Interdependencies In Aerospace, Energy, And Oil & Gas Markets · New Generation Engines To Cope With High Fuel Prices Sources: CFM, Pratt & Whitney LEAP-X PW1000 series GTF AEROSPACE

0icfi.com/aviation |

October 9, 2012 Titanium 2012

Atlanta, GA

Dr. Kevin Michaels, Vice PresidentAerospace & MRO Practice Leader

Interdependencies In Aerospace, Energy, And Oil & Gas Markets

Implications For Advanced Materials Suppliers

1icfi.com/aviation | 1

AGENDA

Key Trends In Aerospace, Oil & Gas, and Energy

Interdependencies & Implications


AEROSPACE TRENDS

In Aerospace, Aircraft Production Is Projected To Reach 5,000 Units By 2017; Aeroengine Production Will Hit 10,000

Source: ICF SH&E

-

1,000

2,000

3,000

4,000

5,000

6,000

2011 2013 2015 2017 2019 2021

Aggregate Production Market 2011-2021, By Market Segment

Aero-Engine Production Market* 2011-2021, By OEM

-

2,000

4,000

6,000

8,000

10,000

12,000

2011 2013 2015 2017 2019 2021

Other

Pratt & Whitney

GE

CFMRolls-Royce

Pratt & Whitney

Rotary Wing

Business & GA

Military Fixed Wing


Aerospace Raw Material Demand Will Ramp Up With Production

Aerospace Raw Material Demand ForecastBuy Weight, M Lbs

* Includes aluminum-lithium

Source: ICF SH&E

0

100

200

300

400

500

600

700

800

Aluminum Alloys*

Steel Alloys

Titanium Super alloys

CompositesOther

AEROSPACE TRENDS


Consolidation Amongst Tier 4 Material And Process Suppliers Is Also Gaining Momentum

Source: ICF SH&E Analysis

The Aerospace Manufacturing Supply Chain Consolidation Examples

AEROSPACE TRENDS


Aeroengine OEMs Are Making Significant Investments In New Generation Engines To Cope With High Fuel Prices

Sources: CFM, Pratt & Whitney

LEAP-X

PW1000 series GTF

AEROSPACE TRENDS

Fuel prices have more than tripled and are now 30-40% of airline cost structures

CFM International and Pratt & Whitney are in a titanic battle to win orders on future generation single aisle aircraft

CFM’s Leap-X is emphasizing thermal efficiency through advanced materials – including advanced alloys, ceramic matrix composites, and epoxy matrix composites

Pratt is betting on enhanced propulsive efficiency through its innovative geared turbofan design

The new engines are expected to yield ~15% fuel efficiency improvement


In Oil & Gas, Shale Gas Is The Largest Source Of Growth In Unconventional Gas Supplies In The US…

0

10

20

30

40

50

60

70

80

90

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Aver

age

Ann

ual B

cfd

U.S. and Canadian Unconventional Gas Production

Shale Gas

Tight Gas

6

OIL & GAS TRENDS

Shale gas is by far the fastest growing type of unconventional gas production

ICF expects unconventional gas to reach 77 Bcfd by 2030

Source: ICF International Integrated Energy Outlook


…And In A Bullish Scenario, The Number Of Unconventional Wells Drilled Globally Could Increase 10X….

OIL & GAS TRENDS

Source: IAE, “Golden Rules For A Golden Age Of Gas,” 2012

Under a “Golden Rules” scenario, the number of unconventional wells drilled globally could increase 10X by 2035


…And Could Fundamentally Restructure The Natural Gas Supply Structure…And Geopolitics

OIL & GAS TRENDS

Source: IAE, “Golden Rules For A Golden Age Of Gas,” 2012

In the IEA’s positive scenario, unconventional sources could be double conventional sources

China and the US will account for a significant portion of new supply, reducing the importance of The Middle East & Russia

Russia’s closure of the $15b Shtokman project could be a harbinger of these shifts


