Cover Story

The value of the worldwide comme rcial jet transpor t MRO marke t will grow mor e tha n 25 pe rcen t over the nex t five year s and by 56 pe rcen t by 2016 , accordin g to the annua l MRO Forecas t produced for O&M by TeamSA I and BACK Aviatio n Solutions.

MRO Market Up M odestly As Efficiencies Take Hold

The value of the worldwid e commercia l jet transpor t MRO marke t rose a modes t 1.3 percen t last year to $38.8 billion, but it is expecte d to grow at a pace approachin g 5 percen t annuall y over the next five years as the recen t decline in labor rates bottom s out and engin e overhau l costs con- tinu e their upwar d trajector y. The annua l MRO Forecast, prepare d for O&M by TeamSAI and BACK Aviatio n Solutions , predicts a compound annua l growt h rate (CAGR) of 4.7 percent , with the worldwid e MRO marke t reach- ing a value of $48.8 billion by 2011. In the second half of the 10-yea r forecast peri- od, the market s CAGR will tail off somewha t to 4.4 percent , with the marke t reach- ing $60.6 billion by 2016. The $60.6 billion figure represent s an overall increas e of nearly 56.2 percen t from the end of 2005 and a jump of nearly 68 percen t from the end of 2002, whe n the MRO marke t was at its lowest point in recen t memor y. The past years relativel y anemi c growth , while potentiall y worrisom e at first glance, is the result of a variety of factors, includin g continue d focus on

efficiency

Ap ril 20 06 O ve rh au l & M ai nt en an ce

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Source: Team SAI/BACK Aviation Solutions

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Market Forecast
and productivit y, and the movemen t of labo r-intensiv e airframe overhau l work to lower cost providers . The reductio n in air- frame overhau l costs wen t a long way towar d mitigatin g con- tinue d increase s in engin e MRO spendin g increase s that are expecte d to continu e for the next decade. The [airline ] quest for profitabilit y has begun really driving health y behavio r effecting revenu e per available seat mile, or unit revenue , and cost per available seat mile, or unit costs, said Christophe r Doan, presiden t and CEO of TeamSAI. Were cer- tainly seeing that aircraft are flying more to maximiz e revenue potential . That was borne out this year by ASM and utilization growt h (up 5 percen t and 6 percent , respectively ) outpacing fleet growth, he said. According to BACK figures, the world wide commercia l jet transpor t fleet expande d 4.1 percen t last year to 17,90 3 aircraft. The worldwid e fleet is expecte d to con- tinu e to grow at a 4 percen t CAGR over the next 10 years. Increase d capacity and greate r aircraft utilizatio n generally lead to increase d maintenanc e demand , but overall MRO spendin g has been mitigate d by declinin g MRO unit costs. According to the forecast, MRO unit costs, as measure d in dollars spent per 1,000 ASMs flown, have fallen nearly 20 percent from 2001s level of $14.9 per 1,000 ASMs to $12.1 per 1,000 ASMs this year. The decline is even more dramati c if 2002s fig- ure of $15.9 per 1,000 ASMs is considered . (Note: Unit costs spiked upwar d in 2002 as airlines reduce d flying levels and overall capacity in the wake of Sept. 11 and as a result of a declinin g econom y.) The continuin g focus on unit costs is creatin g new demand and challenge s for the whol e MRO network, Doan said. So we see the mandat e to imp rove as a positive one. There certainl y is a drive now to minimiz e time in maintenanc e in order to maxi- mize time in the air. At the same time, [there ] is a real deman d to improv e qualit y and reliabilit y. That influenc e is causing the whol e system to get bette r. Aircraft productivit y is up and the MRO unit costs are continuin g to come dow n as this quest for profitabilit y continue s in the indust ry, he said.

Afte r droppin g sharpl y fro m 2001' s pea k of $42. 2 billion , the worldwid e com e rcia l jet m MRO marke t has bee n recoverin g graduall y.

