World Aviation Market Outlook

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World Aviation Market Outlook

• Presentation To Pacific Northwest Aerospace
  Association Annual Conference
• Everett, WA
• By Richard Aboulafia
• Vice President, Analysis
• Teal Group Corporation
• raboulafia_at_tealgroup.com
• February 2006

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The Military MarketMisplaced Pessimism
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Whats To Like?

• A civil/military upturn.
• Lots of cash, with budget tricks.
• FY 07 much better than expected.
• Good profits.
• High barriers to entry.
• Unquestioned US export market dominance.
• With a few exceptions, and two second-source
  markets.

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So Whats Eating Everyone?Quite A Lot, Actually

• Program uncertainty.
• Too many programs and requirements, insufficient
  budget growth.
• First ever link between economy and defense
  spending?
• The end of budget tricks?
• Uncertainty insecurity higher costs.
• What of our beloved MYPs?

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Whats Eating Everyone? (2)

• Highest priority (force recap) is the least
  transformational.
• The weird LRS game-changer.
• Changing program models.
• Less production less profit?
• Higher risk with NCW, etc.
• Political interference/grandstanding.
• Export rule uncertainties.

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Net-Centric Warfare Implications

• Aircraft eclipsed by electronics, systems of
  systems.
• Planes as lower-margin, slower-growth components
  that plug into higher value networks (FCS, MMA,
  Deepwater).
• Also eclipsed by their own components (especially
  for upgrade).

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NCW Implications (2)

• Net-centric strategy/spending long-term fighter
  market threat.
• Hurts the fighter budget.
• Forces multiplied (numbers subtracted).
• Enables UAVs to play a useful role.

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The Civil MarketMisplaced Optimism
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Teal Jetliner Market Comment

• 2005 orders inflated will fall in 2006/7, but
  deliveries still rising.
• Airbus increased lead in deliveries 5545 (by
  value) in 2005.
• Boeing achieved orders victory in 2005 5842
  (by value).
• Airbus still ahead in backlog.
• But Boeing has initiative should pull ahead in
  06 due to widebody product line strength.

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Good And Bad News

• Good Order Numbers!
• Bad Traffic and yields not growing fast enough
  to absorb all those orders. If both players ramp
  up too fast, the day of reckoning will be grim.
  Many of those orders are on spec, or wont be
  delivered until 2025. Thanks to the global LCC
  phenomenon, many of those orders are fratricidal.
  A lot of value is still locked up in zombie
  carriers. We really dont know how the
  post-Chapter 11 industry shake out will go. Did
  I mention fuel?

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Teal Group Order/Delivery/Backlog Valuation
Methodology

• Numbers provided by manufacturers.
• No manufacturer backlog adjustment except five
  Iraqi Airways A310s.
• Constant, simplified, discount prices.
• Boeing prices 717 30 m 737 43.5 m 747-400
  170 m 747-8 175 m 757 55.5 m 767 99 m
  777 149 m 787 119 m.
• Airbus prices A318/19/20/21 44.5 m A330 112
  m A350 116 m A340-300 120 m A340-5/600
  148 m A380 190 m.

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The Competition Takeaway Points

• Boeing right strategy, underfunded.
• Theyre finally starting to fund it.
• And, like a lot of other US manufacturers,
  theyre getting other people to do the heavy
  lifting.
• Airbus wrong plane, well-funded. Need new
  plane to respond to 787.
• As of Le Bourget, theyre living in Boeings
  world finally fighting the 777-200ER, and
  attacking the middle market.

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The Competition (2)

• Boeing WTO objective stop Airbus from using
  public money for the fight that matters.
• Airbus objective finish privatization with a
  product line that is still superior, despite the
  787.
• If only Boeing had stayed dead...

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WTO A Handy Reference Guide To All The Important
Issues And Arguments

• Boeings pretty much right.
• So What?
• It might soon be irrelevant.
• A front-loaded middle market.

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A Very Useful Websitehttp//www.wto.org/english/
docs_e/legal_e/air-79_e.pdf

• Yes, you should take this seriously. Look at
  China.
• Shouldnt we learn something from Embraer in
  Harbin?
• Exception does Russia care about WTO?

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RJs In Brief A Shrinking Market (At Best), But
Great Upside Potential

• Little tangible evidence of large RJ demand
  explosion, small RJ demand deflating (or
  imploding).
• Big Hope (for large RJs) JetBlue approach works.
• Big Risk (for small RJs) hub and spoke system
  keeps eroding.
• New RJ business cases come and go.

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Signpost On Recovery Road

• Despite declining deliveries, survey purchase
  expectations have remained generally steady and
  at a relatively high level since 2001.
• Honeywells 2003 market forecast.

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Big Economic Question 1 With Elasticity/Price
Sensitivity and Wealth, What Does The Market (and
Society) Look Like?
?
Or

• This question affects
• Efforts to expand the market with jet cards,
  private airlines, etc.
• VLJs (air taxis).
• The High End, and SSBJs.

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