aerospace supply chain - november update

8/13/2019 Aerospace Supply Chain - November Update

1/22

Important Disclosures Found in Appendix

AEROSPACE SUPPLY CHAIN REVIEWA Look At The Most Important Issues For The Specialty Material & Forging Markets

A Bi-Monthly Update Report November 22, 2013

1. The AIRLINE INDUSTRY is seeing continued positive momentum in travel growth and load factors. The market hasbeen showing relative strength over the past few months (adjusted for the disappointing September results associated with

the government shutdown). The global industry traffic growth was reported @ +5.5% versus +6.8% in August.

2. We raised our COMMERCIAL AIRCRAFT production outlook to reflect the revised long-term planning for the BA737(going to 47 per month) and BA787 (going to 12 per month). We also expect the regional aircraft market to become apositive driver over the next few years. Our 2014 delivery outlook is now at 1,600 units (all-in) which represents +15%growth versus 2013. This includes 640 units for BA (+22-23%), 630 for Airbus (+3-4%), & 120 for the regionals (+4-5%).

3. The results of our TITANIUM survey were disappointing from a demand and pricing point of view. The preliminary 2014volume growth outlook was +3-4% (we were expecting at least +6%) which reflects a push-out of the BA purchasingneeds into 2015. The mills have been plagued by excess inventory throughout the channel for the past 2-3 years. Spotingot prices have now fallen below the $9.00 per pound threshold.

4. The results of our NICKEL-BASED ALLOY survey have also revealed muted growth for the products levered to the jetengine channel and the main aftermarkets (growth is still holding near +1-2%). The early demand outlook offered by our

contact base was +2-3%.

5. The AEROSPACE FASTENERS market has seen some moderation in order trends over the past 90 days (@ +7-8%growth versus +9-10% last quarter). However, the 2014 outlook is holding @ +10-15%, which suggests the airframemarket is becoming a stronger pull for the forging segments. This could drive 20-25% growth for the producers over thenext 12 months.

Company Ticker Price Mkt Cap ($000) 30 Day Chg. 3 Month Chg. Industries 2014E 2015E

1 Spirit Aerosystems SPR $30.98 4,482 26% 116% Tier 1 Aerospace 3% 4%

2 B/E Aerospace BEAV $83.98 8,798 10% 92% Interiors & Fasteners 1% 1%

3 Boeing BA $136.50 102,574 9% 82% OEM 3% 2%

4 Wesco Aircraft Holdings WAIR $19.27 1,815 7% 51% Aerospace Distribution -2% -1%

5 Hexcel Corp HXL $43.67 4,348 6% 74% Composites 1% 1%

6 Alcoa AA $9.07 9,701 6% 10% Aluminum -17% -23%

7 EADS EAD-PAR $51.98 40,456 5% 113% Parent of Airbus - OEM -2% -4%8 Allegheny Technologies ATI $33.91 3,662 5% 28% Forging & Special Metals -50% -21%

9 Cytec Industries CYT $85.56 3,034 5% 29% Composites -4% -5%

10 Precision Cast parts PCP $251.58 36,544 5% 43% Forging & Special Metals 1% 0%

11 TransDigm Group TDG $148.48 7,801 4% 11% Aircraft Components -1% 0%

12 Universal Stainless & Alloy USAP $32.25 225 3% 5% Nickel-Alloys -38% -31%

13 S&P 500 SP50 $1,793 3% 29% Index

14 RTI International Metals RTI $34.36 1,050 3% 44% Titanium -12% -10%

15 Heico Corp. HEI $52.05 2,763 2% 77% Jet Engine Replacement Parts 2% 4%

16 Kaiser Aluminum KALU $66.59 1,249 2% 13% Aluminum -11% -9%

17 Triumph Group TGI $70.56 3,673 2% 14% Forging -9% -10%

18 Carpenter Technology CRS $61.22 3,243 2% 34% Nickel-Alloys -2% 1%

19 A.M. Castle CAS $14.64 342 -2% 13% Specialty Distribution -68% -31%

Average AERO SUPPLY 13,098 6% 46% -11% -7%

Aerospace Materials Peer Group - Recent Stock Movement Earnings Changes


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Aerospace Supply Channel Update Reportovember 21, 2013age 2

TABLE OF CONTENTS

#1- Macro Demand Outlook

A Review Of The Production Outlook..3

#2- Airline Travel Data SeriesIATA Travel Growth, Global Demand Highlights..4Individual Domestic & Regional Highlights5Cross-Atlantic & Cross Pacific Travel Trends.....6Latin American & Regional Aircraft Trends....7Non-US Airline Data8Cargo Traffic Momentum.....9

#3- Interesting News

Releases & Articles That Caught Our Attention....11A Review Of The Global Airline Equity Trading & Estimate Changes....11Jet Fuel & Commodity Prices.12

#4- CRC Research RecapsQuarterly Titanium Survey Highlights13Quarterly Nickel-Based Alloy Update15Aerospace Fastener Survey ........16

Key Industry Drivers Recap

Aircraft Production Outlook Titanium Trends(Upstream)

Airline Travel Data (JetCapacity Driver)

Nickel-Based AlloyTrends (Upstream)

Jet Fuel (Airline Margins) Aero Fasteners(Downstream & FrameDemand)

Commodities (RawMaterials)

Equity Trading (HealthIndex)

The Cleveland Research Company Aerospace Materials Coverage Team

Chris Olin, Sr. Research Analyst (216) 649-7212 [email protected] Money, Research Associate (216) 649-7254 [email protected] Siegmeyer, Research Associate (216) 649-7208 [email protected]
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]://www.heico.com/Default.aspxhttp://www.alcoa.com/global/en/home.aspmailto:[email protected]:[email protected]:[email protected]


3/22


AIRCRAFT DELIVERY OUTLOOK THROUGH THE CYCLE

We raised our LT commercial aerospace delivery outlook to reflect the 787 and 737 production revisions announced by BA and thepositive momentum developing for the regional aircraft market. Our aerospace macro model is now proactively adjusted for theupside coming from both new delivery targets and the pending introduction of next-generation aircraft (we use other industry sourcesas the final benchmark). The all-in calculation is now @ 1,600 units for next year (both commercial and regional jets), whichrepresents +15% growthfrom 2013. This is up from our previous +10-12% outlook. Moreover, we believe the 2015 deliveries wilhit 1,675 by 2015, which is up another 5%. This translates into 80-90% growth from peak to trough (versus 140% last cycle).

