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    The Changing Face of the Aerospace & Defense Industry

    Aerospace & Defense the way we see it

    A review of key segments and emerging trends

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    Business Process Outsourcing the way we do it

    Contents

    Introduction 3

    Industry Overview 4

    Industry Growth Drivers 5

    Market Segment Analysis 8

    Large Commercial Aircraft (LCA) Segment 8

    Regional Aircraft Segment 10

    Business Jets Segment 12

    Helicopter Market 14

    Global Defense Market 15

    Aerospace Supply Chain Analysis 17

    Supply Chain Analysis 17

    Key Components of the Aerospace Supply Chain 18

    Aircraft Engines 18

    Avionics 18

    Global Maintenance, Repair and Overhaul (MRO) 19

    Future Trends 20

    Increasing Usage of Composites 20

    Optimized Usage of Turboprops and Jets 20

    Alternate Fuels 20

    Globalization 21

    Conclusion 22

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    Aerospace & Defense the way we see it

    IntroductionThe global Aerospace & Defenseindustry has experienced transformationin the past 18 months. Following adecline in orders and backlogs in 2008and 2009 aircraft manufacturers areseeing phenomenal growth in 2011.This strong recovery is being driven bythe commercial aviation segment asglobal passenger traffic increased

    sharply by 8% to 10% year-on-year. Also contributing to the industrysgrowth are the overall improvement of the global economy, the emergence of low-cost carriers, and increasingdemand for aircraft from the developingeconomies of China and India.

    The two primary players have alreadyraised their production plans: Airbusincreased the A320 rate to 36 permonth by the end of 2010 and

    expected to reach the figure of 40 permonth in the first quarter of 2012.Boeing is ramping up its productionrate of the 737 to 38 per month by2013, and there have been reports of it going higher.

    However, despite the optimism, fuelprices remain a major concern stillhampering the recovery and with thepotential to affect industry growth. TheInternational Air Transport Association(IATA) has reduced its forecast forairline industry profits (net post-tax) in2011 from US$9.1 billion to US$8.6billion due to the recent surge in oil and

    jet kerosene prices.

    In terms of regions, weak domesticmarkets are affecting the Europeanairlines, although business travel andoutbound freight look positive. AsiaPacific, Latin American and Africanairlines are benefiting from the strongeconomic growth and are experiencing

    significant gains in traffic. Formanufacturers, Asia Pacific is the largestsource of order backlog.

    This Capgemini research study assessesthe global Aerospace & Defenseindustry and identifies both thechallenges and opportunities the marketpresents for manufacturers. The reportexamines five key industry segments:Large Commercial Aircraft, Regional

    Aircraft, Business Jets, Helicopter andDefense. In addition, it provides an

    analysis of the aerospace supply chain. Also contained in the report are keymarket observations, substantiated byrelevant market sizing and forecastfigures, and an overview of futuretrends and recommendations, which aredesigned to inform and inspiremanufacturers as they develop theirgo-to-market strategies.

    3

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    The Aerospace & Defense (A&D)industry is comprised of manufacturersfrom civil and military aerospace anddefense procurements. The defenseprocurements segment comprisesrevenues earned from defenseelectronics and military aerospace;whereas the civil aerospace segment

    includes revenues earned from civilianplanes (but excludes military aircraftand related items). Globally, the A&Dindustry recorded total revenues of US$771 billion in 2010 and registeredyear-on-year growth of 4.8% fromUS$744 billion in 2009. Defenseoccupied the largest share of thespending pie with 71.8% at US$660.8billion in 2009.

    Globally the A&D industry has been

    forecasted to record an accelerated

    Industry Overviewgrowth with an anticipated CAGR of 5.3% for the period 2009 to 2014,reaching a market value of US$1,190.5billion. This growth rate is expected tobe driven by the Commercial segmentdue to a more positive economicoutlook, rising income levels and thebooming Commercial Aviation segment.

    However, the demand outlook fromDefense will be under pressure as manydefense programs are experienceingbudget cuts.

    A&D companies will also continue toface the challenges of improvingproductivity and responding to ever-increasing government regulations.The United States is, by far, theworlds largest Aerospace & Defensemarket, with revenues close to

    US$543 billion. The U.S. market isfollowed by the European market withan estimated share of about 27%.Even though Asia falls behind the U.S.and the European markets it isconsidered to be the fastest-growingmarket for A&D products.

    Boeing and Airbus continue todominate the Large Commercial

    Aircraft market space while Embraerand Bombardier dominate the smalleraircraft segments, which includeRegional and Business Jets.

    Figure 2 : Aerospace & Defense Market Size and Forecast

    743.9 771 798.7839.8 839.4

    937.5

    4.80%

    3.60% 3.60%

    5.10%5.90%

    5.40%

    0%

    1%

    2%

    3%

    4%

    5%

    6%

    7%

    0100

    200

    300

    400500

    600

    700

    800900

    1,000

    2009 2010 2011 2012 2013 2014

    Y - O - Y

    G r o w t h R a t e s

    U S D B i l

    l i o n

    A&D Market Size and Growth Growth Rate

    Figure 1: A&D Market Size Values by Region, 2009

    Europe,22%

    Asia,19%

    100% = US$743.9 billion

    UnitedStates,59%

    Source Datamonitorhttp://www.datamonitor.com/store/Product/aerospace_defense_global_industry_guide_2010?productid=4949A252-DDED-4B3F-9F88-B9B3DC27A1F6 2010

    Source Datamonitor

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    Aerospace & Defense the way we see it

    Industry Growth Drivers

    Economic Growth: The demand foraircraft is related to air travel, which inturn is linked to the increasing wealth,increasing per capita income andpositive Gross Domestic Product(GDP) outlook. An increase in air

    travel has occurred in the developingeconomies like India and China; bothof these countries signify robustoptimism for the Aviation segment.Other factors leading to Civil Aviationgrowth include international trade andglobalization. The global economy hasalso shown gradual signs of recoveryfrom the economic recession. As seenin Figure 3, IMF predicts that therecovery is likely to continue andglobal GDP is expected to grow

    between 4.4% and 4.6% until 2015. An analysis by Boeing spanning the last50 years revealed that the best indicatorfor measuring the performance of the