Source: Team SAI/BACK Aviation Solutions

Ai rframe and Line Maintenance

The retiremen t of olde r ai rcraft , downward pressur e on labo r rate s and delay s in many mo d program s are am g the reason s that on the HMV/mo d marke t has decline d ove r the pas t five years . Growt h is expecte d to resume ove r the nex t decade.

The quest for profit growt h and cost reduction s has affected the airfram e heavy maintenance/modificatio n segmen t more tha n any othe r. In the past five years, the value of HMV/mod segmen t actuall y has decline d 6.7 percen t annuall y from $14.1 billion at the beginnin g of 2001 to $10 billion at the outse t of this year, accordin g to the forecast. The HMV (heav y maintenance visit) segmen t now is smaller tha n the engin e ove rhau l segment. Last year saw a fairly substantia l continue d reduction in the cost of airfram e maintenance , accordin g to David A.

Marcontell , executiv e vice presiden t and chief financia l

officer of

The Official Publicatio n of MRO April 2006

TeamSAI. Marcontel l said the reductio n was drive n by thre e prin- ciple considerations : greate r efficiency in heavy maintenanc e lines and how they are organized ; the effect of technologie s such as composite s and corrosio n inhibitin g coatings that have reduced the numbe r of man-hour s neede d to repair the newe r genera- tion airplanes ; and the continue d decline in net labor rates for labo r-intensiv e heavy maintenance. Since Septembe r 2001, the worlds airlines have retired hundred s of maintenance-intensiv e older airframes , man y of which probabl y would have been operate d longer if not for eco- nomic problem s exacerbate d by Sept. 11, which sent the indus- try into a tailspin. At the same time, a large numbe r of new- generatio n aircraft have entere d the marke t since the late 1990s. Its worth y of note that the [Boeing ] 737 NGs and some of the [Airbus ] A320 family ... have just recentl y completed their first HMVs and the survey we did this past year showe d the numbe r of man-hour s [necessar y to complete thos e HMVs] were coming in quite a bit less tha n we had predicted in previou s years, Marcontel l said, adding ther e is an order of magnitud e difference betwee n wha t it takes to complet e an HMV on older aircraft and wha t it takes to complete one on a newe r generatio n airframe. The botto m line is the technolog y that the OEMs are using in building these newe r generatio n airplane s is manifestin g itself in less cost to maintai n the m from an airfram e standpoint, Marcontel l said. In additio n to more effective corrosion-resistant coatings, composite s are having a huge impact. It flat out does- nt corrod e and it doesnt crack very much, he said. Also to be considere d are process improvement s implemente d by airlines and MROs. There has been a definit e effort on the part of the MROs to start addressin g more effective ways of doing things, more effective processes, etc., said Doan. The net effect is that the man-hour s necessar y to maintain the fleet are on the decline. At the same time, the cost of the labor necessar y to perfor m heavy checks also has been on the wan e for the past few years. The cost of a heavy check general - ly is 75 percen t to 80 percen t labor and the rest is materials. Marcontel l attribute d the continuin g decline in net labor rates to airlines outsourcin g heavy work to lower cost provider s and to carriers renegotiatin g their labor contract s to achiev e more favorabl e for the m labor rates. Last yea r, airlines outsource d 55 percen t of their airfram e HMVs, and TeamSAI expects that figure to reach 70 percen t by 2010. Still, Marcontel l said he does not expect to see labor rates continu e to decline at their curren t pace. Were startin g to see that botto m out, he said. Over the next five years, the HMV/mo d segmen t is

expected to increas e at a rate of 3.4 percen t annuall y, reachin g $11.8 billion

April 2006 Overhaul & Maintenance

The engin e MRO m arke t no w is large r tha n the HMV/mo d segm t an d is expecte d to gro w at a en rapi d pac e ove r the forecas t period , at least in par t becaus e of escalatin g part s costs.

The com ponen t MRO segm en t is expecte d to gro w steadil y betwee n no w an d 2016.

