Transcription changing MRO landscapeIATA Maintenance Cost ConferenceAthens, Greece19 September 2018

AgendaICF proprietary and confidential. Do not copy, distribute, or disclose. Global trends World fleet MRO trends The changing MRO landscape Summary2

ICFICFproprietaryandandconfidential.Do Donot notcopy,distribute,or r disclose.3

Our HistoryAirports Airlines Aerospace & MRO Asset AdvisoryICF is one of the world’s largestand most experienced aviationand aerospace consulting firms Founded in 1963 100 professional staff Dedicated exclusively to aviationand aerospace Blend of consulting professionals and experiencedaviation executives Specialized, focused expertiseand proprietary knowledgejoined in 2007joined in 2011joined in 2012joined in 2014 Broad functional capabilities More than 10,000 private sector andpublic sector assignments Backed by parent company ICF(2016 revenue: US 1.05 billion) Global presence — offices aroundthe worldNew York Boston Washington D.C. London SingaporeICF proprietary and confidential. Do not copy, distribute, or disclose.4

Global trendsICF proprietary and confidential. Do not copy, distribute, or disclose.5

Asia Pacific, Middle East and Africa have been thefastest growing regions in the past five years14%12%10%8%Asia Pacific, 5.6%6%Africa, 3.3%4%2%North America, 2.2%Europe, 1.6%Middle East, 2.5%0%South America, 0.2%-2%-4%-6%1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017ICF proprietary and confidential. Do not copy, distribute, or disclose.Source: World bank6

Traffic growth, driven by increasing fuel prices, isslowly reversing as 2019 is forecast to shrink to 5.0%FuelAir traffic growth3.59%8%32.56%25%1.54%3%1Annual traffic growth (%)Jet fuel price ( /gallon)7%2%0.51%020100%201120122013ICF proprietary and confidential. Do not copy, distribute, or disclose.201420152016Source: ICF Analysis, IATA, EIA2017201820197

Global airline industry achieved a record profitability in2017, but this is estimated to decrease to 28.1B in 2019Billions 40Global airline profitabilityPer departing passenger profit & marginLatin America, 0.9B 30Asia Pacific, 8.1B 20Europe, 6B 10N. America, 15.0B 0 125.0% 10.10 10 9.00 8Africa, - 0.1B 6.10 6 44.0% 6.90Middle East, - 1.1B- 10 9.202.0% 4.10 3.401.0% 2- 20 -ICF proprietary and confidential. Do not copy, distribute, or disclose.0.0%2013 2014 2015 2016 2017 2018 - 303.0%Per departing passenger profitSource: IATA, ICF AnalysisMargin8

The European aviation industry is more fragmentedthan other marketsNumber of airlinesEurope has a total ofEurope has four large airlines & groupswhich are responsible for most of theEuropean profits; Lufthansa Group,IAG, AFI-KLM and Ryanair195Airlines348EuropeCity pairsDrop in maintenance-related cancellationsof North AmericaWhilst North America only has98Airlines167 City pairsSouthwest to install AHM on complete 737 NGIn Europe,it takes348 city pairs to generate 25%fleet to improveperformanceof the inter-Europe passenger revenue, with 28airlines holding approximately 80% of the availableseating capacityICF proprietary and confidential. Do not copy, distribute, or disclose.In North America, the seven biggest airlines hold 80% ofthe of the available seat capacity and there are 167 citypairs needed to generate 25% of theSource: PAXiS, IATA and ICF research9

Commercial aircraft OEM production backlog remains athistorical high, with nearly 7 years of production Backlog more than doubledbetween 2010 and 2014, due to: Growing global economyRapid growth of emerging marketsVery low interest rates and plentiful capitalHigh oil and commodity pricesIntroduction of new technology aircraft/engines Total backlog peaked in 2018 withalmost 15,000 on firm order15000BacklogBacklog % 180ICF proprietary and confidential. Do not copy, distribute, or disclose.10

World fleetICF proprietary and confidential. Do not copy, distribute, or disclose.11

The current commercial air transport fleet consistsof 30,870 aircraft; 7,500 are located in EuropeTurboprop13%By Fleet TypeBy RegionSouthAmerica7%Regional Jet14%AsiaPacific30%30,870 AC30,870 ACWidebody Jet19%Africa5%Middle East5%Narrowbody Jet54%ICF proprietary and confidential. Do not copy, distribute, or disclose.Europe25%Source: ICF AnalysisNorth America28%12