    Aviation segment is the world GrossDomestic Product (GDP). The Boeingstudy further found that the downturnsexperienced by the Airline industrytypically match the worldwideeconomic slumps. Given the presenteconomic situation it is clear that the

    Airline industry will continue to recover

    5

    Figure 3: Global GDP Growth

    % C

    h a n g e

    6

    4

    2

    0

    4.572 5.244 5.395

    2.865

    -0.524

    5.01 4.401 4.513 4.54 4.627 4.667

    20152014201320122011201020092008200720062005-2

    in the near future with increasingdemand from developing economieslike India and China, which will offsetthe relative slowdown in demand frommature economies like North Americaand Europe.

    Environmental Concerns Fueling

    the Replacement Aircraft Market:The environment has become aprimary focus for any industry,particularly with the increasedawareness resulting from theCopenhagen Climate Conference 2009.The implications for the Aviationsegment are significant, with engineand airframe manufacturers along withairline operators in the limelight toreduce their carbon footprints.

    Despite the fact that carbon dioxideemissions by aircraft account for only2% of total global emissions, the

    Aviation segment is gradually takingsteps towards carbon-neutral growth.The airlines are committed toimproving average fuel efficiency by1.5% per annum until 2020. Beyond2020, carbon dioxide emissions fromthe Aviation segment are expected tostabilize and then decline despite theanticipated increase in traffic;achieving these targets will lead to a

    carbon-neutral Aviation industry inthe future. However, progress towardsthat can only be achieved by replacingolder aircraft with new, efficientaircraft fleets, infrastructure,operational improvements as well asappropriate economic levers. Theincrease in environmental awareness

    and regulations will have a positiveeffect on demand for new, efficientaircraft in the future.

    Focus on Fuel-Efficient Aircraft: The global economic recovery hasboosted demand for oil across theworld, creating further pressure onenergy prices. Additionally, the recentpolitical turmoil in the Middle Eastand North Africa has also added tothe surge in prices. Even if the

    political risk is reduced, theanticipated economic growth willcontinue to justify the revisions in oilprice forecasts for this year.

    According to the International AirTransport Association (IATA), jetkerosene prices have doubled sincetheir low point in early 2009, reachingUS$113 a barrel in early 2011. Withthese costs representing around aquarter of total operating costs this pricerise has added some 25% to unit costs.

    Source- http://www.imf.org/external/ns/cs.aspx?id=28

    http://www.imf.org/external/ns/cs.aspx?id=28http://www.imf.org/external/ns/cs.aspx?id=28
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    Over the same period the average returnfare, excluding fuel surcharges, has risenby 20%. To date the airlines have beenable to manage the impact of theincreasing input costs by addingsurcharges, which in effect offset theirincrease in revenue over the sameperiod. However, in the long run,

    aviation companies will be forced toundertake premature retirement of aircraft and will explore more fuel-efficient options. This will create agrowth opportunity for aerospacemanufacturers in both the short andmedium term.

    Capacity for Network Expansion: Airlines are highly dependent on thestrength of their network to registerrevenues. Therefore, they are

    constantly making efforts to ensurethat their routes maintain an acceptablereturn for their investment. With thisin mind, airlines are oftenstrengthening their networks throughthe addition and deletion of routes aswell as strong code share relationships.

    Figure 4: Oil Prices Tracked Week by Week

    U S $ / B a r r e

    l

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    100

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    However, with heavy traffic growth indeveloping regions, airlines areexploring options to add capacity inthese new routes. Recently IndiGo, anIndia-based airline, launched eight newdirect flights from Lucknow toMumbai, Delhi and Bangalore. Thisroute expansion followed the induction

    of the new Airbus A320 into its fleet.

    Continual Growth of Low-CostCarriers (LCCs) in DevelopingEconomies: The low-cost carriershave proved to be strong, particularlyin the developing economies of Asiaand Latin America during the 2008-2009 economic downturn. Double-digit growth has been the norm forthese carriers over the last couple of years in the Asia Pacific region. The

    highest growth in particular was inthe short-haul market aroundSoutheast Asia, India and Australia. InIndia, a country the size of Southeast

    Asia, low-cost carriers SpiceJet andIndiGo continue to grow as theyreplace the likes of Air India, Jet

    Source EIA, Website

    http://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm

    http://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htmhttp://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm
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    Aerospace & Defense the way we see it

    7

    100%

    80%

    Mainline Regional Low Fare

    60%

    40%

    20%

    2004 2005 2006 2007 2008 2009

    0%

    Figure 5: Historical Distribution of US Domestic Seat Share

    21%

    22%

    57%

    23%

    23%

    54%

    23%

    25%

    52%

    23%

    27%

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    59%

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    31%

    54%

    15%

    32%

    53%

    Mainline Regional Low Fare

    60%

    40%

    20%

    2004 2005 2006 2007 2008 2009

    0%

    Figure 6: Historical Distribution of EU Domestic Seat Share

    Airways and Kingfisher Airlines. Evenbig fish like Jet and Kingfisherconverted 70% of their domesticoperations to the low-cost model inthe past couple of years.

    Despite LCCs opting forpredominantly wide-body aircraft,

    Boeing and Airbus both forecastedthat the demand for single-aisleaircraft in the region is expected toaccelerate in the coming years. Boeingand Airbus also predicted that thecompanies will require approximately5,200 new airliners in the 100 to 210seat category, such as the best-selling

    A320 family. This increase in demandwill be driven primarily by the growthin fleet size of the LCCs along withthe opening of new secondary short-

    haul routes, especially in China, Indiaand Southeast Asia.

