Aerospace Industry Characterization

September 30, 2018

Submitted by: ICF

Submitted to:

Contract #: (EP-C-16-020)

Work Assignment: # (1-02)

Aerospace Industry Characterization

Table of Contents I. Preface ...... 4 II. Report Analysis Methodology ...... 5 1. Data Sources ...... 5 1.1.3 Benchmark databases, industry conferences, and latest industry news & announcements ...... 6 2. Benchmarks to Comparable Report ...... 6 III. Introduction to Aerospace Production Market ...... 8 1.1 Commercial Air Transport ...... 8 1.2 Business and General Aviation ...... 8 1.3 Military ...... 8 1.4 Civil Rotary Wing ...... 9 2. Nature of Aerospace Product Development and Life Cycle ...... 9

3. ICAO CO2 Standard Applicability and Report Scope ...... 9 IV. Large Jet Transport Segment of Commercial Air Transport Market ...... 13 1. Market Definition and Size ...... 13 2. Key Market Trends ...... 14 2.1 Flattening Production ...... 14 2.2 Declining New Program Development ...... 15 2.3 Financial Pressures ...... 15 2.4 Emerging Process Technologies ...... 16 2.4.1 Additive manufacturing: ...... 16 2.4.2 Advanced materials: ...... 17 2.4.3 Automation: ...... 17 2.4.4 Faster processing: ...... 17 V. Regional Aircraft Segment of Commercial Air Transport Market ...... 18 1. Market Definition and Size ...... 18 2. Key Market Trends ...... 20 2.1 Blurring of single aisle and distinction ...... 20 2.2 Smaller OEMs entering the regional market...... 21 VI. Business and General Aviation Market ...... 22 1. Market Definition and Size ...... 22 2. Key Market Trends ...... 24 2.1 New Life in Light and Midsize Jets ...... 24 VII. Commercial Engines ...... 25 1. Market Definition and Size ...... 25 2. Key Market Trends ...... 27 2.1 Differing Technology Approaches...... 27 2.2 Market Positioning ...... 28 VIII. Market Participants ...... 29

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1. Aircraft OEMs in Commercial Air Transport and Business and General Aviation Segments that have Aircraft Subject to the ICAO CO2 Standards ...... 29 1.1 Boeing ...... 29 1.2 ...... 30 1.3 ...... 30 1.4 Bombardier ...... 31 1.5 Gulfstream ...... 31 1.6 Other Aircraft OEMs ...... 32 2. Engine OEMs for Commercial Air Transport and Business and General Aviation Segments and Aircraft Subject to the ICAO CO2 Standards ...... 33 2.1 Pratt & Whitney ...... 33 2.2 GE ...... 34 2.3 Rolls-Royce ...... 34 2.4 Safran ...... 35 2.5 Other Engine OEMs ...... 35

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I. Preface

This report has been composed for the US Environmental Protection Agency (EPA) to provide a characterization of the commercial aerospace industry. Despite the aerospace market having a large scope across multiple market segments, this report only focuses on market segments and aircraft models to which ICAO’s aircraft CO2 standards are applicable. This report addresses the market sizes, segments, 10-year outlook, key trends, and key commercial airframe and engine OEMs to give a holistic background of the industry. This report was prepared by Peter Zimm and Kent Harli of ICF.

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II. Report Analysis Methodology

1. Data Sources As a specialized consultant in the field of aviation, ICF works across the aviation value chain – from airlines and aerospace equipment makers to airports and investors. Specifically, in the aerospace market, ICF provides aerospace thought leadership and comprehensive services. We work with manufacturers and component original equipment manufacturers (OEMs) on aftermarket strategies and assist buyers, sellers, and advisors with aerospace-related acquisition targeting, commercial due diligence, and document preparation. More specifically, the essence of the work we do spans across the following project types: • Analyzing market fundamentals • Developing business strategies • Assessing interest in new products and services • Conducting customer satisfaction assessments • Benchmarking supply chain functions. As we perform these projects for the largest clients in the industry, we continually develop up-to- date analyses and maintain our in-house databases that translate years of proprietary data in areas such as aircraft and equipment production forecasts and raw material demand projections into analysis for expansion, capital allocation, and other strategic decisions. Therefore, we constantly draw from the following resources: • Secondary research into industry published articles, white papers, scientific papers • Primary research with market experts • Domain Knowledge and ICF Internal Cost and Performance Models • Benchmark databases, industry conferences, and latest industry news & announcements. Therefore, all the analyses that are laid out in this report incorporate the aforementioned resources, synthesized with our constant internal dialogue within our team of aerospace senior- level aviation experts and aerospace industry contacts that validate the credible results that we produce. 1.1.1 Secondary Research Secondary research provided a wealth of information about individual technologies and ongoing research programs. This was captured in the industry press, supplier and Original Equipment Manufacturer (OEM) press releases, conference proceedings, and news articles. University publications and websites also provided much information. 1.1.2 Domain Knowledge and ICF Internal Market Forecasts The ICF team was able to leverage knowledge gained through past consulting engagements, as well as internal market forecast models that had been developed to support market knowledge

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and ongoing project work. In some cases, knowledge was available from in-depth cost and performance models used for particular technologies.