Asia Pacific has surpassed North America and Europe intotal fleet size, and will continue to grow to 14,700commercial aircraft by ,4422018ICF proprietary and confidential. Do not copy, distribute, or 28Source: ICF AnalysisAsia PacificEuropeNorth AmericaSouth AmericaMiddle EastAfrica13

New aircraft deliveries are for both expansion andreplacement of retirement aircraft10-year Global Fleet Forecast Deliveries 0182020ICF proprietary and confidential. Do not copy, distribute, or disclose.2022Source: ICF Analysis14

Aircraft retirements are influenced by many differentelements 3.00 2.961000 3.06 3.2 2.92900 2.69 2.8700 2.15600 1.52 1.25 1.66 1.56 2.03 2.3 1.8500 1.4400712607300200501580710643534550552592625 0.9Fuel price ( /gallon)# of retirements800 0.51000 0.02008200920102011ICF proprietary and confidential. Do not copy, distribute, or disclose.201220132014Source: ICF Analysis, CAPA, World bank201520162017201815

MRO trendsICF proprietary and confidential. Do not copy, distribute, or disclose.16

2018 commercial air transport MRO demand is 82.4B, with engines representing the largest shareBy MRO erica6%By RegionAfrica4%MiddleEast8% 82.4 BAsiaPacific32% 82.4 BLine16%Components21%ICF proprietary and confidential. Do not copy, distribute, or disclose.NorthAmerica24%Source: ICF AnalysisEurope26%17

BillionsThe global MRO market is expected to grow tonearly 128 billion by 2028 160 152.37 140 127.97 12047% 100 80 6046% 82.428%43%8%11%11% 407%13% 2016%21%EnginesModificationsHeavy maintenanceLine maintenanceComponents14%14%20%19%20282038 2018ICF proprietary and confidential. Do not copy, distribute, or disclose.Source: ICF Analysis18

BillionsEurope is the second largest region, with a totalspend of 21 billion in 2018 160 152.378% 140 127.97 120 100 80 4018%19%9%10% 82.4221%6%23%25% 607%8%South AmericaNorth AmericaMiddle EastEuropeAsia PacificAfrica35%26%35% 2032%4% 02018ICF proprietary and confidential. Do not copy, distribute, or disclose.6%9%20282038Source: ICF Analysis19

BillionsThe total MRO spend for narrow body aircraft willgrow from 40B in 2018 to nearly 86B in 2038 160 152.37 140 127.9737% 12038% 100 80 602%5% 82.4240% 404%8% 2049%2%5%Widebody JetTurbopropRegional JetNarrowbody Jet56%54% 02018ICF proprietary and confidential. Do not copy, distribute, or disclose.2028Source: ICF Analysis203820

The changing MROlandscapeICF proprietary and confidential. Do not copy, distribute, or disclose.21

Customer ValueMaintenance principles have evolved over time andcontinue to change, resulting in safer and more efficientmaintenance lMaintenanceComputers/DiagnosticsMSG-3Rotary Wing Healthand Usage Monitoring(HUMS)Reliability MaintenancePrognostics andHealth s19681980s1979Handbook “MaintenanceEvaluation and ProgramDevelopment” or MSG-1developedMethodology formaintenance programsbased on tested andproven airline practices orMSG-31970MSG-1 updated to MSG-2ICF proprietary and confidential. Do not copy, distribute, or disclose.1990s2000s2010s19992016 -2017Rolls-Royce starts itsTotalCare programintroducing extensivehealth monitoring servicesAFI KLM and LHTlaunch healthmanagement andprognostic products2012Boeing launchesAHM and AirbuslaunchesAiRTHM22

New generation aircraft provide significantopportunities for airlines and MRO’s alike2018 E-ENABLED INSTALLED FLEET800Transmittable Data730(MB / Flight)700 28 MB787616600777 1 MB500 New generation aircraft generate significantlymore data compared to older types40031630020010023623112361804 Aircraft health monitoring through theincreased use of date will improvemaintenance processes This will reduce maintenance cost andimprove operational revenueICF proprietary and confidential. Do not copy, distribute, or disclose.23