    In 2010 low-cost carriers likeIndiGo, SpiceJet and JetLite ordered46 new aircraft, which are to bedelivered by 2014.

    http://www.bombardier.com/files/en/supporting_docs/BCA_2010_Market_Forecast.pdf Source OAG Aviation Solutions & Bombardier Commercial Aircraft Market Forecast, 20102029, Page 8

    http://www.bombardier.com/files/en/supporting_docs/BCA_2010_Market_Forecast.pdfhttp://www.bombardier.com/files/en/supporting_docs/BCA_2010_Market_Forecast.pdf
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    Market Segment AnalysisThe A&D industry can be segmentedinto Large Commercial Aircraft,Regional Aircraft, Business Jets andHelicopter. However, with changingindustry dynamics these segments aregradually blending into one another.

    The following section includesdetailed descriptions of thesesegments in order to provide a view of the future outlook for the A&Dindustry as a whole.

    Large Commercial Aircraft (LCA)Segment

    The Aviation industry as a whole ishighly sensitive towards the economicsituation; this was reflected in the

    direct effect the economic downturnhad on the industry during 2009. Ittriggered one of the biggest declinesin passenger traffic since World WarII. However, with the stabilization of the economy, airlines are graduallyexperiencing relative improvement inthe air traffic. Low passenger yields

    along with rising fuel costs took amajor toll on airline finances during2009. According to the March 2010IATA estimate, globally airlines lostapproximately US$9.4 billion in 2009.

    Albeit even with the recovery, IATA

    expected the industry to lose US$2.8billion in 2010. However, the growthprospects for the global passengeroutlook remain at an all-time highfor the near future.

    Aircraft manufacturers alsoexperienced a sudden drop in ordersfor new aircraft as a result of theeconomic downturn. Overall the

    Aerospace industry generally lagsthe economic cycle by

    approximately two years.However, Aircraft manufacturers wereable to manage the slowdown becauseof geographically balanced backlog of 2005-07. The industry was also ableto handle the overall backlog in anefficient way by shifting the delivery

    Figure 7: Order and Delivery Trend Analysis Boeing and Airbus, 2006 - 2010

    1,800

    1,500

    1,200

    2006

    1,008

    398

    824

    434 441 453 608375

    900

    483263

    481310

    498 625 462644

    510

    1,4581,282

    Boeing Aircraft Order

    Airbus Aircraft OrderBoeing Aircraft Deliveries

    Airbus Aircraft Deliveries

    2007 2008 2009 2010

    900

    600

    3000

    N u m

    b e r o

    f A i r c r a t

    f

    Source Boeing and Airbus Websiteshttp://active.boeing.com/commercial/orders/index.cfm?content=displaystandardreport.cfm&RequestTimeout=500&optReportType=AnnOrd&pageid=m15521http://www.airbus.com/presscentre/corporate-information/key-documents/

    Note According to the 2010 company annual reports, Airbus had 310 orders in 2009, down from 900 in 2008, while Boeings new ordersdeclined to 263 in 2009 from 608 in 2008.

    http://active.boeing.com/commercial/orders/index.cfm?content=displaystandardreport.cfm&RequestTimeout=500&optReportType=AnnOrd&pageid=m15521http://www.airbus.com/presscentre/corporate-information/key-documents/http://www.airbus.com/presscentre/corporate-information/key-documents/http://active.boeing.com/commercial/orders/index.cfm?content=displaystandardreport.cfm&RequestTimeout=500&optReportType=AnnOrd&pageid=m15521
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    Aerospace & Defense the way we see it

    time slots as well as switchingdeliveries among its customers.

    However, with the improvedeconomic outlook, global airlinetraffic is expected to grow 4.7% on

    average every year from 2009 to2028, with the highest gains in AsiaPacific and the Middle East, accordingto the Airbus Global Market Forecast.Over the next 20 years, Airbusforesees a demand for around 25,850passenger and freighter aircraft, worthapproximately US$3.2 trillion andBoeing forecasts demand of 28,980aircraft at US$3.5 trillion.

    This growing demand is expected to

    be driven by developing economieslike India and China, which areexpected to witness a surge in airtraffic in the near future. Observingthe forecasted numbers in Figure 8and Figure 9 of both Boeing and

    Airbus, 33% and 34% of this growthis expected to originate from the Asia

    Pacific region, while North Americaand Europe will contribute 23% each.

    In the near future Airbus and Boeingare expected to face increasingcompetition from manufacturers like

    Bombardier CSeries, Embraer, RussianMS-21, Sukhoi SuperJet and ComacC919. Though late to arrive, theseplayers have realized the potentialeconomic opportunity thatcommercial airplanes and relatedservices will represent in the future.This dynamic was reinforced in theforecasts of both Airbus and Boeing.

    Airbus projected an increasingdemand of 16,977 single-aisle aircraftin 2009 while in 2010 it saw a

    demand for 17,870. Boeing saw ademand for 19,460 single-aisle aircraftin 2009 while in 2010 it was close to21,150.

    In addition, demand for fuel-efficientairplanes will continue to pushcompanies to create designs that will

    be environmentally progressive innature and will adhere to North

    American and European airlinesenvironmental strategy.

