SAP A&D Innovation Days

A&D Flightpath to Navigate Disruptions

Glenn McDonald & Michael Cisek

April 19, 2023

Contents

Commercial Market Outlook

Defense Market Outlook

2
The recovery trajectory has been strong, but worsened global economic projections
lower growth in the long-term
Global Travel Demand (Billion RPK) Forecast
3000 Recovery Drivers
› Loosening border restrictions
2500
› Pent-up demand for leisure travel
(including international)
2000 Stronger Asia
Pacific › Easing of China lockdowns
Recovery Pre-COVID
1500

Year End 2020 Recovery Drags

1000
Actual › Russia/Ukraine war

500
› Airline staffing issues
May 2022
› Inflation
0
Nov 2022

2020 2021 2022 2023 2024 2025 2026

3
AIR TRANSPORT: PRODUCTION

Absent a resurgence of MAX orders, Boeing’s unit market share could decline to
30% by early next decade
2019 – 2031 Commercial Air Transport Delivery Units (2019-2031)

2,500

Others
2,000

Embraer
1,500
31% Boeing
42%

1,000 Airbus

22%
500 46% 55%

64%
0
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031

Source: Airbus, Boeing, AeroDynamic Advisory 4

PRODUCTION

The dramatic reduction in launch costs coupled with low-cost nanosatellites underpins
explosive growth in space activity
Launch Cost per Kg to Low Earth Orbit (2022 dollars) Active Satellites In Orbit
$18,000 25,000

$16,000 20,000

15,000
$14,000
10,000
$12,000
5,000
$10,000 0

$8,000 2005 2020 2030

$6,000

$4,000

$2,000

$0
Space Shuttle Ariane 5 (2005) Delta IV (2002) Atlas V (2002) Soyuz 2 (2004) Falcon 9 (2010) Falcon Heavy
(1972) (2018)

Sources: Futron Corporation, SpaceX, AeroDynamic Advisory, secondary research 5

Three major trends are shaping today’s aerospace supply chain

New (And Old)

Bottlenecks

Russia & China

Uncoupling
3 Inflation

6
New (And Old)
Bottlenecks

The aerospace supply chain faces numerous bottlenecks

Aerospace supply chain bottlenecks

› The aeroengine supply chain has become a pacing

Microchips Forgings Super alloys item for aircraft deliveries and is hit by many of the
bottlenecks

› Microchips have a growing impact on avionics and

Chemicals & Castings Titanium mill defense electronics suppliers
resins product & sponge

› Several bottlenecks are caused by labor shortages

and the health of sub-tier suppliers

Engineered Machined
components* parts*
Source: AeroDynamic Advisory
7
* Primarily caused by labor shortages and sub-tier supplier health
New (And Old)
Bottlenecks

A&D inventory turns are deteriorating thanks to bottlenecks and labor shortages

Inventory Turnover – Selected A&D Companies

(2018 = 100%)
› A combination of factors underpin
deteriorating inventory turns
› Increasing production rates
› Supply chain de-synchronization
› Increased buffers
› Higher uncertainty in transportation
lead times

› The average inventory turn is now less

than 4.0

Source: S&P Capital IQ, AlixPartners analysis 8

 Inflation

Tier 2 and 3 manufacturing suppliers will bear the brunt of inflationary pressures

Airlines Aircraft OEMs Tier 1 Tier 2/3 Raw Materials

› Aircraft OEMs generally have › Build-to-print Tier 2/3 suppliers

inflation protection built into
contracts with airlines
› Some Tier 1s have some level of
protection
have limited leverage with Tier 1s
and OEMs
› Raw material suppliers pass on
price increases to Tier 2/3
suppliers

Source: AeroDynamic Advisory research 9

Uncoupling Russia
& China

The aerospace industry’s uncoupling from China is accelerating due to geopolitics

and IP theft…

› Investment into China is drying up due

to Geopolitics and IP theft

› Canada’s 2021 decision to deny an

export license for PW150s for the
MA700 effectively paused the program

› The China-Russia CR929 project will

be delayed by many years with
western suppliers not participating

Sources: NY Times, FlightGlobal, Aviacion 10

Contents

Commercial Market Outlook

Defense Market Outlook

11
The new great power competition with China and Russia will force the services to
prioritize certain aircraft missions over others
Potential Mission Winners & Losers

