1 / 66

William H. Alderman President Alderman & Company

Investment Themes in the MRO Sector of the Aerospace and Defense Industry. William H. Alderman President Alderman & Company. Oklahoma City, Oklahoma May 1, 2005. Agenda. Introduction Aerospace in Oklahoma Investment Themes in Aerospace MRO . Introduction Aerospace in Oklahoma

arleen
Download Presentation

William H. Alderman President Alderman & Company

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Investment Themes in the MRO Sector of the Aerospace and Defense Industry William H. Alderman President Alderman & Company Oklahoma City, Oklahoma May 1, 2005

  2. Agenda • Introduction • Aerospace in Oklahoma • Investment Themes in Aerospace MRO

  3. Introduction • Aerospace in Oklahoma • Investment Themes in Aerospace MRO

  4. Introduction: Our Firm Alderman & Company • A boutique investment bank focused exclusively in the aerospace and defense industries • Our primary work is advising sellers in mergers and acquisitions transactions • We also provide a broad array of ancillary services, such as valuations, strategic planning, and management consulting in regard to operational and financial restructurings

  5. Introduction: Bio William Alderman • Bank of New England, Assistant Vice President 1985-1987 • Bankers Trust Company, Associate 1989-1990 • General Electric Company, Vice President, GECAS 1990-1995 • Aviation Sales Company, Senior Vice President 1996-1999 • Fieldstone, Managing Director 1999-2000 • Founded Alderman & Company 2001 Education • MBA J.L. Kellogg, Northwestern University 1989 • AB Kenyon College 1984 • The Taft School 1980 Licenses • FAA: Pilot (PPSEL) • NASD: 7, 24, 63 & 65 Honors • GE Circle of Excellence, 1995 • Academic All-Ohio Soccer Team 1983; Kearney Award 1983 & 1984

  6. Introduction: Sample Transactions

  7. Introduction: Sample Clients

  8. Introduction • Aerospace in Oklahoma • Aerospace MRO Investment Themes • Defense • Civilian

  9. Aerospace in Oklahoma • Aerospace is Oklahoma’s largest industry • More than 400 aerospace companies in Oklahoma generate an annual payroll of $5 billion and an industrial output of $12 billion • Average Annual Wage: $54,419 Sources: Oklahoma Aeronautics Commission, as cited in The Journal Record (Oklahoma City, OK) November 21, 2005, and Oklahoma Department of Commerce, Research & Economic Analysis Division, 2005 Aerospace Cluster Analysis.

  10. Aerospace in Oklahoma • 42,458 Direct Jobs; 3% of state employment Sources: Oklahoma Aeronautics Commission, as cited in The Journal Record (Oklahoma City, OK) November 21, 2005, and Oklahoma Department of Commerce, Research & Economic Analysis Division, 2005 Aerospace Cluster Analysis.

  11. Aerospace in Oklahoma Tinker Air Force Base • 732 buildings comprising 15.5 million sq. ft. • 24,000+ employees • Comparable to a city with population of nearly 30,000 • The largest single-site employer in Oklahoma with an annual payroll exceeding $1.1B • Home to seven major Department of Defense, Air Force and Navy activities with critical national defense missions. • Tinker's largest organization is the Air Logistics Center (ALC), worldwide manager for a wide range of aircraft, engines, missiles, software and avionics and accessories components. Source: Global Security.org, Air Force Bases.

  12. Investment Themes in Aerospace MRO Air Force Materiel Command: 78,000 personnel Cradle-to-grave oversight for Air Force aircraft • Testing • Acquisitions • Logistics and Support (MRO) Logistics & Support: Air Logistics Centers (ALC) • Ogden Air Logistics Center, Hill AFB, Utah, provides logistics, support, maintenance, distribution and engineering management for the F-16, C-130A, A-10, B-2, KC-135, T-38, T-37 and 22 other actively flying. • Oklahoma City Air Logistics Center, Tinker AFB, Okla., repairs and maintains bomber, refueling and reconnaissance aircraft, among others. Cradle-to-grave support for a variety of aircraft, including the E-3 AWACS, C/KC-135, B-52 and B-1. • Warner Robins Air Logistics Center, Robins AFB, Ga., provides product support, purchasing and supply-chain management, and depot maintenance. It has management and engineering responsibility for repairing, modifying and overhauling the F-15, C-130 and all Air Force helicopters.

