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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
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Real Average Passenger Revenue Per Passenger km
Ave
rag
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(in
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(in
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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 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
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
Today’s 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 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.
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