Outsourcing Trends in the USA

9th Annual Aircraft Maintenance Outsourcing Conference for the Americas November 2009

Presented by:

David A. Marcontell
Executive Vice President & Principal
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Who We Are
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Market Intelligence
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Whats in store
Guiding Questions
How have outsourcing trends been affected by the recession? What has been the impact of currency value fluctuations? How does work move between markets and geographical regions? What are the key US companies that import outsourced work? Overview of outsourcing State of the market Currency trends North American MRO (engine and airframe) overseas volume estimates Regulatory environment

Discussion Points

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Outsourcing overview
With very tight operating conditions, airlines are constantly evaluating their maintenance work
Market is seeing a mix of remarkably diverse RFPs each driven by broad ranges of confidence
Shorter and longer contract terms Smaller and larger work scopes

If there is one common denominator, it is lower prices are in demand

Recession is putting pressure on operators to consider in-sourcing work first before bidding the workif able
This does not mean that they will use that option, but a first-look is increasingly common

OEM / MRO tension is on the rise, with OEMs continuing to raise prices despite recession and continuing to exert their presence down the supply chain
MROs poor position being exacerbated by added pressure from airlines wanting to avoid flight cancellations/interruptions and resultant costs Thus, airlines are pushing MROs to maintain larger inventoriesa capital intensive need that adds to the MROs costs Internal capabilities, experience with fleet type(s), and fleet size Turnaround time Exchange rates Fuel costs for ferrying if required

Major factors that influence the outsourcing decision remain the same:

Effectiveness of an MROs LEAN execution is also having a strong influence on the outsourcing decision
How will these conflicting approaches ultimately impact the industry?
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State of the market

Work outsourced by segment
World % Outsourced % Outsourced - % Outsourced Independent All Independent/OEMs Outside Region 77% 58% 15% 95% 81% 24% 89% 84% 12% 33% 28% 15% 79% 67% 18%

MRO $ (B) $6.5 $19.1 $9.0 $8.3 $42.9

Segment HMV (Check)1 Engines Components Line Total North America

MRO Prospector keeps a listing of known contracts and relationships

An industry unique feature Provides user with a means of seeing which operators have established relationships with MROs

% Outsourced % Outsourced - % Outsourced Independent All Independent/OEMs Outside Region 85% 70% 22% 99% 81% 12% 86% 81% 7% 56% 40% 19% 85% 71% 15%

Market share is estimated based on this research With an understanding of existing contracts, estimates are made to determine trends in outsourcing

Segment HMV (Check)1 Engines Components Line Total

MRO $ (B) $2.2 $6.3 $3.1 $2.9 $14.4

Contract research suggests that a significant amount of HMV and engine work worldwide is done outside the operator
Airlines increasingly wish to focus on their customer-facing roles and allow non-customer-facing tasks to others

Of course some of that work is sent to the operators affiliated MROs, so it is not all truly independent Of the work that is sent to an independent MRO, less than a quarter leaves the region North America largely mirrors the overall worldwide behavior
1 HMV (Check Only) excludes modification work in this analysis Note: values include turboprops

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State of the market

Work outsourced by segment, YOY trends
Outsourced HMV (Check) MRO

Outsourced Engine MRO

81%

70%
53% 53% 58%

75%

Outsourcing continues to grow, especially in component and line maintenance HMV is about 50:50 but has been on the rise

2007

2008

2009

2007

2008

2009

Note: HMV (Check Only) excludes modification work in this analysis

Outsourced Component MRO

84%
77%

Outsourced Line MRO

Line MRO is still mostly in-house, but now beginning to rise quickly

63%

28%
17% 16%

2007

2008

2009

2007

2008

2009

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State of the market

North Americas HMV (Check) MRO outsourced work by region HMV
(Check Only)1

$1.5B

2%
North America Western Europe Eastern Europe

64%
stays in NA
Latin America

China Africa

5%
2%
Asia Pacific

64%

25%

4%

5%

Middle East

4%

India

25%
Most NA HMV work stays within NA (64%)

