1AeroStrategy
© 2008 AeroStrategy
Outlook For The Global Aerospace Maintenance, Repair, And Overhaul Market
Implications For Wichita
Presented by
Kevin Michaels
Ann Arbor, Michigan • Amersham, United Kingdomwww.AeroStrategy.com
2AeroStrategy
© 2008 AeroStrategy
Why MRO Matters
Agenda
The Global Aerospace MRO Market
Implications For Wichita
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© 2008 AeroStrategy
Most Capital Goods Industries Are Shifting To A Greater Emphasis Of Service Revenues
• American businesses and American businesses and consumers spend more than $1 consumers spend more than $1 trillion on aftermarket servicestrillion on aftermarket services
• Businesses earn 45% of gross Businesses earn 45% of gross profits from the aftermarket, profits from the aftermarket, although it accounts for just 24% of although it accounts for just 24% of revenuesrevenues
Source: Cohen, Agrawal, Agrawal (HBR, May 2006)
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© 2008 AeroStrategy
The IBM Journey Is An Excellent Example Of The Shift To Services
IBM Revenue ($B)
• In 1991, services In 1991, services accounted for 20% of accounted for 20% of IBM’s revenueIBM’s revenue
• In 1993, Lou Gerstner In 1993, Lou Gerstner became CEO and became CEO and emphasized services as a emphasized services as a growth vehiclegrowth vehicle
• By 2004, services By 2004, services comprised $42.6B in comprised $42.6B in revenue – 44% of IBM’s revenue – 44% of IBM’s revenuerevenue
LouGerstner
ServicesServices
$13 B$13 B$42 B$42 B
Sources: CNET News.com, IBM
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© 2008 AeroStrategy
Spending On Aerospace Maintenance, Repair & Overhaul (MRO) Is Equivalent To Manufacturing
2007 Aircraft Production And MRO Markets ($B)
Sources: OAGback/AeroStrategy, Teal Group
$117 B$117 B$116 B$116 B
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© 2008 AeroStrategy
Spending On Aerospace Maintenance, Repair & Overhaul (MRO) Is Equivalent To Manufacturing
2007 Aerospace MRO Market$117 $B
Sources: OAGback/AeroStrategy
ServiceServicePartsParts
• Service parts account for Service parts account for more than 25% of more more than 25% of more spending – in excess of $30 Bspending – in excess of $30 B
• Service parts profitability is Service parts profitability is extremely high, which extremely high, which margins in excess of 100%margins in excess of 100%
• For many OEMs, service For many OEMs, service parts profits are the source of parts profits are the source of profitability – and investment profitability – and investment in new productsin new products
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© 2008 AeroStrategy
MRO Is Crucial To Safety And An Important Determinant Of Customer Satisfaction
• Safety is the underpinning of the aerospace Safety is the underpinning of the aerospace industry , where standards are industry , where standards are uncompromisinguncompromising
• MRO has a direct bearing on aviation safetyMRO has a direct bearing on aviation safety
• Product support and MRO services are Product support and MRO services are important determinants of customer important determinants of customer satisfaction for aerospace OEMssatisfaction for aerospace OEMs
• Customers want outstanding support and Customers want outstanding support and choice; OEMs must avoid the temptation of choice; OEMs must avoid the temptation of aftermarket monopolizationaftermarket monopolization
Customer Satisfaction
Safety
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© 2008 AeroStrategy
Why MRO Matters
Agenda
The Global Aerospace MRO Market
Implications For Wichita
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© 2008 AeroStrategy
The Global Aerospace MRO Market Is $117 B
Business & General Business & General Aviation $12 BAviation $12 B
2007 Global Aerospace MRO Market ($B)
Air Transport $45 BAir Transport $45 B
Military $60BMilitary $60B10%
39%51%
Source: OAGback/AeroStrategy
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© 2008 AeroStrategy
The Business And General Aviation Fleet Includes More Than 42,000 Aircraft
Fixed WingFixed Wing26,40026,400
Civil Rotary Civil Rotary WingWing16,00016,000
2007 Business & General Aviation FleetTotal ~ 42,400 Aircraft
Sources: AeroStrategy analysis
Fixed Fixed WingWing63%63%
Rotary Rotary WingWing37%37%
2007 Business & General AviationMRO Market - $11B
BusinessBusiness
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© 2008 AeroStrategy
Global Fixed Wing MRO Expenditures Are $7B; North America Accounts For 70%
2007 Fixed Wing Business Aviation MRO Market Total = $7B
Engine26%
Component30%
Modifications22%
North America70%
Europe13%
Rest of World9%