Investment In Deepwater Oil Platforms Will Grow Significantly

OIL & GAS TRENDS

Source: World Resources Institute

Deepwater platforms will be a significant destination for new O&G investment

Significant developments are underway in numerous theatres

The upshot: deepwater requires ultra-high quality materials and components –especially since the Deepwater Horizon disaster

Gulf Of Mexico O&G Platforms


Falling Natural Gas Prices Are Influencing Energy, Where Coal To Gas Switching Increased Sharply In 2012

012345678

$/MMBtu

Commodity Fuel Prices

Illinois 4lb Pennsylvania 4lbNYMEX Spec Henry Hub Gas

43% 35%

22% 30%

34% 34%

0

500

1,000

1,500

2,000

2,500

2011 Jan-Jun 2012 Jan-Jun

TWh

US Coal versus Gas Generation

Coal Generation Gas Generation Other Generation

-20% Coal

+34% Gas

-2% Other

-2% Total

Sources: ICF analysis, Bloomberg, EIA

ENERGY TRENDS

Tumbling natural gas prices due to unconventional production have erased coal’s historical delivered cost advantage in key eastern generation markets

As a result, U.S. gas-powered power generation increased its market share from 22% to 30% in one year

The implication: greater industrial gas turbine demand and utilization


In The US, Natural Gas And Renewables Will Dominate Future Capacity Additions

In all regions in the US, natural gas and renewables will be the only types of economic builds per ICF’s latest Integrated Energy Outlook

ICF does not project that any new nuclear capacity will be developed during the study

California will lead renewable growth

0

5

10

15

20

25

30

35

California ERCOT(Texas)

New York NewEngland

PJM*

New

Cap

acity

(GW)

US Power Generation Capacity Additions: 2016 to 2030

11

Source: ICF Integrated Energy Outlook 2012*PJM – regional transmission organization covering 13 states in Mid-Atlantic and Midwest

ENERGY TRENDS

Gas

Renewables


Globally, Investment In Energy Infrastructure Could Exceed $15 Trillion Through 2035

The IEA anticipates in excess of $15T in energy infrastructure investment through 2035

Power generation accounts for over half of the investment – worth $9T

Much of the investment will be in developing economies

Source: WEO 2011; figures are for New Policies Scenario

ENERGY TRENDS

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AGENDA

Key Trends In Aerospace, Oil & Gas, And Energy

Interdependencies & Implications


Market Trend Implications

Aerospace• Large air transport backlog• Tier IV consolidation• Major investments in new fuel

efficient aeroengines

• Larger, more capable suppliers with end-to-end capability

• New materials and technologies will improve gas turbine efficiency for aero and energy applications

Oil & Gas• Growth in unconventional

supplies • Falling natural gas prices• Emphasis on deepwater

oil…while improving safety in the post-Deepwater Horizon era

• Significant investment growth in unconventional equipment & infrastructure

• Need to improve maintenance processes & quality

Energy• Natural gas substitution for coal• Emphasis on natural gas &

renewable for new capacity

• Increased demand for efficientcombined cycle IGTs

• Need for technology to improve efficiency and reduce emissions…at the right price

• Growing IGT maintenance demand

INTERDEPENDENCIES

Market Trends Create Important Implications…

Source: ICF SH&E analysis


And Contribute To Interdependencies Between The Three Sectors

INTERDEPENDENCIES

Cutting edge aerospace technologies needed in energy

Linkage between IGTs and aeroengines

Massive energy infrastructure investment creates major new market for aerospace suppliers

Energy Oil & Gas

Aerospace Cutting edge aerospace technologies needed in oil & gas

Aerospace maintenance practices/standards needed by oil & gas

Major O&G investment creates major new market for aerospace suppliers

IGTs

Materials for demanding environmentsSource: ICF SH&E analysis


Gas Turbines Are An Excellent Example Of Linkages Between Aerospace, Energy And O&G…

