Stabilization, And That’s About It For Now

Teal Group 20th Annual Business Aircraft Market Forecast And Industry Overview

Presentation to The Canadian Business Aviation Association 2010 Annual ConventionCalgary, AlbertaBy Richard AboulafiaVice President, AnalysisTeal Group Corporationwww.tealgroup.comJuly 2010

Where We’ve Been;

Where We Are

Aviation Markets: The Past 20 Years

'89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '090

20

40

60

80

100

120

140(Market Value in 2010 $ Bns)

Fighters Bizjets Rotorcraft

Mil . Transports/Trainers/Other Jetl iners/Regional AC

1989: biz ac 11.8% of civ il transport business

2008: biz ac peak at 28.3% of civ il transport business (21.2% in 2009)

The Great Boom, And A Curious Grace Period (But Not For Business Aircraft)

Market CAGR ’03-‘08

CAGR ’03-‘09

‘08-‘09

Large Jetliners 7.0% 8.0% 13.5%

Business Aircraft 17.2% 9.0% -24.3%

Regionals 1.4% 0.2% -5.7%

Civil Rotorcraft 16.5% 13.5% -12.5%

Military Rotorcraft 8.5% 12.3% 32.0%

Fighters 2.9% 5.7% 20.5%

Military Transports 3.1% 5.0% 15.5%

Total 7.5% 7.5% 7.0%

Business Aircraft History (W/Jetliners+RJs+Turboprops)

'64 '66 '68 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 .'090

300

600

900

1,200

1,500

1,800(Units Delivered)

0

5

10

15

20

25(Market Value in '10$ Bns)

Units Value

Post-2003 boom

9/11, tech and coms downturn

The Great Expansion: strong economic growth, fractionals, new models, etc

Smaller plane boom; some military Learj et market distortion

Market creation, exhaustion of initial demand

Static period. Limited growth in late 1980s, limited downturn after First Iraq War

Business Aircraft Deliveries By Value

'64 '67 '70 '73 '76 '79 '82 '85 '88 '91 '94 '97 '00 '03 '06 '09$0

$5

$10

$15

$20

$25(Value in '10 $Bns)

‘01-‘03 -18.9% CAGR; -34% peak-trough

‘81-‘86 -9.4% CAGR; -39% peak-trough

‘68-‘71 -22.6% CAGR; -53% peak-trough

‘76-‘8114.6% CAGR

‘91-‘0114.4% CAGR

‘03-‘0817.2% CAGR

Bottom Half Market Segments V. Top Half

'89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '090

2

4

6

8

10

12(Market Value in 2010 $ Bns)

Top Half (>$25M) Bottom Half (<$25M)

‘03-‘08 CAGR: 19.4% Bottom, 15.7% Top

‘08-‘09: -42.8% Bottom, -4.1% Top

Market Bifurcation: Reasons Why• Bottom half defined: business jets costing

<$24 mn (VLJs through Class 3).

• A sharp cut-off point, but with some variation within the top and bottom halves.

• This bifurcation could be due to:–Bottom half greater 3rd party finance reliance.

–Greater bottom half customer sensitivity to economic cycles.

–More discretionary users in bottom half.

–Bottom half greater fractional exposure.

–Top half greater exposure to emerging markets that have stayed intact (Mideast, Asia); bottom half greater exposure to North America.

Bifurcation: Reasons Why (2)–Top half greater exposure to government

demand, particularly head-of-state aircraft.

–A matter of timing (lead times, finance, etc)?

• Less bifurcation in utilization.

–2009: short range -19%, medium range -20%, long range -15%.

• One large question: Do both halves recover at the same pace?

Business Jets For Sale As % Of Total Fleet

Source: AMSTAT

9.7

%1

0.1

%

10

.4%

10

.6%

11

%

11

.2%

11

.5%

12

%

12

.4%

13

.2%

14

%

14

.6%

14

.6%

15

.6%

15

.9%

16

.2%

16

.3%

16

.2%

16

.3%

16

.3% 16

%

15

.7%

15

.6%

15

.5%

15

.1%

14

.7%

14

.7%

14

.8%

14

.9%

14

.9%

9%

12%

15%

18%

Used Jet AvailabilityAftershocks Of An Economic Heart Attack

Source: AMSTAT

0

400

800

1200

1600

2000

2400(Num ber of aircraft)

Light Medium Heavy

Used Jet Average Selling Prices

Source: AMSTAT

0

10

20

30

40

50($ Mns)

Citation Bravo Lear 45 Hawker 800XP

Citation X Sovereign Challenger 604

GIVSP Global Express

Business Jet OperationsWorst Moment: February 2009 (-30.5% Y/Y)