o BA raised its 737 delivery target last month. This will accommodate the current backlogs while creating space to get the newMAX designs into the queue faster. The current delivery run rate is @ 42 per month, expected to hit 44 by April/May. BA ispushing on the channel to reach a long-term production rate of 47 per month by 2017. This translates into an annualizedshipment rate of 560-570 units versus 500 in 2013 (up 13%).

o BA lowered the production target for the 747-8 to 1.5 per month versus the current 1.75x run-rate to reflect a weak freightermarket. There could be more downside to this number based on what we are hearing for UPS and FDX (see page 9).

o The stated 787 delivery target for 2014 is 10 per month, which we expect to happen by early 2014. This compares to thecurrent 7-8x monthly production rate. Long-term, BA is looking to get to 12 per month by 2016 and 14 per month by the endof the decade. This plane still represents a game-changer for the aero supply channel.

o The Airbus A350 design is expected to start entering service by 2015. This is likely to become a mini demand-pull by mid2014. We are using 50 deliveries in our model for year-one.

o The new 777X design has been released. The wide-body aircraft is expected to increase fuel-efficiency by 12% and lowethe overall operating cost by 10% (@ 350-400 seats). The first delivery is expected to occur by 2020. There are no annuanumbers attached to the program yet.

Our current cyclical demand outlook implies a very mild correction could occur when looking our 3-4 years (in between 2016-2017)before another period of acceleration, which is consistent in the data presented by the Airline Monitor. A majority of the new jedemand is expected to come from the shift toward more fuel-efficient aircraft, assuming 3,000 jets are retired over the next four years(roughly 12% of the existing fleet of 23,000).

The outlook is very bullish for the part makers, forgers, and specialty material producers. In addition to the increased volumes, mosof the companies in our watch group should also benefit from greater content of premium materials and service (secular growthevident through 2018-2020).

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Commercial Aerospace Industry AnalysisTotal Jet Deliveries (Through 2020) Includes Regional Builds

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4/22


COMMERCIAL AIRLINE INDUSTRY DATA -- TRAFFIC ANALYSIS & HIGHLIGHTS

We monitor the monthly IATA airline traffic data for a general read into aerospace-related aftermarket demand (for theforged/machined parts and metal channels). We believe the trends in global and domestic airline travel represents a leading indicatoby approximately 6-9 months.

Bottom-line, the airline industry traffic and capacity momentum has been more favorable over the past few months, showing relativestrength since early-2013. While there was some sequential weakness in the September data series versus the month of August, therecent reports coming from the airline operators suggests the October mileage growth rebounded with the government shutdownheadwinds no longer present. The average RPM growth has now trended above +5% for the past five months.

The overall industry RPM growth was reported @ +5.5% in September, which compares to +6.8% in August. The available seatingcapacity growth was +5.3% which supported an overall load factor of 80.4% (down from 83.4%).

The three most interesting data points within the September IATA report include:

North American travel growth moderated to +1.7%, which compares to a +2-3% range over the past 3-4 months. Thegovernment shutdown appears to have impacted comps by 50-60 basis points. The 2H average of +2.2% compares to the 1Hcomp of +1.7%. The available seat mileage growth has been muted in 2013, with September reported @ +1.8% versus the 6month average of +2.3%. Load factors remain high in the region @ 82%.

European passenger travel growth was reported @ +3.7% for September versus +5.2% in August. This marks 6-7 straighmonths of better growth rates. The load factor was reported @ 83.1% - the highest level among the 6 tracked regions.

Asia-Pacific airline traffic seems to be holding up fairly well through September. The average RPM growth was reported @+9.2% versus the August average of +10.4%. The year-to-date comps for 2013 is now +6.7% versus an average of +5.9% in2012. The average load factor was reported @ 78%.

International traffic showed a bigger decline @ +5.7% versus +7.5% in August. The domestic RPM comp was moreconsistent @ +5.1% versus +5.6%.

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Commercial Airline Market AnalysisReported Passenger Traffic Growth (2006 To Present)

Available Seat Kilometers Revenue Passenger KilometersSource: IATA


5/22


DOMESTIC AIRLINES Our analysis of the Big-6 airlines in North America (we adjusted our data for the U.S. Airways &American Airlines merger) suggests October traffic growth rebounded versus a more difficult September. We calculate the averagegrowth rate @ +3.0% last month which compares to +1.9% in September. The airlines showing the best demand data points waJetBlue (JBLU) @ +7.1% (up from +1.6%). October 2013 also represented an easier comp going against the impact from last yearsEast Coast hurricane.

The domestic operators are seeing continued strength in cross-Atlantic travel. The average growth rate for October is estimated@ +7.6% which is up considerably from the +2-3% growth rate the previous two months. United Airlines (UAL) is seeing themost strength in international travel with growth hitting +11%. (chart on page 6)

The cross-Pacific RPM data has turned negative once again following five months of positive demand growth. We calculate anaverage cop for October @ -0.7% versus the +3.0% average during the previous five months. The September comp was +1.0%(chart on page 6)

The Latin America travel has been holding in positive territory. The October comp was calculated +7.7% which is up from+4.4% in September. This market has been a source of strength for the three domestic airline operators levered to these routes(Delta, United, and AA/LLC). The average growth rate for 2013 is +5.9% versus +3.8% for the comparable 2012. (chart on page7).