Airframe22%
Latin America8%
By Type of MRO By Operator Region
Source: AeroStrategy/OAGback
BusinessBusiness
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© 2008 AeroStrategy
One Key Trend Is Significant Growth In The Non-Warranty Fleet….And Aging Aircraft
Sources: AeroStrategy analysis; JetnetAge is not identified for 600 aircraft
0
100
200
300
400
500
600
700
800
900
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39
2006 Business Jet Fleet2006 Business Jet Fleet13,94013,940
Aircraft Age
InWarranty
AircraftIn Sunset
Phase
BusinessBusiness
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© 2008 AeroStrategy
Growth In The Non-North American Fleet WillAlso Shape The MRO Environment
• Historically 75% of business jet Historically 75% of business jet deliveries are to North American deliveries are to North American operatorsoperators
• International demand is accelerating; International demand is accelerating; up to half of deliveries over the next up to half of deliveries over the next decade will be to non-North decade will be to non-North American customersAmerican customers
• MRO networks, which are heavily MRO networks, which are heavily concentrated in North America and concentrated in North America and Europe, will need to expand and Europe, will need to expand and adapt to marketplace realitiesadapt to marketplace realities
~ 50% Of~ 50% OfFutureFutureDeliveriesDeliveries
BusinessBusiness
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© 2008 AeroStrategy
The Business Aviation Fleet Grows From 26,400 Aircraft To 38,000 By 2015; A 4.6% CAGR
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
2007 2015
Hawker BeechcraftHawker Beechcraft
CessnaCessna
BombardierBombardier
GulfstreamGulfstream
DassaultDassault
OtherOther
2007 & 2015 Business Aviation Fixed Wing Fleet By Aircraft OEM
4.6% CAGR
BusinessBusiness
Source: AeroStrategy/OAGback
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© 2008 AeroStrategy
The International MRO Market Will Grow Rapidly
0
2
4
6
8
10
2007 2015
EuropeEurope
North North AmericaAmerica
Rest of WorldRest of World
Latin Latin AmericaAmerica
70%
13%
8%9%
64%
16%
9%
11%
2007 & 2015 Business Aviation MRO Market By Operator Region ($B)
Source: AeroStrategy/OAGback
BusinessBusiness
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© 2008 AeroStrategy
OEMs And Large Independents Will Increase Their Share Of The Market…
• OEMs and large OEMs and large independents are independents are expected to take a expected to take a growing share of the MRO growing share of the MRO marketmarket
• Smaller independents will Smaller independents will need to target niches need to target niches where they have where they have competitive advantagecompetitive advantage– Mature aircraftMature aircraft
– Niche aircraftNiche aircraft
– Underserved Underserved regions/customer regions/customer segmentssegments
– VLJsVLJs
OEM NetworksOEM NetworksLarge IndependentLarge Independent NetworksNetworks
Opportunities for Opportunities for smaller independentssmaller independents
nichesniches
nichesniches
BusinessBusiness
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© 2008 AeroStrategy
… Driven, In Part, By Supplier Consolidation…
The aim: develop global networks with MRO, FBO, The aim: develop global networks with MRO, FBO, charter and aircraft management servicescharter and aircraft management services
Source: Secondary research
BusinessBusiness
Recent MRO Supplier Consolidation Activity
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© 2008 AeroStrategy
…And Significant Investment By OEMs And Large Independent Suppliers
• OEMs are making significant in OEMs are making significant in maintenance infrastructure , maintenance infrastructure , service parts logistics, and service parts logistics, and information technologyinformation technology
• Cessna’s new Citation Service Cessna’s new Citation Service Center in Wichita is a good Center in Wichita is a good exampleexample
• Large independents are also Large independents are also investing heavy – particularly in investing heavy – particularly in Europe, Asia and The Middle EastEurope, Asia and The Middle East
Source: Jet Aviation
BusinessBusiness
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© 2008 AeroStrategy
Global Airline MRO Expenditures Are A Whopping $45 Billion
2007 Air Transport MRO Market $45B
N. America
36%
Europe27%
Asia Pacific17%
L. America 4%
China 4%
Africa 3%E. Europe 2%
Middle East5%
India 1%
Source: AeroStrategy/OAGback
Air Air TransportTransport
• North America comprises 36% North America comprises 36% of air transport MRO spendingof air transport MRO spending
