AEROSPACE RAW MATERIALS MARKET OUTLOOK
AEROSPACE RAW MATERIALS MARKET OUTLOOKPresented by:Kevin MichaelsVice Presidentkmichaels@icfi.com6th Annual Aerospace Raw Materials conferenceApril 24, 2012icfi.com/aviation Pittsburgh, PA0
How One Economist Cut His Teeth In Analyzing TheAerospace Raw Materials Market! “The [Korean Was] buildup was upsettingthe market for raw materials andequipment.and it was putting a massivequestion mark over the businessoutlook ” “I knew the weights of particular aircraft andcould surmise the proportions of aluminum,copper, and other materials that went intoeach type. With all of that in hand, I couldestimate demand”Alan GreenspanConsultant – Conference BoardEarly 1950s “Some of the Pentagon’s planners had beensurprised by how closely the analysismatched their classified numbers.”Source: Age of Turbulence (Greenspan)icfi.com/aviation 1
Agenda Aerospace Raw Material Demand Outlook Key Events Since AMM 2011icfi.com/aviation 2
RAW MATERIAL DEMAND OUTLOOKAir Transport Production Will Increase From 1,200 To Over1,800 By 2021, Led By Boeing and AirbusUnitsAir Transport Production Market2011-2021*, By Transition toA320neo & 1720192021Total CAGR 3.4%* Drop in production rates from 2014 to 2016 is due to a change in orders, shifting from legacy aircraft to next generation—see following pageicfi.com/aviation 3
RAW MATERIAL DEMAND OUTLOOKThe Air Transport Fleet Will Exceed 35,000 Aircraft By 2021Air Transport Fleet Growth* 6,0003.9%25,87025,00021,000Middle EastAfricaSouth AmericaAsia / PacificEuropeNorth 0.6%-4,0002011icfi.com/aviation 3.9%16,0005,000Source: ICF SH&E analysis7.7%20213.3%Average* Includes Turboprops4
RAW MATERIAL DEMAND OUTLOOKHigh Fuel Prices Are Driving a Structural Increasein RetirementsAir Transport Retirements and Deliveries# Aircraft 40% of deliveries arenow for replacementDeliveries400 retirements peryear is the new normalRetirementsSource: Airline Monitoricfi.com/aviation 5
RAW MATERIAL DEMAND OUTLOOKAs A Result, Surplus Parts Usage Is Becoming A MajorFactor In The Air Transport Aftermarket20181614121086420Air Transport MRO Market ( B)Use Of Service Parts And Alternatives*SurplusOEM New & PMA20%18%10% Thousands of aircraft are noweconomically obsolete due to a uniqueblend of high fuel prices, low interestrates, high production rates, and newtechnology aircraft The parting out of many of these aircrafthas fueled an increase in surplus partssupply Also fueling growth is the financialsophistication of the largest surplusdealers – many are owned by leasingcompanies or OEMs20012011* Includes engines, components and airframe parts;2015 ICF projects surplus penetration of 20%or more by 2015 – six times greater thanPMASource: ICF SH&E analysisicfi.com/aviation 6
RAW MATERIAL DEMAND OUTLOOKProduction Growth Through 2021 Varies Greatly By MarketAircraft Production Forecasts2011 & 2021Business & General AviationMilitary Fixed WingRotary Wingunits1,6006001,4001,2001,6001,4005004.0% CAGR-4.5% CAGR4001,0008000% 202102011202120112021* Includes SparesSource: ICF SH&Eicfi.com/aviation 7
RAW MATERIAL DEMAND OUTLOOKAnnual Aircraft Production Is Projected To Increase From4,200 to Over 5,000 Units By 2017Aggregate Production Market2011-2021, By Market SegmentUnits6,000Market, CAGR5,000Military Fixed Wing, -4.5%4,000Business & Gen Aviation;4.0%3,000Rotary Wing; 0%2,000Air Transport; 3.4%1,000Total CAGR 1.8%201120132015201720192021Source: ICF SH&Eicfi.com/aviation 8
RAW MATERIAL DEMAND OUTLOOKAnnual Aero-Engine Production Should Exceed 10,000Units By 2021UnitsAero-Engine Production Market*2011-2021, By OEM12,000OEM, CAGR10,000Other; -4.0%8,000Rolls Royce/ 3.7%6,000CFM; 2.3%4,000General Electric; 1.0%2,000Pratt & Whitney;7.3%201120132015201720192021* Includes SparesSource: ICF SH&Eicfi.com/aviation 9
RAW MATERIAL DEMAND OUTLOOKTotal Aerospace Material Demand In Buy Weight Is 1.2BPounds, Led By the Air Transport Sector2011 Aerospace Raw Material Buy Weight*1.20 B es3%SuperAlloys9%TitaniumAlloys10%SteelAlloys22%* Fundamental Mill Demand; Maintenance, repair and overhaul (MRO) included in total;* * Includes air transport aircraft used as VIP transport, contributing roughly 12% to the totalSource: ICF SH&Eicfi.com/aviation 10
