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

    Impact on the Southeast

    March 17, 2015

    Stuart McAvoy

    UPS Customer Solutions

    Type date here (Month DD, YYYY)

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

    2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 2

    An Inside Look at the Aerospace Industry and Impact on the Southeast

    Why UPS and Aerospace?

    Aerospace trends

    Production trends

    Trending developments

    Aerospace challenges

    Southeastern U.S. Aerospace emergence

    Trends in Freight Movement

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

    2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 3

    Aerospace supply chain

    UPS currently serves more than 1,800 customers across the aerospace supply chain

    Our customers consist of parts and major component suppliers, integrators,

    aircraft operators, as well as service companies that perform aircraft

    maintenance

    Parts, components and systems

    Aircraft assembly

    Airlines/operators

    Tier 2-3 suppliers

    Tier 1 suppliers

    OEMs Operators

    Service and maintenance

    MRO

    AftermarketProduction

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

    U.S. Commercial Air Carriers

    U.S Passenger Demand Continues to Drive the Supply

    Chain in Production and MRO*

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

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

    Aircraft orders driven by air travel demand

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

    Record aircraft sales orders, production and backlog

    Sources: Airbus, Boeing, Deloitte estimates

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

    New travel demand is driving production

    Sources: Airbus, Boeing, Deloitte estimates

    Replacement vs. New Aircraft 2013-2032 Deliveries % Share

    Aircraft orders as replacement 13,480 43%

    New aircraft orders to grow fleet size 17,763 57%

    Total 31,243 100%

    Airbus announced an A320 rate increase from 42 to 46 per

    month starting 2016 (552 a/c per year)

    Boeing announced a 737 rate increase from 42 to 47 per month

    starting 2017 (564 a/c per year)

    Possible increase to 52 per month in 2018 or 2019 (624 a/c per year)

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

    Air transportation value chain is being disrupted by the 46%

    decrease in airfares since 1990

    Passengers paying less to fly, impacting airline operators who in turn are

    driving hard bargains for aircraft purchases

    Aircraft OEMs who in turn are pressuring the supply chain to participate in

    the investment, risk sharing and unit price expectations

    Suppliers being impacted by falling airfares

    8.4

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    Real Average Passenger Revenue Per Passenger km

    Ave

    rag

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    eve

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    km

    (in

    fla

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    (in

    ce

    nts

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    Revenue per passenger kilometer

    Recent history

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

    Air cargo traffic continues to grow amid tough

    competition from other modes of transportation

    Industry growth on an uptick with emerging countries contributing bulk of the growth

    Global air cargo traffic to grow at 5.0 percent annually through 2032

    Emerging economies are likely to account for 80 percent of growth in terms of FTKs (freight ton kilometers) through 2032

    Asia Pacific region will account for 42 percent of the air cargo traffic through 2032

    North Americas market share in air cargo traffic is likely to decline to 20% in 2032, compared to 24 percent share in 2012

    US air cargo market is expected to generate revenues of $39 billion in 2018, a margin growth of 2.7 percent from 2013

    Number of freighter fleet in service to increase to 2,905 aircraft in 2032 from 1,645 in 2013

    Mode shift: increased competition as shipping/rail transport gains momentum

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

    The aerospace supply chain is challenged to keep pace

    The commercial air transportation value chain is putting

    enormous pressure on suppliers

    Dramatically increasing the rate of production of components, systems

    and services

    Investing in lean manufacturing, digital product development, and

    supplier rationalization to reduce costs

    However, aerospace suppliers are struggling to meet OEMs

    expectations for price concessions

    The supply chain is expected to continue to transform and

    consolidate further to succeed

    Transition from build to print to risk sharing partner means greater

    program risk and more shared responsibilities

    Suppliers putting their balance sheets at risk

    Smaller suppliers may drop of out business or be acquired

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

    New supply chain value model opens opportunity

    Financial, talent & operational implications of becoming a

    super supplier - consolidation and fewer, larger suppliers

    Leading to potential bottlenecks and manufacturing capacity

    delays, OEM margin pressure and/or supplier price increases

    Leading to risks of schedule delays and constrained ability to

    meet production volume demands

    Mitigations: OEMs are taking steps to de-risk the supply base

    Bringing some design authority back in house

    Recalling some manufacturing work packages, execution of supplier

    development & surveillance programs

    Providing financial support to help certain suppliers

    For suppliers, the new reality is that continuous cost

    reductions and pricing pressure are here to stay

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

    2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved.

    Increasing opportunities

    Continued growth in 2015 and beyond

    New commercial aircraft production expected to be

    between 29,000 and 34,000 over the next 20 years

    Expected revenue and production growth driven by:

    Replacement of obsolete aircraft with more fuel-efficient

    fleets

    Rise in passenger traffic in areas with increasing middle-

    class wealth such as the Middle East and Asia Pacific

    Source: 2014 Global Aerospace and Defense Industry Outlook, Deloitte

    12

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

    2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved. 13

    Unique Supply Chain Characteristics of the

    Aerospace Industry

    Extended product life cycle (20+ years)

    Supply chains are complex due to the regulatory environment, global nature

    and need for integration

    Almost half of sales are in the aftermarket, global spare parts distribution

    Customers requirements require fast transit time, tight quality control, &

    complete visibility across the supply chain

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

    2015 United Parcel Service of America, Inc. UPS, the UPS brandmark, the color brown and photos are trademarks of United Parcel Service of America, Inc. All rights reserved.

    Supply Chain

    Optimizing an

    increasingly complex

    network

    Responding to growing

    product demands

    Efficiently serving a

    growing global

    customer base

    Managing an evolving

    service parts supply

    chain

    Improving quality in a

    changing regulatory

    environment

    Proactive monitoring

    and visibility of

    inventory and in-transit

    parts

    Todays aviation environment

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

    14

    Aerospace Challenges

    Globalization

    Visibility

    Increasing

    customer

    demands

    Risk

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