The small-aircraft regional traffic has been a headwind for the domestic airlines. The average growth rate has been negative fo11 out of the last 12 months, including down 3.6% in October (versus +1.0% in September). United seems to be losing markeshare. Ultimately, we believe this data series reads fairly cautious for the smaller aircraft market. (chart on page 7)

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RevenuePassangerMiles%Grow

th

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Southwest13.2%13.0% 9.8% 8.7% 9.9% 7.5% 5.9% 3.9% 6.4% 3.5% 2.5% -0.3% -2.7% 3.8% -0.9% -2.2% -2.6% -0.1% 0.0% 0.1% -2.1% -2.4% -1.5% -0.2% -1.7% -2.3% 4.0% 1.5% 4.2% 2.3% -1.5% -2.7% 1.3% 1.3%

Delta 2.3% 1.4% 0.5% 2.6% 2.2% -1.5% 0.1% -0.3% -0.9% -3.8% -1.9% -2.3% -1.5% 2.5% 2.0% 1.2% -0.6% 0.4% -2.8% 0.2% -1.1% 0.3% 1.2% 0.5% 0.0% -2.2% 0.1% -0.7% 1.4% 0.7% 1.7% 2.7% 1.8% 1.4%

United 0.9% -3.4% -2.2% 1.1% -0.3% -0.9% -0.1% -0.9% -1.7% -5.1% -3.6% -0.7% -3.2% 3.4% 1.0% 0.9% 0.3% 0.1% -3.3% -0.1% -2.1% -0.3% -2.3% -4.0% 0.9% -3.4% -1.2% -3.8% -0.8% -0.6% -0.6% 0.0% 1.0% 0.2%

Alaska 15.8%19.0%19.3%18.1%11.7% 7.9% 6.8% 7.6% 10.4% 6.0% 7.8% 6.2% 17.5%21.5%15.7%17.1%11.2%10.6% 8.8% 8.1% 5.1% 8.5% 9.4% 8.4% 11.5% 6.0% 9.4% 8.5% 6.8% 8.1% 9.2% 8.1% 4.3% 3.8%

Jet Blue 5.1% 9.0% 7.1% 6.1% 10.6% 7.2% 11.1% 5.8% 7.6% 7.6% 10.9%14.3%13.3%17.4%12.5%14.5% 7.4% 9.7% 7.1% 13.1% 6.1% 1.0% 5.7% 6.1% 11.2% 2.6% 8.6% 4.7% 9.4% 7.8% 7.3% 6.2% 1.6% 7.1%

AA/LCC 0.6% 1.8% 1.5% 0.1% 3.5% 1.3% 2.4% -0.7% 0.1% -2.5% 0.6% 0.6% 1.5% 6.2% 1.6% -0.6% 0.6% -1.3% -1.8% 1.6% -3.7% -2.0% 1.7% 2.3% 4.0% 0.1% 1.5% 1.7% 0.8% 3.1% 2.6% 2.7% 1.5% 4.3%

Average 6.3% 6.8% 6.0% 6.1% 6.3% 3.6% 4.4% 2.6% 3.6% 1.0% 2.7% 3.0% 4.2% 9.1% 5.3% 5.2% 2.7% 3.2% 1.3% 3.9% 0.4% 0.8% 2.4% 2.2% 4.3% 0.1% 3.7% 2.0% 3.6% 3.6% 3.1% 2.8% 1.9% 3.0%

Commecial Aerospace Market AnalysisMonthly Reported RPM Growth (Domestic Airliner Rates) -- 2011 to Present

Source: Compay Reports


6/22


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Delta 8.8% 6.1% 4.0% 19.6% 0.8% -1.1% -1.1% -2.4% -7.6% -10.3 -11.0 -7.3% -4.2% 3.0% -0.4% -6.1% -4.4% -5.5% -6.7% -5.1% -0.3% -3.0% -3.1% -4.3% -6.4% -8.8% -5.7% -3.2% 2.0% 4.8% 5.1% 6.0% 2.1% 2.4%

United -4.7% -9.2% -1.3%18.3% 1.4% -2.0% -2.4% -2.0% -2.1% -7.9% -4.1% -1.1% -1.9% 0.8% 1.4% -6.0% -1.7% -1.4% -5.8% -2.4% -5.3% -9.6% -7.2% -4.6% -4.7% -9.2% -6.8% -4.1% -1.3% 1.0% 2.5% 7.2% 5.9% 11.4%

AA/LCC 8.1% 9.9% 2.7% 20.2% 5.8% 1.9% 4.2% 3.3% 1.8% 2.4% 1.4% 2.3% 4.4% 7.8% 2.0% 0.2% -7.1% -1.3% 0.1% 2.5% -0.9% -6.1% -9.0% -6.0% -7.3% -10.6 -0.5% -1.5% 3.3% 0.6% -0.4% 1.1% 2.3% 5.5%

Average -0.8% -1.3% -2.2%19.2% 3.2% 0.5% 1.3% 1.3% 0.1% -2.0% -1.8% 2.0% 1.9% 5.6% 1.8% -2.8% -6.2% -2.7% -3.0% -0.2% -2.3% -8.0% -8.0% -5.2% -6.3% -10.3 -0.8% -3.5% 0.6% -0.1% -0.3% 2.4% 2.7% 7.6%

Commercial Aerospace Market AnalysisMonthly Reported Cross-Atlantic RPM Growth (Domestic Airline Rates) -- 2011 to Present

Source: Company Reports

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Delta 19.6%13.6% 0.6% -3.0% 5.5% 3.9% 9.5% 14.8% 0.8% -6.0% -7.0% -3.6% -2.5% 2.1% 12.6%16.3%12.2% 7.3% -2.0% 0.7% 5.3% 7.5% 11.5% 6.5% 0.9% 6.0% 3.8% 5.1% 0.5% -2.7% -1.4% -1.0% -0.9% -0.1%

United 4.8% 2.5% -6.6% -8.4% -1.6% -2.0% -1.1% -2.0% -3.6% -1.9% 1.8% -4.3% -5.6% 3.5% 7.9% 13.0% 6.2% 3.4% 0.0% 3.8% 5.2% 2.0% -0.4% -0.6% 4.8% 2.5% 2.6% -3.2% -1.0% 1.2% 0.3% -2.7% -4.5% -5.0%

AA/LCC12.3%13.9%13.9% 8.9% 16.8%14.8%22.7%23.5% 5.7% 2.4% -4.9% 8.7% 17.2%15.8%13.4%18.9%13.0% 9.1% -4.4% -3.9% 7.2% 8.8% 17.3% 8.3% -2.1% 1.5% -0.9% -4.7% 6.7% 12.2%12.5%15.4% 8.4% 3.0%