  13. Aerospace in Oklahoma Tinker • Located 200 miles from the geographic center of the country. • Named in honor of Major General Clarence L. Tinker of Oklahoma, who served and died in WWII. • Tinker was conceived in 1940 by a group of Oklahoma City civic leaders who actively responded to the military’s quest to develop an aviation maintenance and supply depot in the center of the country. • In 1999 Tinker was awarded the largest engine repair contract in the history of the Air Force, valued at $10.2 billion over 15 years.

  14. Aerospace in Oklahoma Tinker • Provides “nose-to-tail” MRO services for more than 2,000 aircraft and 23,000 engines in the DOD arsenal • Aircraft: B-1, B-2, B-52, C/KC-135, E-3, VC-25, VC-137 • Engines: TF30, TF33, F101, F107, F108, F110, F118, F110-400, TF30-414A, J79 CFM56-2A-2 • Awards roughly $5 billion per year to private industry

  15. Aerospace in Oklahoma Tulsa • An aerospace hub for civilian maintenance, repair and overhaul of private sector aircraft • Aerospace employers include: American Airlines, Boeing, Honeywell, Lufthansa and NORDAM. Plus an additional 200 small- to medium-sized companies engaged to support the industry. All have major facilities in Tulsa.

  16. Aerospace in Oklahoma AMR Tulsa Maintenance & Engineering Base • Established in 1946 • American Airlines is one of the few remaining carriers still doing its own heavy maintenance. • 8,300 employees • Maintains American's fleet of MD-80, B737, Boeing 757, Airbus A300 aircraft and Pratt and Whitney JT-8 and GE CF6-80 engines. Sources: American Airlines, Tulsa Board of Commissioners

  17. Introduction • Aerospace in Oklahoma • Investment Themes In Aerospace MRO

  18. Investment Themes in Aerospace MRO Aerospace MRO Defined • MRO: “Maintenance, Repair and Overhaul” • Every and anything that happens to an aircraft or any component thereof after the date the aircraft is delivered to the (first) customer • Market Size: $53 billion annually • $20 Billion Defense (United States) • $38 Billion Civil (worldwide) Source: Aviation Week, April, 2006

  19. Investment Themes in Aerospace MRO • What areas of the Aerospace MRO market present attractive investment opportunities for industry participants and fund managers? • What are the high demand areas within this market over the next 5-10 years?

  20. Investment Themes in Aerospace MRO Investment Opportunities in the Defense Aviation MRO • Strong demand for routine maintenance • High utilization rates • Aging fleet • Very high demand for Upgrades & Modifications (“Mods”) Investment Opportunities in Civil Aviation MRO • Rising demand for “outsourced maintenance” • Rising demand from Asia • Increasing market share of PMA products

  21. Investment Themes in Defense Aviation MRO

  22. Investment Themes in Aerospace MRO U.S. Naval, Air and Ground supremacy is absolute • U.S. air combat loss ratios in Afghanistan were not significantly higher than peacetime training losses • U.S. air combat loss from enemy fire was negligible U.S. ICBM arsenal provides limited tactical benefit • The “old” nuclear arsenal provides limited value in the War Against Terror U.S. Cold War era combat equipment remains unsurpassed – but is it effective today?

  23. Investment Themes in Aerospace MRO Gone – threat of Sino/Soviet Invasion • Defense: Protection of nation and national interests through assured mutual destruction from massive arsenals of nuclear weapons New – threat of Terrorism & Rogue States • Defense: Protection of nation and national interests through agile, intelligent, networked, rapidly deployable war fighting assets

  24. Investment Themes in Aerospace MRO New threat: terrorists and rogue states • Hidden and hardened targets • Urban warfare • Attacks with Weapons of Mass Destruction • Chemical (VX, mustard gas, etc.) • Biological (anthrax, smallpox, etc.) • Radiological (dirty bombs) Requires new war fighting technologies • Faster, Lighter, Smarter The paradigm has shifted.