AHM can be viewed as a subset of data managementvalue chainAircraft Health Monitoring is inferring the stateof the aircraft.Aircraft Health Management is extracting valuefrom this information.Acquisition gwhether thecomponent isperforming itsfunctionICF proprietary and confidential. Do not copy, distribute, or disclose.AnalysisDiagnosticPrognosticTroubleshoot while theaircraft is in flight or afterit landsCustomise maintenanceprogram to preventunscheduled downtimeMROPlanningMRO ActionRecordsKeepingPrognosticsPredicting theremaining life ofa componentAircraft Health Management goes beyondpredicting and replacing components, itincorporates flight operations and helpsairlines in fleet and inventory management24

But AHM needs several building blocks for it to bean efficient and effective systemAccess to Hardwareand InfrastructureHardware onAircraftIn-FlightTransmissionIntellectual PropertyAnalyticsAircraft ExpertiseTechnical ExpertiseMaintenanceExpertiseAircraft Health DataFlight Operationsand torageWeb Portal or OtherInterfaceCustomer SupportOEMDocumentation ofAircraft & SystemsDiagnosticsOE DesignExpertisePrognosticsIntegration withMRO softwareMaintenanceManualsProcesses forValidating andCommunicatingOutcomes toCustomersTechnical SupportCentreHistoric MRO dataICF proprietary and confidential. Do not copy, distribute, or disclose.25

It is becoming clear that only a handful of playershave the expertise to succeed in this marketBuilding blocksDATACOLLECTIONMain FORMALGORITHMS“Large airlines may well decide to do it in-house as their scalemake this option viable and they have the engineering expertiseto do it.However, if you don’t already have the engineering expertise andhave limited scale, don’t waste time hiring data scientists”- Predictive Maintenance providerICF proprietary and confidential. Do not copy, distribute, or disclose.26

There is a large variation in the predictive capabilityof the available systemsSolutionAnalytXIKONStrengthsWeaknesses Data acquisition monopoly on FOMAX equipped Airbus fleet High airline & supplier adoption Less MRO expertise Limited to Airbus aircraft Market penetration through offset Wide coverage and multiple value propositions Less MRO expertise Limited to Boeing Aircraft Open and independent platform with multiple solutions High MRO expertise (LHT and LHT group) Limited customer adoption Covers all major Airbus and Boeing platforms High MRO expertise (AFI KLM E&M) Currently limited to aircraft under AFI KLM E&Mservice Scope of services is narrower than other products Platform covering more industries than aviation Decades of engine data processing Limited airframe and component MRO expertise Engine focused expertise & limited to GE engines Platform covering more industries than aviation Decades of engine data processing Limited airframe and component MRO expertise Engine focused expertise & limited to RR engines Potential monopoly on Embraer aircraft Integrated with Amazon Web Services Late entry limited to E2 jets & only 2 customers so far Total in-service and on order fleet 300 aircraftICF proprietary and confidential. Do not copy, distribute, or disclose.27

ICF estimates that in 2018 airline operation digitalmarket to be 639M EFBs are 40% of the airlinespend given the high costassociated with it and highadoption Predictive maintenance solutionsare the third largest spend forairlines The e-Tech log market, currentlyat 4% of the total spend, will growas more airlines adopt thesolutione-Tech LogFuel4%Management5%ElectronicFlight Bag39%FlightTracking8%TOTAL* 639MPredictiveMx18%FlightPlanning26%*Note: This doesn’t include regular IT spend on network planning, crew planningsoftware etcICF proprietary and confidential. Do not copy, distribute, or disclose. Source: ICF Analysis28

Digitisation could enable airlines to save in excessof 5B/yearMaintenance costFuel savingDelay reduction 3B 1.7B 0.8BFrom AHM andpredictive maintenanceFrom flight optimisationFrom improvedoperational processes Driven by improved dispatchreliability, No Fault Found reduction,Inventory reduction and Improvedlabour productivity Continuous flight optimisationthrough live weather updates,speed and altitude optimisation Improved turnaround process, inflight routing optimisationICF proprietary and confidential. Do not copy, distribute, or disclose.29

Summary andconclusionICF proprietary and confidential. Do not copy, distribute, or disclose.30

