Oklahoma Aerospace Summit & Expo Tulsa Convention Center, Tulsa, OK 6-8 June 2011

1. Commercial & Defense Industry Update Oklahoma Aerospace Summit & Expo Tulsa Convention Center, Tulsa, OK 6-8 June 2011 Presented by Hal Chrisman, Principal AeroStrategy LLC Photo: US Air Force

2. Agenda Defense Market Outlook Commercial Market Outlook Aftermarket Implications

3. Defense Market Outlook US And Western Europe Face Massive Structural Deficits That Must Be Addressed … Fiscal Summary For USA And Select Western European Countries Source: IMF World Economic Outlook April 2011 SIPRI Military Expenditures Database

4. Defense Market Outlook … Some European Union Countries Are Changing Military Spending Plans As A Result Of Budget Pressures … Germany France Spain Greece At least $3B cut over next 5 years Cuts up to $9B through 2016 Cut 5% since 2009 Planned cuts of 10% Eurofighter A400M • Cost overruns, • Reduced orders • Cancelled orders? Source: AeroStrategy analysis

5. Defense Market Outlook … While The US Has Been Slowly Coming To Terms With The Current Fiscal Situation … 2001-2010 US Defense Budget And Annual Budget Deficit Robert Gates Secretary Of Defense “Given the fiscal challenges facing the nation, the Department of Defense must make every dollar count. But as I’ve stressed before, this effort is ... about getting more bang for the buck by shifting resources” “The reductions would likely fall most heavily on our operations and maintenance accounts. Cuts in maintenance could force parts of our aircraft fleet to be grounded… Cuts in operations would mean fewer flying hours…all of which directly impacts readiness.” Source: IMF World Economic Outlook April 2011 SIPRI Military Expenditures Database

6. Defense Market Outlook … But Recent Rhetoric Suggests That This Will Change Quickly FY 2010 & 2011 Defense Base And OCO Budget Comparison Source: DoD FY 2012 Budget Request

7. Defense Market Outlook The History Of The F-22 Sheds Some Light On The Future Of New Weapons Systems Current Programs At Risk? Font too way small V-22 430 (p) / 135 (b) Initial Production 1,368 Aircraft JSF 2,456 (p) Major Aircraft Review 1,196 Aircraft Navy version terminated in 1992 Aircraft Programs Probably Safe F/A-18E/F 515 (p) / 454 (b) C-130J 307 (p) / 120 (b) P-8 117 (p) Successive Program Reductions thru FY2007 Programs Definitely Safe Final F-22 (187) EA-18 114 (p) / 28 (b) UH-60M 1,221 (p) /270 (b) MH-60R/S 572 (p) / 238 (b) Source: Teal Group

8. Defense Market Outlook As The Economic Growth Shifts, The Relative Size Of Domestic Defense Budgets Will Shift As Well … 2010 – 2020 GDP Versus Military Expenditures 19% Asia & China 26% Asia & China ? 36% Source: CIA World Factbook Economist Intellgence Unit

9. Defense Market Outlook … While The Rise Of China Will Change The Geopolitical Environment … • China’s defense capabilities are growing in parallel with its torrid economic growth • Defense budget growing 8-10% per annum • Expanding deep-water navy • Large investments in asymmetric warfare capability • Unexpected unveiling of J-20 Stealth Fighter program in 2010 • In addition, China is expanding its use of foreign aid, diplomacy, and alliances throughout Asia, Africa and Latin America to support its national interests…including access to raw materials, shipping lanes, and oil • China’s rise, in turn, is creating angst throughout Asia and beyond from potential rivals • USA • Japan • India • South Korea • Vietnam • Russia • Australia South China Sea China’s Share Of Global GDP* China’s J-20 Steath Fighter Source: IMF, Global Security ; Note: GDP data in purchasing power parity

10. Defense Market Outlook …And That Will Drive Defense Budgets In Asia Pacific 2010 Estimated GDP, Asia Pacific Countries Source: CIA World Facebook AeroStrategy analysis

