinly resourced technically
• A whole new demand profile
• Multiple work-outs
• Additional aircraft on the market (finance failures)
• More competition for technical resource
• Lack of lessor engagement in some cases
• And Supply had been stifled due to mobility issues
11
SOMETHING OLD / SOMETHING NEW…….
www.iba.aero
LEASE CONTRACT CONSIDERATIONS
MAX related - extended grounding due to the design faults
• Already delivered - Warranty/AD position
• Impact on delayed maintenance and reserve funds
12
NOT JUST COVID RELATED BUT THE MAX TOOK US TO NEW CHALLENGES
DEFINITION of 'Hell or High Water Contract'. A hell or high water contract (also known as a promise-to-pay contract) is a noncancellable contract whereby the purchaser must make the specified payments to the seller, regardless of any difficulties they may encounter.
What if we see another pandemic – will we see provisions for it – built into leases?
• It will be requested
• Case by case?
• Step down/step up rates?0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
0
5,000
10,000
15,000
20,000
25,000
Park
ed &
Sto
red/A
ctive +
Park
ed +
Sto
red
Num
ber
of
Aircra
ft P
ark
ed/S
tore
d
Storage Projection - Revisited
All NB All WB All TP All RJ
All NB% All WB% All TP% All RJ%
All NB% All WB% All TP% All RJ%
www.iba.aero 13
• Understanding Scope 1, 2 and 3 aspects of the business
• Many MRO’s still behind understanding what to do
• Some are part of larger entities others stand alone
• Investors want and need to know the ESG strategy
• The Logistics challenges
• Direct – flying to the facility
• The parts in and parts out cycle
• Workshop processes
• JIT v bulk
• Waste
• New technology
• 3D printing
• Paperless processes
ESG - MRO CONSIDERATIONS
www.iba.aero
IBA’S CARBON EMISSIONS INDEX
14
IBA is proud to announce the launch of our new Aviation Carbon Emissions Index in association with KPMG. A new standard for aviation CO2 analysis.
Questions?
16Ep 4 - Operating in the post pandemic 6 October 2021
Phil SEYMOUR
President and Head of Advisory –IBA
phil.seymour@iba.aero
MRO OutlookCOVID’s implications for airlines and MRO suppliers
17Ep 4 - Operating in the post pandemic 6 October 2021
Jonas MURBY
Principal – AeroDynamic Advisory
jmurby@aerodynamicadvisory.com
PREPARED FOR
MRO OutlookCOVID’s implications for airlines and MRO suppliers
Jonas Murby, Principal
6 October 2021
0
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Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Pre-COVID
August 2021Forecast
2020 YearEnd Forecast
Actual
Lockdowns & Containment
Supply Side Constraints
“New Normal”
19
AeroDynamic forecasts air travel recovery by late 2023 or early 2024
Source: AeroDynamic analysis, IATA
AIR TRAVEL OUTLOOK
Nominal Scenario for Air Travel Recovery
Qu
art
erly R
PK
s (
bill
ion
s)
Pre-COVID
outlook
2020 2021 2022 2023 2024 2025
Business Travel Growth
Growth from Vaccinations
Impairment of 11%
from pre-COVID
forecast
Historical Projection
20
A large portion of the global population remains unvaccinated; the coming years will be a race between vaccines and new variants
Source: The Economist, Bernstein, AeroDynamic Advisory analysis
AIR TRAVEL OUTLOOK
Global Adult Population and Vaccination Status*
-
200
400
600
800
1 000
1 200
1 400
# Inhabitants
by S
tatu
s
Two doses (M) One dose (M) No dose (M)
Size of box
proportional to global
accumulated