There is significant opportunity for predictivemaintenance to grow further and mature The MRO market will continue to growto 128B by 2028Digitisation of aircraft operationscontinues to develop at a fastpace, but still has a long way togo. Solutions for predictive maintenanceneed to mature further, so that allsystems line upAircraft OEMs have eseeingdigitalisation of aircraft operationsas a an avenue to grow theirservice business line. At around 5B, the benefits for theairlines are significantFull integration of the predictivemaintenancesolutionsintoexisting and future MRO softwareis required to support all theairline’s business processesICF proprietary and confidential. Do not copy, distribute, or disclose.31

f.comICF proprietary and confidential. Do not copy, distribute, or disclose.32

Four specialized practices collaborate togetherand with our clients to effectively addressbusiness challengesAirline AdvisoryAirportsAircraftAerospace & MROOperational, strategic,and transactionsupport for airlinesand air transportbusinessesOperational andstrategic support forowners, operators,regulators, anddevelopersIndustry-focusedsupport for aviationequipment transactionactivitiesStrategy andmarketing advisory,and transactionsupport for OEMs,MROs, and investorsICF provides aircraft operators, manufacturers, financiers, lessors, owners, maintainers, airports, and related businesseswith world-class advisory, implementation, and improvement management consulting services.ICF proprietary and confidential. Do not copy, distribute, or disclose.33

Serving theAviationCommunitySince 1963ICF Aviation Comprehensive Services:Airlines - Fleet and network planning, pricing andrevenue management, OTP and operational efficiencyAirports - Strategic planning, policy, route development,concessions planningBROAD PERSPECTIVE.COMPELLING RESULTS.ICF offers our team of nearly 100 aviation experts dedicated tostrategic and operations consulting for the aviation industry. Ouraviation practice was founded as SH&E in 1963 and, after beingacquired by ICF in 2007, we further expanded with the acquisitionof AeroStrategy in 2011. Today we are one of the world’s largestaviation consulting organizations. We provide objective,independent commercial, financial, technical, and regulatoryguidance to aviation clients, including airlines, airports, lessors,financial institutions, manufacturers, governments, and VIPs.From our offices around the globe, ICF helps aviation clientsmanage assets and operations, mitigate risk, and maximizereturn on investment. Visit us online at - Valuations, cash flow forecasts, portfoliodue diligence, market analysis, technical servicesAerospace & MRO - Operations assessment,M&A support, marketing analysisICF proprietary and confidential. Do not copy, distribute, or disclose.ICF is a proud member of both ISTAT and the IATA StrategicPartnerships Program.34

AirlinesICF supports airlinemanagement andstakeholders insolving complexstrategy issuesto improveperformance.ICF provides strategic and operational advice toairline management and related stakeholdersthroughout the world. We help our clientsnavigate key business challenges by leveragingdecades of global industry experience and a suiteof proprietary models and databases. Below, webriefly describe our core airline advisory servicesand proprietary supporting products.Airline ProductsICF’s suite of proprietary airline tools, models, and databasesoffers a data-driven approach to help management andstakeholders navigate key business challenges to theiradvantage.NetWorks Planning SoftwareICF provides its network and schedule analysis/systems tolongstanding clients and for use in consulting assignments.RM100/500/750 Revenue Management SoftwarePartnering with SITA, ICF has been the developer andtechnical support for SITA’s multi-product RMS suite.PlanningWhether in network, fleet, revenuemanagement, alliances, loyalty,distribution, catering, maintenance, orexpense planning, ICF has experiencewith carriers globally, large and small,legacy and low cost.StrategyAs airlines assess long-term successcriteria, alliance pros and cons, thechanging competitive landscape, andareas of defensible advantage, ICF canhelp with strategic studies.OperationsICF supports airlines in turn-timereduction, OTP improvement, costreduction, operations control, crewproductivity, and MRO programs.FinanceFrom bankruptcy and turn-aroundsituations to cash-flow forecasting,transaction modeling, and financialplanning, ICF has worked with airlineCFOs, investors, and creditors.Airline Fleet Planning ModelDeveloped to give airlines a strong decision support product,ICF’s model offers speed and clarity.35

AirportsICF supportsairports and industryparticipants acrossa range ofexpertise-basedengagements.ICF advises airport management, governments,civil aviation authorities, and buyers & sellers ofairport assets throughout the world. Our long-termrelationships with these entities make us a trustedguide through today’s complex, competitivelandscape. Below, we briefly describe our coreairport advisory services and proprietarysupporting products.Airport ProductsICF’s suite of proprietary airport tools, models, and databaseshelps management and stakeholders navigate key businesschallenges to their advantage.NetWorks Planning SoftwareICF provides its network and schedule analysis/systems tolongstanding clients and for use in consulting assignments.Commercial Revenue DatabaseThis premier assembly of expected revenue-generation valuesguides commercial planning.Airline Fleet Planning ModelICF’s own, independent traffic demand forecast gives plannersan unbiased point of view.Strategic PlanningICF brings airport planners withdecades of expertise from hundredsof assignments to deliver the insight,attention to detail, and multi-facetedthinking needed for success.Transaction AdvisoryICF has participated in almost everymajor airport asset transaction aroundthe world in the past 20 years—andcontinues to be a trusted, objective,impartial advisor in every engagement.Policy and RegulationSome of the best-known consultantsin policy and regulation are with ICF,helping airport directors, governingboards, and agencies determinethe right framework for eachdistinct need.Operations ImprovementRecognizing the power of integrated ITsystems, the complexities of hub turntimes, and the environmental cost ofnon-sustainable operations, ICF canhelp improve both costs and efficiency.36