11. Defense Market Outlook An Outbreak Of Democracy Could Slow Growing Military Budgets In the Middle East 2011 Middle East Defense Budgets And Percentage Of GDP Global Average = 3.6% of GDP Saudi Arabia Countries With Political Instability Source: CIA World Facebook AeroStrategy analysis

12. Defense Market Outlook Threats Faced Today Are Different Than 20 Years Ago, Dictating A Change In The Nature Of Warfare … Conventional Warfare Irregular Warfare Parapublic Expeditionary / Urban Warfare ISR

13. Defense Market Outlook Technological Innovations Such As The UAV Have Driven Growth In Battlefield Intelligence Airborne ISR Full Motion Video Collection (Flight Hours) Source: US DoD Briefing

14. Defense Market Outlook Para-Public Missions Have Grown And Driven The Demand For More Vertical Lift Capability Examples Of Parapublic Missions Source: AeroStrategy analysis

15. Defense Market Outlook Expeditionary Battlefield Requirements Are Driving Demand For Vertical Lift, ISR, And Transport Aircraft The Impact Of Expeditionary Warfare Of Aviation Needs Expeditionary Warfare: Robust Intel And Communications (C4ISR) Technological Interoperability Flexible and Swift Logistics Adaptive Force Packaging Source: AeroStrategy analysis

16. Defense Market Outlook Over The Next Decade, Fixed Wing Aircraft Production Will Be Replaced In Part By UAV Production … Worldwide Military Fixed Wing Aircraft Production (2011-2020) Units Mission, CAGR Source: OAG Aviation

17. Defense Market Outlook … While Helicopter Production Is Expected To Remain Relatively Flat Worldwide Military Rotary Wing Aircraft Production (2011-2020) Units Helicopter OEM Source: OAG Aviation

18. Agenda Defense Market Outlook Commercial Market Outlook Aftermarket Implications

19. Commercial Market Outlook Air Transport Production Rates Are Driven By The Complex Interrelations Of Several Factors Aircraft operating factors (utilization, speed, size, load factors) Air Transport Production Demand Drivers Economic Growth Aircraft Demand For Growth Required Aircraft Air Travel Demand Air Travel Value Proposition Temporary Storage Total Aircraft Demand Current Fleet Aircraft Demand For Replacement Retired/ Scrapped Source: AeroStrategy

20. Commercial Market Outlook Oil Prices Are Approaching The High Levels Of The 2008 Price Spike… Annual Average Fuel Costs 1978 to present (cents per gallon) March 2011 price Current: 30+% of airline expenses 2002: 11% of airline expenses Source: Air Transport Association, IATA

21. Commercial Market Outlook …Which Is Changing The Economics Of Aircraft Operation… US Airlines – 2009 Fuel Costs/ASM (cents) Losers Fuel cost/ ASM (cents) High fuel costs exacerbate aircraft cost differences Winners Losers Winners * gal * 2009 figures are based on $1.75 - $1.95 gallon fuel Source: US Air Transport Association

22. Commercial Market Outlook ...And Contributing To A Surge Of Aircraft Retirements... Air Transport Retirements and Deliveries Aircraft Production breakdown ~60% for growth ~40% for replacement Deliveries 400 Retirements per year is the new normal Retirements Source: Airline Monitor

23. Commercial Market Outlook AeroStrategy Developed Three Scenarios For Air Transport Production Rates Based On Fuel Prices 2011 – 2021Air Transport Production Scenarios Downside Risk Outweighs Upside Opportunities Sources: AeroStrategy analysis, Airline Monitor

24. Commercial Market Outlook In AeroStrategy’s Nominal Scenario, Air Transport Production Exceeds 1,600 By 2021 Air Transport Nominal Production Scenario 2011-2021* By OEM Units * Drop in production rates from 2014 to 2016 is due to a change in orders, shifting from legacy aircraft to next generatin 24 Source: AeroStrategy

25. Agenda Defense Market Outlook Commercial Market Outlook Aftermarket Implications

26. Aftermarket Implications The Air Transport And Military Aftermarket Combined Were Almost $130B In 2010 • AIR TRANSPORT • Airlines and freight carriers • Turboprop and jet aircraft • Fleet of about 25,000 • 60 million hours a year or ~ 2,400 per aircraft • MILITARY • Attack, transport, trainers • Fixed- and rotary wing • Fleet of about 39,000 • 11 million hours a year or ~ 300 per aircraft 2010 Military Sustainment Market 2010 Air Transport MRO Market $43.6B $87.1B