Average 12.2%10.0% 2.6% -0.8% 6.9% 5.6% 10.4%12.1% 1.0% -1.8% -3.4% 0.3% 3.1% 7.2% 11.3%16.0%10.5% 6.6% -2.1% 0.2% 5.9% 6.1% 9.5% 4.7% 1.2% 3.3% 1.8% -0.9% 2.1% 3.6% 3.8% 3.9% 1.0% -0.7%

Commercial Aerospace Market AnalysisMonthly Reported Cross-Pacific RPM Growth (Domestic Airline Rates) -- 2011 to Present



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Delta 19.5%12.1%15.7%15.2% 2.1% -1.3% 0.1% 7.3% 1.2% -2.7% -0.6% -2.1% -4.7% -0.7% -4.1% -2.2% 4.6% 4.8% 3.7% 5.7% 3.2% -2.6% 0.6% -2.2% 0.5% -3.5% -0.8% -3.1% -5.9% -4.9% -4.6% -1.6% -0.1% 6.9%

United 2.8% -2.9% 3.0% 11.3% 5.5% 2.7% 6.2% 2.7% 8.5% 1.2% 1.4% 4.5% -0.6% 8.3% 6.5% 1.5% 2.9% 8.1% 0.0% 5.6% 2.2% -0.7% 4.0% 0.3% 2.8% -2.9% 6.1% -1.4% 3.4% 3.4% 0.9% -0.2% -1.7% -0.8%

AA/LCC 6.3% 0.7% 0.3% 2.3% 1.6% 0.0% 1.4% -5.0% -2.5% -0.8% 1.7% -0.7% 1.4% 6.4% 2.4% 1.5% 2.7% 3.7% 1.3% 4.3% 5.8% 3.1% 8.6% 4.8% 4.4% 3.8% 6.1% 2.7% 8.1% 10.7%10.8%11.0% 1.3% 5.5%

Average 0.5% -4.6% -1.5% 4.3% 3.8% 0.7% 1.9% -2.4% 6.6% 2.4% 2.9% 3.6% -0.4% 5.7% 4.7% 0.6% 3.3% 6.0% 0.1% 5.7% 7.6% 4.7% 9.6% 5.8% 5.4% 2.9% 6.7% 1.3% 7.4% 6.7% 7.4% 9.2% 4.4% 7.7%

Commecial Aerospace Market AnalysisMonthly Reported Latin American RPM Growth (Domestic Airline Rates) -- 2011 to Present


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nuePassengerMiles%Growth

Jan-11

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11Sep-11

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12Sep-12

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Jul-13 Aug-

13Sep-13

Oct-13

Nov-13

Dec-13

Delta -4.6% -6.4% -2.4% -3.9% 1.3% -1.9% -2.0% -2.0% 2.3% 0.7% 0.6% -3.4% -2.1% 5.7% 1.1% 1.4% -3.7% -3.3% -7.7% -4.7% -12.1 -7.5% -9.0% -7.9% -7.1% -13.3 -10.4 -8.7% -6.0% -7.3% -6.9% -3.2% -2.2% -1.6%

United 2.8% -1.3% -1.2% -3.1% 0.9% -0.1% -1.0% -0.1% 0.2% -2.1% -0.6% 3.8% 1.3% 9.8% 1.3% 1.0% -2.3% 1.8% 0.0% 0.0% -1.2%24.9% 1.4% -3.6% 2.8% -1.3% 2.4% 1.4% 4.1% -1.3% 0.3% 1.9% 4.0% -13.8

AA/LCC14.3%16.3%13.5% 7.9% 13.1% 2.4% 1.2% -2.2% -3.8% -5.1% -2.3% -2.0% -7.6% -10.2 0.3% 0.8% 2.5% 2.8% 1.1% 6.0% -0.1% -0.4% 1.7% 2.4% 3.4% 0.4% 3.5% -0.1% 1.2% -0.1% 0.7% 0.0% 1.1% 4.7%

Average 4.2% 2.9% 3.3% 0.3% 5.1% 0.1% -0.6% -1.4% -0.4% -2.2% -0.8% -0.5% -2.8% 1.7% 0.9% 1.1% -1.2% 0.4% -2.2% 0.4% -4.4% 5.7% -2.0% -3.0% -0.3% -4.8% -1.5% -2.5% -0.2% -2.9% -2.0% -0.4% 1.0% -3.6%

Commercial Aerospace Market AnalysisMonthly Reported Regional RPM Growth (Domestic Airliner Rates) -- 2011 to Present



8/22


GLOBAL AIRLINES The global airlines that we are tracking have shown relative demand strength since the 1Q13 market trough.We calculate the average October RPM growth rate @ +5.5%, which is up from +4.2% the previous month. The six month average isholding @ +5.4% which compares to +2.6% for 1H13. The incremental passenger traffic drivers appear to be emanating from theNorthern Europe and United Kingdom rebound. British Airways parent IAG, is seeing the most pronounced demand increases overthe past 3 month (average +8-9%).

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RevenuePassangerMiles%Growth

Jan-11

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11Sep-11

Oct-11

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13Sep-13

Oct-13

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Dec-13

China Southern16.7% 4.5% 4.2% 10.2%13.1% 8.6% 10.7% 6.0% 7.9% 9.0% 18.0%11.6%17.2%11.2%11.0%10.1% 7.3% 9.9% 10.3%12.3%12.5% 7.8% 8.5% 11.5%-1.1%18.0%15.1% 7.1% 10.9%12.4% 8.5% 13.7% 9.3% 8.7%

IAG 4.5% 1.4% 8.8% 24.9%14.1% 9.2% 3.5% 2.2% 4.3% 1.9% 2.1% 12.2% 1.2% 1.6% 6.2% 4.0% 6.6% 8.9% 5.1% 9.1% 5.1% 3.2% 3.6% 0.2% 0.7% -0.3% 0.1% -0.8% 7.4% 8.2% 6.6% 10.6% 8.8% 8.9%

Lufthansa 9.1% 13.1% 0.3% 24.4% 6.9% 4.9% 8.1% 5.7% 4.6% 2.8% 3.4% 6.8% 1.3% 2.5% 4.0% 0.5% -2.8% 1.2% -2.1% -0.2% -2.4% -2.8% -3.9% -5.0% -1.1% 0.7% 4.6% -25.5 5.2% 5.4% 3.6% 7.0% 6.9% 6.0%