Fixed Wing Rotary Wing

Counter Counter
Aircraft Mission Near-Peer Readiness Near-Peer Readiness
Insurgency Insurgency

Bomber N/A N/A

Fighter/Attack

C4ISR

Tanker N/A N/A

Trainer

Transport

UAV N/A N/A

- Heavy Use - Moderate Use - Low Use

Source: AeroDynamic Advisory, secondary research 12

While defense spending has only increased <1% annually over the past decade, we
forecast ~7% annual growth through 2029. That pressures other industry segments.
Defense Spending 2011-2029 (in nominal $)
Trillions

$2.5 $2.4
$2.3
$2.2
Other
$2.1
$2.0 Israel
$2.0
$1.9
Canada
$1.7
Australia
$1.6
$1.5 Italy
$1.5 $1.4
$1.3 $1.3 South Korea
$1.3 $1.3
$1.2 $1.2 $1.2
$1.2 $1.2 Japan
Saudi Arabia
$1.0
Germany
France
United Kingdom
$0.5
India
United States of America

$0.0
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

* Spending includes budgets from all NATO countries, India, Sweden, Finland, Saudi Arabia, Australia, Japan, Israel & South Korea

Source: SIPRI, AeroDynamic Advisory 13

F-35 dominates, but legacy programs still alive; B-21, T-7 grow too
Big question: NGAD
Deliveries Revenue by Platform in 2023 $ Billions
30

25
B-21
T-7
Deliveries in 2023 $ Billions

20 F-35
C-130
T-6
15 T-45
F-22/NGAD
F-16
10 F-15
F/A-18
AV-8B
5 C-17

Source: AeroDynamic Advisory

14
Europe: coping without a fifth gen…Germany, France, UK program decisions loom.
Tempest/F-3 merger intriguing….
Deliveries Revenue by Platform, 2023 $ Billions
9

6 Other Transports
Trainers
5 A400M
Mirage 2000
4 Tornado
Gripen
Rafale
3
Eurofighter

Source: AeroDynamic Advisory

15
The renewed great power competition will inform all aircraft decisions for
the foreseeable future

Used & Serviceable

Emphasis on R&D F-35,Material
F-35, F-35

Retirements &
Capability Gaps

16
The global military MRO market is expected to surpass $140 billion annually in a
decade
2023-2032 Global Military MRO Spending 2023 MRO Spend by Activity

$145
Billions

Airframe
Field
Maintenance
Maintenance
15%
42%
$140 $127
Billion
Engine
Maintenance Component
21% Maintenance
$135 22%

2023 MRO Spend by Aircraft Type

$130

All Others Fighter

26% 34%
$125
$127
Billion
Military
Transport Helicopter
$120 14% 26%
2023 2024 2025 2026 2027 2028 2029 2030 2031 2032

Source: Aviation Week 17

The current budgetary and geo-political landscape is driving four
important military sustainment trends

Used & Serviceable

Sustainment
Focus On Readiness
Material
Initiative Expansion

Increased Digital Increased Industry

Investment Partnerships

18
An unfortunate series of events whipsawed commercial suppliers and
diminished working capital…defense suppliers fared better
Events Impacting Commercial Aerospace Supplier Working Capital

2010 Present

737 MAX
OEM supply chain 2010s Production Production re-
production COVID-19 Crisis
initiatives Ramp-Up shutdown awakening

Price reductions Significant CAPEX Revenue decreases Survival mode Payment terms 90 – 120
30-day payment terms Working capital Layoffs begin Burn down remaining days
increase requirements increase working capital More working capital
CAPEX for ramp up
Payment terms 60-90 wasted Major layoffs required
days Government support + Higher inflation
lenient lenders Many lenders unwilling to
renew lines of credit
Sub-tier suppliers are bleeding financially
Source: AeroDynamic Advisory
19
 Thank You!
AeroDynamic
2019 Winner of Choice
Outstanding Academic
Title Award

Glenn McDonald
Principal
gmcdonald@aerodynamicadvisory.com

Michael Cisek
Senior Associate
mcisek@aerodynamicadvisory.com

+1 (734) 773-3899
121 W Washington Street, Suite 400
Ann Arbor, MI 48104
www.aerodynamicadvisory.com