1
3 4 5 6
7

1 HMV (Check Only) excludes modification work in this analysis

Asia-Pac gets about a quarter of the outsourced business

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State of the market

North Americas Engine MRO outsourced work by region Engine

$5.1B

13%
North America Western Europe Eastern Europe

84%
stays in NA
Latin America

Africa

1%
Middle East

China

Asia Pacific India

2% 84%

1%

13% 2%

NA engine work is even more likely to remain in NA Western Europe also gets about 13% of NAs business
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State of the market

North America outsourced work by service type
HMV
(Check Only)

Engine

$1.5B

2%

12%
Unannounced Total Care / All Mx Heavy

$5.1B

8% 11%
Unannounced

32%

Total Care / All Mx Shop Visit

54%

Light - C Checks
1 HMV (Check Only) excludes modification work in this analysis

81%

Bundled contracts (total care / all maintenance which extend beyond airframe work) make up about a third of the contracts in NA
More than half focus only on heavy maintenance

Dedicated shop visit contracts dominate the engine overhaul business

Some 11% are part of bundled (total care or full engine maintenance) contracts

All this suggests

Work requiring significant manhours or capital equipment (e.g., engine shop repairs) is more likely to be outsourced
Airlines prefer doing their own light C checks due to short turn-times and less manhour intensive volume where cost differential adds up While most engine maintenance is locked up, the prevailing model is event driven rather than hourly driven
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Outsourcing Technical Support Services

Note: MRO Outsourced includes work outsourced to independent MROs or to OEMs, but not work done by operator-affiliated MROs

Outsourced vs In-House MRO 2009

Outsourced % In-House %

Technical Support market continues to grow Examples of recent contracts:

$20 B $18
19%

Provider Lufthansa Technik

Airlines/Offering Aeroflot
(A320, total support)

$16
$14

AeroLogic
(777F, total support)

$12 $10
$8

Khalifa Airways
(A320, total support)
16% 81%

SR Technics TeamSAI
72%

Gulf Air
(full fleet, integrated airline solution)

42%

$6 $4 58%
$2

World Airways North American Milcon Gulf Group Air Malta

84% 95% 28%

CAVOK Avisa Ltd

$0
HMV (Check) Engines Components Line

5%
Technical Support

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A tough year for MRO providers

MRO closures/declines 2008 Nov
AAR

2009 Jan
Chromalloy GE

Dec

Feb

Mar
SRT Dublin

Apr
AAR LHT

May

Jun

Jul

Aug

Sep
Comair P&W

Oct

Nov

LHT-Shannon

LTAI

Dublin Aerospace

TIMCO
Significant decline due to parking of UAL 737s Closing their HOT facility Closed Ft Walton Beach facility Laid off works in NV Transferred workers to San Antonio Consolidated manufacturing & maint. Avoiding closures for now Largest MRO casualty of 2009 Concentrating on basics Low-cost sourcing Suspending India JV Stabilized decline by shifting to military work Confident but cautious Focus on efficiency and newer a/c types Surviving thru LEAN

Closed MRO base in ORL

Shifting work to lower cost facilities by closing some Moving forward with some strategic JVs Replacing SRT-Dublin Awarded key approval certificate Expects to employ 50-150 EEs by end of first year (vs. 1500 before)

Escape SRT-Dublin fate by securing productivity improvements from labor

Are we seeing the bottomyet?

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2009 Contract Highlights

MROs
GE / ADAT / SR Technics / Standard Aero DTO / EGAT

Contract Description
Multi-faceted aviation agreement Abu Dhabi Aircraft Technologies (ADAT) to become first MRO Network provider of GEnx engines and acquire GE90 capabilities GE and Snecma to provide ADAT and SR Technics with engine overhaul and technical support GE designates CFM56-7B work for WestJet to StandardAero ($850M, 12yrs OnPoint Solutions partnership) Delta TechOps wins first 747 component MRO contract since NWA merger by teaming with Evergreen Aviation Technologies Corp. (EGAT) EGAT will continue providing comprehensive maintenance solutions to EVA Airways, but through the new contract, Delta will provide component services for EVAs 747s and MD-90s operated by EVA subsidiary UNI Air LHT-Shannon Aerospace picking up easyJet 737NG checks that formerly were to go to SRT-Dublin Intense LEAN focus to survive downturn In 4/09, GE Engine Services landed $100M PBTH engine overhaul contract for Gulf Airs CFM56-5Bs for its 15 new A320s In 6/09, GE Engine Services landed $1.7B OnPoint contract for Ethihad (GE90, GEnx) Gulf remains relatively bright spot in economic downturn In 6/09, GE Engine Services landed 10-yr, OnPoint contract for Delta Air Lines (GE90) Outsourcing now, despite the fact that DAL carried out >$300M in engine work for other airlines in 2008 In 10/09, GE Engine Services (Celma) landed 15-yr, $1.0B OnPoint contract for Azul (CF34-10E for E190/195) In 6/09, P&W secured long-term $75M contract covering all JAL components for all fleets In 6/09, LHT secured long-term Total Component Support contract for Scandinavian Airlines System