Line maintenanc e wa s affecte d by the post 9/1 1 declin e in flyin g and by improve d effi ciencies . Goin g fo rward , line maintenance will gro w as th e flee t does.

Source: Team SAI/BACK Aviation Solutions

April 2006 Overhaul & Maintenance

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Market Forecast
in 2011. Growt h in the segmen t will slow to 2.7 percen t CAGR over the second five years of the forecast, reachin g $13.4 billion in value by 2016. It looks as if it will be a few years after that before the HMV/mo d segmen t reache s 2001s level of $14.1 billion. Interestingl y, the forecaster s said they expect some carriers to experimen t with their new, lower cost structure s and bring some outsour ced work back in-house , especially wher e they believe that the MRO provider s are not showin g the nec- essary improvement. The decline in labor rates over the past few years also has had an impact on the line mainte- nanc e segment , the value of which droppe d to $8 billion last year from $9.2 billion five years earlie r. Line maintenance , like heavy mainte nance , is very labor intensive . The forecast indicates that the line maintenanc e segmen t will grow at a compoun d annua l rate of 3 percent over the next five years to $9.3 billion in 2011. At the same time, howeve r, the amoun t of line maintenanc e work outsource d is expecte d to increas e from 10 percen t last year to as muc h as 35 percen t in 2010. The line maintenanc e outsou rcing trend is being drive n partly by the growt h of low cost car- riers startin g with a fresh slate, Doan said. But TeamSAI also is seeing a fairly significant consol- idatio n of airpo rt maintenanc e operation s by air- lines. Large airlines, instea d of runnin g 30 stations, are consolidatin g their maintenanc e focus into fewer cities and are trying to captur e more air- planes in a more efficient way. The carriers then outsourc e line maintenanc e tasks at smaller sta- tions mainl y to handl e on-call maintenance. In the U.S. particularl y, ther e are two or thre e MROs that seem to be really growing with a focus in the line maintenanc e world, said Doan, citing Landmar k Aviation , Gearbuc k Aviatio n and Timco as examples.

A irlin Fleet On the Rise e Despite Lack of 50-Seat RJ Deliveries

he size of the worldwid e comme rcial jet transpor t fleet is expecte d to increase at a compoun d annual growt h rate (CAGR) of 4.2 percent over the next five years, despit e a significant reductio n in expected 50-sea t regional jet deliveries, accordin g to BACK Aviation Solutions, which annually calculate s the fleet componen t of the MRO Forecast prepare d for O&M by BACK and TeamSAI. According to BACK there were 17,90 3 commercia l jet transport s in , service worldwid e at the beginnin g of this year, of which 61.5 percent , or just over 11,000 , were narrowbodies ; 23.2 percent , or 4,155 , were wide bodies; and 15.3 percent , or 2,73 4 were regional jets. The worldwid e fleet is expecte d to grow to 21,95 2 aircraft by 2011 , and then 3.9 percen t a year to 26,57 7 by 2016. The makeu p of the fleet is expecte d to stay relatively steady over the life of the forecast , but there will be fewer 50-sea t RJs than BACK expected previously. Deliveries of larger RJs, howeve r, will continu e apace . Basically, we have taken out 1,70 0 R Js from our forecast previously, and that really is a reflection of, basically, the cessatio n of the 50-sea t RJ deliveries, even thoug h the larger RJs will continu e to be delivered, said Tulinda Deegan Larsen, BACK managin g directo r of consultin g services. She was quick to point out, howeve r, that while RJs compris e as muc h as 15 percen t of the fleet, they represen t only five percen t of overall MRO value. Also, 75 per- cent of the 50-sea t R Js are operate d in the U.S. With averag e fares in the U.S. declinin g and the price of fuel driving costs up, the economic s have becom e more challenging, for 50-sea t R J operations , said Larsen. She also said 50-sea t RJ orders were being affected by the restructurin g of bankrup t legacy carriers and that a numbe r of operators had converte d orders for 50-sea t RJ to larger RJs. Another tren d BACK sees in the fleet is that narrowbodie s being delivered to low cost carriers are going towar d expansion , while the same aircraft being delivered to legacy carriers are going for replacemen t capacit y.

