Trends in Freight Movement An Inside Look at the Aerospace Industry and Impact on the Southeast

Trends in Freight Movement An Inside Look at the Aerospace Industry and Impact on the Southeast Stuart McAvoy March 17, 2015 UPS Customer Solutions Type date here (Month DD, YYYY)

Trends in Freight Movement An Inside Look at the Aerospace Industry and Impact on the Southeast Why UPS and Aerospace? Aerospace trends Production trends Trending developments Aerospace challenges Southeastern U.S. Aerospace emergence 2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 2

Aerospace supply chain UPS currently serves more than 1,800 customers across the aerospace supply chain Our customers consist of parts and major component suppliers, integrators, aircraft operators, as well as service companies that perform aircraft maintenance Production Aftermarket Parts, components and systems Aircraft assembly Airlines/ operators Service and maintenance Tier 2-3 suppliers Tier 1 suppliers OEMs Operators MRO 2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 3

U.S Passenger Demand Continues to Drive the Supply Chain in Production and MRO* U.S. Commercial Air Carriers 4 *MRO Maintenance, Repair, & Overhaul Source: FAA.GOV Copyright 2014 Deloitte Development LLC. All rights reserved.

New travel demand is driving production Replacement vs. New Aircraft 2013-2032 Deliveries % Share Aircraft orders as replacement 13,480 43% New aircraft orders to grow fleet size 17,763 57% Total 31,243 100% Airbus announced an A320 rate increase from 42 to 46 per month starting 2016 (552 a/c per year) Boeing announced a 737 rate increase from 42 to 47 per month starting 2017 (564 a/c per year) Possible increase to 52 per month in 2018 or 2019 (624 a/c per year) 7 Sources: Airbus, Boeing, Deloitte estimates Copyright 2014 Deloitte Development LLC. All rights reserved.

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Average Revenue Per Passenger km (inflation adjusted) (in Suppliers being impacted by falling airfares Air transportation value chain is being disrupted by the 46% decrease in airfares since 1990 Passengers paying less to fly, impacting airline operators who in turn are driving hard bargains for aircraft purchases Aircraft OEMs who in turn are pressuring the supply chain to participate in the investment, risk sharing and unit price expectations 9.0 8.0 8.4 Revenue per passenger kilometer Recent history 7.0 6.0 5.0 4.5 4.0 8 Real Average Passenger Revenue Per Passenger km Copyright 2014 Deloitte Development LLC. All rights reserved.

Air cargo traffic continues to grow amid tough competition from other modes of transportation Industry growth on an uptick with emerging countries contributing bulk of the growth Global air cargo traffic to grow at 5.0 percent annually through 2032 Emerging economies are likely to account for 80 percent of growth in terms of FTKs (freight ton kilometers) through 2032 Asia Pacific region will account for 42 percent of the air cargo traffic through 2032 North America s market share in air cargo traffic is likely to decline to 20% in 2032, compared to 24 percent share in 2012 US air cargo market is expected to generate revenues of $39 billion in 2018, a margin growth of 2.7 percent from 2013 Number of freighter fleet in service to increase to 2,905 aircraft in 2032 from 1,645 in 2013 Mode shift: increased competition as shipping/rail transport gains momentum 9 Copyright 2014 Deloitte Development LLC. All rights reserved.

The aerospace supply chain is challenged to keep pace The commercial air transportation value chain is putting enormous pressure on suppliers Dramatically increasing the rate of production of components, systems and services Investing in lean manufacturing, digital product development, and supplier rationalization to reduce costs However, aerospace suppliers are struggling to meet OEMs expectations for price concessions The supply chain is expected to continue to transform and consolidate further to succeed Transition from build to print to risk sharing partner means greater program risk and more shared responsibilities Suppliers putting their balance sheets at risk Smaller suppliers may drop of out business or be acquired 10 Copyright 2014 Deloitte Development LLC. All rights reserved.

New supply chain value model opens opportunity Financial, talent & operational implications of becoming a super supplier - consolidation and fewer, larger suppliers Leading to potential bottlenecks and manufacturing capacity delays, OEM margin pressure and/or supplier price increases Leading to risks of schedule delays and constrained ability to meet production volume demands Mitigations: OEMs are taking steps to de-risk the supply base Bringing some design authority back in house Recalling some manufacturing work packages, execution of supplier development & surveillance programs Providing financial support to help certain suppliers For suppliers, the new reality is that continuous cost reductions and pricing pressure are here to stay 11 Copyright 2014 Deloitte Development LLC. All rights reserved.