• Airlines are increasing Airlines are increasing maintenance outsourcing as maintenance outsourcing as they focus on core they focus on core transportation activitytransportation activity
• Like business aviation, OEMs Like business aviation, OEMs and large independents are and large independents are developing broad networks as developing broad networks as the market globalizesthe market globalizes
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© 2008 AeroStrategy
MRO Work Increasingly Flows To Locations With Comparative Advantage
Source: AeroStrategy
7.0M7.0M
1.7M1.7M0.3M0.3M
0.7M0.7M50M50M
International Suppliers Capture 17% Of North American Airframe Maintenance labor hours
2007 North American Heavy Maintenance Labor Hours
Air Air TransportTransport
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© 2008 AeroStrategy
Military MRO Spending Exceeds $60 Billion; More Than 50% Is In North America
Reset
Figures are for western aircraft onlySource: AeroStrategy/OAGback
2007 Military MRO Market ($B)MilitaryMilitary
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© 2008 AeroStrategy
Global MRO Spending Will Exceed $140B By 2017
00
2020
4040
6060
8080
100100
120120
140140
20072007 20172017
Business Business & GA& GA
Air Air TransportTransport
MilitaryMilitary
Global Aerospace MRO Market ($B)
Source: AeroStrategy/OAGbackFigures are in 2007 USD
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© 2008 AeroStrategy
Why MRO Matters
Agenda
The Global Aerospace MRO Market
Implications For Wichita
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© 2008 AeroStrategy
Aerospace Manufacturing Is A Critical Element Of The Wichita Economy…
13.1%
By Number Of Employees By Payroll
Kansas Department Of LaborIncludes Butler, Harvey, Sedgwick and Sumner Counties)
26.5%
Aerospace Product & Parts Manufacturing – Greater Wichita Area
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© 2008 AeroStrategy
…However, The Aftermarket Supply Chain Is Fundamentally Different From Manufacturing
PARAMETER MANUFACTURING SUPPLY CHAIN
AFTER-SALES SERVICESSUPPLY CHAIN
Nature of demandNature of demand Predictable, can be Predictable, can be forecastforecast
Always unpredictable, Always unpredictable, sporadicsporadic
Required responseRequired response Standard, can be Standard, can be scheduledscheduled
ASAPASAP
Product portfolioProduct portfolio Largely homogeneousLargely homogeneous Always heterogeneousAlways heterogeneous
Delivery networkDelivery network Multiple networksMultiple networks Single networkSingle network
Inventory Inventory management aimmanagement aim
Maximize velocity of Maximize velocity of resourcesresources
Pre-position resourcesPre-position resources
Reverse logisticsReverse logistics Doesn’t handleDoesn’t handle Handles return, repair, and Handles return, repair, and disposaldisposal
Performance metricPerformance metric Fill rateFill rate Product availability Product availability (uptime)(uptime)
Inventory turnsInventory turns 6 – 50 / year6 – 50 / year 1 – 4 / year1 – 4 / year
Source: Cohen, Agrawal, Agrawal (HBR, May 2006)
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© 2008 AeroStrategy
Wichita Participates In The Central US Aerospace MRO Hub…However Many New Hubs Are Emerging
CENTRAL US
MIAMI
SINGAPORE
EASTERN CHINA
UNITED KINGDOM GERMANY
FRANCE
Established HubsEstablished Hubs
Emerging HubsEmerging Hubs
MEXICO
EASTERN EUROPE
DUBAI
Global Aerospace MRO Hubs
CENTRALAMERICA
Source: AeroStrategy
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© 2008 AeroStrategy
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
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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© 2008 AeroStrategy
By Focusing On These Factors, Wichita Can Participate In Significant MRO Growth
• MRO spending will continue to grow – particularly in civil aviation – to nearly $140b by 2017
• The state and its suppliers must continually improve Wichita’s competitiveness
– Improving the business environment – a key role for state government
– Strengthening firm competitiveness in light of growing global competition
– Reinforcing segment specific factors – particularly human resources
00
2020
4040
6060
8080
100100
120120
140140
20072007 20172017
Business Business & GA& GA
Air Air TransportTransport
MilitaryMilitary
Global Aerospace MRO Market ($B)
Source: AeroStrategy/OAGbackFigures are in 2007 USD
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© 2008 AeroStrategy
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
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© 2008 AeroStrategy
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
Kevin Michaels, Principal
Ph: +1 734 821 0220
Hal Chrisman, Principal
Ph: +1 734 821 0227