27. Air Transport MRO Market – Realized Supplier Revenue($B) * Source: AeroStrategy * Constant 2009 US$ Aftermarket Implications AeroStrategy Anticipates Mid-To-Upper Single Digit MRO Growth In 2011… Realized supplier revenue 60 Fundamental MRO demand 50 • Key Assumptions • Fuel costs in $80 – $110 /bbl range • 2-3% global GDP growth and modest airline profitability • Some make up for deferred maintenance and modest inventory restocking 2012: Low double digit growth 40 30 2011: Mid-to-upper single digit growth 2009: MRO demand down 15-20% 20 10 2010: 1-3% growth 0 2008 2010 2012 2014 2016 2018

28. Aftermarket Implications … But The Impact Of High Fuel Prices Could Further Change Airline Supply Chain Practices … Economic Crisis Depressed Demand 2008-2010 • Supply Chain Practices • Burn Inventory • Deferred Maintenance • Cannibalization / Surplus High Fuel Prices Further Depressed Demand 2010-2012 • Supply Chain Practices • Aircraft Retirements • Parting Out • Excess Surplus Parts Source: AeroStrategy

29. Aftermarket Implications …And Future Growth Will Be Highly Dependent On The Fluctuation In Fuel Prices MRO Growth Scenarios Based On Fuel Costs Best case Oil < $80/bbl Worst case Oil > $110/bbl Nominal case Oil $80 – 110/bbl AeroStrategy Forecast • Fuel costs fall to less than $80/bbl • Falling costs boost GDP, air travel growth, and airline profits • Facilitates return of hundreds of aircraft from storage – which need MRO • Fuel costs escalate to >$110/bbl…or much higher • A dramatic spike in fuel costs could lead to a “W” shaped recession and reduced air travel growth • Airlines again in red, which results in further capacity reductions and cost cutting • More aircraft to desert • Fuel costs remain in $80-110/bbl range • Modest (2-3%) global GDP growth…and airline profitability • Fuel costs limit return to service of most stored aircraft Source: AeroStrategy

30. Aftermarket Implications Recent Rhetoric Suggests That All Aspects Of The Defense Budget Will Feel Pressure … “Although reducing the defense budget cannot alone solve our deficit problem, it is hard to envision an overall solution that does not include some contribution from the 20 percent of government spending that goes toward defense.” – Deputy SecDef Bill Lynn

31. Aftermarket Implications … And Reductions In O&M Spending Will Impact The Military Aftermarket 2010-2015 North America & Europe Military Sustainment Forecast Billions Lower utilization reduces sustainment … or lower budgets reduce readiness which lowers utilization 10% reduction in utilization for aircraft excluding helicopters and fixed wing transport results in a 6% decline in sustainment spending Recovery to expected levels by 2014? All Values In 2010 U.S. Dollars Source: AeroStrategy analysis

32. In Summary…. • US And Western Europe face Massive Structural Deficits That Must Be Addressed resulting in severe defense budget pressures • China’s Emergence As A Great Power Creates Angst Throughout Asia … and drives Asian Defense budgets • An outbreak of democracy in the Middle East could slow robust growth in defense spending • Changing mission requirements drive increasing need for ISR, vertical lift and fixed wing transport • UAVs are the bright spot is fixed wing production and rotary wing production is projected to be flat • Aircraft economics have fundamentally changed as a result of high fuel prices, leading to premature retirement of hundreds of aircraft • The air transport MRO market, after a difficult recession, is currently valued at $43.6 billion • The parting out of aircraft is suppressing a rapid recovery in MRO demand with 15-20 aircraft parted out per month • The shape of MRO recovery is tightly linked with the price of oil • 2011 MRO demand growth of mid-to-upper single digits is anticipated in the nominal scenario • Long-term MRO growth will be 3.3% CAGR, led by engines and modifications Source: AeroStrategy

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