SpeedNews Regional & Corporate Aviation Suppliers Conference

A View From Wall Street

SpeedNews Regional & Corporate Aviation Suppliers Conference

A View From Wall Street

Ronald J EpsteinRonald J Epstein

Discuss market trends from an investor perspective

Equity market conditions

Review regional jet market ML regional jet forecast

Review business jet market conditions and opportunities ML business jet forecast

Conclusions

Discuss market trends from an investor perspective

Equity market conditions

Review regional jet market ML regional jet forecast

Review business jet market conditions and opportunities ML business jet forecast

Conclusions

OverviewOverview

Equity Market ConditionsEquity Market Conditions

Equity Market PerformanceEquity Market Performance

Investors prefer Aerospace: YTD, Aerospace & Defense has outperformed both S&P 500 and DJ Industrial Average

Investors prefer Aerospace: YTD, Aerospace & Defense has outperformed both S&P 500 and DJ Industrial Average

Source: Bloomberg

90%

95%

100%

105%

110%

115%

120%

1/3/06 3/3/06 5/3/06 7/3/06 9/3/06

Rel

ativ

e Pr

ice

Perf

orm

ance

S&P Supercomposite A&D Index S&P 500 DJ Industrial Av erage

S&P Supercomposite A&D Index

S&P 500

DJIA

A&D Outperforming S&P 500A&D Outperforming S&P 500

6.1%

7.2%

8.6%

9.1%

9.9%

10.4%

10.6%

14.2%

17.2%

17.7%

24.2%

25.3%

25.4%

30.7%

32.4%

33.8%

36.8%

59.4%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%

Em braer

NASDAQ

Goodrich

L-3 Com m unications

Crane

S&P 500

Northrop Grum m an

Boeing

United Technologies

Textron

Raytheon

General Dynam ics

Rockwell Collins

Precision Castparts

Trium ph Group

Moog

Lockheed Martin

Garm in

YTD Perform ance

Aerospace/Defense ValuationAerospace/Defense Valuation

Price 30 Oct 2006 Equity Enterprise P/E (x) EV/EBITDA (x) EV/Sales (x)

Company Symbol Opinion Objective Price Capitalization Value CY2005A CY2006E CY2007E CY2008E FY2005A FY2006E FY2007E FY2005E FY2006E FY2007E

S&P Composite SPX500 17.1 15.5 15.2

LARGE CAP

Boeing* BA 1 - Buy $97.00 $80.22 $63,414 $62,079 25.1 31.8 16.9 13.6 14.4 14.1 9.1 1.2 1.0 1.0

Lockheed Martin LMT 2 - Neutral 87.03 38,406 40,562 21.2 15.5 15.1 13.6 11.0 8.7 8.5 1.1 1.0 1.0

General Dynamics GD 1 - Buy 80.00 71.46 28,906 29,128 19.7 17.0 14.9 13.5 11.5 9.8 8.7 1.4 1.2 1.1

Northrop Grumman NOC 2 - Neutral 66.47 23,318 26,851 17.4 14.8 14.0 13.3 9.1 8.1 7.8 0.9 0.9 0.8

Raytheon RTN 2 - Neutral 49.87 22,382 25,203 24.0 17.8 16.6 14.9 12.0 11.9 11.5 1.2 1.1 1.0

Average 21.5 19.4 15.5 13.8 11.6 10.5 9.1 1.1 1.0 1.0

MULTI - INDUSTRY

United Technologies UTX 1 - Buy $70.00 $65.52 $66,110 $71,487 21.0 17.7 15.8 14.6 11.6 10.0 9.2 1.7 1.5 1.4

Textron* TXT 1 - Buy 100.00 90.60 12,037 11,932 24.0 16.9 14.6 12.6 10.5 8.8 7.4 1.2 1.0 1.0

Crane Co. CR 2 - Neutral 38.76 2,412 2,679 17.2 14.4 12.5 11.1 9.9 8.5 7.5 1.3 1.2 1.1