RAW MATERIAL DEMAND OUTLOOKThe Total Aerospace Raw Material Market is Over 9 Billion2011 Aerospace Raw Material Value US Billions, By Aircraft CategorySteel l 9.2BSuperAlloys20% Aluminum and titaniumare the largest materialmarkets by value – bothare worth 2.4B Super alloys is thirdlargest category, with attotal value of 1.8BTitaniumAlloys26% Composites is the nextlargest at 1.2BSource: ICF SH&Eicfi.com/aviation 11
RAW MATERIAL DEMAND OUTLOOKAerospace Raw Material Demand Will Ramp Up WithProduction800700Aerospace Raw Material Demand ForecastBuy Weight, M LbsAluminum Alloys*600500400Steel Alloys300200TitaniumSuper alloys1000OtherComposites* Includes aluminum-lithiumSource: ICF SH&Eicfi.com/aviation 12
Agenda Aerospace Raw Material Demand Outlook Key Events Since AMM 2011icfi.com/aviation 13
KEY EVENTS SINCE AMM 20112011 Was A Great Year For Aluminum Airbus and BoeingRe-engine A320 and B737 Avoided doomsday scenarioof clean sheet compositesingle aislesA350XWB integrates heavyuse of Al-Li into designB777x toFollow? Dominance of Al ensureduntil mid-2020s New generation Al-Li alloysvery competitive versuscompositesThree suppliers announcemajor Al-Li investmentsSource: ICF SH&Eicfi.com/aviation 14
KEY EVENTS SINCE AMM 2011 And The A320neo And 737 MAX Will Begin To ContributeTo Aluminum Demand Mid-DecadeAluminum Demand From A320 NEO & 737 MAX2011-2021M LBs300250A320 NEO200150737 MAX100502011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021icfi.com/aviation 15
KEY EVENTS SINCE AMM 2011The Latest New –And Big – Event UTC and Goodrichlargest transaction in aerospace history*What does this meanfor further Tier 1consolidation?* If approved by regulators; next largest were Honeywell-AlliedSignal and Boeing-Douglas Aircrafticfi.com/aviation 16
KEY EVENTS SINCE AMM 2011Aerostructures, Systems and Aeroengines Comprise70% of Aircraft ValueAircraft Production Value BreakdownOEM finalassembly,margins, NRE 35BAerostructures 40B2011 Market 130BInteriors 5BAeroengines 25BAircraft systems, avionics& defense electronics 25BSource: ICF SH&Eicfi.com/aviation 17
KEY EVENTS SINCE AMM 2011Despite Recent Consolidation, Vigorous CompetitionBetween Tier 1 Suppliers Remains in Most SegmentsAerostructuresrelatively fragmentedMarket Share – Top Two SuppliersSupplier 1Supplier 2Other SuppliersAerostructuresFlight ControlsAvionics & Defense ElectronicsEnvironmental Control SystemsWheels & BrakesVigorous competitionremains in mostequipment segmentsElectrical Power & DistributionNacelles & Thrust ReversersEnginesInteriorsLanding GearAPU0%20%40%60%80%100%Source: ICF SH&Eicfi.com/aviation 18
KEY EVENTS SINCE AMM 2011The UTC/Goodrich Merger, If Completed, Could UsherStimulate Further Tier I Consolidation What does this meanfor further Tier 1consolidation?icfi.com/aviation 19
KEY EVENTS SINCE AMM 2011 As The Tier I Supply Chain Model ReshapesSpending Patterns With OEMsComponent MRO Spending DistributionB777 versus B787B777B787OtherB/E AeroCollinsMessierVickersMenascoSupplier consolidationTier I supply chain modelRedefined system ource: ICF SH&E, Airframer, Teal Groupicfi.com/aviation 20
KEY EVENTS SINCE AMM 2011The Emergence Of Integrated Propulsion Systems CouldReshape The Aeroengine Supply ChainIntegrated Propulsion Systems Combines engine, nacelle, thrustreverser, and engine accessoriesas an integrated system Reduces design redundanciesand optimizes overall aircraftperformance Controlled by single integratorTwo Major IPS Supplier GroupsUTX/ GR MergerCollaborating on future GTF designs;sold IAE stake to PrattSource: GE Aviation; ICF SH&Eicfi.com/aviation 21
KEY EVENTS SINCE AMM 2011Consolidation Amongst Tier 4 Material And ProcessSuppliers Is Also Gaining MomentumThe Aerospace Manufacturing Supply Chain Leading rawmaterial suppliersand processsuppliers arerepositioning viavertical integrationand consolidation This includesforging, castingand machining“process”suppliers The upshot:increasesbargaining powervs. customersSource: ICF SH&E Analysisicfi.com/aviation 22
KEY EVENTS SINCE AMM 2011Three Blockbuster Deals in 2011 Are Harbingers ofContinued Tier 4 Consolidation/Vertical Integration ATI acquired Ladish inMay 2011 for 883M ATI is now able to offercustomers advancedforging, casting andmachining assets fortitanium alloys, nickelbased superalloys andspecialty alloys PCC acquired PrimusInternational in June2011 for 900M Deal significantlyexpands PCC’smachining and finalassembly capabilities PCC is integratingupstream (raw materials)and downstream(machining) In June 2011 CarpenterTechnology announcedthe intention to buyLatrobe in 558M deal Deal was approved byFTC on 2 March 2012 Brings together twoleading aerospacespecialty alloy suppliersSource: Secondary Researchicfi.com/aviation 23
