Coping With A Time Of

ExtremesAviation Industry Overview And Forecast

Presentation To The Wichita Aero Club Luncheon MeetingWichita, KSBy Richard AboulafiaVice President, AnalysisTeal Group Corporationwww.tealgroup.comMay 2013

Jetliners Are A Serious AnomalyAircraft Markets, Through Good And Bad YearsWorldwide Deliveries By ‘13 $

Value (in 2012) CAGR ’03-‘08

CAGR ’08-‘12

Change ‘08-‘12

Change ’11-‘12

Large Jetliners ($88.1 b) 7.4% 12.0% 57.4% 29.4%

Business Aircraft ($19.9 b) 17.1% -6.3% -29.2% 5.7%

Regionals ($6.2 b) 4.4% -9.6% -33.2% -12.6%

Civil Rotorcraft ($4.9 b) 17.2% -5.4% -15.2% 7.6%

Military Rotorcraft($14.7 b) 8.9% 13.0% 62.9% 6.6%

Military Transports ($6.2b) 3.1% -2.0% -7.7% -12.5%

Fighters ($14.3 b) 1.9% 0.5% 2.1% -13.8%

All Civil ($118.9 b) 9.7% 5.2% 22.6% 20.4%

All Military ($36.7 b) 3.7% 3.8% 16.2% -7.6%

Total ($155.6 b) 8.0% 4.9% 21.1% 12.4%

GDP Year/Year Growth Rates

Source: Morgan Stanley, IMF W orld Economic Outlook January 2013

'92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 13f'14f

0%

2%

4%

6%

8%

10%

-2%

-4%

World EU US Asia Ex-Japan

Y/Y Traffic: Recovery Stalls; Cargo A Concern2012 Totals; RPKs 5.3%, ASKs 3.9%, FTKs -1.5%;

2011: RPKs 6.9%, ASKs 8.2%, FTKs -0.6%

Source: IATA

0%

10%

20%

30%

-10%

-20%

RPKs ASKs FTKs

Historical Jetliner Orders And Deliveries

All Airbus and Boeing aircraft

'69 '71 '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13f0

500

1000

1500

2000

2500

3000(Number of aircraft)

Deliveries Net orders

Our Forgotten Nemesis...CyclicalityLarge Jetliner Deliveries By Value

'59 '63 '67 '71 '75 '79 '83 '87 '91 '95 '99 '03 '07 '11 '12$0

$20

$40

$60

$80

(Value in '13 $Bns)

‘01-‘03 -10.7% CAGR; -28.8% peak-trough‘91-‘95 -12.5%

CAGR; -41% peak-trough

‘80-‘84 -13.9% CAGR; -45% peak-trough

‘68-‘77 -11% CAGR; -65% peak-trough

‘84-‘9116.1% CAGR

‘95-‘9920.8% CAGR

‘03-‘129.5% CAGR

OR‘99-‘03 -11% CAGR; -37.3% peak-trough

Interest Rates And Large Jetliner Deliveries

Federal Reserve (Federal Funds Effective Rate); Teal Group research

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '120%

5%

10%

15%

(Interest Rates)

0

20

40

60

80

(Value of Deliveries in '13$ Bns)

Interest Rates Value

Oil Prices And Interest Rates

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12f0

20

40

60

80

100

120(Oil Prices/bbl in '12$)

0%

5%

10%

15%

20%(Interest Rates)

Oil Prices Interest Rates

0%10%20%30%40%50%60%70%80%90%

100%Q

4 20

00Q

2 20

01Q

4 20

01Q

2 20

02Q

4 20

02Q

2 20

03Q

4 20

03Q

2 20

04Q

4 20

04Q

2 20

05Q

4 20

05Q

2 20

06Q

4 20

06Q

2 20

07Q

4 20

07Q

2 20

08Q

4 20

08Q

2 20

09Q

4 20

09Q

2 20

10Q

4 20

10Q

2 20

11Q

4 20

11Q

2 20

12Q

4 20

12

FINANCED

CASH*50%

Start of Economic Melt-down

Data based on the 4 quarter total moving average

*FAA registries without debt instruments or lease presumed to be cash

Source: JETNET; Presentation and Analysis by Chase & Associates

77%

23%

60%

US Business Jet Sale Transactions: Financed Vs. Cash

Bottom Half Bizjet Segment V. Top Half

'89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '120

2

4

6

8

10

12

14(Market Value in 2013 $ Bns)

Bottom Half (<$26M) Top Half (>$26M)

‘03-‘08 CAGR: 19.7% Bottom, 15.3% Top

‘08-‘12: -55.9% Bottom, 0.3% Top

‘08-‘11: -55.7% Bottom, 2.8% Top

Business Aircraft Deliveries And Corporate Profits

Source: US BEA, Teal Group Research

'64 '66 '68 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '120

500

1,000

1,500

2,000

(Corp. Profits in $ Bns)

0

5

10

15

20

25

30(Deliveries -'13 $Bns)

Corporate Prof its Value of Deliveries

Business Jet Leading Indicators Strong, But Market Growth Slow

• Strong profits recovery, and strong cash buildup (record 7.1% of assets in cash).– Equities markets, Case-Shiller index also turning up.

