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

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  • Trends in Freight MovementAn Inside Look at the Aerospace Industry and

    Impact on the Southeast

    March 17, 2015

    Stuart McAvoy

    UPS Customer Solutions

    Type date here (Month DD, YYYY)

  • Proprietary and Confidential: This presentation may not be used or disclosed to any person other than employees of customer, unless expressly authorized by UPS.

    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

    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

    Trends in Freight Movement

  • Proprietary and Confidential: This presentation may not be used or disclosed to any person other than employees of customer, unless expressly authorized by UPS.

    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

    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

    Parts, components and systems

    Aircraft assembly

    Airlines/operators

    Tier 2-3 suppliers

    Tier 1 suppliers

    OEMs Operators

    Service and maintenance

    MRO

    AftermarketProduction

  • Copyright 2014 Deloitte Development LLC. All rights reserved.4

    U.S. Commercial Air Carriers

    U.S Passenger Demand Continues to Drive the Supply

    Chain in Production and MRO*

    Source: FAA.GOV*MRO Maintenance, Repair, & Overhaul

  • Copyright 2014 Deloitte Development LLC. All rights reserved.5

    Aircraft orders driven by air travel demand

  • Copyright 2014 Deloitte Development LLC. All rights reserved.6

    Record aircraft sales orders, production and backlog

    Sources: Airbus, Boeing, Deloitte estimates

  • Copyright 2014 Deloitte Development LLC. All rights reserved.7

    New travel demand is driving production

    Sources: Airbus, Boeing, Deloitte estimates

    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)

  • Copyright 2014 Deloitte Development LLC. All rights reserved.8

    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

    Suppliers being impacted by falling airfares

    8.4

    4.5

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    Real Average Passenger Revenue Per Passenger km

    Ave

    rag

    e R

    eve

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    e P

    er

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    sse

    ng

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    km

    (in

    fla

    tio

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    dju

    ste

    d)

    (in

    ce

    nts

    )

    Revenue per passenger kilometer

    Recent history

  • Copyright 2014 Deloitte Development LLC. All rights reserved.9

    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 Americas 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

  • Copyright 2014 Deloitte Development LLC. All rights reserved.10

    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

  • Copyright 2014 Deloitte Development LLC. All rights reserved.11

    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

  • Proprietary and Confidential: This presentation may not be used or disclosed to any person other than employees of customer, unless expressly authorized by UPS.

    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.

    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 middle-

    class wealth such as the Middle East and Asia Pacific

    Source: 2014 Global Aerospace and Defense Industry Outlook, Deloitte

    12

  • Proprietary and Confidential: This presentation may not be used or disclosed to any person other than employees of customer, unless expressly authorized by UPS.

    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

    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

  • Proprietary and Confidential: This presentation may not be used or disclosed to any person other than employees of customer, unless expressly authorized by UPS.

    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.

    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

    Todays aviation environment

    Strained supply chains are stretched further, leading to new challenges and opportunities

    14

    Aerospace Challenges

    Globalization

    Visibility

    Increasing

    customer

    demands

    Risk

    management

    Cost

    containment

  • Proprietary and Confidential: This presentation may not be used or disclosed to any person other than employees of customer, unless expressly authorized by UPS.

    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 Supply Chain Trending Developments

  • Proprietary and Confidential: This presentation may not be used or disclosed to any person other than employees of customer, unless expressly authorized by UPS.

    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.

    Proprietary and Confidential: This presentation may not be used or disclosed to any person other than employees of customer, unless expressly authorized by UPS.

    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

    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 Grummans 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 Floridas 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.

  • Proprietary and Confidential: This presentation may not be used or disclosed to any person other than employees of customer, unless expressly authorized by UPS.

    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.

    Proprietary and Confidential: This presentation may not be used or disclosed to any person other than employees of customer, unless expressly authorized by UPS.

    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

    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.

    Aerospace Manufacturing Trending Southeast U.S.

    Creating a Regional Distribution Cluster

    Source:

  • Proprietary and Confidential: This presentation may not be used or disclosed to any person other than employees of customer, unless expressly authorized by UPS.

    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.

    Proprietary and Confidential: This presentation may not be used or disclosed to any person other than employees of customer, unless expressly authorized by UPS.

    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

    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..

    Source:

  • Proprietary and Confidential: This presentation may not be used or disclosed to any person other than employees of customer, unless expressly authorized by UPS.

    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.

    Proprietary and Confidential: This presentation may not be used or disclosed to any person other than employees of customer, unless expressly authorized by UPS.

    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 Alliance created to regionalize efforts (aerospaceallliance.com)

    Louisiana

    Mississippi

    Alabama

    Florida

    Aerospace Manufacturing Trending Southeast U.S.

    Creating a Regional Distribution Cluster

    NEWS

    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

  • Proprietary and Confidential: This presentation may not be used or disclosed to any person other than employees of customer, unless expressly authorized by UPS.

    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.

    Proprietary and Confidential: This presentation may not be used or disclosed to any person other than employees of customer, unless expressly authorized by UPS.

    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

    NCAM is based at NASA Michoud Assembly Facility in New Orleans, LA

    NCAM facilitates Aerospace research projects

    University research partnerships

    Aerospace Industry research projects

    Aerospace Manufacturing Trending Southeast U.S.

    Creating a Regional Distribution Cluster

  • Proprietary and Confidential: This presentation may not be used or disclosed to any person other than employees of customer, unless expressly authorized by UPS.

    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.

    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

    21

  • Proprietary and Confidential: This presentation may not be used or disclosed to any person other than employees of customer, unless expressly authorized by UPS.

    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.

    Proprietary and Confidential: This presentation may not be used or disclosed to any person other than employees of customer, unless expressly authorized by UPS.

    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.

    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

  • Thank you