INTERDEPENDENCIES

Source: ICF SH&E analysis, Forecast International

0

5

10

15

20

25

30

Aeroengine IGT0

5

10

15

20

25

30

35

Aeroengine IGT

2011 Global Gas Turbine Production ($B)

Civil

Military

2011 Global Gas Turbine Maintenance ($B)

Civil

Military

Frame

Aeroderivative

Frame

Aeroderivative

Technology, materials

Designs, supply chains

Services, suppliers

Repair technology

Used for Power Generation

Used for O&G and peak power generation


…And Rolls-Royce Is An Example Of An Aeroengine OEM That Is Diversifying Into Other Markets

£11.277 B revenue

Rolls has increased its business from non-aerospace sectors over the last decade

In March 2011, Rolls-Royce and Daimler AG acquired Tognum (50-50 joint venture), which makes engines for O&G, mining, marine, power generators, military vehicles and locomotives

In the same year, Rolls sold its stake in IAE to Pratt & Whitney & MTU; it also agreed to collaborate with Pratt on future geared turbofan designs

Rolls-Royce is executing a diversification strategy

Civil Aerospace 49%

DefenseAerospace20%

Marine20%

Energy11%

INTERDEPENDENCIES

Source: Rolls-Royce


Allegheny Technologies Is An Example Of A Materials Supplier That Addresses All Three Markets

$5.2B revenue

11,500 employees

ATI is a world-leading mission critical metallic supplier covering Ti, nickel alloys, stainless and exotic alloys

One of the largest aeroengine and aerospace material suppliers

Revenues from O&G/Processing and Electrical Energy increased from $1.15 $1.89 B from 2009 to 2011

• Growth in natural-gas fired IGTs• Increased directional drilling and deepwater exploration

Created matrix organization to align capabilities and investment with markets

Aerospace & Defense 29%

O&G & Processing21%

Energy15%

Other35%

INTERDEPENDENCIES

Source: ATI


PAS Technologies Is A 650 Employee Firm Has Expanded Into O&G and Energy Markets

PAS Technologies is an independent maintenance service provider focused an aeroengine parts repair and manufacturing

PAS has expanded its business in industrial gas turbine (IGT) and Oil & Gas (O&G) markets considerably in recent years; these markets now account for 30% of its revenue

Three factors aided expansion into O&G and energy• Proprietary technology developed for aerospace including

coatings in demand in IGT and O&G• Aerospace quality standards is required by some customer

segment• Alignment with OEMs – works as partner rather than

competitor

650 employees

Seven facilities in US, Ireland, Singapore, and Romania

Source: PAS Technologies

Aerospace & Defense 70%

O&G 15%

Energy15%

INTERDEPENDENCIES


Organization Implications

Suppliers• Determine implications for strategy – are there opportunities to expand in

adjacent markets? What are the implications of competitors that are diversifying?

• Organize for success – how to best connect technologies with markets?

Service companies

• Aerospace-oriented service firms must determine if there are opportunities to take aerospace processes, technologies, and/or value propositions into these markets?

• Energy and O&G firms: opportunity to play offense and expand into aerospace? How to play defense against new competitors?

Customers• Understand how interdependencies impact procurement and supply chain

strategies – do they create new “pinch points?”• Seize opportunity to find new suppliers from adjacent markets• Determine how diversification strategies will affect supplier positioning,

technology, and financial resources

INTERDEPENDENCIES

Interdependencies Create Challenges And Opportunities

Source: ICF SH&E analysis


Thanks and Questions

Kevin MichaelsVice PresidentAerospace & MRO Practice Leader+1 734 821 [email protected]


ICF International Is A Leading Global Consulting Firm Serving Government And Commercial Clients

One of ICF's founders and its first president was a Tuskegee Airman. C.D. "Lucky" Lester flew more than 90 missions and earned the Distinguished Flying Cross. In 1969, "Lucky" and 3 DoD analysts founded the organization that is now ICF International.

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Interdependencies In Aerospace, Energy, And Oil & Gas Markets · New Generation Engines To Cope With High Fuel Prices Sources: CFM, Pratt & Whitney LEAP-X PW1000 series GTF AEROSPACE