Average 20.7 16.3 14.3 12.7 10.7 9.1 8.0 1.4 1.2 1.2

SMALL & MID CAP

Garmin GRMN 1 - Buy $60.00 $52.56 $11,475 $11,054 38.4 25.6 21.0 18.4 29.1 20.2 17.0 10.8 6.6 4.7

Rockwell Collins COL 2 - Neutral 58.27 10,250 10,370 25.4 21.0 18.8 16.6 15.1 13.0 12.2 3.0 2.7 2.5

L-3 Communications LLL 2 - Neutral 81.14 10,005 14,523 19.4 19.6 14.1 12.8 12.6 10.4 9.6 1.5 1.2 1.1

Precision Castparts PCP 2 - Neutral 67.71 9,290 10,174 28.6 20.2 16.6 14.9 19.7 15.5 10.8 3.4 2.9 2.1

Embraer ERJ 1 - Buy 45.00 41.47 7,133 6,606 16.4 16.3 12.6 10.5 11.7 11.9 8.2 1.9 1.7 1.3

Goodrich GR 1 - Buy 50.00 44.65 5,608 7,281 21.0 16.8 14.0 12.1 9.6 8.2 7.3 1.3 1.2 1.2

Moog MOGA 1 - Buy 44.00 37.98 1,547 1,899 22.5 18.4 16.3 14.5 13.1 10.1 8.9 1.8 1.5 1.3

Triumph Group TGI 2 - Neutral 48.48 778 983 29.4 18.9 14.7 12.9 15.9 11.2 9.2 1.4 1.3 1.1

Average 25.1 19.6 16.0 14.1 15.8 12.6 10.4 3.1 2.4 1.9

Source: Merrill Lynch

Note:

Enterprise Value equals market value plus straight debt plus straight preferred less cash and equivalents

Free cash flow equals cash from operations less capex

*Debt excludes finance debt for Boeing and Textron

Civil Aero OEM Stock Performance Since 2001Civil Aero OEM Stock Performance Since 2001

Since 2001, Aircraft prime manufacturers have appreciated. Bombardier’s shares; however, continues to lag the group

Since 2001, Aircraft prime manufacturers have appreciated. Bombardier’s shares; however, continues to lag the group

Source: Bloomberg

0%

20%

40%

60%

80%

100%

120%

140%

160%

1/1/2001 1/1/2002 1/1/2003 1/1/2004 1/1/2005 1/1/2006

Rel

ativ

e Pr

ice

Perf

orm

ance

EADS BA ERJ Bombardier

Bombardier

EADS

Embraer

Boeing

Civil Aero OEM Stock Performance YTDCivil Aero OEM Stock Performance YTD

Issues at EADS have plagued the stock, Bombardier stock recovers a bit Issues at EADS have plagued the stock, Bombardier stock recovers a bit

Source: Bloomberg

50%

70%

90%

110%

130%

150%

170%

1/2/2006 3/2/2006 5/2/2006 7/2/2006 9/2/2006

Rel

ativ

e Pr

ice

Perf

orm

ance

EADS BA ERJ Bombardier

Bombardier

EADS

Embraer

Boeing

Business Jet Manufacturer Stock PerformanceBusiness Jet Manufacturer Stock Performance

Business jet OEM appreciate since 2001 Business jet OEM appreciate since 2001

Source: Bloomberg

0%

50%

100%

150%

200%

250%

1/1/2001 1/1/2002 1/1/2003 1/1/2004 1/1/2005 1/1/2006

Rel

ativ

e Pr

ice

Perf

orm

ance

Bombardier Embraer General Dy namics Ray theon Tex tron

Bombardier

Embraer

General

Dy namics

Tex tron

Ray theon

Business Jet Manufacturer Stock PerformanceBusiness Jet Manufacturer Stock Performance

Biz Jets Performed Relatively Well So Far in 2006 Biz Jets Performed Relatively Well So Far in 2006