confirmed cases of
corona as of 16
August: 206 Million
(2.6% of population)
(*) As of 1 August 2021; calculations assume two doses required per
person
21
For most regions, returns to 2019 traffic levels will take multiple years
Source: AeroDynamic Advisory analysis
AIR TRAVEL OUTLOOK
2019 Global RPK, Broken Down by Region (Intra / Inter) – Color Based on Estimated Return to 2019 Levels
2021
2022
2023
2024+
”Airports are full”
Three factors are preventing a full recovery during the coming few years
22
› 20 percent of adult global population fully vaccinated as of 1 Aug 2021
› Theoretical capacity of 15 Billion doses in 2022, but only 5 Billion mRNA
› Vaccine skepticism and distribution challenges linger
› Extremely difficult to coordinate a consistent global scheme of COVID-related travel restrictions
› As a result, a heavy layer of unpredictability may hamper international travel for a long time
Vaccines Variants
› Only 230 Million confirmed cases (3% of global population) → large feedstock for virus to work on & mutate
› Delta variant 4 times more infectious than original version
› Several vaccines provide less efficacy versus Delta variant
Government Responses
AIR TRAVEL OUTLOOK
Source: WHO, The Economist, Bernstein, AeroDynamic Advisory analysis
-
300
600
900
1,200
1,500
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
The recovery of air travel will be bifurcated between intra-region and inter-region travel
23Source: AeroDynamic analysis, IATA
RPK Forecast by Flow Type, Intra-Region and Inter-Region
AIR TRAVEL OUTLOOK
Qu
art
erl
y R
PK
s (
bil
lio
ns)
2020 2021 2022 2023 2024 2025
Historical Projection
= recovery to pre-COVID levels
?
Downside Risk:
bumpy recovery from
local lockdowns in
China
Downside Risk:
new variants
evade vaccines
Intra-region / domestic
Inter-region
However, shifting supply chains are driving long-term growth in air cargo
24
Conventional Retail Supply Chain
E-commerce Retail Supply Chain
AIR CARGO OUTLOOK
Source: LogCapStrat analysis
Factory
HKG
US Port Trainload
LAX ONT
Rail
Ramp
Distribution
Center
Store
Store
Store
≈ 125 days
Factory
HKG
Fulfillment by
Amazon
Forwarding Center
5kg
Weekly cycle
Structural
tailwind for
Air Cargo
Quarterly Airline MRO Expenditures* By Region
25
MRO spending remained resilient in China and nearly recovered in the US…elsewhere it remained well below pre-COVID levels
AIR TRAVEL OUTLOOK
Source: Airline financials, AeroDynamic Advisory analysis
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
1Q2020 2Q2020 3Q2020 4Q2020 1Q2021 2Q2021
(*) Versus same quarter 2019, 44 airlines covered
› Global MRO spending remains >30%
below pre-COVID levels
› China and the US are the most resilient
MRO markets
› Europe and APAC remain well below
pre-COVID spending levels
Total
Americas
China
APAC
Europe
2019-2021F Airline MRO Expenditures
2019 2020 2021F
26
High-level estimates point at a full-year increase of MRO expenditures of 5 percent in 2021
MRO FORECAST
Source: AeroDynamic Advisory
-35%
+5%
Region Q3 Q4 Commentary
China
• August outbreaks impacted airline utilization.
Capacity could come back in Q4, but road is
bumpy
APAC• Little improvement in utilization expected due to
high case loads
Americas
• Close-to-full domestic capacity towards
summer
• However, outbreaks of Delta variant in August
meant fewer-than-expected paying passengers.
