19th Annual Business Aircraft

Market Forecast And Industry

OverviewFrom Record Growth To Uncharted Territory

To The Canadian Business Aviation Association48th Annual ConventionBy Richard AboulafiaVice President, AnalysisTeal Group Corporationwww.tealgroup.comMay 2009

Last Year Teal Said:• 18,401 business aircraft

worth $270.6 billion (‘08$) ‘08-’17.

• Long term growth looks great. This REALLY is a transformed industry.

• Mild dip ahead (after ‘10).

• Big Five. Plus +1+0.5. Maybe + another 0.5.

• We’re air taxi atheists. Nihilists, actually.

This Year Teal Says:• 12,768 business

aircraft worth $195.7 billion (‘09$) ‘09-’18.

• This is a transformed industry. But after a serious shock we’re headed into a very difficult bust cycle. This will take about three years.

• Big Five. Plus +1+0.5. That’s it.

• Not an issue.

We’re Down For The First Time In Over A Decade

A Very Important BookNow Available In A Single PowerPoint Slide (or half of one)

• Black Swan: an unanticipated event (like the appearance of a scientifically “impossible” bird) whose arrival has profound consequences for the future.

• Its very appearance changes perceptions and outlooks.

• It means the future might not just consist of a mixed-up bits of the past that can be used to extrapolate outward.

– The future might feature radical shifts that alter the direction or composition of a market.

• Black Swans don’t do great things for the forecasting biz.

Where We’ve Been;

Where We Are

Aviation Markets: The Past 20 Years

'89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09e0

20

40

60

80

100

120

140(Market Value in 2009 $ Bns)

Fighters Bizjets RotorcraftMil i taryTransports/Trainers/Other Jetl iners/Regional AC

What We Did During The Great BoomMarket CAGR

’03-08 Outlook/Notes

Jetliners 6.8% Airbus 9.1%, Boeing 4.5%; BA and market would be higher w/o strike

Business AC 17.1% Market nearly quintupled ’95-’08; falling first, most, and fastest

Regionals 2% Anemic. RJs Shrank, props grew

Civil Rotorcraft

14% Best growth in decades; perhaps ever

Military Rotorcraft

11.5% Strong US mil. Supplementals. Total rotorcraft: 12.3%

Fighters 6.6% Big force structure problems

Mil. Trans. 4.3% Relatively low priority given the mission

Total 7.9% Best growth in decades.

Business Aircraft History (W/Jetliners+RJs+Turboprops)

'64 '66 '68 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '080

300

600

900

1,200

1,500

1,800(Units Delivered)

0

4

8

12

16

20

24(Market Value in '09$ Bns)

Units Value

Post-2003 boom

9/11, tech and coms downturnThe Great

Expansion: strong economic growth, fractionals, new models, etc

Smaller plane boom; some military Learj et market distortion

Market creation, exhaustion of initial demand

Static period. Limited growth in late 1980s, limited downturn after First Iraq War

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 '080

600

1,200

1,800(Corp. Profits in $ Bns)

0

4

8

12

16

20

24(Value of Deliveries-'09$ Bns)

Corporate Prof its Value of Deliveries

Corporate Profits BreakdownWhy Those Car Guys Should Have Stood Their Ground

Source: BEA

157 151 144

53 4876

150

244304 317

240

165194 200

228276

317344

424479

449

309

'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '080

100

200

300

400

500

600 ($ billions)

Financial Manufacturing

Something To Watch. And Worry About.

US Profits ($ bns) 2004 2005 2006 2007 2008-1Q 2008-2Q 2008-3Q 2008-4QTotal Corporate 1,231 1,448 1,669 1,642 1,599 1,533 1,514 1,265Manufacturing 152.7 243.8 304.3 316.6 240.5 214.9 272.6 231.2Financial 348.9 425.3 478.8 449.9 412.8 383.2 308.9 130.9Source: US BEA

Used Jet AvailabilityAftershocks Of An Economic Heart Attack

Source: AMSTAT

0

500

1000

1500

2000

2500(Num ber of aircraft)

Light Medium Heavy

Used Jet Average Selling Prices

Source: AMSTAT

12/95 12/96 12/97 12/98 12/99 12/00 12/01 12/02 12/03 12/04 12/05 9/06 3/07 3/08 12/08 5/090

5

10

15

20

25

30($ Millions)

Citation X Hawker 800XP Citation BravoGIVSP Challenger 604 Lear 45

Two Big Possible Black Swans

• World economic growth and trade.

