The Aerospace & Defense Forum Los Angeles & San Fernando Valley Chapters May 14, 2020 Welcome to our Joint LA & SFV Chapters Meeting May 14, 2020 LA Chapter Host and Sponsors SFV Chapter Host and Sponsors 1 Who We Are… • A 10-year-old global aerospace and defense leadership community of over 2,400 professionals that facilitates communication, collaboration, and commerce relative to the business of A&D • Eight chapters – Los Angeles, San Fernando Valley, Santa Clarita Valley, South Bay, Orange County, San Diego, Arizona and Dallas-Ft. Worth • Conduct monthly meetings with presentations, panels and tours with industry leaders focused on some aspect of the business of A&D 2 1
The Aerospace & Defense Forum Los Angeles & San Fernando Valley Chapters May 14, 2020 COVID-19 and Civil Aviation Markets “Believe It or Not…There’s Good News If You Look Hard Enough” Richard L. Aboulafia Vice President, Analysis Teal Group 3 COVID-19 And Civil Aviation Markets Believe It or Not…There’s Good News If You u Look Hard d Enoug ugh To Aerospace & Defense Forum Richard Aboulafia Vice President, Analysis Teal Group Corporation www.tealgroup.com May 14, 2020 4 2
The Aerospace & Defense Forum Los Angeles & San Fernando Valley Chapters May 14, 2020 International traffic hit hardest and longest. Twin aisle Already an overcapacity situation. jetliners Secular shift towards single aisles already underway. Fuel prices a big problem. Single aisle China comeback uncertain. Aviation jetliners Some relief due to deferred Airbus ramp, and MAX stop. Segments Large cabin strongly correlated with oil prices. By Damage Business Small/medium strongly correlated with corporate Jets profits, equities indices. Most to Least Civil Oil and gas segment (large) hit again, before Rotorcraft recovery even began. Emphasis on “shovel-ready.” Military Advance development programs at greater risk. Programs Pure-play contractors in best shape; suppliers with most defense in best shape. 5 “You don’t make the timeline, the virus makes the timeline.” (Dr. Fauci) • The economy, and people’s willingness to fly, depends on Coronavirus, and really nothing else. • Limited air travel recovery due to secondary outbreaks until vaccine, or effective post-infection drug or herd immunity. • Vaccine development/distribution is an 18-24-month process. • Therapeutic drugs may arrive sooner. • Key growth markets might be hit later, and worse, than China and the West. • The most likely air traffic scenario is an L-shaped market, with an upward- angled floor, lasting 2-3 years. • Another possibility scenario is a U-shaped recovery, with the floor lasting about two years. But it’s not a V. • Return to traffic peak in 2023, we hope. 6 3
The Aerospace & Defense Forum Los Angeles & San Fernando Valley Chapters May 14, 2020 Aircraft Markets, In Good And Bad Yea ears World New Deliveries CAGR CAGR CAGR Change In 2019 (2020 $) ’03-‘08 ’08-‘14 ’14-18 ’18-‘19 Jetliners-SA ($46.2 b) 9.7% 6.9% 5.0% -23.9% Jetliners-TA ($55.3 b) 5.0% 13.5% 1.7% 2.0% Regionals ($5.8 b) 3.9% -3.1% -5.2% -5.1% Business Aircraft ($22.4 b) 16.7% -2.2% -5.0% 15.6% Civil Rotorcraft ($3.9 b) 18.5% -2.5% -7.4% -6.6% Military Rotorcraft($13.3 b) 10.6% 9.6% -11.8% 16.9% Military Transports ($4.9 b) 3.2% -0.9% 0.2% -1.2% Fighters ($24 b) 1.6% 0.8% 2.5% 25.5% All Civil ($133.8 b) 9.7% 5.6% 1.4% -7.6% All Military ($45.5 b) 3.9% 4.0% -3.3% 16.6% Total ($179.3 b) 8.0% 5.2% 0.3% -2.4% 7 Cyclicality, Our Long-Forgotten Nemesis 120 '04-18 8% CAGR A 14-Year Super Cycle 100 The 2019 MAX '95-'99 problem; 20.8% CAGR not a 80 market Value In 2020 $ Bns problem (until now) 60 '84-'91 16.1% CAGR '01-'03 40 -10.7% CAGR; 28.8% peak-to-trough '91-'95 Or -12.5% CAGR; 41% '99-'03 peak-to-trough 20 -11 CAGR; 65% peak- '68-'77 -11 CAGR; 65% '80-'84 -13.9% CAGR; peak-to-trough -45% peak-to-trough 0 8 4