Source: Team SAI/BACK Aviation Solutions

Engine Segment Thrust

The decline in the HMV/mo d and line maintenanc e segment s has been more tha n offset by a substantia l increase in the engin e MRO sector. According to the forecast statistics, the size of the engin e MRO marke t jumpe d to $13.5 billion at the end of last year from $10.7

The Official Publicatio n of MRO April 2006

billion in 2004, an increas e of more tha n 26 percent . Engine MRO now account s for nearly 35 percen t of the overall MRO market. Marcontel l attribute d the increas e in the engin e sector partially to bette r data on engin e costs per hours . But he also said, There was a very noticeabl e increas e in utilizatio n about seve n million more flying hour s in the world commercia l jet fleet this past year. The end result of that is more spend from an engin e standpoin t becaus e you are flying more hours. The engin e MRO marke t is expecte d to grow at more than twice the rate of any segmen t over the next five years. TeamSAI and BACK expect the engin e MRO marke t to expand 7.3 percen t per year over the next five years to $19.2 billion, before taperin g off to 6.5 percen t CAGR over the second half of the forecast period . In five years, engin e MRO will represent 39.3 percen t of the expecte d $48.8 billion market . In 2016, engin e MRO could represen t 43.2 percen t of the overall $60.6 billion market. Because the cost of an engin e ove rhau l is 70 percen t to 80 percen t materia l and only 20 percen t to 30 percen t labor, the seg- men t does not benefit from labor rate declines seen in the air- frame segment . The expecte d growt h in the engin e segmen t is really drive n by the materia l pricing increase s and the absenc e of a large efficiency improvemen t capabilit y, Marcontel l said. It has to do with the fact that the re is just not a lot of labor in the engines . We see the materia l side being influence d by the OEMs of course we dont see that that is going to tempe r itself from a price escalatio n standpoin t very much. The forecaster s see prices increasin g thre e to six percen t a year for the foreseeabl e future. While the delivery of new aircraft is pushin g dow n the cost of airfram e maintenance , it is exertin g upwar d pressur e on engin e MRO costs. New aircraft come equippe d with more reliable, more fuel efficient engines , but those engine s run hotter tha n older engine s and thus cost more to maintain , particularly in terms of the more sophisticate d parts and material s needed for the hot sections. Cleary in total, ther e is a more economi cally operatin g engine , but the tradeoff to the fuel efficiency is definitel y a highe r cost of maintenance, said Doan. The temperatur e at which the engin e operate s is the key issue that is driving new technolog y into the engine , particularly the hot section, said Doan. OEMs are using muc h more sophisticate d alloys and single-crysta l constructio n in the casting of parts. The single crystal casting concep t is a construction type that is very difficult to repai r, he said. The newe r parts are very difficult to repai r. Theres been very few developments in the repair area yet, so whe n ther e is damag e

or a problem, generall y the part is being replaced . Also, coatings in the hot section have becom e muc h more sophisticate d and costly.

April 2006 Overhaul & Maintenance

MRO uni t cost s hav e decline d sinc e 2002 , but are forecas t to be fla t ove r the nex t decade.

Nort h Americ a (char t above ) will remain the dominan t MRO regio n in term s of size for the nex t 10 years , but China , India and Easter n Europ e (char t below ) are the fastest growin g markets , albei t fro m smalle r bases.