  25. Investment Themes in Aerospace MRO Faster, Lighter and Smarter • Combat supremacy through information superiority • IRAQ-1: 99 mps (megabits per second avg.) • IRAQ-2: 3,200 mps • C4ISR • Command • Control • Communications • Computers • Intelligence • Surveillance • Reconnaissance Source: American Forces Information Service, Office of the Assistant Secretary of Defense for Public Affairs, 3/31/04.

  26. Investment Themes in Aerospace MRO Source: ODUSD (Industrial Policy)

  27. Investment Themes in Aerospace MRO Aerospace MRO Investment Opportunities in Defense 1) Fleet Upgrades • Need to bring legacy weapons systems into the network • Cost-effectiveness of upgrades versus new spends • Historical experience with time and cost overruns on completely new weapons systems 2) Routine Maintenance • The U.S. military spends $20 billion each year on maintenance and parts for its aircraft, at all levels from field to depot. • Depot-level heavy maintenance costs $8 billion, roughly half of which is done by the private sector Source: American Forces Information Service, Office of the Assistant Secretary of Defense for Public Affairs, 3/31/04 The Logistics Management Institute (LMI), 2005

  28. Investment Themes in Aerospace MRO Upgrades: Putting the old platforms “on the Network” • C4ISR • New Avionics • New Sensors • New Targeting Systems • New high-bandwidth secure communications

  29. Investment Themes in Aerospace MRO First flown in 1954 First flown in 1977 Hercules first flown in 1954 Source: ODUSD (Industrial Policy); Alderman & Company analysis

  30. Investment Themes in Aerospace MRO Upgrades: Putting old platforms on the Network • E-3 AWACS • Militarized version of Boeing 707-320B • First E-3’s received in 1977 • Recent modifications include addition of GPS • Enhancing the Network • C-130 Avionics Modernization Program (AMP) • Avionics upgrades (500 aircraft) • Six digital displays and new flight management system • Network enabled • Boeing chosen to design, develop, integrate, test, fabricate and install the new system

  31. Investment Themes in Aerospace MRO Upgrades: Updating certain legacy systems • CH-47 Chinook • First delivered 1962 • Avionics upgrades • Common Avionics Architecture System (CAAS) • Forward Looking Infrared (FLIR) • UH-60 Black Hawk • First delivered 1974 • Avionics upgrades • Common Avionics Architecture System (CAAS) • Multi-node radar

  32. Investment Themes in Aerospace MRO The O&M budget is roughly the same size as the procurement budget

  33. Investment Themes in Aerospace MRO Example: KC-135 • 490 total KC-135s in the fleet • Boeing (NYSE: BA) and their subcontractor Pemco (NASDAQ: PAGI) perform roughly half of all KC-135 PDMs (approx. 80/year). The Air Force handles the balance in-house at Tinker. Source: U.S. Air Force Fact Sheet KC-135, March 2006 OMB Overhaul & Maintenance, November 3, 2003 & August 23, 2005

  34. Investment Themes in Aerospace MRO Depot Maintenance – Investment commentary Pluses: • The fleet is flying at high tempo • High utilization rates result in high maintenance costs • Fleet is aging and requires increasing maintenance • Tinker: In 2005 awarded $5 billion in contracts to private industry Minuses: • Congressional limits on “outsourcing” • Section 2466 of Title 10; No more than 50% of funding for depot maintenance and repair workload across any military department or defense agency can be contracted to industry • Limit had been 36% until 1991 Source: U.S. General Accounting Office, GAO/T-NSIAD-00-112

  35. Investment Themes in Aerospace MRO Weekly Closing Prices, 6/30/2003 – 4/24/2006 Major Players in Defense Aviation MRO Sector returns have far exceeded overall market performance

  36. Investment Themes in Aerospace MRO Defense MRO Summary • The 5-10 year outlook for defense MRO is good • Stable demand for depot level maintenance • High demand for aircraft upgrades • Sector equities have been performing very well

  37. Investment Themes in Civil Aviation MRO

  38. Investment Themes in Aerospace MRO Historical Framework 1950’s – 1980’s: Golden Years of Aviation in the U.S. • Development of a global consumer market • Growth of intercontinental jet networks • Advancements in airline technology and infrastructure • Speed, comfort, and safety improvement • Jet overtakes rail/marine as preferred mode of long-distance travel • U.S. Deregulation 1979

