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PMA Forecast and Market Trends

Presented by:Presented by:

Michael J. HowardPrincipal ICF Internationalmhoward@icfi.com

Michael J. HowardPrincipal ICF Internationalmhoward@icfi.com

Gorham PMA ConferenceSan Diego, CA21-23 March, 2016

Gorham PMA ConferenceSan Diego, CA21-23 March, 2016

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Today’s Agenda

MRO Forecast

Meet the Frackers!

The PMA Market…

22

MRO ForecastMRO Forecast

33

The current commercialair transport fleet consists of over 27K aircraft

Source: CAPA 2015

NarrowbodyJet

WidebodyJet

Turboprop

Regional Jet

27,114Aircraft

14%

53%14%

19%

By Aircraft Type By Global Region

North America

Asia Pacific

Europe

Latin America

Middle East

31%

27%

25%

8%

5% 5%

27,114Aircraft

2015 Global Commercial Air Transport Fleet

44

The combination of strong air travel demand and the need to replace ageing aircraft will drive fleet growth at 3.4% annually

Source: ICF International, CAPA 2015

Air traffic growth of ~4.1%

Fuel costs in $55/bbl range

~19,600 aircraft deliveries

~8,800 aircraft retirements

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2015 2025

AfricaMiddle EastLatin AmericaEuropeAsia PacificNorth America

27,100

31% 26%

37,900

27%

25%

8%

32%

23%

8%

# Aircraft

3.8%

2.5%

1.6%

5.2%

5.3%

5.1%

CAGR

3.4% Avg.

5%

6%

10 Year Global Air Transport Fleet Growth

55

Current air transport MRO demand is $64.3B; Asia Pacific is now equivalent to North America and Europe

Source: ICF International

Engines

Components

Line

Airframe

Modifications

14%

17%

22%

40%

7%North

America

Asia Pacific

Europe

Middle East

Latin America

Africa

29%

28%

26%

8%

6%4%

$64.3B$64.3B

By MRO Segment By Global Region

2015 Global MRO Demand

66

The global MRO market is expected to grow by 4.1% per annum to $96B by 2025

Source: ICF International; Forecast in 2015 $USD, exclusive of inflation

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

2015 2025

Modifications

Airframe

Line

Component

Engine

40%

22%

14%

17%

$64.3B

$96.0B

2.8%

3.6%

4.3%

4.4%

CAGR

4.1% Avg.

5.3%

41%

22%

16%

13%

10 Year Global MRO Demand Growth

77

Over the next decade, China and Asia Pacific region will drive absolute MRO spend growth

Source: ICF International; Forecast in 2015 $USD, exclusive of inflation

Difference in MRO Spend, 2025 vs. 2015 – By Global Region$ USD Billions

$7.9

$6.4$5.2

$3.2$2.6 $2.2 $2.0

$1.2$0.0

$1.0

$2.0

$3.0

$4.0

$5.0

$6.0

$7.0

$8.0

$9.0

Asia Pacific(excl China)

China Middle East NorthAmerica

LatinAmerica

EasternEurope (incl

CIS)

Africa WesternEurope

71% 93% 103% 17% 73% 72% 85% 10%Percent Change:

88

2014 Top 10 Airframe MROs by Man-Hours PerformedIn Millions

Among the top ten airframe MRO providers, ST Aerospace and HAECO account for 50% of man-hours performed in 2014

Source: Aviation Week

12.0

11.7

4.9

3.6

3.0

2.9

2.9

2.2

2.0

2.0

ST Aerospace

HAECO

AAR

AFI KLM E&M

Lufthansa Technik

GAMECO

Turkish Technic

Evergreen Aviation Tech.

Aviation Technical Services

Sabena Technics

99

Meet the Frackers!Meet the Frackers!

1010

Breakthrough technologies in horizontal drilling and hydraulic fracturing (aka fracking) resulted in a US-led energy revolution

Source: BP Statistical Review of World Energy June 2015, ICF International Analysis

North American crude oil and natural gas production have soared in recent years…

3,500

4,500

5,500

6,500

7,500

8,500

9,500

10 year growth = 105%(7.45% CAGR)

Thousands

1,250

1,450

1,650

1,850

2,050

2,250

2,45010 year growth = 66%

(5.22% CAGR)

Billion cu. ft.