Increasing opportunities Continued growth in 2015 and beyond New commercial aircraft production expected to be between 29,000 and 34,000 over the next 20 years Expected revenue and production growth driven by: Replacement of obsolete aircraft with more fuel-efficient fleets Rise in passenger traffic in areas with increasing middleclass wealth such as the Middle East and Asia Pacific Source: 2014 Global Aerospace and Defense Industry Outlook, Deloitte 2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 12

Unique Supply Chain Characteristics of the Aerospace Industry Extended product life cycle (20+ years) Supply chains are complex due to the regulatory environment, global nature and need for integration Almost half of sales are in the aftermarket, global spare parts distribution Customers requirements require fast transit time, tight quality control, & complete visibility across the supply chain 2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 13

Today s aviation environment Strained supply chains are stretched further, leading to new challenges and opportunities Cost containment Aerospace Challenges Visibility Globalization Risk management Increasing customer demands Supply Chain Optimizing an increasingly complex network Responding to growing product demands Efficiently serving a growing global customer base Managing an evolving service parts supply chain Improving quality in a changing regulatory environment Proactive monitoring and visibility of inventory and in-transit parts 2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 14

Aerospace Supply Chain Trending Developments 2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 15

Aerospace Manufacturing Trending Southeast U.S. Creating a Regional Distribution Cluster Emergence of the Southeast The southeast region has made headlines in recent years for landing projects such as Airbus in Mobile, Alabama; Boeing in Charleston, South Carolina; and Northrop Grumman s Centers of Excellence in Florida; and is inching upward in employment numbers. Airbus committed to 1,000 jobs in Mobile, Alabama, by 2015; Boeing is adding 3,800 jobs by 2016 in Charleston, South Carolina, with 2,000 more by 2021; and Northrop Grumman is adding 1,800 jobs along Florida s Space Coast. Not surprisingly, the southeast region is showing increased value of shipments and increased capital expenditures. This region is appealing to these manufacturers and their suppliers for proximity to ports and highways, less expensive labor, relatable automotive industry experience and opportunities for expansion. 2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 16

Aerospace Manufacturing Trending Southeast U.S. Creating a Regional Distribution Cluster Source: Industry Report - Industry Locations Aircraft parts distributors are primarily concentrated in the Southeast and West regions of the United States. The Southeast region is home to roughly 35.2% of industry establishments. A large number of facilities are located in the Southeast region because this enables distributors to be close to key market segments. A majority of the US population is located in the Southeast, with large hangars and aerospace repair located here. Florida, in which 21.3% of industry establishments are located, is supported by the presence of every major defense contractor, some of which include Boeing, Lockheed Martin and Northrop Grumman. 2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 17

Aerospace Manufacturing Trending Southeast U.S. Creating a Regional Distribution Cluster Source: Airbus, Boeing, Rolls Royce part of the new U.S. Southeast Aerospace Cluster Most recently, Mr. Norman has been active advising French and German aerospace suppliers, manufacturers and technology companies on legal questions relating to expanding business in the United States. Recently, he helped French and Canadian companies set up a Joint Venture to supply a U.S. helicopter manufacturer in Texas.. 2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 18

Aerospace Manufacturing Trending Southeast U.S. Creating a Regional Distribution Cluster Aerospace Alliance created to regionalize efforts (aerospaceallliance.com) NEWS Louisiana Mississippi Alabama Florida MOBILE, Alabama Jobs and collaboration are at the core of a partnership being announced between the Mobile Airport Authority and Bishop State Community College, intended to help establish Mobile Aeroplex. FORT WALTON BEACH The potential the Mobile Airbus factory has for bringing thousands of new jobs to Northwest Florida is so great a delegation of local business leaders traveled.. Lafayette, LA - Gov. Bobby Jindal and Bell Helicopter CEO John Garrison announced the company will build its new SLS helicopter line at Lafayette Regional Airport,.. Source: aerospaceallliance.com 2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 19

Aerospace Manufacturing Trending Southeast U.S. Creating a Regional Distribution Cluster NCAM is based at NASA Michoud Assembly Facility in New Orleans, LA NCAM facilitates Aerospace research projects University research partnerships Aerospace Industry research projects 2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 20

Synchronizing your Supply Chain for Growth How many facilities do you need & where? Which modes or routes should be used? How much inventory is needed & where? What about production support services for materials and parts? Finding answers to these above questions helps companies achieve the Five Rights of Logistics 2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 21

Key Takeaways Aerospace industry growth trajectory is still up, due to commercial aerospace With a backlog of nearly eight years of production, the sector continues its record performance Primary drivers of new commercial aircraft requirements include Increased travel demand, especially in the Middle East, India, and China Replacement of obsolete aircraft with new fuel-efficient models Traffic from emerging countries to drive air cargo market growth through 2032 Southeast U.S. continues to emerge as a new Aerospace Cluster Factors of competition - scale economies, risk taking, technology innovation, quickness, talent, and customer presence/preference Wildcards - Chinese economy, sovereign indebtedness, escalation in regional conflicts, global economy, new players, and technology disruptions 2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved.

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