1.1.3 Benchmark databases, industry conferences, and latest industry news & announcements

The ICF team also drew our information from various benchmark databases that were published by other market experts. Additionally, ICF team members regularly attend industry conferences in which industry experts attend and discuss the latest trends in the market. Finally, the ICF team is always up to date on the latest industry news & OEM announcements. Through a combination of these sources, ICF was able to create comprehensive profiles of the aerospace industry.

2. Benchmarks to Comparable Report Although further discussion may be needed on the assumptions in each of these three reports to truly compare forecast results on a normalized basis, the presented figures from the ICF forecast are within a reasonable range based on the similarities of the methodologies (to the other three two reports) that were employed: • ICF Forecast – At a top level, ICF’s forecast methodology can generally be broken down into three main steps: o ICF takes into account air traffic demand growth, and determines how many aircraft will be on demand based on passenger traffic, as well as fleet replacement cycles. o ICF takes into account the supply side and analyzed each original equipment manufacturer (OEM) capacity, backlog, order book, and announcement on rates to determine the availability of supply. o Based on the supply and demand, ICF performed a macroeconomic analysis to determine the likely overall market growth, and then analyzed microeconomic factors to determine appropriate allocation of aircraft delivery for each year. • Boeing Current Market Outlook – At a top level, Boeing Current Market Outlook employs a methodology similar to ICF through assessing air travel demand, as well as airplane demand: o Air travel demand: Similar to ICF, Boeing assesses economic activity, ease of travel, local market factors, and GDP. o Airplane demand: Boeing takes into account current fleet composition, its short- term fleet plans, inclusive of seating configurations, aircraft utilization, and fleet retirement schedule. • Airbus Global Market Forecast – At a top level, Airbus’ Global Market Forecast uses a methodology similar to ICF’s that includes the following aspects of analysis: o Historical market analysis: Airbus analyzes the key drivers and trends of the past and how the fleets are operated. o Forecast passenger and cargo traffic: Airbus analyzes where passengers will fly and how the demand will be distributed.

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o Forecast carrier operations: Airbus analyzes how the networks and routes will evolve, and how much growth on existing routes. o Forecast fleet requirements: Airbus analyzes demand for future aircraft based on knowledge of life cycles and replacement of current fleets. . FAA Aerospace Forecast – The FAA Forecast mostly discusses passenger traffic growth and active fleet growth. To analyze the forecast’s delivery rates, deeper analysis is needed to assess their retirement assumptions, which needs to be acquired from the source and is not readily available from the published report.

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III. Introduction to Aerospace Production Market In 2016, the global aerospace manufacturing market produced over 4,300 aircraft, with total production value of approximately $168B. The global aerospace production is split between two major types of heavier-than-air aerial vehicles: fixed-wing aircraft and rotary-wing aircraft. Fixed- wing aircraft are aircraft that utilize wings to generate lift from the aircraft’s forward airspeed causing air to flow over a fixed wing. These planes are propelled forward by thrust produced from a jet engine or a propeller. Rotary-wing aircraft (i.e., helicopters) are aircraft that generate lift by using rotor blades that revolve around a mast. ICF categorizes the global aerospace production market into four market segments: commercial air transport, business and general aviation, military (both fixed-wing and rotary-wing), and civil rotary wing.

1.1 Commercial Air Transport Commercial air transport is scheduled air transport that moves passengers and cargo loads utilizing aircraft operating on regularly scheduled routes. This market segment includes large jets such as wide-body and narrow-body airliners, as well as regional aircraft such as regional jets and turboprops. The drivers of production in this market segment include gross domestic product (GDP) growth, fuel prices, and revenue passenger kilometer metrics. Aircraft in this market segment are heavily utilized (>1,200 flying hours per year), which drives elevated levels of maintenance activity. In 2016, this market segment generated 39% of aircraft production by units and 64% of production by value.

1.2 Business and General Aviation Business and general aviation (BGA) is other than scheduled civil air services. Business and general aviation spans a wide range of flying types from corporate passengers to utility transport to special mission flights. This market segment includes jet and turboprop business aviation aircraft, and piston engine aircraft. The drivers of production in this market segment vary from corporate profits, resource development, and GDP growth, depending on the type of flying. This market segment has a fragmented fleet (<1.2 aircraft per fleet) with varying degrees of maintenance price sensitivity. In 2016, this market segment generated 24% of aircraft production by units and 12% of production by value.

