Trading PlacesGeopolitical Change, Macroeconomic

Uncertainty And Aircraft Markets

Presentation To The National Aeronautic Association

Arlington, VA

By Richard Aboulafia

Vice President, Analysis

Teal Group Corporation

www.tealgroup.com

January 2017

Aircraft Markets, Through Good And Bad Years

World New Deliveries CAGR CAGR Change Change

In 2016 (2017 $) ’03-‘08 ’08-‘14 ’14-15 ’15-‘16

Large Jetliners ($105.4 b) 7.5% 9.9% 4.9% 1.7%

Business Aircraft ($21.2 b) 17.1% -2.2% -2.8% -11.2%

Regionals ($7.1 b) 4.6% -2.8% -10.5% 0.3%

Civil Rotorcraft ($4.2 b) 18.1% -1.7% -10.6% -22.1%

Military Rotorcraft($13.6 b) 10.3% 8.8% -17.0% -4.8%

Military Transports ($6.6b) 3.2% -1.7% 6.2% 13.2%

Fighters ($17.8 b) 1.9% 1.1% 9.0% -5.3%

All Civil ($138 b) 10.0% 5.0% 1.9% -1.5%

All Military ($41.7 b) 3.9% 3.3% -0.9% -2.5%

Total ($179.8 b) 8.3% 5.0% 1.3% -1.7%

DoD Investment, O&M FundingThe Trump Effect

Then-year dollars

FY01 FY03 FY05 FY07 FY09 FY11 FY13 FY15 FY17 FY19 FY210

50

100

150

200

250

300

($ bns)

Procurement (pre-Trump) Procurement (post-Trump) RDT&E

O&M (pre-Trump) O&M (post-Trump)

USAF Aircraft Investment Funding

FY2016-2021

Source: CRS

FY2016 FY2017 FY2018 FY2019 FY2020 FY20210

4

8

12

16(Funding in then-year $ Bns)

F-35A

KC-46

LRS-B

C/MC/HC-130

RPA (MQ-9, MQ-4)

PAR

CRH

JSTARS recap

T-X

About Those Trump Tweets: Two Possibilities

1. He’s a businessman and a tough negotiator.

2. He’s driven by a mix of four compatible factors:

i. Placating fiscal conservatives while being fiscally

loose. (http://www.richardaboulafia.com/shownote.asp?id=502)

ii. Close correlation with Putin’s objectives and goals.(http://www.forbes.com/sites/richardaboulafia/2016/12/26/putins-us-aircraft-wish-list/#4faee16c56b3 )

iii. Asserting power of government to reward friends and

punish enemies (as with Carrier); a.k.a. cronyism.

iv. Ego.

• If it’s the first, there’s little risk. If it’s the second,

we’re in for a very difficult four years.

– Complication: keeping a handle on costs and profits

while “draining the swamp.”

• In any case, flattery essential.

DoD Tactical Aircraft Procurement, FY1986-2017

A Sudden Return To The Peak, But Still A Fundamental Problem

FY86

FY88

FY90

FY92

FY94

FY96

FY98

FY00

FY02

FY04

FY06

FY08

FY10

FY12

FY14

FY16

FY17

0

100

200

300

400(Units Procured)

0

2

4

6

8

10

12

(Funding in '16 $Bns)

Units Funding

SMA Market Development By MissionThe Past Ten Years Have Been Transformative

1989

-199

1

1992

-94

1995

-97

1998

-200

0

2001

-03

2004

-06

2007

-09

2010

-12

2013

-15

0

10

20

30

40

(Deliveries in '16 $ Bns)

AEW GBI GTT LACOIN MP MP-C

SAR SCE SPT Str Tanker

Missile/Munition/UAV Forecast

'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22 '23 '24 '25

0

2

4

6

8

10

12

14

16

18(Market value in '16 $Bns)

AAM ASM ADM ATM Anti-Ship

SSM Smart munitions UAVs

Our Forgotten Nemesis...CyclicalityLarge Jetliner Deliveries By Value

'58

'60

'62

'64

'66

'68

'70

'72

'74

'76

'78

'80

'82

'84

'86

'88

'90

'92

'94

'96

'98

'00

'02

'04

'06

'08

'10

'12

'14

'16

$0

$20

$40

$60

$80

$100

(Value in '17 $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-‘91

16.1% CAGR

‘95-‘99

20.8% CAGR

‘04-‘15

9.2% CAGR;

A 12-Year

Supercycle

OR

‘99-‘03 -11%

CAGR; -37.3%

peak-trough

Y/Y Traffic: Nicely Above Trend2015 Totals: RPKs 6.5%, ASKs 5.6%, FTKs 2.2%; 2014 Totals: RPKs 5.9%,

ASKs 5.6%, FTKs 4.5%; 2013 Totals: RPKs 5.2%, ASKs 4.8%, FTKs 1.4%

Source: IATA

Jul '

08Sep

Nov

Jan '0

9M

arM

ayJulSep

Nov

Jan '1

0M

arM

ayJulSep

Nov

Jan '1

1M

arM

ayJulSep

Nov

Jan '1

2M

arM

ayJulSep

Nov

Jan '1

3M

arM

ayJulSep

Nov

Jan '1

4M

arM

ayJulSep

Nov

Jan '1

5Apr

Jul

Oct

Jan '1

6Apr

JulSep

0%

10%

20%

30%

-10%

-20%

RPKs ASKs FTKs

The State Of The Industry, 2017

• The Great Boom is over.

– We won’t see it’s kind again for some time.

• But good news: minimal threat of bust cycle.

• Military replacing civil as growth engine.

– Geopolitical tension, uncertainty good for military, bad

for civil.

– Trade more important than ever for civil, under greatest

threat since WW2.

– Defense not cyclical. But sometimes counter-cyclical.

• Good (-ish): Inflation.

• Bad: strong dollar.

• Few new programs. Horizontal industry

squabbling being replaced by vertical squabbling.

– Boeing’s unique challenges imply supply chain

pressure won’t let up.

Global Aircraft Market Outlook In One Page

Market 2017 Risk Elevator Comment

Large Jetliners -0.6%Tough to de-rail the SA ramp, but fuel prices and

China are big concerns. TA overcapacity too.

Business Aircraft -0.7%Weak emerging markets and resource-

extraction country/company demand.

Regionals -2.3% Scope clause is only big risk.

Civil Rotorcraft 1.0%Ugly. Too many new models aimed at a weak

Segment (oil).

Military Rotorcraft 9.8%Will trend down as programs of record

end/slow; no risk of accelerated downturn.

Military Transports 6.7%Drop due to C-17 end. Only risk is A400M

execution; C130J benefits if it’s a problem.

Fighters 10.5% I like this market.

All Civil -0.6%Jetliner growth not compensating for weakness in other

segments; more risk from emerging markets, oil.

All Military 10.6%Global insecurity, Tension, Malice. Trainers

boost topline.

Total Industry 2.0% Downshifting, with more risk