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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



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


Aircraft orders driven by air travel demand


Record aircraft sales orders, production and backlog

Sources: Airbus, Boeing, Deloitte estimates


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)


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

4.5

4.0

5.0

6.0

7.0

8.0

9.0

19

90

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91

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92

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20

13

Real Average Passenger Revenue Per Passenger km

Ave

rag

e R

eve

nu

e P

er

Pa

sse

ng

er

km

(in

fla

tio

n a

dju

ste

d)

(in

ce

nts

)

Revenue per passenger kilometer

Recent history


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


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


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


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



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



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

management

Cost

containment



Aerospace Supply Chain Trending Developments





Aerospace Manufacturing Trending Southeast U.S.

Creating a Regional Distribution Cluster

Emergence of the Southeast

The southeast region has made headlines in recent years for landing projects such as Airbus in

Mobile, Alabama; Boeing in Charleston, South Carolina; and Northrop Grummans Centers of

Excellence in Florida; and is inching upward in employment numbers. Airbus committed to 1,000 jobs in

Mobile, Alabama, by 2015; Boeing is adding 3,800 jobs by 2016 in Charleston, South Carolina, with 2,000

more by 2021; and Northrop Grumman is adding 1,800 jobs along Floridas Space Coast.

Not surprisingly, the southeast region is showing increased value of shipments and increased capital

expenditures. This region is appealing to these manufacturers and their suppliers for proximity to ports

and highways, less expensive labor, relatable automotive industry experience and opportunities for

expansion.





Industry Report - Industry Locations

Aircraft parts distributors are primarily concentrated in the Southeast and West regions of the United

States. The Southeast region is home to roughly 35.2% of industry establishments. A large number

of facilities are located in the Southeast region because this enables distributors to be close to key market

segments. A majority of the US population is located in the Southeast, with large hangars and aerospace

repair located here. Florida, in which 21.3% of industry establishments are located, is supported by the

presence of every major defense contractor, some of which include Boeing, Lockheed Martin and

Northrop Grumman.



Source:







Airbus, Boeing, Rolls

Royce part of the new

U.S. Southeast

Aerospace Cluster

Most recently, Mr. Norman has been

active advising French and German

aerospace suppliers, manufacturers and

technology companies on legal questions

relating to expanding business in the

United States. Recently, he helped French

and Canadian companies set up a Joint

Venture to supply a U.S. helicopter

manufacturer in Texas..

Source:





Aerospace Alliance created to regionalize efforts (aerospaceallliance.com)

Louisiana

Mississippi

Alabama

Florida



NEWS

MOBILE, Alabama Jobs and

collaboration are at the core of a

partnership being announced between

the Mobile Airport Authority and Bishop

State Community College, intended to

help establish Mobile Aeroplex.

FORT WALTON BEACH The potential

the Mobile Airbus factory has for bringing

thousands of new jobs to Northwest

Florida is so great a delegation of local

business leaders traveled..

Lafayette, LA - Gov. Bobby Jindal and

Bell Helicopter CEO John Garrison

announced the company will build its new

SLS helicopter line at Lafayette Regional

Airport,..

Source: aerospaceallliance.com





NCAM is based at NASA Michoud Assembly Facility in New Orleans, LA

NCAM facilitates Aerospace research projects

University research partnerships

Aerospace Industry research projects





Synchronizing your Supply Chain

for Growth

How many facilities do you need & where?

Which modes or routes should be used?

How much inventory is needed & where?

What about production support services for materials

and parts?

Finding answers to these above questions helps companies

achieve the Five Rights of Logistics

21





Key Takeaways

Aerospace industry growth trajectory is still up, due to commercial aerospace

With a backlog of nearly eight years of production, the sector continues its record

performance

Primary drivers of new commercial aircraft requirements include

Increased travel demand, especially in the Middle East, India, and China

Replacement of obsolete aircraft with new fuel-efficient models

Traffic from emerging countries to drive air cargo market growth through 2032

Southeast U.S. continues to emerge as a new Aerospace Cluster

Factors of competition - scale economies, risk taking, technology innovation,

quickness, talent, and customer presence/preference

Wildcards - Chinese economy, sovereign indebtedness, escalation in regional

conflicts, global economy, new players, and technology disruptions

Thank you

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