AircraftICF supportsinvestors in aviationhard assets andprovides assetmanagement andremarketing toaircraft owners,lenders, andoperators.Lessors, operators, and investors count onICF for integrity, flawless analysis, and experttechnical support with aviation deals—from asingle aircraft to the world’s largest leaseportfolio. Our certified ISTAT appraisers valueaircraft and aviation assets worth billions ofdollars each year, provide due diligence to buyersand sellers, and offer a full range of financialservices. Below, we briefly describe our aircraftservices and proprietary supporting products.Aircraft ProductsICF’s suite of proprietary asset advisory tools, models, anddatabases helps stakeholders navigate key businesschallenges to their advantage.Maintenance Cash Flow ForecastOur proprietary model builds portfolio cash flows from eachdiscrete maintenance event.TrueBook ValuationsAircraft and engine bluebooks forecast residual values built upfrom component value over time.Spare Parts Inventory AppraisalsMillions of transactions for spare parts support valuationand benchmarks.Aircraft TransactionsAcross the lifecycle—acquisition,inspection, transition, defaultmanagement, and remarketing—ICF’s experienced aircraft advisorsdeliver the specialized expertisewhere and when needed.Financial ServicesRecognized as best-in-class formaintenance cash flow projectionsand modeling for capital marketsand P/E firms, ICF is able to supportcomplex structures and transactionsof aircraft lease portfolios andsecuritizations.ValuationICF’s ISTAT-certified appraisersroutinely value aircraft, engines,spare parts, simulators, plusintangible assets like routes, slots,and gates—backed by ICF’s best-inclass methodology and models.Due DiligenceICF provides aircraft trading duediligence services for single aircraftor full portfolios, and for investorsor lessors during M&A or IPOtransactions—combining ouranalytical expertise with our team'sexecutive experience with lessors,airlines, and MRO providers.37

Aerospaceand MROICF focuses on keyaspects of theindustry that drivevalue in bothrevenue growthand cost control.ICF guides manufacturers, airlines, independentMROs, suppliers, and the financial communitythrough every step of the aerospace and MROsupply chain to realize value and developstrategies that drive growth. We understand andfocus on the key aspects of the industry, and havethe proprietary tools necessary for successfuloperations. Below, we briefly describe our coreaerospace & MRO services and proprietarysupporting products.Aerospace and MRO ProductsICF’s suite of proprietary asset advisory tools, models, anddatabases helps stakeholders navigate key businesschallenges to their advantage.Fleet & MRO ForecastsProprietary, independent forecasts for commercial andbusiness aviation, industrial gas turbine, and military markets.Value DatabaseProduction value breakdown by component category and rawmaterial content across the aerospace supply chain.MRO Best Practices and BenchmarksComprehensive, proprietary databases on processes, costs,and organization.Strategy DevelopmentLeveraging years of aerospace andMRO advisory experience as well asproprietary market intelligence, ICFdelivers data-driven, objective insightto underpin sustainable strategies.Transaction SupportFor clients’ investment decisions,ICF combines global thought leadershipin aerospace and MRO supply chainwith accurate market intelligence,operations expertise, and unparalleledindustry contacts.Operations and Supply ChainICF’s proven tools and methodologiesoffer improved performance and costreduction across manufacturing,operations, and all phases of make-buysupply chain planning and execution.MRO Business ImprovementFor airlines, OEMs, and independentMROs, ICF has deep experience incomprehensive operational and financialdiagnostics based on extensiveproprietary benchmarks, followed byresults-oriented improvement programs.38

European profits; Lufthansa Group, IAG, AFI-KLM and Ryanair. Number of airlines. Drop in maintenance-related cancellations of Southwest to install AHM on complete 737 NG fleet to improve performance. Europe has a total of . 195 . Airlines Whilst North America only has. 98. Airlines. 34