Source: Team SAI/BACK Aviation Solutions

April 2006 Overhaul & Maintenance

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Market Forecast
ings from operatin g more fuel efficient engine s accelerates. North America will remai n the worlds largest MRO marke t for the life of the forecast, but its share of the overall marke t will continu e to decline. Currentl y, North America represents abou t $16.6 billion, or 42 percent , of the $38.8 billion market , followed by Wester n Europ e at $8.5 billion (22 percent), and the Asia-Pacific region not includin g China or India at $5.7 billion (15 percent) . China today represents thre e percen t of the marke t and India one percent . In five years, North America s share of $48.8 billion marke t is expecte d to decline to 39 percent , while Wester n Europ e and the AsiaPacific region remai n relativel y flat at 22 percent and 16 percent , respectivel y. By 2016, North America will accoun t for 36 per- cent of the $60.6 billion market ; Western Europ e will be at 21 percen t and the Asia-Pacific region at 16 percent. Over the 10-yea r forecast period, China and India are expecte d to be the two fast growing markets , at 13 percent CAGR and 9.5 percen t CAGR, respectively. By 2016, the China will represent six percent , or $3.9 billion, of the total, and Indias share will be four percent , or $998. 3 million. The phenomenal growt h in China and India, that certainly is continuing, said Doan. The Middle East marke t is expected to grow at a relativel y modes t pace of 5.2 percen t CAGR over the next 10 years and will remai n abou t six percen t of the marke t throug h the period . Still, ther e is a lot of potentia l in that region of the world. You just cant forget the Middle East and the tremendou s numbe r of airplanes theyre buying, said Strand . Its outpacin g China and its outpacin g India in terms of actual dollars until you get out to the 10-yea r point of the forecast, whe n China starts to exceed the Middle

Source: Team SAI/BACK Aviation Solutions

The trend toward outsou rcing will continue and increasingl y will includ e line maintenance.

So accordin g to TeamSAI, OEMs are tradin g highe r MRO costs for greate r fuel efficiency. Wher e you get the gain, obtusel y, is as the fuel price increases, and you apply that to the consumption

rate decline, you actuall y get a geometric effect that helps you offset that increase in maintenanc e costs, said Bruce Strand TeamSAI founde r and chairman . So as fuel prices increase , the rate of cost sav-

U.S. A irlin Traffic Growth to Slow e Considerably in 2006

fter two years of stron g gains, U.S. airline traffic growt h will slow considerably this year as expecte d increases in internationa l traffic are substantiall y offset by essentially flat domesti c traffic, accordin g to the Federal Aviation Administration s annual aerospac e forecast. Systemwide , U.S. comme rcial air carriers are expecte d to fly just 1.5 percen t more revenu e passenge r miles in 2006 than they did in 2005 , accordin g to FAA. Howeve r, systemwid e load factors should increase 0.5 of a point becaus e capacit y, as measured in available seat miles, is forecast to grow just 0.9 percent . U.S. carriers international passenge r traffic is expecte d to grow 5.4 percen t this year on 5.9 percen t more capacit y, resultin g in a load factor decline of 0.4 to 78.9 percent . Domesticall y, how- ever, U.S. carrier traffic is forecast to be flat, growin g just 0.2 percen t on 0.7 percent less capacit y. U.S. airlines flew an estimate d 775. 3 billion RPMs in 2005 , which is a full eight percen t more than they flew in 2004 , accordin g to FAA. Traffic in 2004 was up 10.7 pe rcen t over 2003s level. Systemwid e traffic growt h is expecte d to pick up stea m again in 2007 , growing nearly 4.8 percen t over this years expecte d level. Over the life of the 10-year forecast, FAA expect s U.S. carrier systemwid e traffic to grow 4.1 annually, only slightly faster tha n its forecast 4 percent averag e annual growt h for capacit y. Internationa l traffic will grow at a faster rate than domesti c traffic for the next decade . FAA expect s average annual internationa l traffic growt h of 5.5 percen t (on an averag e of 5.5 percen t more capacity) , while it expect s U.S. carrier domesti c traffic to grow a more modes t 3.6 percent annually on 3.4 percen t more capacit y.

East, he said.

The Official Publicatio n or MRO April 2006