aerospace supply chain & raw material outlook

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Presented by:

Dr. Kevin MichaelsGlobal Managing Director – Aviation Consulting & Services

Aerospace Supply Chain & Raw Material Outlook

2nd Annual European Aerospace Raw Materials & Manufacturers Supply Chain Conference

September 15, 2014Toulouse, France

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Agenda

Aerospace Demand Outlook

Aerospace Supply Chain Trends


Air Transport62%

BGA13%

Military11%

Military RW11%

Civil RW4%

AEROSPACE DEMAND OUTLOOK

Total aircraft production in 2014 is 4,972 units; air transport aircraft account for 62% of value

Source: ICF analysis

Air Transport33%

BGA22%

Civil RW21%

Military RW15%

Military9%

By Units4,872

By Value$171B

2014 Aircraft Production by Market



Annual production value is expected to reach more than $200B, with unit production eclipsing 6,000 aircraft by 2024

Source: ICF analysis* Constant 2014 US$

Aircraft Production 2014-2024By Market Segment

# Aircraft

2014 2019 20240

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Military, (0.9%)

Military RW, 0.4%

Civil RW, 0.7%

BGA, 4.9%

Air Transport, 2.7%

Total CAGR = 2.2%

Type, CAGR $B USD*

2014 2019 2024$0

$50,000,000,000

$100,000,000,000

$150,000,000,000

$200,000,000,000

$250,000,000,000

Civil RW, 1.2%

Military RW, 0.7%

Military, 0.3%

BGA, 4.8%

Air Transport, 2.4%

Total CAGR = 2.3%

Type, CAGR


Aggregate aerospace raw material demand is 1.44B pounds



Alu-minum Alloys48%

Steel Al-loys21%

Tita-nium Al-

loys11%

Super Alloys

9%

Other6%

Composites4%

2014 Aircraft Raw Material DemandBy Material Type (buy weight)

Total1.55 B lbs

Aluminum alloys are nearly half of all total demand

Steel alloys & titanium also are large driver of demand due to their high buy to fly ratios

Composites are relatively small part of total demand at just 4% due to their lightness of weight and their relatively low buy to fly ratio

Aggregate “Buy to fly” ratio is ~ 6


Boeing and Airbus aircraft account for nearly 70% of raw material demand


Source: ICF AnalysisSource: ICF Analysis

Boeing and Airbus aircraft models comprise 67% of demand

GE is the next largest consumer – 7% when including its share of CFM

Boeing36%

Airbus30%

General Electric

5%

CFM Intl4%

CFM3%

Rolls-Royce 3%

Embraer2%

Pratt & Whitney

2%

Other15%

Total1.55 B lbs

2014 Aircraft Raw Material DemandBy OEM (buy weight)



The total aerospace raw material market is worth about $12 billion

Aluminum and titanium are the largest material markets by value – both are worth just over $3B

With 787 production ramping up, and A350 long-lead items under production, composites are the third largest category at $2.3B

The value of superalloys is $1.8B, driven by aero-engine production


2014 Aircraft Raw Material ValueBy Material Type

Titanium Alloys27%

Aluminum Alloys26%

Compos-ites19%

Super Al-loys15%

Steel Alloys10%

Other3%

Total$11.9B


Over the next decade aluminum demand will remain solid while composites & titanium will grow significantly



2014– 2023 Aerospace Raw Material DemandBy Material (buy weight)

Million Lbs

Total CAGR = 1.1%

Type, CAGR Overall raw material demand growth will be lower than aircraft unit growth due to lower buy-to-fly ratios and greater use of composites

Composites and titanium will be the fastest growing material categories

Aluminum demand will be relatively flat

2014 2019 20240

200,000,000

400,000,000

600,000,000

800,000,000

1,000,000,000

1,200,000,000

1,400,000,000

1,600,000,000

1,800,000,000

Other, 1.0%

Composites, 4.9%

Super Alloys, 1.2%

Titanium Alloys, 3.6%

Steel Alloys, 0.1%

Aluminum Alloys, (0.5%)