Source: FAA, BoA Merril Lynch

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10

0

10

20

-10

-20

-30

(Y/Y Change)

0

100

200

300

400(Operations - '000s)

Y/Y Change (January) Monthly Operations (January)

Business Aircraft Deliveries And Corporate Profits

Source: US BEA, Teal Group Research

'64 '66 '68 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08. '090

600

1,200

1,800(Corp. Profits in $ Bns)

0

5

10

15

20

25(Value of Deliveries-'10$ Bns)

Corporate Prof its Value of Deliveries

Corporate Profits BreakdownBusiness Jet Market Growth Closely Linked To, And A Key

Enabler Of, Manufacturing Profits

Source: US Gov . BEA

157151 144

53 4876

150

244

304279

176136

165194 200

228

276317

344

424

479

368

279

332

'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '090

100

200

300

400

500($ billions)

Financial Manufacturing

Business Jet Leading Indicators Stabilizing, But No Growth Yet

• Financial sector partly recovered, main street “green shoots.”

• Impact when stimulus spending ends, and public/private austerity?

• Economy moving sideways? W, V, L or ?

• 18-24 months after growth resumes before new build deliveries growth.

• Good news: utilization/availability free-fall over.

– But prices uncertain.

US Profits ($bns) 2004 2005 2006 2007 08-1Q 08-2Q 08-3Q 08-4Q 09-1Q 09-2Q 09-3Q 09-4Q 10-1QTotal Corporate 1,247 1,456 1,608 1,542 1,460 1,404 1,455 1,124 1,183 1,227 1,359 1,468 1,585Manufacturing 154.1 247.2 304.5 278.6 187.6 160.1 205.7 148.6 121.6 132.3 129.7 160.5 207.7Financial 362.3 443.6 448 367.8 357.0 330.8 297.5 130.3 253.9 280.7 362.4 427.9 450.5Source: US BEA

Business Aircraft Deliveries And World GDP

Source: IMF, Teal Group Research

'64 '68 '72 '76 '80 '84 '88 '92 '96 '00 '04 '08. '090

10

20

30

40

50

60

70

80(GDP In Current International Dollars)

0

5

10

15

20

25(Value of Deliveries-'10$ Bns)

World GDP Value of Deliveries

GDP Year/Year Growth Rates

Source: Morgan Stanley

'92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

0%

2%

4%

6%

8%

10%

-2%

-4%

World EU US Asia Ex-Japan

Business Aircraft And World HNWI Wealth

Source: Merril Lynch/Capgem ini

'96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '090

10

20

30

40

50(World HNWI Wealth in $ Trns)

0

5

10

15

20

25(Value of Deliv eries-'10$ Bns)

HNWI Wealth Value of Deliveries

Jet Distribution By Region

Source: ACAS

813576.5%

113810.7%

7567.1%

6075.7%

1127167.6%

273316.4%

14308.6%

12507.5%

US/Canada Europe

S/C America Rest of World

20092001

Business Aircraft Fleet Growth Rates

2009 Over 2008

15%

13%12%

9%

7%

2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Fractional New Deliveries And The Broader Market

'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '090

5

10

15

20(Share of Market)

0

20

40

60

80

100

120

140(Deliveries to Fractionals)

Share of total market New planes to f ractionals

Looking Ahead

Reasons To Still Be Concerned

• Populism/Government interference with “nationalized” companies.

• Finance/OEM feedback.

• No fast-growth economy segment in sight.

–Fast growth and strong profits aren’t the same.

• Tax incentives won’t work this time (the last time might have made things worse).

• New products and heavy spending.

• Utilization dropped much faster than any economic indicator.

• Record available aircraft numbers.

• New market entrants.

Reasons To Be Hopeful. Or Not.• Populist interference fading.

• Ford took its planes off the market, after “not finding buyers.”

• China, with much of Asia following.

• Ongoing strength of globalization, trade, and de-centralized manufacturing.

• Ex-Im funding possible.

• Ongoing airline cutbacks.

• Security concerns (Maybe. But the plural of “anecdote” is not “data”).

Cultural Attitudes Are Cyclical, Too• Wall Street (Oliver Stone,1987). Gordon Gekko "Rich

enough to have your own jet" gives greed a bad name; really teaches Wall Street bankers a lesson.

• “Sales of business jets, once the ultimate status symbols, have cooled with the US economy…The sleek stratospheric board rooms have come to represent corporate greed for some, and for others are simply no longer affordable.” USAToday, 2/11/03.

• “The business jet, a pricey perk that became a flying symbol of corporate excess, is making a comeback.” (Chicago Sun-Times, Nov. 14, 2004)

• 2008: Obama and McCain campaign on private jets. McCain applauds Sarah Palin for putting the state jet on e-bay. President Obama criticizes bankers who “disappear on private jets.” Obama inauguration sets record for private jet arrivals.