Source: Bloomberg

80%

90%

100%

110%

120%

130%

140%

150%

160%

1/2/2006 3/2/2006 5/2/2006 7/2/2006 9/2/2006

Rel

ativ

e Pr

ice

Perf

orm

ance

Bombardier Embraer General Dy namics Ray theon Tex tron

Embraer

Bombardier

Tex tron

Ray theon

General

Dy namics

Regional Jet MarketRegional Jet Market

Regional Jet Market ConditionsRegional Jet Market Conditions

Stored fleet of modern RJs remains relatively low

Orders moving towards larger aircraft

Fleet skewed towards 50-seat aircraft

Stored fleet of modern RJs remains relatively low

Orders moving towards larger aircraft

Fleet skewed towards 50-seat aircraft

1,644

100

579

377

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

40-50 51-72 73-89 90-110

Seat Sizes

Num

ber

of In

serv

ice

Air

craf

t

2.1%

0.2%

7.6%

10.8%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

40-50 51-72 73-89 90-110

Seat Sizes

% O

n O

rder

RJ

Air

craf

t % R

J Fl

eet

4.0%

2.6%2.3%

1.3%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

40-50 51-72 73-89 90-110

Seat Sizes

% S

tore

d R

J A

ircr

aft %

RJ

Flee

t

50-Seat Fleet Evolution – A Deep Downturn50-Seat Fleet Evolution – A Deep Downturn

0

20

40

60

80

100

120

140

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 YTD

2006

Stor

ed 5

0-se

at R

Js

0

50

100

150

200

250

300

350

400

450

500

50-s

eat R

J de

liver

y an

d or

ders

Stored Deliv eries Orders

0

20

40

60

80

100

120

140

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 YTD

2006

Stor

ed 5

0-se

at R

Js

0

50

100

150

200

250

300

350

400

450

500

50-s

eat R

J de

liver

y an

d or

ders

Stored Deliv eries Orders

Stored fleet increases

Deliveries fall off

Orders fall off

2005 increase in 50-seat RJs resulted from Chapter 11 of Independence Air

Stored fleet increases

Deliveries fall off

Orders fall off

2005 increase in 50-seat RJs resulted from Chapter 11 of Independence Air

50-Seat Jet Considerations50-Seat Jet Considerations

Is there a glut of 50-seaters? –Yes

In the market dead? –No 50-seats is a natural market size There will be a replacement market

Cannibalization by larger aircraft

Emerging market joint ventures: China, Russia?

– HNA Group orders 50 ERJ-145 from Harbin-Embraer

Traditional secondary markets still developing

Is there a glut of 50-seaters? –Yes

In the market dead? –No 50-seats is a natural market size There will be a replacement market

Cannibalization by larger aircraft

Emerging market joint ventures: China, Russia?

– HNA Group orders 50 ERJ-145 from Harbin-Embraer

Traditional secondary markets still developing

Regional Jet Concept is EvolvingRegional Jet Concept is Evolving

What is a Regional Jet? Capacity: 50-Seats, 70-Seats, 100-Seats Range: 1000 NM, 1500 NM, 2000 NM Very confusing to investors

Next Generation Aircraft = Small Narrowbody Jets E-170/-190 Family C-Series RRJ and ARJ Boeing and Airbus move into this market?

What is a Regional Jet? Capacity: 50-Seats, 70-Seats, 100-Seats Range: 1000 NM, 1500 NM, 2000 NM Very confusing to investors

Next Generation Aircraft = Small Narrowbody Jets E-170/-190 Family C-Series RRJ and ARJ Boeing and Airbus move into this market?

Are scope clauses irrelevant?Are scope clauses irrelevant?