Air France 4.8% 4.9% 1.0% 23.1% 4.9% 2.9% 6.9% 7.6% 9.3% 5.7% 2.5% 7.5% 3.6% 6.2% 6.8% 2.8% -0.1% 4.2% 1.2% 0.6% 0.9% -2.0% 2.8% 0.0% 0.2% -0.1% 2.3% 2.3% 4.7% 2.5% 1.8% 4.9% 0.7% 2.8%

Qantas 8.5% 5.1% 3.3% 10.0% 8.6% 4.8% 5.0% 4.0% -1.1% 5.3% 8.5% 9.4% 8.7% 0.8% -1.7% 1.0% 0.4% 0.1% 6.0% 1.3% -2.4% -4.9% -2.0% -0.2% -1.0% -0.6% -1.4% -2.3%

Singapoe Air 2.9% -1.0% -3.6% 7.0% 4.3% 0.1% 4.6% 3.1% 5.1% 1.1% -2.0% 2.1% 2.9% 7.2% 12.1%10.6% 7.8% 12.6% 4.1% 9.6% 8.0% 7.8% 9.3% 6.4% 3.4% 5.7% 2.9% 0.9% 1.6% 2.9% 4.4% 8.7% 1.8% 1.1%

Average 7.8% 4.7% 2.3% 16.6% 8.7% 5.1% 6.4% 4.9% 5.9% 3.2% 4.9% 8.0% 5.8% 6.3% 8.1% 4.8% 2.8% 7.3% 3.3% 5.3% 4.0% 3.3% 3.6% 2.6% -0.1% 3.2% 3.8% -2.7% 4.8% 6.3% 4.1% 7.2% 4.2% 5.5%

Commecial Aerospace Market AnalysisMonthly Reported RPM Growth (GlobalAirliner Rates) -- 2011 to Present



9/22


CARGO MARKET UPDATE

We are seeing some better cargo market trends for the domestic airline group following an extended period of weakness. Octobertonnage growth rebounded to +7.1% versus down 3% in September (driven by a strong showing from the merging airline). Cargotraffic had been down for the previous 13 months.

UPDATED READS FOR UPS AND FDXExcerpts from the notes issued by Fellow CRC analysts, Mark Davis & Bryan Merolla

United Parcel (UPS) Domestic small package volume growth looks sluggish but still up y/y due to B2C growth; B2B

stagnant. The UPS B2C shipments continued to be the primary source of volume upside as consumer shop online and take advantageof ground services in order to minimize shipping expenses. Industry commentary indicates B2B shipment volumes and weight perpackage have not materially improved despite inventories remaining lean. As a result, deployed capacity within UPS domestic ainetwork (~18% of total revenue) looks to be down approximately 1% year-over-year as the company reduces flight activity to match

market demand. Demand for UPS Ground and Basic/SurePost remains solid due to online sales as consumers seek out the cheapest

prices via the Internet, avoid traveling to stores to save on gas, and look to avoid paying tax on purchases. We continue to hear thatUPS is moving more volume on the ground but is doing so with fewer routes and drivers in an effort to reduce overhead.

UPS International volumes look slightly up y/y; we see limited upside from new product launches and peak shipping seasonThrough September (and for all of 3Q13), deployed capacity within UPS international air network was down year-over-year(approximately 2.5%) despite the launch of some high tech products (iPhone) and the beginning of the peak shipping season

Industry commentary indicates UPS continues to leverage its freight forwarding division to try and fill excess space on companyaircraft with heavy freight in key trade lanes (especially out of Asia) and has been aggressively pricing heavy freight products toattract volume. We believe capacity reductions and better utilization on remaining aircraft will help international operating marginsduring 3Q13.

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RevenuePassengerMiles%Growth

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11Sep-11

Oct-11

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13Sep-13

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Delta 19.5%12.1%15.7% 15.2% 2.1% -1.3% 0.1% 7.3% 1.2% -2.7% -0.6% -2.1% -4.7% -0.7% -4.1% -2.2% 4.6% 4.8% 3.7% 5.7% 3.2% -2.6% 0.6% -2.2% 0.5% -3.5% -0.8% -3.1% -5.9% -4.9% -4.6% -1.6% -0.1% 6.9%

United -11.8 -15.7 -8.7% -5.8% -18.4 -16.9 -14.1 -16.9 -15.7 -14.9 -14.3 -8.5% -11.9 -6.6% -5.7% -12.8 -7.4% -2.3% -6.2% -2.6% -0.3% -10.3 -5.3% -10.9 -11.8 -15.7 -13.2 -9.0% -8.3% -10.2 -18.0 -16.5 -16.2 -4.3%

AA/LCC -0.4% -2.7% -2.1% 2.2% -6.6% -7.8% -5.6% -9.2% -5.2% -12.0 -9.4% -5.2% -1.5% 1.4% 3.6% -1.0% -2.0% 1.1% -4.9% 0.3% -8.3% -7.6% 0.8% 3.7% -9.3% -10.2 -4.6% -3.2% 4.1% 8.0% 5.7% 5.7% 7.5% 18.6%

Average 2.4% -2.1% 1.6% 3.9% -7.6% -8.7% -6.5% -6.3% -6.6% -9.9% -8.1% -5.3% -6.0% -2.0% -2.1% -5.3% -1.6% 1.2% -2.5% 1.1% -1.8% -6.8% -1.3% -3.1% -6.9% -9.8% -6.2% -5.1% -3.3% -2.4% -5.6% -4.2% -2.9% 7.1%

Commercial Aerospace Market AnalysisMonthly Reported Cargo Tonnage Growth (Domestic Airline Rates) -- 2011 to Present



10/22


Source: CRC Reports

Federal Express (FDX) Our channel work for the Domestic Express Segment represents a negative leading indicator for th

LT freighter market. Through September, demand for FDX Express services looked flat as shippers continued to trade down fromair to ground services and FDX sales reps encouraged shippers to switch modes. We also continue to hear about FDX quietly takingsteps to re-orient their domestic express network by replacing mainline aircraft with feeder aircraft serving hub airports andsubstituting part-time workers for full-time workers to reduce expenses. As an offset to declining Express volumes, demand forGround and SmartPost remains robust due to B2C shipments while B2B demand remains lackluster from both a volume and packageweight standpoint (coming from a separate report from fellow analyst Mark Davis).