The Aerospace & Defense Forum Los Angeles & San Fernando Valley Chapters May 14, 2020 Traffic: Way Above Trend...Until March 2019 48% Decline in 2020? Down 90-95% Now 2019 Totals: RPKs 4.2% , ASKs 3.4% , FTKs -3.3% 2018 Totals: RPKs 6.5% , FTKs 5.4% ; 2017: RPKs 7.6% , FTKs 9% 35 25 15 Y/T Traffic Chnage (%) 5 -5 -15 -25 -35 -45 -55 Source: IATA RPKs ASKs FTKs 9 And Now, Unprecedented Numbers • Traffic decline, parked fleet like no previous shock. • Per Paul Krugman, reflect a world economy in a “medically-induced coma;” -40% US GDP? • Again, traffic recovery is determined by the virus, not politicians or economics. • Airlines face a very different reality. • ULCCs obsolete? Legacy flag carriers triumphant, with state aid? • Backlogs holding up (MAX a concern), but meaningless in a downturn. • Many early retirements coming, particularly twin aisles. • Primarily twin aisles; A380 bloodbath. • Aftermarket catastrophe. • 48% down ASMs (hopefully), de-stocking, deferred maintenance/upgrades, plentiful USM with early retirements. World Jet Fleet: Now ~65% Unemployed World Air Traffic (RPM Bns) 70% 6000 14000 60% 5000 12000 Percent Parked 50% 10000 Parked Jets 4000 40% 8000 3000 30% 6000 IATA's 48% y/y 2000 2020 decline 20% 4000 still optimistic 10% 2000 1000 about a 4Q recovery 0% 0 0 Source: Parked Percentage Of Total Fleet Ascend/Jeffries 10 5
The Aerospace & Defense Forum Los Angeles & San Fernando Valley Chapters May 14, 2020 Interest Rates And Oil Prices: Less Than 4%, And $50-85/bbl, Ideally; But The Ratio Matters Most 18 120 16 Interest Rates (Federal Fund Effective, %) 100 14 WTI Oil Price in 2016 $/BBl 12 80 10 60 8 6 40 COVID-19 Pressuring 4 Both 20 Downward 2 0 0 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 20f Interest Rates Oil Prices 11 BRIC Deliveries: Peaked; Watch China Growth May Not Resume For A Few Years 2018: 500 China is 23% of world Market 400 300 2000: 200 China is 2% of world Market 100 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 China Russia India Brazil 12 6
The Aerospace & Defense Forum Los Angeles & San Fernando Valley Chapters May 14, 2020 Large Jetliner Orders And Deliveries Book-To-Bill No Longer A Thing 3500 3000 2500 2000 1500 1000 500 0 -500 -1000 Deliveries Net Orders 13 The Air Transport Market By Segment (As of January) Some kind of correction, 90 inevitably; also, wait for next gen 737MAX 80 Problem, and flood 70 Deliveries In 2020 $ Billions Too much, too sudden (A330s, 777s, 787s, Gulf 60 carriers, etc.) 50 The Correction Decade; shift 40 towards single aisles; A321neo effect 30 20 Regionals, The Land Of Misery 10 - Regionals Single Aisles Twin Aisles 14 7
The Aerospace & Defense Forum Los Angeles & San Fernando Valley Chapters May 14, 2020 The Air Transport Market By Segment (May 1) 90 Return to peak: 2024 737MAX 80 Problem, and flood; includes 70 delivery of ~450 already- Too much, too sudden (A330s, built jets 777s, 787s, Gulf carriers, etc.) 60 Deliveries In 2020 $ Billions 50 Return to peak: after 2029... probably 40 30 Hit Hardest and Longest; Capacity hangover, international traffic problems, and shift towards single aisles 20 Now With Greater Misery 10 - Regionals Single Aisles Twin Aisles 15 Firm Order Backlog Values: Boeing Taking A Hit 500 450 400 350 2020 $Billions 300 250 200 150 100 50 0 1h 1h End End End End End End End End End End End End End End 1Q 1997 2001 2004 2006 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Boeing 130.0 107.8 79.5 199.1 300.4 271.1 270.0 300.1 317.0 365.3 421.2 412.9 398.9 402.1 408.0 378.8 367.3 Airbus 48.6 112.9 115.5 173.0 281.8 268.2 277.6 309.5 321.6 399.9 439.9 461.2 468.1 441.8 481.6 463.6 470.6 Bombardier — — — — — — — — 1.9 3.3 4.9 5.5 6.7 9.0 9.0 8.7 8.5 16 8
The Aerospace & Defense Forum Los Angeles & San Fernando Valley Chapters May 14, 2020 Jetliner Market Shares By Deliveries Airbus Seizes The Middle Market and First Place; Covid-19 Accelerates shift to Middle Market 140 120 100 Deliveries in 2020 $Billions 80 60 40 20 0 Boeing Airbus ex 321neo A321neo COMAC/Irkut 17 Bottom Half Bizjet Segment vs. Top Half $20 $18 $16 Market Value in '20 $Billions $14 $12 $10 $8 $6 $4 $2 $0 Bottom Half (<$26M) January Top Half (>$26M) January Bottom after March Top after March 18 9
The Aerospace & Defense Forum Los Angeles & San Fernando Valley Chapters May 14, 2020 DoD Investment: Plateauing After A Boom, And Dwarfed By COVID-Related Stimulus Packages 300 250 200 Then-Year $ Bns 150 100 50 0 Procurement RDT&E O&M 19 US Military Fixed Wing Aircraft Deliveries 25 20 Deliveries in 2020 $ Billions 15 10 5 0 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22 '23 '24 '25 '26 '27 '28 '29 C-17 AV-8B F/A-18 F-15 F-16 F-22 T-45 T-6 C-130 F-35 T-7 B-21 20 10
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