U.S. Crude Oil Production(Barrels / day)

U.S. Natural Gas Production(Monthly marketed production)

1111

The US energy revolution has completely disrupted the global economic and geopolitical balance of power

Source: BP Statistical Review of World Energy June 2015, ICF International Analysis

…making the U.S. a global powerhouse in energy production

728

579

177 173 162135

109 10883 73

0

100

200

300

400

500

600

700

800

11.6 11.510.8

4.3 4.23.7 3.6

3.3 3.12.8

0

2

4

6

8

10

12

14

Global Oil Production(Million barrels / day as of June 2015)

Global Natural Gas Production(Billions of cubic meters as of June 2015)

1212

Continued low fuel costs will have significant repercussions throughout the aviation & MRO supply chain

Source: EIA; ICF International analysis

Aviation fuel costs have dropped by approx. 66% during the past 24 months…

U.S. Gulf Coast Jet Fuel Price per Gallon

$0.8

$1.3

$1.8

$2.3

$2.8

$ USD

~66% Decline

1313

While Asia Pacific & North American airlines have enjoyed record profitability, other regions continue to struggle

Source: IATA

Global Airline Profitability, 2004-2016

$19

$7

$10

-$30

-$20

-$10

$0

$10

$20

$30

$40

$USD Billions

$36B

Rest of World

North America

Asia Pacific

1414

China’s seemingly insatiable demand for global commodities was a key driver of global economic growth

Source: IMF, World Economic Outlook Database October 2015, ICF International Analysis

After years of remarkable GDP growth, China’s economy has been steadily slowing

5%

7%

9%

11%

13%

15%

2007 2008 2009 2010 2011 2012 2013 2014 2015F 2016F2015F 2016F

China GDP Year-on-Year Growth (%)

1515

The fall in commodity prices have had a dramatic impact of economies dependent on commodity exports

Source: Dow Jones Commodity Index

Over the past 5 years, commodity prices have plummeted more than 55%

Dow Jones Commodity Indices (DJCI)(January 2011 Indexed to 100)

40

50

60

70

80

90

100

110

- 56.0%

Indexed Values

1616

The dramatic increase in oil & gas market

supply and reduceddemand for commodities has led to a stronger US Dollar

Partially offsets the positive impact of low fuel costs for operators

Increases the cost of dollar based flight hour agreements (and parts/material in general)

Cost of labor for in-country MROs is cheaper driving up margins for US dollar based contracts

Buying/leasing aircraft becomes more expensive

FOREX Impact

Source: Oanda historical exchange rates, ICF International Analysis

Russian Ruble-55.1%

Brazilian Real-41.1%

S. African Rand-34.1%

Can Dollars-23.1%

Aus Dollars-20.8%

Euro-20.0%

British Pound-12.8%

Japanese Yen-11.9%

Indian Rupee-7.8%

Chinese Yuan-7.2%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

B

R

C

S

A

The “CRABS”: Countries with economies that are heavily dependent on commodity exports

Global Currency Exchange Rates vs USD% Value Change, Jan. 2014 – Jan. 2016

1717

The PMA Market…The PMA Market…

1818

Last year, operators spent over $28B on OEM new parts and an additional $13B on alternatives such as PMA, surplus, and parts repairs

2015 Parts Alternatives Compared To OEM New Parts

OEM new Alternatives

Repair (inclDER)

Surplus

PMA ($0.54B)

Source: ICF International

46%

$28B

$9B

$3.7B

1919

Parts pricing and availability continue to drive demand for PMA parts

Price and availability are the main reasons for PMA usage

Source: ICF International

• PMA parts are typically 20 to 40% off OEM list price

• Many OEMs may protect their aftermarket revenue streams by campaigning against PMA and by insisting that licensed MROs discard PMA parts found during overhaul

• In an AOG situation, any permitted serviceable part will be used irrespective of price, including PMA

• Use of PMA is usually driven by long lead time for OEM parts

Part Price Part Availability

0

20

40

60

80

100

120

New As Removed

OverhauledNew Surplus

PMA

Illustrative* Parts Price Bands

Exceptional circumstances

% OEM List

“TAT on repair order and warranty management are most important for my component repair business. Parts availability might drive the use of alternative parts in the future. “

- Major Chinese Airline

2020

PMA parts tend to be best suited for low price, high velocity parts

Alternative Parts Exposure vs. Part Type

Source: ICF International

2121

PMA growth is expected to be slower due to the retirement of mature aircraft, but still healthy at 5.1%

Air Transport PMA Market Forecast In $ Millions (2015-2020)

Source: ICF InternationalForecast in 2015 USD, exclusive of inflation

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

-

100

200

300

400

500

600

700

800

2015 2016 2017 2018 2019 2020

Component

Engine

Airframe

Total

Penetration (%)

2015 – 2020

7.3%

1.4%

6.5%

5.1%

CAGR:

$ millions% of total MRO material

‘15-’20 CAGR: 5.1%

2222

The air transport MRO market is expected to grow 4.1% per annum through 2025 driven by the Asia Pacific region

The two largest global airframe MRO suppliers are headquartered in the Asia Pacific region

The US energy revolution combined with the economic slowdown in China are having a significant impact commodity export dependent CRABS

The PMA market is expected to grow 5.1% per annum to $700M USD by 2020

In Summary…

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For questions regarding this presentation, please contact:

Michael J. HowardPrincipal Aerospace & MRO

mhoward@icfi.com +1 734.604.9651

THANK YOU!

2424

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