Source: CRC Reports

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CRC UPS International Export Volume Estimates vs.

UPS Reported Export Volumes

CRC Export Volume Estimates UPS Reported International Export Volumes

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CRC U.S. Express Overnight Package Volume Estimates vs.FDX Reported Express Overnight Package Volumes

CRC FDX Domestic Volume Estimate FDX Reported Domestic Volume


11/22


MOST INTERESTING NEWS OVER THE PAST 30-60 DAYSCould Be Impactful For Future Forging Or Metals Demand Modeling Assumptions= ****This Is Now On Our Radar = ***

A Developing Situation = **

Something That We Consider Interesting Information = *

****US Airways & American has finalized an agreement with the DOJ to complete the merger. The settlement is expected tohave positive implications for discount airliners which are likely to fill the newly open slots at key airports like LaGuardia and ReganThe company will not become the largest domestic carrier, flying 15% of the existing fleet (10% for American and 5% for USAirways). Delta (DAL) is trying to win slots @ Dallas Love Airport.

The IATA cut its 2013 airline profit forecast by 8%. The airline associated now projects total profit @ $11.7 billion (versus $7.4billion in 2012). The drivers behind these NT cuts included slower growth for regions in China and a pullback in freight demand. Thecurrent 2014 earnings outlook is holding @ $16.4 billion.

*The Dubai Air Show was a huge success for the airplane markers. There were $200 billion in new commercial aircraft ordertaken over the past week, which underscores the changing demand environment for the Middle East. The momentum helped BAlaunch its new 777X aircraft model (with 200 orders on the tape). Airbus also reported 50 orders for its A380, which has been alaggard.

Equity Trades & EPS Movement

We are seeing mixed signals from the global airliner peer group. In general, current and out-year (2014) earnings forecasts have beencut by 7% and 5%, respectively (driven by weakness in non-US airline operators). However, there has been positive trading activityover the past 30 days, with the peer group trading in-line with the S&P 500. The group has been supported by the resolution of theAA/LCC merger (JBLU is seen as the big winner) and the recent positive take-aways from the United Airlines (UAL) investor day.

o The global shares are up 2% over the past month and +59% over the past three months. The domestic operators haveincreased by 9% over the past three months lead by UAL (+22%) and JBLU (+22%). The group is also up 103% over thepast three months.

o Qantas Airways (QAN AU) continues to be the market laggard, with the shares down 21% over the past month lead by a50-60% cut in current year earnings.

The jet fuel price momentum has turned negative. Potential tailwind for the airline margins:The average price for jet fuel (wewatch Gulf Coast Kerosene-Type) has traded down slightly from the average August price of $3.00 (and 2013 peak of $3.22). The

Company Ticker Price Mkt Cap ($000) 30 Day Chg. 3 Month Chg. Description Current Out Year

1 Jet Blue JBLU $8.60 2,428 22% 75% Discount Airline Operator 5% -1%

2 United Airlines UAL $36.72 13,288 22% 87% U.S. Airline Operator -12% -10%

3 Alaska Airlines ALK $75.74 5,267 15% 82% U.S. Airline Operator 0% 2%

4 Southwest Airlines LUV $18.12 12,625 15% 100% U.S. Airline Operator 7% 4%

5 Delta Airlines DAL $28.06 24,007 13% 188% U.S. Airline Operator -1% -4%

6 U.S. Airways LCC $23.68 4,664 13% 92% U.S. Airline Operator 16% -8%

7 Air China 753-HK $5.21 68,172 10% 18% Chinese-Based Airliner -13% -6%

8 China Southern 1055-HKG $2.81 27,587 7% -3% Chinese-Based Airliner -21% -14%

9Spirit Airlines SAVE $44.50 3,232 5% 168% U.S. Airline Operator 8% 8%

10 Easy Jet EZJ-GB $12.65 5,009 4% 110% U.K.- Based Airliner 2% 3%

11 Lufthansa LHA-ETR $15.19 7,004 4% 38% German-Based Airliner -15% -9%

12 S&P 500 SP50 $1,793 3% 29% Index

13 Allegiant ALGT $105.94 1,968 1% 45% Discount Airline Operator 0% 0%

14 Singapore Airlines C6L-SES $10.33 12,154 -2% -3% Thailand-Based Airliner -1% 5%

15 Air France AF-PAR $7.11 2,104 -4% 17% French-Based Airliner -17% -16%

16 Japan Airlines 9201-TKS $5,510 n/a -11% 20% Japan-Based Airliner 1% 1%

17 Republic Airlines RJET $10.20 503 -12% 90% Discount Airline Operator -25% 0%

18 Ryan Air RY4B-DUB $5.53 7,815 -13% 30% U.K.- Based Airliner -15% -16%

19 Qantas Airways QAN-AU $1.19 2,679 -21% -20% Australia-Based Airliner -52% -29%

11,794 4% 61% -8% -5%

Average Domestic Airlines 7,553 10% 103% -1% -2%

Source: FactSet

Commercial Airl ines Peer Group - Recent Stock Movement Earnings Changes

Average For All Global Airlines


12/22


13/22


14/22


The lack of confidence that Boeing returns to normal ordering patterns before 2015 follows upon the relatively muted guidanceoffered by the OEMs procurement team during the annual titanium conference (in October). The consensus forecast is now 2015(versus the consolidated 2H14 outlooks projected in 3Q). The catalysts behind the more conservative outlook are: (1) delayedproduction ramps for the main aircraft; and (2) the improved buy-to-fly ratios.

We have now recorded 25 months without an uptick in spot market prices. The listed quote for titanium 64 ingot is down to $9.009.25 per pound, but our contacts suggest the real offer is down to $8.70-8.80 per pound. There are three drivers behind the aggressivedeflationary environment: (1) low mill operating rates; (2) the large drop in titanium scrap costs; and (3) more aggressive actionscoming from Precision Castparts (PCP). We estimate ATI to have roughly 15-20% leverage into open market transactions, but therisk to the model would come from downward revisions on contract roll-overs.