    9

    28,980

    24,000Boeing Airbus

    25,000

    26,000

    27,000

    28,000

    29,000

    30,000

    25,850

    Figure 8: 2010 - 2029, New Airplane Deliveries, Boeing and Airbus Forecast

    0%10%

    20%30%

    40%

    50%

    60%

    70%

    80%

    90%100%

    Boeing Airbus

    NorthAmerica, 23%

    Asia Paci c,33%

    Europe, 23%

    Other, 14%

    Middle East,7%

    NorthAmerica, 23%

    Asia Paci c,34%

    Europe, 23%

    Other, 12%

    Middle East,8%

    Figure 9: 2010 2029, New Airplane Deliveries, Boeing and Airbus Regional Demand Forecast

    Source Boeing and Air bus Global Market Forecast, 2010-2029http://www.boeing.com/commercial/cmo/index.html

    Source http://www.airbus.com/presscentre/corporate-information/key-documents/

    http://www.boeing.com/commercial/cmo/index.htmlhttp://www.airbus.com/presscentre/corporate-information/key-documents/http://www.airbus.com/presscentre/corporate-information/key-documents/http://www.boeing.com/commercial/cmo/index.html
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    Regional Aircraft Segment Global manufacturing of regional jetsis dominated by two manufacturersCanadas Bombardier and BrazilsEmbraer. Typically regional jets areconsidered to be commercial aircraftwith fewer than 100 seats. However,

    this traditional definition has evolvedwith the changing market dynamicsas large regional jet manufacturers areproducing jets that are comparableto the smallest aircraft of Boeing and

    Airbus. The demand for regional jetsgrew swiftly in the 1990s as airlinesused them to fill a niche. However, due to the recent economicdownturn, deliveries of smallerregional aircraft slowed, creating

    a new regional aircraft segment of 100 to 149 seats. Bombardier (2010Commercial Aircraft Market ForecastReport) estimates that 12,800 newaircraft worth US$612 billion areexpected to be delivered between2010 and 2029 in the 20 to 149seat category. Of these, 2,400 are

    estimated to be for turboprops, 3,700will be in the 20 to 99 seat category,while 6,700 will be in the 100 and149 seat segments.

    In the coming years turboprops areexpected to play a crucial role in theregional aircraft market of fewer than

    100 seats primarily because regionalairlines are facing the stiff challengeof managing rising fuel costs. Thelow fuel consumption of turboprops,compared with equal size regional

    jets, provides room for airlines tomaintain capacity while reducingfuel bills and effectively curbing theircarbon footprint.

    Large regional jets having fewer than100 seats provide opportunities

    for airlines to fly long routes withoptimized seating capacities, whilereducing costs without compromisingtoo much on passenger comfort.Bombardier forecasted that thedemand for regional jets will outpaceturboprops in the near future.Bombardier also forecasted that 61%

    Figure 10: Aircraft Delivery Trend Analysis - Embraer and Bombardier

    250

    200

    150

    Embraer Aircraft Deliveries Bombardier Commercial Aircraft Deliveries

    2005 2006 2007 2008 2009 2010

    100

    50

    0

    12098

    197138 130

    112

    162

    128 122 110100

    121

    Source Embraer Website and Bombardier Annual report, 2011, Page 62http://ri.embraer.com.br/Embraer/Show.aspx?id_canal=BXgiTZv8CUwvbKlxIjPwpA%3d%3dhttp://www.bombardier.com/en/corporate/investor-relations/financial-results

    Note Bombardier Commercial Aircraft is categorized under Regional Aircraft Segment

    http://ri.embraer.com.br/Embraer/Show.aspx?id_canal=BXgiTZv8CUwvbKlxIjPwpA%3d%3dhttp://www.bombardier.com/en/corporate/investor-relations/financial-resultshttp://www.bombardier.com/en/corporate/investor-relations/financial-resultshttp://ri.embraer.com.br/Embraer/Show.aspx?id_canal=BXgiTZv8CUwvbKlxIjPwpA%3d%3d
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    Aerospace & Defense the way we see it

    of aircraft deliveries having fewerthan 100 seats will be for regional jetswhile the remaining balance will befor turboprops.

    An additional opportunity is predictedto arise for the replacement market asthe 100 to 149 seat category currentlyis dominated by an aging fleet of

    aircraft. Also, many of the aircraftin these segments are derivativesof larger aircraft and not optimallydesigned to meet the requirementfor the 100 to 149 seat category.The added weight and drag produceinefficiencies related to higher fuelburn and more CO 2 emissions

    North America and Europe are thetwo primary markets for regional

    jets, representing 41% and 28% of

    the current fleet in the 20 to 149seat aircraft category, respectively. As seen in Figure 13, Bombardierforecasts that North America willcontinue to be the largest market interms of deliveries in the fewer than150 seat category. By 2029, demandfor fewer than 149 seat aircraft from

    Figure 11: Bombardier 2029 Forecast(20 149 Seat Aircraft)

    20,000

    15,0004,500

    Retained FleetRetirement

    Growth

    6,700

    6,100

    2009 2029

    11,200

    10,000

    5,000

    0

    Figure 12: Embraer 2029 Forecast(30 120 Seat Aircraft)

    12,000

    10,0001,725

    Retained FleetRetirement

    Growth

    4,690

    4,450

    2009 2029

    6,415

    8,000

    4,000

    0

    2,000

    6,000

    North America and Europe willdecline. However, that will be offsetby growing demand from emergingmarkets. In 2009, Asia Pacific,including India and China, captured16% of the total market, whereas thisfigure is forecasted to increase to 22%in 2029 (Figure 13).

    11

    Figure 13: Worldwide Distribution of Regional Airlines Fleet, 2010 - 2029

    0%

    10%

    20%30%

    40%

    50%

    60%

    70%

    80%

    90%100%

    2009* 2029

    Europe, 28%

    North America, 41%

    Asia Paci c, 11%

    China, 5%

    Latin America, 8%

    Africa & Middle East, 6%

    Europe, 19%

    North America, 40%

    Asia Paci c, 15%

    China, 7%

    Latin America, 12%

    Africa & Middle East, 7%

    Source Bombardier Commercial Aircraft Market Forecast, 2010-2029http://www.bombardier.com/files/en/supporting_docs/BCA_2010_Market_Forecast.pdf

    Source Embraer and Bombardier Global Market Forecast, 2010-2029http://www.bombardier.com/files/en/supporting_docs/BCA_2010_Market_Forecast.pdf http://www.embraercommercialjets.com/img/download/248.pdf