KEY EVENTS SINCE AMM 2011China Completed Its First Major Acquisition of aWestern Supplier – FACC – In 2009 Fisher Advanced Composite Components In December 2009, XAC (an AVIC company)acquired Fisher Advanced Composite Components(FACC); AVIC will eventually own 91% FACC is a Tier I aerostructures supplier with 265.3million in revenue and nearly 1,600 employees A supplier on the ARJ21 and many other OEMs;particularly strong with Airbus. Addresses China’s weaknesses in advancedmaterials and complex mechanical systems;should also assist with certification and supplychain management gapsChina’s first major acqusition of a western aerospace supplierSource: ICF SH&E analysis, FACCicfi.com/aviation 24
KEY EVENTS SINCE AMM 2011 And Has Since Followed Through With ThreeAerospace Acquisitions in BGA Since 2010EPIC AIR (2010)CONTINENTALMOTORS (2011) General aviation kitaircraft manufacturerbased in Bend, Oregon Three aircraft underdevelopment includingpiston, turboprop and VLJmodels Brings compositescapability and FAAcertification experience Second largest pistonaircraft OEM Powers many key pistonaircraft models fromCessna, Beech, Piper, andothers Acquired from Teledynefor 186 millionCIRRUS (2011) Iconic GA aircraft OEMthat delivered nearly 5,000new piston airplanes –including the best-sellingCirrus SR22 family Gives China piston trainerand personal jet capability(e.g., Cirrus Vision) Plans to continueproduction in NorthDakota facilitiesSource: ICF SH&E analysis, Press reportsicfi.com/aviation 25
KEY EVENTS SINCE AMM 2011The Events Of The Past Year Underpin Four Megatrends ThatAre Reshaping The Aerospace Supply ChainThe Aerospace Supply Chain1234Supply ChainGlobalizationRise ofChinaNew ProgramExecutionTier 4ConsolidationSource: ICF SH&E analysisicfi.com/aviation 26
KEY EVENTS SINCE AMM 2011Current Aerospace Supply Chain Trends Have ImportantImplicationsAIRCRAFT & ENGINE OEMS Carefully manage consolidating Tier Isupplier base Expanding revenue from services Emergence of IPS paradigmTIER I SUPPLIERS More consolidation in wake of UTXGoodrich Build value around Tier I systemssolutionsTIER 2 SUPPLIERS Monitor make-buy decisions of Tier 1s Need IP, low cost, or both Key decision: global or local?TIER 3 SUPPLIERS Increased competitive intensity – moresupply from low cost regions Incumbents must audit businessmodelsTIER 4 SUPPLIERS Ongoing consolidation & vertical integration More capacity in emerging aerospace clustersSource: ICF SH&E Analysisicfi.com/aviation 27
KEY EVENTS SINCE AMM 2011What To Watch: Scheduled Production Rate IncreasesCould Create Supply Chain “Pinch Points” Aluminum millcapacity Large pressaluminum extrusions RutilePinchPoints? Titanium machining HIP facilities Heat treat facilitiesA nagging question: Are sub-tier suppliers properly capitalized for expansion?Source: ICF SH&E analysisicfi.com/aviation 28
Thanks and QuestionsKevin MichaelsVice PresidentAerospace & MRO Practice Leader 1 734 821 0220kmichaels@icfi.comicfi.com/aviation 29
AeroStrategy is Now Part of ICF SH&E, One of the World’sLargest and Most Experienced Aviation ConsultanciesAirports Airlines Aerospace & MRO Asset Advisory Safety & Security 48 years in business (founded 1963) 80 professional staff Dedicated exclusively to aerospace and aviation Recruited from the industry Specialized, focused expertise and proprietary knowledge Broad functional capabilities More than 6,000 private sector and public sector assignmentsjoined ICF in 2007 Backed by parent company ICF International ( 841M revenue) Global presence – six major officesAnn Arbor Boston New York London Singapore Beijingicfi.com/aviation joined ICF in 201130
The Total Aerospace Raw Material Market is Over 9 Billion 2011 Aerospace Raw Material Value US Billions, By Aircraft Category Aluminum and titanium are the largest material markets by value – both are wo
AMM's 5th Aerospace Materials Conference. Pittsburgh, PA. Aerospace Raw Materials Market Outlook Kevin Michaels. . ASM (cents) High fuel costs exacerbate aircraft cost differences * AIR TRANSPORT MANUFACTURING . monolithic structures. The Overall Aerospace "Buy To Fly" Ratio Is 5.5 . 2010 Aerospace Raw Material Fly Vs. Buy Weight (B Lbs)
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