• No meaningful growth expected in winter MRO
activity beyond typical peak
Europe
• A few airlines may embark on ambitious
preparations for next summer, but most will
need to manage costs carefully
MRO Outlook for Second Half of 2021
(Trajectory Versus Similar Quarter 2019)
27
Airlines post-COVID will be very focused on cost, and simultaneously more dependent on the supply base
AIRLINE MRO POST-COVID
Source: AeroDynamic Advisory
Slimmer airline organizations
Greater dependency on
suppliers
Inventory burn & green-time
management
Alternative materials & repairs
Need for supplier flexibility
Modifications -including
Passenger-to-Freighter
conversions
› LCC growth, while traditional airline
business models under threat
› Short planning horizons
› Staffing challenges
› Strict cost regime and cash-out restrictions
› Greater focus on cargo
› Market uncertainty
› Reduction in business travel
› Leisure travel is new center-of-gravity
Airline Business Impact
Air Travel Post-COVID Implications for Airline MRO & Suppliers Requirements
28
Passenger-to-freighter conversions are expected to reach historical levels - many facilities are fully booked through ~2024
Source: AeroDynamic Advisory
MRO IMPLICATIONS: CARGO
2020-2025 Estimated Global Freighter Conversion Capacity (# aircraft)
Winners: larger variants &
ample feedstock
Losers: smaller variants &
declining feedstock
A321, 737-800, A330-300,
767-300, 777-300ER
A330-200, A320, 757,
737 Classic, 737-700
30 3648 54 54 57
0
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40
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200
2020 2021 2022 2023 2024 2025
Africa
C. America
Asia Pacific
Europe
China
N. America
4 quarters
During
COVID
4 quarters
Pre-COVID
US Airline Quarterly MRO Expenditures
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Network
Cargo
LCC
Regional
National
Charter
US MRO Expenditures 4 Quarters Pre- and During COVID
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
WB NB RJ
29
US airline MRO numbers show the significance of cargo operators in a post-COVID environment, and how this alters MRO demand composition
MRO IMPLICATIONS: CARGO
Source: Form 41 data, AeroDynamic Advisory analysis
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
New Mature Old
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Network Cargo
LCC Regional
National
($ Billion)
Fleet demographics coupled with COVID-induced fleet removals will result in record retirements
30
727
1,186
1,425
0
200
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1000
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1400
1600
2000
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2017
2018
2019
2020
2021
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2023
2024
2025
2026
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2028
2029
2030
Historical Pre-Covid Post-Covid
Historical, Pre-Covid, and Post-Covid Retirements
MRO IMPLICATIONS: AIRCRAFT RETIREMENTS & USM
Source: AeroDynamic Advisory, Alton Aviation, CAPA
2010-2015:
3,481
2020-2025:
Post-Covid Forecast: 6,054
Pre-COVID Forecast: 3,690
› Not all retirements turn into
part-outs
› Aircraft part-outs to reach
700-800 per annum
› Surplus parts market to
grow from $2.2 Billion pre-
COVID to $4.3 Billion
› A320, 737, 777 and
A330parts will contribute
the most to USM growth
Suppliers of integrated component support are being asked to provide greater flexibility
31
› Greater need for supplier to cover operative risk
• Smaller airline engineering / purchasing organization
• Dispatch reliability still important - EU261 claims need to be avoided
› Greater need for flexibility
• Pandemic-specific regulations in contract
• Remove rule for minimum flying hours
• Flexible contract periods?
• Need to conserve cash → updated payment terms
• Less-inclusive contracts
› Cost still of utmost importance
› Becomes very important to build USM acquisition & management capabilities
› Need to closely monitor market developments which customers will make it through the crisis?
› New contracts need to carry financial securities due to the risk involved
› Changed cash flow
› How make business case for customer-related investments?
› Concentration of supply base of integrated providers
› Virtual pools
› Partnerships
Airline Needs Supply Side Implications
MRO IMPLICATIONS: INTEGRATED CONTRACT
Source: AeroDynamic Advisory
Changing Nature of Integrated Component Support Contracts
COVID Recovery – Implications for MRO Suppliers
OEMs
• Aircraft OEMs revising aftermarket goals and narrowing offerings, including broad support
• Component OEMs to position offerings to a more price-sensitive customer, including USM
• Engine OEMs need to watch supply chain to handle coming ramp-up. Need to carefully manage their supply chain to prepare for the ramp-up
MROs
• Integrators prepare for more flexible contracting
• Independents poised to a period of growth - well-positioned to support the freighter fleet
• Must cope with human capital constraints, preparing for ramp-up
• MRO consolidation (incl partial sell-off of Lufthansa Technik?)