    Note *Sum does not add to 100% as figures were rounded

    http://www.bombardier.com/files/en/supporting_docs/BCA_2010_Market_Forecast.pdfhttp://www.bombardier.com/files/en/supporting_docs/BCA_2010_Market_Forecast.pdfhttp://www.embraercommercialjets.com/img/download/248.pdfhttp://www.bombardier.com/files/en/supporting_docs/BCA_2010_Market_Forecast.pdfhttp://www.embraercommercialjets.com/img/download/248.pdfhttp://www.bombardier.com/files/en/supporting_docs/BCA_2010_Market_Forecast.pdf
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    Business Jets Segment

    Demand for business jets soared in2008 as U.S. companies registeredrecord profits and the overallbusiness sentiment was at an all-time high. However, with thecollapse of the financial markets,

    the Business Aviation segment as awhole started facing stiff challengesby the end of 2008. Overall orderactivities recorded a downfallduring the last quarter of 2008.Inventories of pre-owned aircraftincreased significantly with residualvalues taking a hard hit. Moreover,Original Equipment Manufacturers(OEMs) were having a tough timebetween order cancellations anddeferrals. Bombardier estimated

    that more than 800 net orderswere cancelled in 2009 in the Lightto Large categories (BombardierBusiness Jet Market Forecast). Thismarket situation pushed OEMs tocut their production targets.

    However, with the gradual recovery of the economy, business jet usage hasincreased and pre-owned inventoryhas started declining. According tothe General Aviation Manufacturers

    Association (GAMA) the used business jet inventory in December 2010 was14.8% of the active fleet, which was

    1.5% lower than in December 2009. With recovery visible, the averagebusiness jet inventory is still above thehistorical average.

    Credit availability has started torecover, improving the ability of certainoperators to finance their business jetpurchases. GAMA recorded a drop inworldwide shipments of business jetsfor the third year - in 2010, 763 unitsof planes were delivered around the

    globe, compared with 870 units in2009, a 12% decline.

    However, business jet manufacturersare witnessing gradual improvementin demand, but there is contraction

    Figure 14: Worldwide Business Jet Shipments 2005 - 2010 Analysis - Embraer and Bombardier

    1,500

    1,000

    Total Number of Airplanes Growth Rate

    2005 2006 2007 2008 2009 2010

    500

    0

    750

    27%18%

    28% 16%

    -34%

    -12%

    40%

    20%

    -20%

    -40%

    0%886

    1,136 1,313 870

    763

    Source 2010 GAMA Statistical Databook & Industry Outlook, Page 17

    http://www.gama.aero/files/GAMA_DATABOOK_2011_web.pdf

    http://-%20http//www.gama.aero/files/GAMA_DATABOOK_2011_web.pdfhttp://-%20http//www.gama.aero/files/GAMA_DATABOOK_2011_web.pdf
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    Helicopter Market

    The financial crisis had a deep impacton the Helicopter segment, but withthe worst of the economic downturncoming to an end, optimism is backfor the market. However, in the nearfuture, the enduring credit crunch

    along with high inventories of usedproduction models will continue tohamper fresh order intake.

    According to the projections inHoneywells 13th Turbine-PoweredCivilian Helicopter Purchase OutlookReport, global deliveries of newcivilian-use helicopters are expectedto increase 5% during the period20112015. Along with the morepositive economic outlook, the

    introduction of new technologies isgenerating increasing interest amongcustomers.

    Helicopter manufacturers are makingefforts to introduce safety-enhancingtechnologies, which include new

    ways of monitoring health and usage,enhanced situational awareness tools,workload-reducing automatic flightcontrol systems and maintenance-saving vibration-reductionpackages. Manufacturers: such as

    AgustaWestland are also investingin advanced technologies as product

    differentiators. A key goal has beento develop technologies for providing

    jet-like smoothness in helicopterswith active vibration control of structural responses.

    New civilian helicopter deliveries areexpected to reach 4,200 to 4,400during 2011-2015. The vast majorityof the global Civil Helicopter marketis highly polarized among threemanufacturers: Eurocopter, Bell

    Helicopter and AgustaWestland.Observing the geographicsegmentation in Figure 18, North

    America and Europe continue tooccupy the largest regional marketshare for new helicopters, accounting

    Figure 18: 5-year Delivery Outlook Regional Perspective

    North America, 30%

    Latin America, 21% Africa & Middle East, 6%

    100% = 4,200 - 4,400 Units

    Asia Paci c,13%

    Europe, 30%

    4,000

    3,5002006-2010 2011-2015

    4,000

    4,500

    U n

    i t s

    4,200 - 4,400

    Figure 19: Civilian Helicopter Market Outlook 2011 - 2015

    Source Honeywell, Helicopter Market Outlook, Page 6http://honeywell.com/News/Pages/3-6-11-Global-Helicopter-Purchases-Expected-To-Increase.aspx

    http://honeywell.com/News/Pages/3-6-11-Global-Helicopter-Purchases-Expected-To-Increase.aspxhttp://honeywell.com/News/Pages/3-6-11-Global-Helicopter-Purchases-Expected-To-Increase.aspx
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    Aerospace & Defense the way we see it

    for 60% of planned purchases.However, according to Honeywell,buying plans in 2010 fell 26%,compared with 2009. Asia Pacific,

    Africa and the Middle East areexpected to capture a 19% globalshare of the five-year market (2011-15) demand.