Forecast Assumptions• This is a three year downturn:

–Recession/corporate profits: 2008 through a

disappointing 2010 (but watch cash buildup).

–Availability/pricing: 8-2008 through 3/4Q 2010.

–Deliveries: 2009-2011.

• Trough: 2011, 35% (value) off 2008 peak.

–Compare with two year -34% drop in 2001-03.

• Recovery: six years at 10% CAGR

–This is conservative – 2003-2008 was @17.2%.

–No help from fractionals and other concepts.

–The broader economy: less leverage, less

aggressive finance, but more durability.

Teal’s 20th Business Jet Forecast

• Deliveries of 10,285 bizjets worth $184.1 billion (‘10$) in 2010-2019.

–Plus 643 business jetliners/RJs worth $33 billion.

–Plus 3,041 turboprops worth $13.2 billion.

–Comparison: 7,889 bizjets worth $142.8 in 2000-

2009 (‘10$).

• We don’t think the bottom half will recover or grow faster than the top half.

–That’s a major structural shift in market, with

significant market share implications.

Business Jet Forecast: This Will Take Time

Excludes jetliners, RJ, turboprops

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '190

200

400

600

800

1,000

1,200

1,400(Units Delivered)

0

5

10

15

20

25(Market Value in '10$ Bns)

Units Value

Manufacturers, Products, Market Dynamics

Programs: Larger Models DominateCumulative US '10$ Value

All program s >~$3 bn

G650G450/400/350

Global Ex/5000Falcon 7XG500/550

Challenger 604/5/6Challenger 300

Falcon 900CitationJet

Falcon 2000/EXBBJ

Hawker 7/8/900King Air

Legacy 450/500G200/250

Hawker 4000ACJ/Elite

SovereignCitation XLSPhenom 100

MustangPhenom 300Learjet 40/45

PC-12

$0 $4 $8 $12 $16 $20

2010-2019

2000-2009

Business Aircraft Market By Class

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19$0

$5

$10

$15

$20

$25

$30('10$ Billions)

Very Light Entry Level Mid-Sized Super Mid-Sized

Large Very Large Jetliners+RJs Turboprops

Business Jet Manufacturer Market Shares

By Deliveries Value, 2010-2018 Vs 2000-2009

Excludes jetliners, RJs, turboprops

28.2%

9.5%

15.4%

20.4%

26%

0.3% 0.3%

26.3%

8.1%

15.9%

12.7%

28%

8.2%

0.8%

Bombardier Hawker Dassault Cessna Gulfstream Embraer Other0%

5%

10%

15%

20%

25%

30%

'00-09 '10-19

Barriers To Aviation Market Entry: Stubbornly High

Even In This Segment• One successful new civil jet manufacturer

since 1960. Tough for niche players.

• Capital requirements: for $1 billion, you can dig yourself a hole...

• Honda, the great exception.

• Prop guys moving up?

• Are we losing our magnetic attraction?

–Bombardier’s CSeries.

–Embraer’s KC-390.

VLJs/Air Taxis: We Can Learn A Lot From This Atrocity

• It’s Worse Than That, They’re Dead, Jim: Adam Aircraft, Safire, Avocet, AASI, Century Jet, ATG, Promavia,

Visionaire, Eclipse, Grob Utility Jet.

• It’s Life Jim, But Not As We Know It: Sino-

Swearingen, Epic Elite/Victory, Piperjet, Cirrus Jet, Spectrum

Aeronautical.

• People Who Definitely Will Profit From

This Bloated Fiasco: Cessna, Embraer, Pratt &

Whitney Canada.

A Few Concluding Thoughts

• I am not aware of any responsible

forecasts calling for an end to long-term

economic and corporate wealth growth.

• I am not worried about de-linkage between

these drivers and business aircraft

demand.

–“All of this has happened before, and all of this

will happen again.”

• We’re clawing out. But I am worried about

the next six months.

Teal Group Guns:Caviar IndexValue of Combat Aircraft:Business Jet Markets

'89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '090.1

1

10

1999: Bizjets ascendant--first time!Buy petsmart.com! Osama Bin Who?

Cold War defense spending, pre-'90s globalization, tech /com boom s.

Tech /com crashes, post- 9/11 defense rise.

Sustained 1:1

Let's Keep Things In Perspective

Includes Jetliners, RJs, turboprops

'64 '68 '72 '76 '80 '84 '88 '92 '96 '00 '04 '08 '12 '16 '190

300

600

900

1,200

1,500

1,800(Units Delivered)

0

5

10

15

20

25

30(Market Value in '10$ Bns)

Units Value