LHT-Shannon Aerospace GE Engine Services

Pratt & Whitney Lufthansa Technik

DTO

In 7/09, Delta TechOps contracted with Hawaiian Airlines for $500M OnPoint (Total Care) for PW4000-94 and CF6-80A

Large Players Making Strategic Moves

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Currency fluctuations have mixed impact on NA MROs

Contract data does not bear out significant trends but weak USD favors NA MROs to some extent
US Federal Reserve loose monetary policy (i.e., keeping interest rates low to spur the economy) has, in part, driven the US dollars devaluation
Since the beginning of 2008, the USD/EUR exchange rate has fallen
Dollar is currently at its lowest point relative to the Euro since August 2008
EUR to USD Exchange Rate
0.85

0.80

0.75

0.70

Conventional wisdom: weak dollar benefits US exports

And to the extent that MROs are enjoying increased sales in Europe, this wisdom holds Weak dollar is making US MROs very cost-competitive
0.65

However, raw materials sourced overseas in foreign currency are more expensive
Oil, metals, component parts, etc. Tight credit terms can prevent US companies from getting funds to front these costs Higher raw material costs are bad for everyone Higher fuel costs (due to devalued dollar) impact ferry flight breakeven distances Furthermore, many contracts are long-term in nature and cannot be renegotiated to take advantage of the weaker dollar

0.60
Nov-07
Nov-08

Oct-07

Oct-08

May-08

May-09

Mar-08

Mar-09

Feb-08

Feb-09

Aug-07

Aug-08

Aug-09

Apr-08

Sep-07

Sep-08

Apr-09

Dec-07

CYN to USD Exchange Rate

7.70 7.60 7.50 7.40
7.30

7.20 7.10 7.00 6.90 6.80

Aug-07 Aug-08
Aug-09

US economy could also ultimately be harmed by devalued dollar, if it triggers inflation (though Feds are still more concerned about deflation)

Apr-08

Dec-08

Sep-08

Sep-07

Apr-09

Nov-08

Nov-07

Dec-07

Dec-08

Sep-09

Jun-07

Jun-08

Oct-07

Oct-08

Jun-09

Sep-09

May-08

May-09

Mar-08

Mar-09

Feb-08

Anecdotal evidence suggest NA MROs are doing better in EU

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Feb-09

Oct-09

Jan-09

Jan-08

Jul-07

Jul-09

Jul-08

Oct-09

Jan-08

Jan-09

Jul-07

Jul-08

Jun-07

Jun-08

Jun-09

Jul-09

North American MROs service all regions of the world

Of course, most work does come from the Worlds largest market (NA)
HMV
(Check Only)
1% 0% 0% 0% 2%
North America Latin America & Caribbean Western Europe Eastern Europe
Asia Pacific

1%

Engine

1%1%

4%

4%
North America

0%

7%

Latin America & Caribbean Western Europe Eastern Europe

Asia Pacific

11% 7%
65%

China China India Africa Middle East India Africa Middle East

96%

$871M
The vast majority of NA MROs get their airframe maintenance work from NA operators WE contributes just 2% of the NA MROs work

$5,890M
Engine work, on the other hand, is much more geographically diverse in terms of the home region of the customer Still, NA operators contribute nearly twothirds of the business LA&C, WE, and Asia-Pac customers do make up one-quarter of the NA MROs work