    Global Defense Market

    The global military expenditureslowed considerably and is expectedto stay flat in the near future,primarily because of U.S. defensebudget cuts. Cancellations along withdelays of major weapons programswill have a major impact on anyadditional defense-related spendingacross the world. Even then, global

    defense spending was close to 2% of GDP, with Saudi Arabia, Oman andUAE spending proportionately higheramounts. According to the StockholmInternational Peace Research Institute(SIPRI), global military expendituresaccelerated in 2010 by 1.3% in

    15

    Figure 22: Global Military Expenditures, 2006 - 2010

    0

    200

    400

    600

    800

    1,000

    1,200

    1,4001,600

    U S $ B n

    1,800

    2007 2008 2009 20102006

    1,328*

    22.3

    91.9

    361

    227 244

    367378

    93

    25.6

    96.8

    23.2

    258 284

    387

    97

    27.1

    288

    376

    98.6

    28.5

    626

    Americas Asia & Oceania Europe Middle East Africa

    644 692 745 767.7

    1,375*1,446*

    1,540*1,559*

    Figure 20: Regional Split of Global DefenseExpenditures, 2010

    Americas, 49.3%

    Middle East, 6.3%

    Europe, 24.1% Asia & Oceania, 18.5%

    Africa, 1.8%

    100% = US$1,559 billion

    Figure 21: Defense Spending as %of Country GDP

    Saudi Arabia 11.20%

    9.70%

    7.30%

    6.80%

    6.30%

    6.20%

    6.10%

    5.60%

    5.40%

    4.70%

    Oman

    UAE

    Timor Leste

    Israel

    Chad

    Jordan

    Georgia

    0.00% 4.00% 8.00% 12.00%

    Iraq

    USA

    Source SIPRI Market Forecasthttp://www.sipri.org/databases

    Source SIPRI Market Forecasthttp://www.sipri.org/databases

    http://www.sipri.org/databaseshttp://www.sipri.org/databaseshttp://www.sipri.org/databaseshttp://www.sipri.org/databases
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    Figure 23: Global Defense Expenditure

    real terms to reach US$1.6 trillion,albeit the figure represented thelowest growth rate since 2001 and aremarkable slowdown from the globalspending increase of 5.9% in 2009.

    The United States decreased itsmilitary investments in 2010 but still

    remained the largest defense spenderin the world. U.S. defense spendingincreased by a mere 2.8% in 2010amounting to US$698 billion afterregistering an average growth of 7.4% from 2001. European militaryexpenditures fell by 2.8% in 2010due to government efforts to reducecosts to address rising budget deficits.In Asia, defense expenditures grewby only 1.4%, with China leading theway with an estimated US$119 billion

    defense expenditure in 2010. Globally defense contractors arewitnessing a gradual shift in spendingpatterns. Most of the defenseprocurement appears to have shiftedto high-tech intelligence equipment,replacing demand for conventionalbig guns and heavy armor. As a result,consolidation is becoming evident as

    vendors are making efforts to bridgegaps in their product offerings.

    Boeing in particular has been active inthis space, having acquired Argon ST,a developer of intelligence equipment,and Narus, a real-time network trafficand analytics software supplier. Boeing

    further strengthened its position in thelogistics command and control businessareas by acquiring CDM Technologies,a software company specializing inreal-time transportation and logisticsplanning systems for the U.S. military.

    Many defense suppliers are alsoentering into partnerships withcompetitors to improve theirprospects to win major contracts.Boeing and Northrop Grumman

    entered into a strategic partnership tochase the competitive developmentand sustainment contract for futurework on the Ground-based MidcourseDefense (GMD) system for the U.S.Missile Defense Agency (MDA).

    In 2010, defense aircraft sales wereboosted by higher demand frominternational customers. In 2010,

    military aircraft sales recorded a sharp8% growth to reach US$64.5 billion.

    Industry backlogs were stabledespite the fact that many contractswere terminated, showing only amodest plunge.

    However, in the long run factors likeU.S. defense budget cuts, growinginstability in the Middle East, piracyin the commercial shipping lanes of Somalia, North Koreas continuedlong range strike and nuclear armsdevelopment will continue to hamperglobal stability, which in effect willinfluence the global defense spending.

    US$ Billion 31/12/2010 31/12/2009 31/12/2008

    EADS Defense 79.7 76.2 70.4

    Lockheed Martin 78.2 77.2 80.1

    Finmeccanica 65.0 65.0 61.8

    Boeing Defense, Space & Security 48.3 46.0 45.2

    Northrop Grumman 64.1 69.1 76.4

    Source EADS Registration Document, Page 27; Lockheed Martin Annual Report, 2010, Page 20; Femonica Annual Report, 2010, Page 9; Boeing Annual Report, Page 17; Northrop Grumman, Annual Report 2010, Page 49 & Annual Report 2009, Page 47

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    Aerospace & Defense the way we see it

    Source Autodesk Whitepaper Digital Prototyping for the Aerospace Supply Chain, 2008http://images.autodesk.com/adsk/files/aerospace_whitepaper_color_us_1_.pdf

    Aerospace Supply Chain Analysis

    Supply Chain Analysis

    The overall Aerospace supply chaincan be classified among OEMs, Tier1 suppliers, Tier 2 suppliers and

    Tier 3 suppliers. Traditionally, largeaircraft manufacturers, often referredto as OEMs, will specify their needsto the Tier 1 suppliers. OEMs areresponsible for overall designingand manufacturing, which areoften referred to as the most criticalcomponent of the value chain andfrequently face entry barriers dueto high investment requirementsand technological capabilities.Tier2 suppliers produce aircraft parts

    according to the Tier 1 suppliersspecifications. Tier 3 suppliers areresponsible for providing basiccomponents required by othervendors that are present higher in the

    value chain.

    However, with the changingdynamics in the industry, airframemanufacturers and Tier 1 suppliersare gradually becoming largeintegrators of airplane production.New strategies adopted by the

    Aerospace industry to achievegreater efficiency and reduced costsare increasing OEMs dependenceon Tier 1 suppliers. This enhances

    17

    Figure 24: Aerospace Supply Chain

    Aircraft Demand- Passenger, Cargo, Military

    Demand Ful llment

    Engineering Design Service Suppliers

    Low-Cost Region Suppliers

    Airframe Manufacturers - OEM, Jumbo Jets, Twin Aisle, Single Aisle, Regional Jet & Rotary

    Tier 1 Suppliers(Aero Structures, Avionics Systems, Engines,Aircraft Interiors, Landing Gear, Actuators)

    Tier 2 Suppliers(Aero Structures, Avionics Systems, Engines,Aircraft Interiors, Landing Gear, Actuators)

    Tier 3 Suppliers(Components & Parts)

    Special Processing Shop

    Jigs & Tools Suppliers

    Standard Parts Suppliers

    Raw Material Suppliers/Stock List

    http://images.autodesk.com/adsk/files/aerospace_whitepaper_color_us_1_.pdfhttp://images.autodesk.com/adsk/files/aerospace_whitepaper_color_us_1_.pdf
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    risk sharing between suppliers andbuyers (OEMs), including suppliersfrom low-cost regions in the valuechain, and increasing transparencyinto aircraft programs, plans andschedules. Big players like Boeingand Airbus are focusing more onintegration and less on internal

    production capability. These vendorsare working towards a business modelwhere they will need to work withfewer Tier I suppliers, and decreasingdirect interactions with Tier 2 andTier 3 suppliers.