Aerospace Demand Outlook

Aerospace Supply Chain Trends

Agenda


There are several important aerospace trends that are shaping aerospace supply chains

Growing capital market interest

KeyAerospace

SupplyChainTrends

SUPPLY CHAIN TRENDS

Source: ICF

“Right Shoring”

AdvancedAeroengines

AdditiveManufacturing

Supply ChainTransparency

& Control

OEM VerticalIntegration

OEMs PushFor Cost

Reduction


2009-11 2012-140%

10%

20%

30%

40%

50%

60%

70%

80%

Move Between High Cost CountriesReshoreMove Between Low Cost CountriesOffshore

SUPPLY CHAIN TRENDS – RIGHTSHORING

Shifting manufacturing economics underpin increased interest in manufacturing “onshoring”

Source: The Economist January 19 2013

Note: data is for general manufacturing and is not aerospace-specific

Manufacturing Outsourcing Cost Index % of US Cost

Companies’ Intentions To Change Manufacturing Source

Worldwide, % of Capacity


The southeast U.S. and Singapore are now two popular locations for aerospace manufacturing investments


Aerospace Investments In Selected Emerging Clusters

• The southeast U.S. is benefitting from a wide variety of investments

• Manufacturing & some engineering investments from airframe & engine OEMs, as well as airframe suppliers

• Singapore is becoming a new manufacturing hub in Southeast Asia

• Investments include range of high-tech manufacturing, MRO, and engineering

Southeast U.S. Singapore

Source: ICF



“Rightshoring” is the new aerospace investment mantra

Source: ICF

* Note – Russia is emerging for Western certificated equipment

Global Aerospace Manufacturing Clusters

Established Clusters

Emerging Clusters


SUPPLY CHAIN TRENDS – COST REDUCTION

Initiative Activity

New commercialterms

• Unilateral price reductions and revised terms

• “No fly” lists for suppliers that don’t participate

Part redesigns

• Value engineering• Material substitution

New processes

• Shift to lower cost process• Leverage new processes

Capture revert

• Where possible, capture revert from suppliers

• Work with supply chain integrators to close loop on material

OEMs are utilizing a variety of cost reduction initiatives…



SUPPLY CHAIN TRENDS – COST REDUCTION

…and cost reduction will be important as aircraft OEMs target double-digit profitability

Major aircraft OEMs are driving for double-digit profitability

One initiative is to secure concessions from suppliers to ensure access to future programs

OEMs are also expanding their influence and role in the aftermarket

The implication is downward margin pressure on suppliers

Source: ICF analysis, Wall Street Journal


SUPPLY CHAIN TRENDS – ADVANCED AEROENGINES

The push to deploy advanced technology underpins recent re-engining decisions – more are likely

“G2” E-jet

Photo credits: Embraer, Boeing, Airbus

In January 2013 Embraer selected Pratt’s GTF for is “G2” E-Jets

Boeing announced the B777-X with GE9X aeroengines in November 2013

Airbus announced the A330neo with the Trent 7000 at Farnborough 2014 for 2018EIS

A future re-engining possibility includes the A380

777-X

A330 neo

“Every 25 years a big moonshot ...— that’s the wrong way to pursue this business. The more-for-less world will not let you pursue moonshots.”

Jim McNerny – CEO, Boeing


…however aeroengine material trends are encroaching on titanium’s “sweet spot” in aeroengines

Source: CFM, ICF analysis

CFM LEAP-X

SUPPLY CHAIN TRENDS - ADVANCED AEROENGINES

Nickel alloy movingforward in the High Pressure Compressor module

Composite fan and fan cases increasingly popular

Titanium’s “sweet spot” in aeroengines

Composites

Powder Metals

Advanced super alloys

Titanium Aluminide

Winning Materials


Supply chain transparency and control is growing in importance

SUPPLY CHAIN TRENDS - ADVANCED AEROENGINES

Customers (driven by OEMs) demanding increased visibility into supply chain

This contributes to the use of latest technology (physical control centers and software) for 'early alerts'

