A New MRO World A Look Forward

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A New MRO World A Look Forward

• North American MRO Conference
• April 2006

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Quest for Profitability

• Airline executives around the globe are focused
  on widening the POSITIVE gap between RASM and
  CASM
• RASM Making aircraft more productive
• CASM Getting the non-value added activity out
  of the system

The core strategic mandate for the MRO is to be
a POSITIVE contributor
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Introduction

• TeamSAI and BACK Aviation Solutions have
  collaborated on the MRO World Market Forecast for
  several years.
• Our practical experience and proprietary
  intellectual capital assets are unmatched by any
  other MRO consulting group in the industry

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Industry at a Glance

• Industry losses up in 2005
• 42B since 2001
• 6B in 2005
• US Airlines hardest hit
• Order books revealing
• 70 of orders and options are destined for
  International airlines and LCCs
• Oil costs remain high and geo-political pressures
  abound
• Mergers, bankruptcies and LCCs are challenging
  the SOS
• The Same Old Stuff doesnt work any more

2006-07 will be a pivotal period for the industry
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A New MRO World A Look Forward

• Market demands are driving innovation and quality
• Efficiency and performance
• LEAN a powerful tool
• Focus on removing non-value added effort and
  waste
• Technology improvements designed into new
  products
• New approaches to maintenance programs,
  facilities, tooling, staffing, materials,
  inventory
• Solutions often involving Multiple players
• Service Integrators are more dominant
• Emerging nations are leveraging their labor rate
  advantage
• Attracting global interest

Repackaging past practice (SOS) doesnt cut it
anymore!
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MRO Unit Costs Shrinking

• The results to date
• 15 reduction since 2001
• The drivers
• Improvements in design and technology
• Labor cost reductions
• More effective operations
• What is possible?
• One big lever - more efficient operations
• TAT reductions of 25-40
• Quality improvements with the right tools
• And resulting unit cost improvements
• A 15 reduction over the next five years yields
  15B

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MRO Forecasting Methodology
FleetOutlook
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MRO Forecasting Methodology
MROCosts
FleetOutlook
TeamSAI has Enhanced its Model to Reflect
Efficiency Gains on Costs
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MRO Forecasting Methodology
World
Region
Sector
MROCosts
FleetOutlook
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MRO Forecasting Methodology
World
Region
Sector
5 10Year Forecast
MROCosts
FleetOutlook
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Fleet Outlook

• 2005 fleet growth moderated with an increase of
  4.1 to 17,903 total world wide
• RJ growth slowed with abrupt cessation of 50-seat
  production
• Fleet growth will hover around 4 CAGR over the
  10 years
• Average fleet age will remain steady in the 11-12
  year range
• Fleet mix will stay relatively constant with the
  slowdown in RJ growth
• Freighters account for 10 of the fleet with 1788
  aircraft
• 50 growth over 10 years
• 65 of current fleet will retire
• 75 of the replacement aircraft will be
  conversions

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World MRO Forecast

• 2006 MRO spend will be 39B
• Grows to 60B over 10 years
• 4.5 CAGR
• Line Maintenance will grow to 11B by 2016
• Component Maintenance will grow at a rate of 3.2
  CAGR over the period
• HMV and MOD grows at 3.1 CAGR
• Engine sector fastest growth at 6.9 CAGR

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MRO Trends by Fleet Type

• Comparing fleet count and fleet MRO value
  provides
• WB and NB fleet expansion is the real growth
  engine for next 10 years

2006 Comparison Data
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Regional MRO Values

• The top three regions make up 80 of the 2006
  value
• North America itself is 43 to the total in 2006
  but falls to 35 by 2016
• While the balance of the emerging regions make up
  only 20 of the value in 2006, by 2016 they
  account for 27
• The emerging regions are growing much faster due
  to passenger demand and corresponding fleet growth

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North American MRO Market

• The 2006 MRO market value is nearly 17B, 43 of
  the world market
• While the value grows to 21.4B in 2016, the
  share of world value shrinks to 35
• Fleet influenced values are portrayed below

North America Fleet Distribution
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Outsourcing Continues

• Currently the world airlines outsource nearly 60
  of all MRO activity
• There have been several outsourcing reversals in
  the US this year
• AA has announced a strategy to grow their MRO
  business with internal improvements
• Both have served as a wake up call to the
  independent MRO community
• The economics of outsourcing will continue to
  drive a shift in work to outsourcing
• But only to the degree that the independent MRO
  can meet the growing demands of the airline
  customer

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More RASM, Less CASM

• What becomes important?
• Minimizing out of service time (aircraft,
  engines, components)
• Improving reliability and quality
• Reducing labor cost
• By improving efficiency
• By reducing rework and eliminating waste
• By seeking lower cost providers (low labor rate
  regions)
• By matching labor skills to the work requirement
• Retiring older, inefficient aircraft and engines
• Simplifying fleet make-up
• Developing a more efficient inventory strategy

Faster Better
Lower Total Cost
Can MRO Have an Impact?
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Can MRO be More Efficient?

• In a word, absolutely!
• In fact it MUST continue to make progress!
• LEAN revolutionized the manufacturing world
• With some adaptation, the concepts can and are
  revolutionizing MRO
• Moving right to the bottom line these attributes
  are key
• More capacity and throughput without adding
  people or facility
• Higher quality, less rework and fewer warranty
  claims
• More satisfaction and pride in keeping your good
  customers

Get better or get beaten!
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Conclusions

• MRO Market growth predictions remain strong
• New investments and consolidation will naturally
  follow
• Margins will be higher where labor content is
  lower
• A world wide focus on cost of MRO Services will
  intensify
• And the MRO community will respond
• Where labor rates are high, progressive MRO
  leaders are examining their value proposition
• Speed, with quality and reliability, provide
  particular value to airlines
• Repackaging the Same Old Stuff does not work any
  more
• Supply chain and inventory innovations will
  continue to provide value to operators

Be a POSITIVE contributor to More RASM, Less CASM
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• A New MRO World
• Thats Our Look Forward

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Thank You!