From an OEM perspective “scope clauses” have become less relevant due to changes in pay and other work rules

Airline bankruptcies have help close at least part of the scope arbitrage US Airways, Air Canada and other airlines have

worked around scope clauses

– Revised labor rates at mainline make scope less meaningful

– Air Canada example: CRJ-200 $77 (at Jazz), 5 yr ERJ 190 captain $118, A320 $156

From an OEM perspective “scope clauses” have become less relevant due to changes in pay and other work rules

Airline bankruptcies have help close at least part of the scope arbitrage US Airways, Air Canada and other airlines have

worked around scope clauses

– Revised labor rates at mainline make scope less meaningful

– Air Canada example: CRJ-200 $77 (at Jazz), 5 yr ERJ 190 captain $118, A320 $156

100-Seat Market is Real – Not Just North America100-Seat Market is Real – Not Just North America

ERJ-170 Interior

An ERJ-190

Rationalization of pilot pay structures and “re-gauging” on domestic routes will drive E-Jet market share gains

Rationalization of pilot pay structures and “re-gauging” on domestic routes will drive E-Jet market share gains

Investor ConsiderationsInvestor Considerations

50-seat jets were controversial in both the equity and fixed income markets

Small Narrow body jets are less controversial and gaining global investor appeal

E-Jets are a more favorable asset class in the financing community than 50-seat jets and derivatives

Investors are treating the next generation of small narrow body jets more like traditional narrow body jets

50-seat jets were controversial in both the equity and fixed income markets

Small Narrow body jets are less controversial and gaining global investor appeal

E-Jets are a more favorable asset class in the financing community than 50-seat jets and derivatives

Investors are treating the next generation of small narrow body jets more like traditional narrow body jets

2004 2005A 2006E 2007E 2008E 2009EBombardier CRJ 100/200/440 100 44 12 6 6 6 CRJ 700 64 50 48 45 43 40 CRJ 900 14 27 24 20 20 15Total, Bombardier 178 121 84 71 69 61

Embraer ERJ-135/140/145 91 48 14 15 15 15 ERJ-170 46 46 33 34 40 45 ERJ-175 0 14 12 20 24 29 ERJ-190 0 12 45 54 62 64 ERJ-195 0 0 4 20 24 27Total, Embraer 137 120 108 143 165 180

Total, regional jets 315 241 192 214 234 241

Merrill Lynch Regional Jet ForecastMerrill Lynch Regional Jet Forecast

Business Jet MarketBusiness Jet Market

Business Jet Market is ThrivingBusiness Jet Market is Thriving

Demand continues to be robust in all market segments

Deliveries could peak in 2007/2008 2008/2009 “Available for sale” fleet as % of fleet beginning to

climb, but still near 15 year average levels Historical data suggests bottom in “available for sale”

fleet leads peak in new deliveries by 1 to 2 years

– R2=0.49 for lights, R2=0.52 for mid-size, R2=0.32 for heavies

Potentially disruptive forces on the horizon for light jets and avionics

Demand continues to be robust in all market segments

Deliveries could peak in 2007/2008 2008/2009 “Available for sale” fleet as % of fleet beginning to

climb, but still near 15 year average levels Historical data suggests bottom in “available for sale”