• Relationship between global economic growth and business aircraft demand.

• But there are many “it’s different this time” little black swans….

Business Aircraft Deliveries And World GDP

Source: IMF, Teal Group research

'64 '68 '72 '76 '80 '84 '88 '92 '96 '00 '04 '08 '09e0

5

10

15

20

25(Deliveries in '09 $ Bns)

0

10

20

30

40

50

60

70(GDP In Current International Dollars)

Deliveries World GDP

Cultural Attitudes Are Cyclical, Too• Wall Street (Oliver Stone,1987). Gordon Gekko "Rich

enough to have your own jet" gives greed a bad name; really teaches Wall Street bankers a lesson.

• The Bonfire of the Vanities, (Tom Wolfe, 1987). Discredits “masters of the universe.”

• “Yuppies’ Last Rites Readied” (New York Times headline, Oct. 21, 1987)

• “I’m done with the material stuff.” (James Cramer, October 2000)

• “Sales of business jets, once the ultimate status symbols, have cooled with the US economy…The sleek stratospheric board rooms have come to represent corporate greed for some, and for others are simply no longer affordable.” USAToday, Feb. 11, 2003.

Cultural Attitudes Are Cyclical (2)• “The business jet, a pricey perk that became a flying

symbol of corporate excess, is making a comeback.”

(Chicago Sun-Times, Nov. 14, 2004)

• 2008: Obama and McCain campaign on private jets.

McCain applauds Sarah Palin for putting the state jet

on e-bay. President Obama criticizes bankers who

“disappear on private jets.” Obama inauguration sets

record for private jet arrivals.

• Send me yours! raboulafia@tealgroup.com.

Four Expensive Words: It’s Different This Time

• No safe havens.• Very high volatility in ALL markets (equities,

capital, oil, etc.).• Exogenous yet non-violent shock.• More than one popped bubble.• Many “too big to fail” players.• Clogged credit market—credit cheap, supply

broken.• De-coupling didn’t happen; coupling is worse.• Feedback loop between Main St. and Wall St.• Impossibly low global growth numbers.• Popular threat to globalization, market economy.

It’s Different For Us, Too• Populism/Government interference with

“nationalized” companies.–Bizjets worth ~30% of the jetliner business by

value, yet transport ~0.1% of the traffic.• Finance/OEM feedback.• Tax incentives won’t work this time (the last

time might have made things worse).• New products and heavy spending.• Utilization dropped much faster than any

economic indicator.• Record available aircraft numbers.• Protectionism/anti-trade sentiment.• New market entrants.

Business Aircraft Deliveries By Value

'64 '67 '70 '73 '76 '79 '82 '85 '88 '91 '94 '97 '00 '03 '06 '09e$0

$5

$10

$15

$20

$25(Value in '09 $ Bns)

‘01-‘03 -18.9% CAGR; -34% peak-trough

‘81-‘86 -9.4% CAGR; -39% peak-trough

‘68-‘71 -22.3% CAGR; -53% peak-trough

‘76-‘8114.3% CAGR

‘91-‘0114.3% CAGR

‘03-‘0817.1% CAGR

Looking Ahead

Three Scenarios: Baseline + Two Departures

1. This too shall pass:– Worst popped bubble(s) yet.

– The credit crisis just start of a serious downturn.

– But, nothing fundamental has changed; deliveries

growth resumes in 2012 after a prolonged and

severe recession (three years rather than two).

– Think: hockey stick.

[THIS IS PROBABLY WHERE WE ARE. AT LEAST I

HOPE IT’S WHERE WE ARE. IT’S THE RESULT OF A

SMALL BLACK SWAN.]

Three Scenarios2. We’re still falling:

–Deflationary shock hurts prices and demand.

–Massive liquidity injections help.

–Then inflation. That feels better than deflation.

–Little growth (stagflation), but at least the

steep fall would end.

–Think: Big “V” or “W” (dead cat bounce).

[THIS MIGHT BE WHERE WE ARE.]

Three Scenarios3. We Have A Serious Problem:

– We’re overleveraged and indebted.

– Starting an extended period of painful restructuring and de-leveraging, perhaps with global stagflation (following deflation).

– Overdue social spending bills make it worse.

– After a painful downturn, a decade of lost growth.

– Populist anti-globalization/anti-market economy sentiment could make things worse too.