  39. Investment Themes in Aerospace MRO Hartsfield Atlanta International Airport ATL 1961 (“Jet” terminal) IAD 1962 LHR 1955 (main terminal) PHL 1953 (main terminal) This was a high growth industry in the U.S. • 1950 – 1975: Massive levels of capital expended to build the world’s commercial aviation network IAH 1969 DFW 1973 ORD 1962

  40. Investment Themes in Aerospace MRO This was a REGULATED Industry • 1950s – 1970s: Routes and fares regulated, making aviation a “safe place to invest” with “good growth prospects” and “high profit margins” for many suppliers. But how good was the business model – from a consumer perspective? • Fares high • Service poor • Little competition • Few frequencies

  41. Investment Themes in Aerospace MRO The rate of growth in the U.S. market began declining in the 1950’s Source: Air Transport Association

  42. Investment Themes in Aerospace MRO Source: Air Transport Association US

  43. Investment Themes in Aerospace MRO With deregulation came the decline of U.S. legacy carriers • Outright Liquidation • Pan Am • Eastern • Liquidation via merger • American - TWA • America West - USAirways • Reorganizations (bankruptcies) • Continental (1990s) • Delta • Northwest • United

  44. Investment Themes in Aerospace MRO SINCE 2000, US AIRLINES, IN AGGREGATE, HAVE LOST $42 BILLION Source: Air Transport Association VP & Chief Economist John Heimlich, April 14, 2006

  45. Investment Themes in Aerospace MRO Commercial Aviation – the next 10 years • Deregulation has finally taken hold globally and fares will remain low throughout the forecast period worldwide • Traffic will rise slowly in the U.S., as the market is mature • Traffic will rise much faster in the developing world, fueled by global economic development and low airfares • Globally, fares are no longer able to support inefficient operations • Continuous airline focus on reducing costs • Automation: airport kiosks, internet ticket sales • New methods and practices • “Low Cost Carriers” • Use of PMA parts • Maintenance trends

  46. Investment Themes in Aerospace MRO southwest Low-Cost Carriers have 30+% of U.S. market • U.S. legacy airlines have tried to follow suit

  47. Investment Themes in Aerospace MRO Low-Cost Carrier fleets continue to grow Source: Company public records and Alderman & Company research

  48. Investment Themes in Aerospace MRO PMA Parts • Alternative Replacement Parts • U.S. FAA regulatory approval designation - Parts Manufacturing Authority (“PMA”) • Parts approved by regulatory agencies (US: FAA, Europe: EASA) but NOT manufactured by the original equipment manufacturer (OEM) • PMA parts are typically 30% - 50% lower cost than OEM • $300 million market in 2005. Potentially $1.2 billion within 5 years. • Major Players • Heico (NYSE:HEI) 25% owned by Lufthansa • Wincer West • Timken (NYSE: TKR) • Pratt & Whitney (NYSE: UTX) • Manufacturing 100 replacement parts for CFMI engines • Announced February, 2006 Source: David Jensen, Aviation Today, March 1, 2006

  49. Investment Themes in Aerospace MRO Overview of Commercial MRO Market • $38+ Billion worldwide • Maintenance represents roughly 10% of the average airlines' costs; with 35-40% being for parts and the balance for labor • North America is the world’s largest market • 42% of world consumption • $16.6 billion • Western Europe • 22% • $8.5 billion • Asia-Pacific region - not including China or India • 15% • $5.7 billion • China & India • Today: 4% (China - 3%, India – 1%) • 5-10 years: possibly 15% of world MRO demand Source: Aerostrategy, March, 2006

  50. Investment Themes in Aerospace MRO Outlook • Maintenance unit costs have fallen nearly 20% in the U.S. in past 5 years • $14.9 per 1,000 ASM in 2001 • $12.1 per 1,000 ASM in 2005 • Manufacturers continue to develop better aircraft designs and materials technologies to reduce maintenance costs • Operators continue to reduce waste and increase efficiency • MRO expenditures will not increase as fast as the rate of growth in air travel • World RPM is forecast to grow by 5.1% • World commercial jet MRO forecast to grow 4.7% per annum . Sources: Aviation Week, April 12, 2006, “Annual MRO Forecast”, TeamSAI and BACK Aviation Solutions, 2006, Embraer Market Outlook, 3rd Edition, 2006-2025

More Related