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Titanium 6'4 Ingot/Scrap PricesMonthly Average Quotes

Titanium Ingot Prices 6'4 BW ScrapSource: metalprices.com


15/22


NICKEL-BASED ALLOYS UPDATE

We are seeing the same absence of consumption growth within the nickel-alloys market, matching the sluggish downstream titaniumorder trends. We estimate the current comp to be running @ +0-1% which is consistent with the 3Q data point. This product categoryis levered to jet engine OEM and aftermarket customers, which has been a headwind since 2Q. There is also weak demand visible fothe industrial markets like power generation and energy exploration, which have slowed quarter-to-quarter. The current order trendseem to be running in-line with expectations as nearly all of our contacts reported 4Q shipment levels in-line with plan.

The average 4Q price point for nickel-alloys is down roughly $0.50 per pound, but a greater number of contacts believe the market hasfound a bottom (following 6 quarters of incremental declines). This could be attributed to the changing direction of the commodity

markets (and surcharge sentiment) which seem to be holding in the low-$6.00 per pound range.

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1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14

CRC Nickel-Based Quarterly - Demand UpdateNT Order Growth Trends (%, y/y)

Source: CRC Survey

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CRC Quarterly Nickel-Based Alloy Price UpdateEst. Quarterly Pricing Band

Source: CRC Research


16/22



17/22


AEROSPACE FASTENERS UPDATE

**Bottom-line: 4Q Data Points Were Modestly Weaker, But The Underlying Channel Confidence Is HoldingOur channel discussions are showing continued underlying demand strength for aerospace fasteners, but the data points appear to bemodestly lower versus our 3Q update. Underlying demand growth appears to be slightly weaker versus 3Q, as there seems to beslightly more cautious activity @ the distribution level and an inventory overhang throughout the rest of the supply base. The relativevolume weakness appears to be a temporary factor as the bullish 2014 outlook seems to be holding. The channel commentarysuggests next year should become a period of accelerated demand growth & backlog expansion for the peer group driven by highercommercial aircraft delivery schedules.

At this point, we believe the distributors are slightly better-positioned in 4Q based on the location of excess inventories in the channelWe expect the producers to start seeing better demand-pull @ some point in 1Q. The companies best-positioned appear to be winingmarket share on the new aircraft platforms. We have listed the seven most interesting take-aways from the August channediscussions.

1) Downstream fastener order growth has slowed by 1-2 points versus 3Q. We calculate the average comp for 4Q @ +78% versus +9-10% in 3Q. A pullback in military/defense spending is driving some new weakness in the channel, but there isalso some buying disruptions evident in the commercial market. This has been attributed to the introduction of new jedesigns (which could impact production rates for legacy models) and the lowered 747 targets. The commercial aerospace

order rates appear to be running @ +10-12% and military is now estimated to be down 5-10% (depending of the program).

2) The fastener producers are seeing some inventory-related headwinds. There appears to be some excess inventory withinthe channel and certain distributions are staying cautious on the number of held units until order rates accelerate. We believethis translates into a 2 point reduction in fabrication comps, estimated @ +4-5% versus +5-6% last quarter. This also appearsto be putting additional pressure on the wire feedstock market for CRS and Perryman. The inventory situation is expected tobecome a tailwind over the next 3-4 months.

3) There is some optimism building for the regional market. The channel is starting to see better activity for the smalleraircraft market, which includes better order momentum for Bombardier and Gulf Stream over the past 3-4 months. While thecomps are very easy, multi-year planning also seems to be moving higher based on the new positive outlook for the new jetdesigns, like the Bombardier C-Series (technically competes with BA737) or G650 business jet.

4) 2014 expectations are holding. The downstream growth outlook is holding in the +10-15% range, which is consistent withour 3Q update. The major drivers of demand will be the increased 787 & 737 delivery schedules, early pull from the A350

program, and the regional jet market. This is expected to offset the weakness in military aircraft, which is looking downanother 5% for 2014. The inventory position could represent an incremental catalyst for the products, with some distributorsexpected to build holding next year. This implies volume growth for the PCP and AA segment could be up 15-25% nexyear.

Our revised aircraft commercial jet delivery outlook for 2014 is +15%, which includes +20-22% for Boeing, +3-4% forAirbus, and +4-5% for regional aircraft.

5) Lead times have moved out by 2-3 weeks since August but pricing power has not increased. We calculate the averagelead time @ 30-32 weeks, which compares to 25-30 weeks @ summer end. The backlogs have improved considerably from

Aerospace Fastener Flow Chart -- Estimated Growth For Each Part Of Supply Channel

Source: CRC estimates

Wire Feedstock Aero Fastener Production Aerospace Fastener Distribution

Commercial Aircraft

Military Aircraft

Volume Growth @ +7-8%Volume Growth @ +2-3% Volume Growth @ +4-5%

Demand @ +10-12%

Demand @ down 5-10%

Carpenter Technologies (CRS) Precision Castparts (PCP)

Alcoa (AA)

LISI (FII)

Wesco Aircraft (WAIR)

B/E Aerospace (BEAV)


18/22


the 14-16 weeks level in mid-2012. However, we are not seeing much pricing leverage leading into 2014. Prices are lookingflat-to-up-slightly until the lead times reach 40-50 weeks.

6) Boeing is still trying to bring more fastener work in-house. One of the drivers behind BAs new Partnering For SuccessProgram is bringing fastener production & procurement in-house. BA is currently working with New Breed Logistics tobetter maintain control of its internal fastener supply which includes the increased internal fabrication, better inventorymanagement, and concerted effort to reduce the number of SKUs. At this point, we have not seen the BA strategy impact thedistribution channel or supplier base. There are multiple contacts who do not believe BA is likely to be successful incontrolling the fastener volume due to past failures at other companies who have attempted similar strategies like SpiritAerosystems (SPR).