fleet leads peak in new deliveries by 1 to 2 years

– R2=0.49 for lights, R2=0.52 for mid-size, R2=0.32 for heavies

Potentially disruptive forces on the horizon for light jets and avionics

Light Business Jet Secondary MarketLight Business Jet Secondary Market

-

200

400

600

800

1,000

Jan-9

0Ja

n-91

Jan-9

2Ja

n-93

Jan-9

4Ja

n-95

Jan-9

6Ja

n-97

Jan-9

8Ja

n-99

Jan-0

0Ja

n-01

Jan-0

2Ja

n-03

Jan-0

4Ja

n-05

Jan-0

6

Num

ber

for

Sale

0%

5%

10%

15%

20%

Jan-9

0Ja

n-91

Jan-9

2Ja

n-93

Jan-9

4Ja

n-95

Jan-9

6Ja

n-97

Jan-9

8Ja

n-99

Jan-0

0Ja

n-01

Jan-0

2Ja

n-03

Jan-0

4Ja

n-05

Jan-0

6

For

Sale

as

% o

f Fle

et

USA76%

AFRICA1%

SEASIA0%

CAMERICA7%

SAMERICA6%

EUROPE9%

OCEANIA1%

15 to 20 years10%

20 to 25 years21%

25 to 30 years31%

> 30 years11%

10 to 15 years11%

5 to 10 years10%

< 5 years6%

Source: AMSTAT

Age Distribution

Geographic Distribution

Jets Available for Sale

Jets Available for Sale as % of Fleet

Medium Business Jet Secondary MarketMedium Business Jet Secondary Market

< 5 years13%

5 to 10 years21%

10 to 15 years15%

15 to 20 years10%

20 to 25 years23%

25 to 30 years12%

> 30 years6%

USA79%

AFRICA0%

SEASIA1%

CAMERICA4% EUROPE

13%

0

100

200

300

400

500

Jan-9

0Ja

n-91Ja

n-92Ja

n-93Ja

n-94Ja

n-95Ja

n-96Ja

n-97Ja

n-98Ja

n-99Ja

n-00Ja

n-01Ja

n-02Ja

n-03Ja

n-04Ja

n-05Ja

n-06

Num

ber

for

Sale

0%

5%

10%

15%

Jan-9

0Ja

n-91Ja

n-92Ja

n-93Ja

n-94Ja

n-95Ja

n-96Ja

n-97Ja

n-98Ja

n-99Ja

n-00Ja

n-01Ja

n-02Ja

n-03Ja

n-04Ja

n-05Ja

n-06

For

Sale

as

% o

f Fle

et

Source: AMSTAT

Age Distribution

Geographic Distribution

Jets Available for Sale

Jets Available for Sale as % of Fleet

Heavy Business Jet Secondary MarketHeavy Business Jet Secondary Market

0

50

100

150

200

Jan-9

0Ja

n-91Ja

n-92Ja

n-93Ja

n-94Ja

n-95Ja

n-96Ja

n-97Ja

n-98Ja

n-99Ja

n-00Ja

n-01Ja

n-02Ja

n-03Ja

n-04Ja

n-05Ja

n-06

Num

ber

for

Sale

0%

5%

10%

15%

Jan-9

0Ja

n-91Ja

n-92Ja

n-93Ja

n-94Ja

n-95Ja

n-96Ja

n-97Ja

n-98Ja

n-99Ja

n-00Ja

n-01Ja

n-02Ja

n-03Ja

n-04Ja

n-05Ja

n-06

For

Sale

as

% o

f Fle

et

5 to 10 years24%

10 to 15 years21%

15 to 20 years25%

20 to 25 years25%

< 5 years5%

USA82%

SEASIA0%CAMERICA

5%

SAMERICA2%

EUROPE9%

Source: AMSTAT

Age Distribution

Geographic Distribution

Jets Available for Sale

Jets Available for Sale as % of Fleet

Fractional Programs Approach EquilibriumFractional Programs Approach Equilibrium

Shares bought from fractional programs less shares sold back approaching zero

New aircraft are now replacing retirements

Shares bought from fractional programs less shares sold back approaching zero

New aircraft are now replacing retirements

-50

0

50

100

150

200

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Airc

raft

Uni

ts

Bought Sold Net Capacity

-50

0

50

100

150

200

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Airc

raft

Uni

ts

Bought Sold Net Capacity

0

100

200

300

400

500

600

700

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Cap

acity

Req

uire

d by

Fra

ctio

nal P

rogr

ams

(Cum

lativ

e Si

nce

1997

)

-5%

15%

35%

55%

75%

95%

115%

135%

155%

175%

Ann

ual G

row

th R

ate

0

100

200

300

400

500

600

700

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Cap

acity

Req

uire

d by

Fra

ctio

nal P

rogr

ams

(Cum

lativ

e Si

nce

1997

)

-5%

15%

35%

55%

75%

95%

115%

135%

155%

175%

Ann

ual G

row

th R

ate

Fractional Programs are ImprovingFractional Programs are Improving

Source: AMSTAT

-30

-20

-10

0

10

20

30

40

50

60

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Net

Airc

raft

Shar

es

NETJETS FLIGHT OPTIONS FLEXJET CITATION SHARES

2005 looks like it may have been the bottom in terms of overcapacity

FlexJet and Flight Options have both improved

2005 looks like it may have been the bottom in terms of overcapacity

FlexJet and Flight Options have both improved

Secular Shift to Lower Cost Private AviationSecular Shift to Lower Cost Private Aviation