USM Suppliers*
• $2 Billion pre-COVID, growing to $4.5 Billion in a few years
• A320ceo, 737NG, A330, 777 key platforms
• Will impact airline sourcing, OEM aftermarket revenue streams and become central in most support contracts
Passenger-to-Freighter Conversions
• Structural trends favoring long-term cargo growth
• Cargo important piece of airlines' revenue mix
• Majority of supply of freighters to come from PTF conversions
• Significant ramp-up in PTF conversion capacity
• Over-supply mid-decade?
32
A dynamic time awaits the MRO industry on multiple fronts
MRO IMPLICATIONS: SUPPLIERS
Source: AeroDynamic Advisory (*) Used Serviceable Material
+1 (734) 773-3899
121 W Washington Street, Suite 400Ann Arbor, MI 48104
www.aerodynamicadvisory.com
Thank You!
Jonas Murby
Principal
jmurby@aerodynamicadvisory.com
AeroDynamic2019 Winner of Choice
Outstanding Academic
Title Award
AeroDynamic2019 Winner
Choice Outstanding
Academic Title Award
Questions?
34Ep 4 - Operating in the post pandemic 6 October 2021
Jonas MURBY
Principal – AeroDynamic Advisory
jmurby@aerodynamicadvisory.com
Navigating through the pandemic
35Ep 4 - Operating in the post pandemic 6 October 2021
Swaran SIDHU
Head of Fleet Technical Management – easyJet
swaran.sidhu@easyjet.com
37
The pandemic path reminder
• Lockdown lifted March 21
• Resumption of some flying
• Lack of coordination within EU & UK
• PCR test still costly and discouraging people to book
• Pandemic declared by WHO
• World Fleet grounded
• Airlines trying to make sense of parking/storing aircraft
March 2020
March to June 2021
• International travel limited to repatriation flying.
• Business travel outlook gloomy
• Entering into 2nd
lockdown
• Re-negotiating suppler contracts
• Heavy EOL activity
• Cash preservation
• Bombardment of comms within the industry
• Airlines coming to terms with all the different directives.
• TCH/OEM taking the lead to help operators
• Retrenchment & Furloughs
March to June 2020
• EU & Swiss AOCs full flying
• UK AOC 65 % of flying due to restrictive government bio-security measures
June 2021 to date
• Some resumption of flying
• Strict bio-security measures
• Confusion of bio-security regulations i.e. PCR test
• Cost of PCR test
• Internal cost review
• Re-negotiated aircraft purchase agreement with Airbus
June to November 2020
Nov 2020 to Mar 2021 ARE WE OUT OF THE
WOODS/VARIANTS YET ??
40
EOL Activity/MRO
Cost/HMV Visits
Our Cash Preservation strategies
Reviewed Parking Location / Fees /
MRO Consideration
SupplyChain/Re-negotiated
Contract
Engine SVStrategy
HumanResources
• Furlough Scheme• Redundancies
New supplier for our records
management services
Automation/Innovation at the forefront
Pro
cess review o
f all wo
rk activities
• C’ check optimisation review
• EOL clearance by individual task review
44
Summary
• Embracing/Embedding the new normal
• View the crisis as an opportunity
• Show good leadership and take your people through this journey
• Learn the lessons, document them and store them safely for the future…………………..(tell your grandchildren this story)
Grounded Phase
Survival Phase
Recovery Phase
Growth Phase
We need to get to a Sustainable Growth Phase
We are now in a Recovery Phase
Questions?
46Ep 4 - Operating in the post pandemic 6 October 2021
Swaran SIDHU
Head of Fleet Technical Management – easyJet
swaran.sidhu@easyjet.com
Useful links
• Maintenance Cost Technical Group www.iata.org/mctg
• Technical Operations Working Group www.iata.org/tog
• Safely Restarting the Aviation Industry
47Ep 4 - Operating in the post pandemic 6 October 2021
Thank you!
For more information on MCC 2021, please visit www.iata.org/mcc
Contacts
• Chris Markou, markouc@iata.org
• Geraldine Cros, crosg@iata.org
See you next year for MCC 2022!
48Ep 4 - Operating in the post pandemic 6 October 2021
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