    Another important component of the value chain is the aftermarketindustry, often referred to asMaintenance, Repair and Overhaul(MRO), which provides support to the

    OEMs and airlines through day-to-daymaintenance and required upgrades.

    Key Components of the Aerospace Supply Chain

    Aerospace manufacturing is anextremely complicated process,involving manufacturing of a wide

    range of components that vary interms of specifications and functions.It is estimated that the airframe andengine constitute a quarter of thetotal aircraft production values whilesystems and avionics combinedaccount for another quarter of thetotal value chain. The following

    section describes the dynamics of major components of the value chain.

    Aircraft EnginesThe Aircraft Engines segment consistsof companies that primarily specializein manufacturing jet engines. Thismarket is dominated by threecompanies: General Electric, Rolls-Royce and Pratt & Whitney. Rolls-Royce is the current market leaderand is estimated to have about 50% of

    the new orders in the most lucrativewide-bodied aircraft market, while GEholds about 40% of the new orders. In this segment intense competitionoften results in price wars among theplayers. To avoid such situations,engine manufacturers typically enterinto exclusive supplier contracts

    with commercial aircraft makersor OEMs. In many instances thesemanufacturers enter into joint-ventureagreements to share high investmentsrequired for future engine designand development. In some cases,

    jet engine manufacturers are willingto sell their products at no profit

    no loss in order to capture futurelucrative MRO business, whichprovides them with incrementalincome over the years. As a result,companies in this segment tend tohave healthy profit margins.

    Apart from the large OEMs and thecorresponding joint ventures (with aregional emphasis on the U.S.), thereare several suppliers in the globalaviation engine market including

    MTU Aero Engines of Germany, Volvo Aero of Sweden, Avio S.p.A. of Italyand ITP Engines of the UK.

    AvionicsThe Avionics market consists of electronic aircraft systems like fly-by-wire (or even fly-by-light) flightcontrols, system monitoring, anti-

    48

    3.5%

    1.3%

    5.7%

    10.0%

    1.3%

    15.0%

    10.0%

    5.0%

    0.0%

    -5.0%

    -7.4%

    -10.0%

    44

    46

    Growth Rate

    G r o w t h

    R a t e

    42

    U S $ B n

    40

    38

    36

    2005 2006 2007 2008 2009 201034

    Figure 25: Global MRO Market, 2005 - 2010

    38.3 38.8 41 45.1 45.7 42.3

    70

    50

    60

    202020152010

    42.3

    50.1

    65.3

    40

    U S $ B n

    30

    20

    10

    0

    Figure 26: Global MRO Market Forecast, 2010, 2015 - 2020

    Source TeamSAI Consulting.MRO Market Forecast

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    Aerospace & Defense the way we see it

    19

    collision systems and pilot assistant/ interface systems like communication,flight management systems, navigationand weather forecast. After theeconomic downturn the outlookfor the Avionics software marketcontinues to be difficult. However,the market is expected to follow

    the overall aircraft manufacturingcycle. Key players in this segmentinclude Thales, Honeywell andL3-Communications.

    Global Maintenance, Repair andOverhaul (MRO)Demand for MRO services is primarilydriven by airline companies, whichuse in-house maintenance servicesor outsource these activities to third-party providers. As noted previously,

    with the number of aircraft inoperation expected to increase acrossall regions in the future, demand forMRO services is set to grow. Airlineoperators are also influencing thedynamics of the market through theirgrowing demand for quick turnaroundtimes in order to keep their planesin the air as long as possible. Also,

    outsourcing of MRO-related activitiesis gaining traction as airlines focuson their core business of passengertransport while leaving non-coreactivities in the hands of specialists. However, the increasing global airlinefleet does not necessarily mean that

    the MRO market will also recordgrowth at par with the increasingfleet size. Over time the maintenancerequirements of aircraft tend todecline as new-generation aircraft thatrequire less maintenance replace theolder ones.

    The global MRO market is expectedto grow by 3.4% per annum through2015 and 4.4% through 2020. Interms of value, the MRO market is

    predicted to reach US$50.1 billion by2015. In 2010, global MRO-relatedexpenditures fell by 7.5%, althoughthey have registered growth of 2.1%in 2011.

    The greatest share of MRO revenueis derived from engine maintenanceactivities, which involve a material-

    Figure 27: Global MRO Market Regional Split, 2010

    Middle East &Africa, 10%

    Latin America, 5%

    Asia Paci c, 22%

    100% = US$42.3 billion

    North America, 33%

    Europe, 30%

    0% 5% 10% 15% 20% 25% 30% 35% 50%

    Engine

    % o

    f S a l e s

    Components

    Line

    Airframe

    Modi cation

    Figure 28: Global Air Transport MRO Market

    7%

    15%

    20%

    22%

    36%

    intensive process with labor onlyaccounting for close to 30% of therevenue earned from this segment.Engine manufacturers are increasinglymaking efforts to raise their share of the engine maintenance market as itis a source of substantial incrementalrevenue and profit. Components

    contribute around 23% of the overallMRO market. The highest market share withinthe MRO market is captured bythe OEMs. They have an addedadvantage with technical knowledgeof products as they can be readilyadapted for maintenance-relatedactivities. Other associated serviceslike airframe, line maintenance andmodifications contribute 15%, 21%

    and 7%, respectively.