There is also growing use of data analytics

Sub-tier suppliers are being asked to provide utilization and ramp-up plans


Some OEMs are trending towards greater vertical integration; Boeing is a notable example

SUPPLY CHAIN TRENDS – VERTICAL INTEGRATION

Selected Examples of Boeing Vertical Integration


Boeing has set up the nacelle and pylon Center of Excellence in South Carolina

The 777X wing production will remain in Everett

Facility expansions in Winnipeg, South Carolina, and Helena, MT will support machining and in-house production of structures assemblies


GE is also vertically integrating for strategic technologies

SUPPLY CHAIN TRENDS – VERTICAL INTEGRATION

Acquired Avio•LPTs•Gearboxes

Acquired Morris Technologies for additive manufacturing capability

Will make ceramic matrix composite blades, vanes, seals

Established JV with Parker to make fuel nozzles via additive manufacturing

Selected Examples of Vertical Integration - GEnx

CFAN JV with SAFRAN makes composite fan blades



Additive manufacturing represents a potential step-change in cost and part design capability

SUPPLY CHAIN TRENDS – ADDITIVE MANUFACTURING

Sources: ICF analysis

• Additive manufacturing (AM) “builds up” parts with material deposition, rather than removing material through machining

• There are many types of additive manufacturing processes and little industry standardization

Traditional Subtractive Manufacturing Additive Manufacturing



Several OEMs are trialing additive manufacturing on a range of production and aftermarket parts

Source: ICF analysis, GKN, GE Aviation, Airbus, Boeing

Examples of Additive Manufacturing Adoption

• GKN is using AM on aerostructures for Falcon 5X

• Driver is cost reduction

• Boeing is currently using AM for polymer ducting on F-18 & 787

• Part consolidation & cost driver

• GE using AM for Leap-X fuel nozzles in Parker Aerospace JV

• Performance is main driver of adoption



In addition to adoption on certain parts, OEMs and suppliers are announcing substantial investments in AM

Source: RTI, GE, Carpenter Technology, ICF analysis

RTI Acquires Directed Manufacturing

Jan 2014▪ RTI acquired Direct

Manufacturing for $23M to enhance production capabilities in medical devices and aerospace

▪ Makes full rate production parts for UAVs

GE Expands Auburn AL

▪ GE will expand Auburn facility starting in late 2014

▪ 10 machines in 2015 with capability for 50

▪ Will handle full rate production of all AM parts, including Leap fuel nozzles

Announced July 2014

Carpenter Powder Facility in Athens, AL

▪ Facility will be located adjacent to current mill facility in Athens

▪ Will produce superalloy powders for isothermal forging and additive manufacturing

Announced Oct 2013


SUPPLY CHAIN TRENDS - ADDITIVE MANUFACTURING

A long term trend to watch is the penetration of additive manufacturing and its impact on buy-to-fly ratios

Ti Wing Beam Concept(China Northwest Polytechnical Univ.

Sources: RapidReady, China Northwest Polytechnical University

The industry aggregate buy-to-fly ratio based on subtractive manufacturing is ~6:1; for some parts it is >15:1

In contrast, the buy to fly ratio for additive manufacturing is very low

Early application of AM will be in unmanned systems, experimental aircraft, space, and military sustainment

In the long term, AM will impact mainstream aerospace production and raw material demand


WILDCARD – TITANIUM SUPPLY RESTRICTIONS

A Wildcard to watch: political crises with Russia and Ukraine could drastically impact aerospace supply chains

Source: ICF analysis, Wall Street Journal

VSMPO30%

ATI23%

Timet22%

RTI10%

Japanese Suppliers

10%

Others5%

Total169M lbs

Over 30% of aerospace titanium is supplied by VSMPO

Ukraine is a key supplier of nearly all titanium concentrates to VSMPO

Some OEMs are stockpiling titanium as a contingency

2014 Aerospace Titanium Market


Thanks and Questions

Kevin MichaelsVice PresidentGlobal Managing Director – Aviation Consulting & Services

+1 734 821 [email protected]


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