– Think: Big “L,” or bathtub. [THIS IS A REMOTE BUT A TANGIBLE RISK,

AND PRODUCED BY A BIG ANGRY BLACK SWAN.]

Forecast Assumptions• This is a three year downturn:

–Recession/corporate profits: 2008-10.

–Availability/pricing: 8-2008 through mid 2010.

–Deliveries: 2009-2011.

• Trough: 2011, 40% below 2008 peak by value.

–Compare with two year -34% drop in 2001-03.

• Recovery: five years at 10% CAGR –This is quite conservative—2003-2008 recovery

was 17.1%.

Forecast: As It Turns Out, We’ve Peaked

Excludes jetliners, RJ, turboprops

'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '180

200

400

600

800

1,000

1,200

1,400(Units Delivered)

0

4

8

12

16

20

24(Market Value in '09$ Bns)

Units Value

Teal’s 19th Business Jet Forecast

• Deliveries of 9,300 bizjets worth $153.7

billion (‘09$) in 2009-2018.

–Plus 575 corporate jetliners and RJs worth

$29.6 billion.

–Plus 2,893 turboprops worth $12.4 billion.

The Market by Aircraft Class

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

$4

$8

$12

$16

$20

$24

$28('09$ Billions)

Very Light Class 1 Class 2 Class 3Class 4 Class 5 Jetliners+RJs Turboprops

Programs: Larger Models DominateCumulative US '09$ Value

All program s >~$3 bn

G650Global Ex/5000

Falcon 7XG500/550

Challenger 604/5/6CitationJet

Challenger 300Sovereign

Hawker 800/900G450/400/350

BBJFalcon 900

King AirCitation XLS

Falcon 2000/EXG200/250

Hawker 4000Columbus

MustangPC-12

Learjet 40/45$0 $3 $6 $9 $12 $15 $18

2009-20181999-2008

Business Jet Manufacturer Market Shares2009-2018 Vs 1999-2008

Excludes jetliners, RJs, turboprops

28.1%

9.5%

14.9%

20.7%

26.5%

0% 0.3%

23.2%

8.8%

16.8%19.2%

24.8%

6.4%

0.7%

Bombardier Hawker Dassault Cessna Gulfstream Embraer Other0%

5%

10%

15%

20%

25%

30%

'99-08 '09-18

Canadian Aero Index/L’Indice Aero CanadienGrounds For Concern

'88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09f$0

$1

$2

$3

$4

$5

$6

$7(Value of deliveries in '09$ Bns)

Bombardier-CRJ Bombardier--Challenger, GExDHC Bell Canada

Pratt Canada And The Business Aircraft Propulsion Market

'89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08$0

$1

$2

$3

$4

$5

$6(Value of deliveries in '09$ Billions)

Pratt Canada Other Engine OEMs

1989: PWC powers 24.3% of the market by value

2008: PWC powers 33.6% of the market by value

Barriers To Aviation Market Entry: Stubbornly High

Except, Perhaps, In This Segment• One successful new civil jet manufacturer

since 1960. Tough for niche players.

• Capital requirements: for $500 million, you can dig yourself a hole...

• Honda, the great exception.

• Prop guys moving up?

• Are we losing our magnetic attraction?–Bombardier’s CSeries.

–Embraer’s KC-390.

VLJs/Air Taxis: We Can Learn A Lot From This Atrocity

• It’s Worse Than That, They’re Dead, Jim: Adam Aircraft, Safire, Avocet, AASI, Century Jet, ATG, Promavia,

Visionaire, Eclipse, Grob Utility Jet.

• It’s Life Jim, But Not As We Know It: Sino-

Swearingen, Epic Elite/Victory, D-Jet, Piperjet, Cirrus Jet,

Spectrum Aeronautical.

• People Who Definitely Will Profit From

This Bloated Fiasco: Cessna, Embraer, Pratt &

Whitney Canada.

A Few Concluding Thoughts• I am not aware of any responsible forecasts

calling for an end to long-term economic and corporate wealth growth.

• I am slightly worried about de-linkage between these drivers and business aircraft demand.–But “all of this has happened before, and all of

this will happen again.”

• We’re clawing out. But I am worried about the next six months.

Let's Keep Things In Perspective

Includes Jetliners, RJs, turboprops

'64 '68 '72 '76 '80 '84 '88 '92 '96 '00 '04 '08 '12 '16'180

300

600

900

1,200

1,500

1,800(Units Delivered)

0

5

10

15

20

25(Market Value in '09$ Bns)

Units Value