    Source TeamSAI Consulting.MRO market Forecast Source Aero Strategy/OAG Aviation

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    Future TrendsThe A&D industry has always beenknown for its innovation capabilityin achieving extraordinary technicaladvances and also in allowingindividual companies to remaincompetitive in a rapidly evolving

    landscape. A few of the innovations,like the Global Positioning System(GPS), Boeings Joint Direct AttackMunitions (JDAM), the Airbus A380and SpaceXs Falcon 1, have alteredthe entire industry in terms of itsfunctioning. Several developing trendshave similar potential. Increasing Usage of Composites

    The composite class of materials has

    the capability to play an importantrole in the Aerospace industry todayand in the future. The key reasons forcomposite materials attractiveness toaviation and aerospace applicationsare their exceptional durabilityand high stiffness-to-density ratios.Composite material generally consistsof relatively strong, stiff fibers in atough resin matrix. Other compositematerials that are often used inaerospace include carbon- and glass-fiber-reinforced plastic (CFRP andGFRP, respectively). Usage of composite materialsis lucrative in aircraft becausecomposites help in reducing theoverall weight of the airframeenabling better fuel efficiency.Composites are estimated to enablea 20% saving in terms of weightalong with lower production timeand improved damage tolerance.Usage of composites in aircraft has

    gradually increased over the years.The A380 has used 20% to 22%composites by weight along withextensive usage of GLARE (glass-fiber-reinforced aluminum alloy). As

    conventional metallic materials andtheir derivatives continue to evolveto increase performance, there is littledoubt that the significant benefits of using composites are yet to be fullyexploited. As this understanding

    develops, composite materials willplay an increasingly significant role inaircraft manufacturing.

    Optimized Usage of Turbopropsand Jets

    Aircraft and engine design playa crucial role in determining theairline fleet size for optimizing thenetworks as well as reducing thefuel bills. Once again airlines have

    started embracing turboprops as acost-effective way of serving short-haul markets. Turboprops not onlylower fuel burn but often play atangible role in decreasing emissions.

    As environmental considerationsdrive airline and passenger choices,the advantages of turboprops aresubstantial. The propeller has beenused since the earliest days of powered flight; the concept has beenrefined over the years with significantimprovements in turbine efficiencyand propeller technology. In thefuture airlines will make an ongoingeffort to maintain the right balancebetween turboprops and jet numbersto increase their profitability.

    Alternate Fuels

    The Aerospace industry is exploringthe possibilities of alternative fuelsto decrease exposure to oil pricevariations and reduce dependency

    on crude oil. The fuel crisis in 2008illustrated the industrys sensitivity torapidly rising fuel prices. Biofuels areprimarily developed from feed stockof one of two key sources, namely,

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    ConclusionThis report makes it clear that the

    Aerospace & Defense industry facescritical changes and challenges. In thisincreasingly competitive environment,

    A&D companies more than ever mustexcel in key strategic areas by taking

    the following actions:

    Take advantage of new andinnovative technologies: In a contextwhere newcomers from developingcountries will aggressively launchtheir products to the market,innovation and new technologies canhelp traditional players stay ahead of these new competitors.

    Reduce development cycles for new

    programs: With strong pressure toreduce development cycles and theincreasing importance of Tier 1suppliers in product design, OEMsmust rethink their concurrentengineering process toward morecollaboration, while securingintellectual property. To address thesechallenges requires a new standard inProduct Lifecycle Management that isnothing less than excellence.

    Secure the industrial ramp-up of programs: To meet the aggressiveproduction targets of new or existingprograms, A&D industrials mustoptimize their processes toward moreintegration both internally (fromplants to final assembly line) and inthe global supply chain (from Tier 1suppliers to final assembly line).

    Grow revenues from the servicesarea: A&D industrials mustincreasingly make the shift from

    products towards services in order tocreate new revenue streams throughadded-value services in maintenanceactivities. The best performingcompanies in the coming years will be

    those that have successfully managedtheir development in the MRO area.

    Reduce costs without concedingquality: In most A&D companiescost-reduction programs have been

    running for a number of years. Yetthere are still opportunities foradditional reduction via approachessuch as Business Process Outsourcingof some business functions likeTechnical Publications.

    This study presents an overview of keyindustry segments and critical trends.

    Yet there is much more that can beexplored and applied to your ownorganization. For additional

    information about how Capgemini canhelp you address the trends andchallenges, please visit our Aerospace& Defense practice website atwww.capgemini.com/aerospace-defense

    http://www.capgemini.com/aerospace-defensehttp://www.capgemini.com/aerospace-defensehttp://www.capgemini.com/aerospace-defense
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    Aerospace & Defense the way we see it

    23

    Capgemini, one of theworlds foremost providers

    of consulting, technology andoutsourcing services, enables its clientsto transform and perform throughtechnologies. Capgemini provides itsclients with insights and capabilitiesthat boost their freedom to achievesuperior results through a unique wayof working, the Collaborative BusinessExperienceTM. The Group relies on itsglobal delivery model calledRightshore, which aims to get the right

    balance of the best talent from multiplelocations, working as one team to createand deliver the optimum solution forclients. Present in 40 countries,Capgemini reported 2010 globalrevenues of EUR 8.7 billion andemploys over 112,000 peopleworldwide. More information isavailable at www.capgemini.com

    Rightshore is a trademark belonging to Capgemini

    About Capgemini

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    www.capgemini.com/aerospace-defense

    Rightshore is a registered trademark belonging to Capgemini. The information contained inthis document is proprietary. Copyright 2011 Capgemini. All rights reserved.

    For more information please contact:

    Aurlien Bouvet+33 6 25 46 03 [email protected]

    Nick Gill+ 44 (0)870 904 [email protected]

    Sachin Nadkarni+91 9820 671 [email protected]

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