19/22


APPENDIX

Important Disclosures

Allegheny Technologies Incorporated - (ATI: $33.57 - BUY)

RTI International Metals, Inc. - (RTI: $34.99 - UNDERPERFORM)

Carpenter Technology Corporation - (CRS: $61.78 - BUY)FedEx Corporation - (FDX: $134.58 - NEUTRAL)

United Parcel Service, Inc. Class B - (UPS: $100.13 - BUY)

Precision Castparts Corp. - (PCP: $250.49 - NOT RATED)

The Boeing Company - (BA: $132.45 - NOT RATED)

European Aeronautic Defence & Space NV - (EAD-FR: $52.18 - NOT RATED)

Alcoa Inc. - (AA: $9.05 - NOT RATED)

Hexcel Corporation - (HXL: $42.72 - NOT RATED)

Wesco Aircraft Holdings, Inc - (WAIR: $19.74 - NOT RATED)

B/E Aerospace Inc. - (BEAV: $85.71 - NOT RATED)

Cytec Industries Inc. - (CYT: $86.05 - NOT RATED)

TransDigm Group Incorporated - (TDG: $143.37 - NOT RATED)

Universal Stainless & Alloy Products, Inc. - (USAP: $34.05 - NOT RATED)HEICO Corporation - (HEI: $54.29 - NOT RATED)

Kaiser Aluminum Corporation - (KALU: $66.58 - NOT RATED)

Triumph Group, Inc. - (TGI: $72.29 - NOT RATED)

A. M. Castle & Co. - (CAS: $13.76 - NOT RATED)

JetBlue Airways Corporat ion - (JBLU: $8.78 - NOT RATED)

Delta Air Lines, Inc. - (DAL: $27.71 - NOT RATED)

United Continental Holdings, Inc. - (UAL: $37.27 - NOT RATED)

Alaska Air Group, Inc. - (ALK: $75.58 - NOT RATED)

Southwest Airlines Co. - (LUV: $18.01 - NOT RATED)

US Airways Group, Inc. - (LCC: $24.06 - NOT RATED)

Air China Limited Class H - (753-HK: $5.55 - NOT RATED)

China Southern Airlines Co. Ltd. Class H - (1055-HK: $3.02 - NOT RATED)

Spirit Airlines, Inc. - (SAVE: $43.47 - NOT RATED)

easyJet plc - (EZJ-GB: $13.77 - NOT RATED)

Deutsche Lufthansa AG - (LHA-DE: $15.44 - NOT RATED)

Allegiant Travel Company - (ALGT: $106.14 - NOT RATED)

Singapore Airlines Ltd. - (C6L-SES: $10.24 - NOT RATED)

Air France-KLM SA - (AF-PAR: $7.23 - NOT RATED)

Japan Airlines Co., Ltd. - (9201-TKS: $5,380.00 - NOT RATED)

Republic Airways Holdings, Inc. - (RJET: $9.75 - NOT RATED)

Ryanair Holdings Plc - (RY4B-DUB: $5.64 - NOT RATED)

Qantas Airways Limited - (QAN-AU: $1.15 - NOT RATED)


20/22


Oct-10

Dec-10

Feb-11

Apr-11

Jun-11

Sep-11

Nov-11

Jan-12

Mar-12

May-12

Jul-12

Sep-12

Nov-12

Jan-13

Apr-13

Jun-13

Aug-13

Oct-13

30

40

50

60

70

BUY,

$80 BUY,

$75BUY,

$65

BUY,

$57

BUY,

$52

FactSet Research Systems

Allegheny Technologies Incorporated

Oct-10

Dec-10

Feb-11

Apr-11

Jun-11

Sep-11

Nov-11

Jan-12

Mar-12

May-12

Jul-12

Sep-12

Nov-12

Jan-13

Apr-13

Jun-13

Aug-13

Oct-13

35

40

45

50

55

60

BUY,

$46

BUY,

$56

BUY.$64

BUY,

$58


Carpenter Technology Corporation

Oct-10

Dec-10

Feb-11

Apr-11

Jun-11

Sep-11

Nov-11

Jan-12

Mar-12

May-12

Jul-12

Sep-12

Nov-12

Jan-13

Apr-13

Jun-13

Aug-13

Oct-13

20

25

30

35

40

BUY,

$35

NEUTRAL

UNDERPERFORM,

$15


RTI International Metals, Inc.


21/22


Oct-10

Dec-10

Feb-11

Apr-11

Jun-11

Sep-11

Nov-11

Jan-12

Mar-12

May-12

Jul-12

Sep-12

Nov-12

Jan-13

Apr-13

Jun-13

Aug-13

Oct-13

60

65

70

75

80

85

90

BUY


United Parcel Service, Inc. Class B

Oct-10

Dec-10

Feb-11

Apr-11

Jun-11

Sep-11

Nov-11

Jan-12

Mar-12

May-12

Jul-12

Sep-12

Nov-12

Jan-13

Apr-13

Jun-13

Aug-13

Oct-13

70

80

90

100

110

120

NEUTRAL


FedEx Corporation

BUY

36%

NEUTRAL

63%

UNDERPERFORM

1%

Cleveland Research Company - Ratings Distribution


22/22


DisclosuresBuy: The stocks return is expected to exceed the market due to superior fundamentals and positive catalysts.Underperform: The stocks total return is expected to underperform the market due to weak fundamentals and a lack of catalysts.

Neutral: The stock is expected to be in line with the market due to full valuation and/or a lack of catalysts.

Valuation and Risk: Price targets are established under various valuation methods including P/E, P/S, EV/EBITDA on financial estimates based on forward earnings.

Price targets are not established for every stock. The price targets effectiveness may be affected by various outside factors. Risk assessments can be found in the most

recent research on these stocks.

Other Disclosures: We, Christopher D. Olin, Kevin L. Money and Curt Siegmeyer certify that the views expressed in the research report(s) accurately reflect ou

personal views about the subject security(s). Further we certify that no part of our compensation was, is, or will be directly or indirectly related to the specific

recommendations or views contained in the research report(s). The analysts responsible for the preparation of this report have no ownership stake in this companyCleveland Research Company provides no investment banking services of any type on this or any company.

The information transmitted is intended only for the person or entity to which it is addressed. Any review, retransmission, dissemination or other use of, or taking of any

action in reliance upon, this information by persons or entities other than the intended recipient is prohibited. If you received this in error, please contact the sende

and delete the material from any computer.Member FINRA/SIPC

aerospace supply chain - november update

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