1 HMV (Check Only) excludes modification work in this analysis

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Top 15 MRO providers in NA

Top NA MROs service have regionally-diverse client base, but still focus mainly on NA operators

Looking at the major airframe and engine MRO providers in North America, we estimate the portion of their business that originates from other regions
Delta TechOps has wide expanse in the airframe MRO market
Just over half of their work comes from NA LAN Airlines (LA&C), Star Air (WE), and Royal Air Maroc (AF) make up some of their major customers overseas

Engine overhaul providers have a wider reach than airframe MRO providers
P&W, AeroThrust, Delta TechOps, and United Services are some of the most regionally diverse These providers service operators outside NA, with P&W having the broadest reach in the engine overhaul space

HMV (Check Only) Top 15 MRO 1 TIMCO Aviation Services, Inc. 2 AAR Corp. 3 Aviation Technical Services, Inc. 4 Pemco World Air Services 5 ST Mobile Aerospace Engineering, Inc. 6 Aveos Fleet Performance 7 ExelTech Aerospace 8 Goodrich Corporation 9 Empire Aero Center 10 Cascade Aerospace, Inc. 11 Bombardier Services Corp. 12 Delta Air Lines/DTO 13 Tucson Air Center 14 Flightstar Aircraft Services, Inc. 15 American Airlines, Inc. Engine Top 15 MRO 1 GE 2 Pratt & Whitney Global Service Partners 3 Rolls-Royce plc, Aero Repair & Overhaul 4 IAE International Aero Engines AG 5 Delta Air Lines/DTO 6 Texas Aero Engine Services Ltd. LLC 7 Aveos Fleet Performance 8 Standard Aero, Inc. 9 MTU 10 AeroThrust Corp. 11 United Airlines, Inc. 12 Chromalloy Gas Turbine Corp. 13 Eagle Aviation Services, Inc. 14 Vector Aerospace Engine Services - Atlantic 15 Honeywell Aerospace Services

NA LA&C WE EE AP CH IN AF ME Total 96% 4% 100% 100% 100% 100% 100% 100% 100% 100% 100% 99% 1% 100% 93% 6% 1% 100% 100% 100% 89% 11% 100% 100% 100% 100% 100% 52% 11% 29% 8% 100% 100% 100% 100% 100% 100% 100% NA LA&C WE EE AP CH IN AF ME Total 64% 6% 14% 0% 6% 2% 0% 0% 8% 100% 46% 4% 10% 0% 20% 11% 3% 2% 2% 100% 85% 5% 8% 1% 1% 100% 37% 14% 10% 4% 13% 16% 6% 100% 67% 26% 6% 0% 1% 100% 100% 100% 100% 100% 99% 1% 100% 83% 17% 100% 57% 43% 100% 0% 15% 85% 100% 100% 100% 66% 34% 100% 100% 100% 100% 100%

Note: All in-house work is excluded from this analysis. So, for example, United Airlines work excludes the work that United Services does for the UAL parent

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Outsourcing and regulation

Outsourcing to low cost regions has again come to the forefront of the publics attention with some high profile maintenance mishaps and media coverage

In this age of government involvement, protectionist measures are a very real concern
But now that we are beginning to see the end of the recession, globalization will likely continue its growth (though perhaps not as fast as that in the past) Increased pressure from the FAA on airlines will likely be felt by both US-based and foreign MRO providers
This is a new era of regulation where increased scrutiny of maintenance will be the norm

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Summary
Despite the recession, or perhaps because of it, outsourcing work continues to be a persistent trend in MRO market

Over 65% of all MRO is outsourced to third parties

Largely due to either complex nature of the work , or the shear volume of manhours required

MRO providers have had to take a long, hard look at their operations and adjust to the changes in utilization and capacity
2008 was the year of airline capacity reduction 2009 may prove to be the year of the MRO providers response to capacity reduction
Less business form older aircraft and engines that are not coming back Turning focus toward new aircraft with an understanding that they will (at least for the near future) require less maintenance

Recession has made the market place more competitive though

Weak USD makes for a temporary bright spot for North American MROs, but long-term implications must not be forgotten LEAN remains the answer

All this said, cost remains king

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THANK YOU
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