We are in the midst of a secular shift towards lower cost private aviation

Manifestations: Fractional Programs, VLJs, Jet Cards

Manifestations: New light engines and avionics

Just as commercial aviation has become the Greyhound in the sky, private aviation will become for accessible to a broader audience

Other business models will emerge

We are in the midst of a secular shift towards lower cost private aviation

Manifestations: Fractional Programs, VLJs, Jet Cards

Manifestations: New light engines and avionics

Just as commercial aviation has become the Greyhound in the sky, private aviation will become for accessible to a broader audience

Other business models will emerge

Very Light Jets Are ComingVery Light Jets Are Coming

Impact of VLJs on market and OEMs Another source of lift or incremental lift Bridging corporate aviation and owner/operator GA

– Serving a market that is starved for innovation

Possible market size for VLJs Number of aircraft transactions in the $0.5 million to $4.0 million

range

– New or used transactions

• ~2000 Used Transactions

• ~400 New Aircraft

– Total: 2400 (20% to 40% share shift) -> 480 to 960 with mid-point of 720 Jets

Impact of VLJs on market and OEMs Another source of lift or incremental lift Bridging corporate aviation and owner/operator GA

– Serving a market that is starved for innovation

Possible market size for VLJs Number of aircraft transactions in the $0.5 million to $4.0 million

range

– New or used transactions

• ~2000 Used Transactions

• ~400 New Aircraft

– Total: 2400 (20% to 40% share shift) -> 480 to 960 with mid-point of 720 Jets

Merrill Lynch Business Jet ForecastMerrill Lynch Business Jet Forecast

-200400600800

1,0001,200

2000

2001

2002

2003

2004

2005

2006

E20

07E

2008

E20

09E

2010

E

Bus

ines

s Je

t Del

iver

ies

Business Jet Forecast 2003 2004 2005 2006E 2007E 2008E 2009E 2010E

Cessna 195 179 249 304 377 440 475 465 Bombardier 89 128 186 210 202 191 180 180 Gulfstream 74 78 89 111 127 130 111 104 Raytheon 98 115 153 161 180 180 180 170 Dassault 48 60 51 65 85 95 80 70 Embraer 13 13 14 27 24 49 109 149

Total, business jets 517 573 742 878 995 1,085 1,135 1,138 Yr/Yr Change % 10.8% 29.5% 18.3% 13.3% 9.0% 4.6% 0.3%Total, business jets (excl. VLJs) 517 573 742 877 950 960 960 913 Yr/Yr Change % 10.8% 29.5% 18.2% 8.3% 1.1% 0.0% -4.9%

Investor ConsiderationsInvestor Considerations

How much better can it get? The peak is coming

International demand is sustaining the cycle Is it permanent or temporary? Is it secular or event driven? Mitigate some cyclicality?

VLJs are still not widely appreciated

New competitors in light jet market: Embraer, Honda, etc.

How much better can it get? The peak is coming

International demand is sustaining the cycle Is it permanent or temporary? Is it secular or event driven? Mitigate some cyclicality?

VLJs are still not widely appreciated

New competitors in light jet market: Embraer, Honda, etc.

ConclusionsConclusions

From an investor perspective

Equity market conditions – volatile, but aerospace has done

Regional jet market conditions and opportunities Next generation of small narrowbody jets Are scope clauses becoming irrelevant

Business jet market conditions and opportunities Secular shift to lower cost private aviation How much better can it get?

From an investor perspective

Equity market conditions – volatile, but aerospace has done

Regional jet market conditions and opportunities Next generation of small narrowbody jets Are scope clauses becoming irrelevant

Business jet market conditions and opportunities Secular shift to lower cost private aviation How much better can it get?

DisclosuresDisclosures

DisclosuresDisclosures