• Stage was set for 2011 recovery, quashed by Japan, Mideast turmoil, US legislative gridlock, Eurozone fears etc. 2012 was nearly identical. 2013 looks all too familiar (“Spring Swoon?”).

• Available cash, coupled with pent-up demand implies upturn 2013 followed by decent recovery, but...

– Exogenous shocks and risks remain (fiscal cliff, more Eurozone horrors, etc).

• Bottom half hoping for a US re-equipment cycle (like the rest of the economy…)

US Profits ($bns) 2006 2007 2008 2009 2010 11-1Q 11-2Q 11-3Q 11-4Q 12-1Q 12-2Q 12-3Q 12-4QTotal Corporate 1,608 1,511 1,284 1,362 1,778 1,679 1,765 1,799 1,953 1,900 1,922 1,968 2,013 Manufacturing 304.5 271.3 195.5 125.2 233.5 215.5 229.2 248.9 285.9 363.5 372.8 367.6 382.9Financial 448 345.5 122.2 401.8 424.3 417.6 365.6 380.8 441.2 428.9 389.2 457.3 453.8Source: US BEA

Business Jets For Sale As % Of Total Fleet

Source: AMSTAT/MLBOA

9%

11%

13%

15%

17%

Available Business Jets V. Available Workers

0%

4%

8%

12%

16%

(Jets Available For Sale)

0%

2%

4%

6%

8%

10%

(US Unem ploym ent Rate)

Business Aircraft Market By ClassBalance Shifting Towards Larger Aircraft

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22$0

$10

$20

$30

$40('13$ Billions)

Very Light Entry Level Mid-Sized Super Mid-Sized Large

Very Large Ultra Jetliners+RJs Turboprops

DoD Investment, O&M FundingUpsides: Asia Pivot, Iran. Downside: Sequestration

Budget Authority

115

140

173190

179

214

239 237

271

293285 284

210 209

235 230220

42 4657

65 69 73 78 77 80 80 8172 69 68 71 69 72

54 6178 83

97105

134

165

135 138 134121

100 99 100 106110

FY01 FY03 FY05 FY07 FY09 FY11 FY13 FY15 FY170

50

100

150

200

250

300($ bns)

Procurement RDT&E O&M

Pre-OCO; pre-sequestration

Highest Value Fighter Programs: History and Forecast

Cumulative US '13 $Bns Value

F-35

Undetermined

Su-27/30/T-50

Eurofighter

Rafale

F/A/EA-18

F-16

F-15

MiG-29

A/T-50

LCA

Gripen

$0 $15 $30 $45 $60 $75 $90

2013-2022

2003-2012

Military Transport Deliveries By Value

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '220

2

4

6

8

(Value In '13 $Bns)

C-17 C-130J A400M KC-390 Other

Missile/Munition/UAV Forecast

'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '220

4

8

12

16

20(Market value in '13 $Bns)

AAM ASM ADM ATM

Anti-Ship SSM Smart munitions UAVs

Aircraft Production 2003-2022Largely Sheltered From The Storm; Long-Term Growth, Too

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '220

40

80

120

160

200(Market Value in '13 $ Bns)

Fighters Business Aircraft Rotorcraft

Mil i taryTransports/Trainers/Other Jetl iners/Regional AC

Five (6) Wichita-Related Thoughts (Revisited And Revisited Again)

1. There are five great aviation clusters in the world today. Wichita is one of them. Clusters can not be created; only destroyed. (Still True.) (Yes.)

2. Of these clusters, Wichita has the highest exposure to the business jet market, the fastest growth segment, but with very high cyclicality. (What nobody saw coming was the bifurcation between the top and bottom half. I also thought the business aircraft peak would come in 2009, just after my speech; turned out it was in 2008. I’d also point out that Wichita has the most diverse industrial base of any cluster.) (I was partly wrong. It’s diverse in OEMs, but not diverse enough in segment exposure and globalization. It’s also the most exposed to weak OEMs).

Five Wichita-Related Thoughts (2)3. Business jets are well behind the other aviation

segments in outsourcing, a possible threat to manufacturing jobs in Wichita. While it’s also an opportunity (with Spirit), there’s no guarantee that work will be performed here. (Still True.) (Yes.)

4. I’m skeptical about KC-X. But the military overhaul/upgrade market is growing. (Very wrong on the first, right on the second.) (Sadly overtaken by events.)

5. São Jose Dos Campos wants some of your business. (Still True.) (Yes, but they are not unstoppable.)

That Sixth Wichita-Related Thought

6. My biggest concern with Wichita isn’t the market and jobs. It’s engineering and design.