1.3 Military Military aviation is the use of military aircraft for the purposes of conducting or enabling aerial warfare. Military aviation missions also span a wide range of types from air cargo transport to aerial combat. This market segment includes fixed-wing military aircraft, as well as rotary-wing military aircraft. The driver of production in this market segment is defense spending. Military customers tend to prefer dealing with the original equipment manufacturer (OEM) and purchasing new parts. In 2016, this market segment generated 25% of production by units and 22% of production by value.

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1.4 Civil Rotary Wing The civil rotary wing market is defined to be the use of rotorcraft for non-military purposes that may include air medical, charter, corporate, utility, and government uses. Production in this segment is driven by GDP and activities in certain industries that heavily utilize helicopters (e.g. oil and gas). The average fleet size is relatively small at 2.6 aircraft per operator. In 2016, this market segment generated 12% of aircraft production by units and 2% of production by value.

2. Nature of Aerospace Product Development and Life Cycle Commercial air transport aircraft and engines have long product development, production, and operating life cycles. It typically takes eight to ten years for a new airframe to be developed; engine clean sheet development is about an eight year process. Avionics typically take 3-4 years to develop and test prior to entry into service and airframe systems typically have their research and majority of its technology done 2-3 years before entry into service. Once they enter service, aircraft are usually produced for two to three decades: each 737 design was produced for around 20 years; the A320ceo was produced for over thirty years. The 767 is just ending production after 34 years; the A330ceo will be in production for 26 years; by the time it goes out of production, the 747 will have been produced for 50 years. Lastly, once in service, aircraft typically fly for 25 years but can fly for 35 years or more.

3. ICAO CO2 Standard Applicability and Report Scope

The ICAO aircraft standard for CO2 only applies to in-production and new type aircraft above a certain size; it does not apply to out of production aircraft. More specifically, only subsonic jet aircraft greater than 12,566lb of maximum take-off mass (MTOM) and multi-engine turboprops greater than 19,000lb MTOM are subject to ICAO’s CO2 emissions standard. Furthermore, ICAO’s CO2 standard only impacts the civil fixed-wing market segments, which include the commercial air transport and business & general aviation market segments. Civil rotary-wing and military market segments are not impacted by the regulations; neither are piston-engine aircraft.

The scope of this report is restricted to those aircraft to which ICAO’s CO2 standards apply. This characterization addresses both the aircraft and engine programs as well as the OEMs impacted. These aircraft and engine programs and OEMs are listed in Exhibit 2.1 below.

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Exhibit 2.1: ICAO In-scope Aircraft Models and Engine Models by Market and OEM

Over 2,200 impacted aircraft (i.e., programs subject to the standard) were produced in 2016, with total production value of $125B. Out of the 2,200 in-scope aircraft, 75% are in commercial air transport while 25% are in business and general aviation. Furthermore, out of the $125B of production value, 87% of the production value is attributed to commercial air transport while only 13% is attributed to business & general aviation. These 2,200 aircraft drive the production of over 5,000 engines having total production value of $38B. For each market segment, ICF forecasts units and value for a 10-year period. ICF begins with unit forecasts then converts them to value by analyzing individual aircraft families and deriving a set of assumptions for appropriate realized prices for each aircraft model. ICF’s near term forecasts are based on OEM production rate announcements along with customer order backlogs of each aircraft family. The years later in the forecast period are more based on GDP growth forecasts, aircraft utilization assumptions, and other factors that drive aircraft demand.

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Exhibit 2.2: Global Aircraft and Engine Production Market Outlook by Market Segment1

#Units $B

#Units $B

As shown in Exhibit 2.2, over the next 10 years, production of the ICAO in-scope aircraft production rise in the first half of the forecast period, then decline in the second half for an overall modest growth rate. This production rise is driven by the backlog that is accumulated by Boeing and Airbus, while after the end of the decade, rates will be going down due to the end of new program development. Aircraft production will grow from 2,277 units produced in 2016 to 2,654 units in 2026. In terms of production value, this production unit growth translates to $125B production value in 2016 to $137B in 2026. As a result of the stagnant growth in aircraft production, engine production will also experience only modest growth over the next 10 years.

1 CAGR = compound annual growth rate

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Engine unit production will only grow from 5,069 units in 2016 to 5,817 units in 2026, or $38B in production value in 2016 rising to $40B in 2026.

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IV. Large Jet Transport Segment of Commercial Air Transport Market

1. Market Definition and Size The large jet transport segment of the commercial air transport market, is comprised of four main categories: single aisle, small twin aisle, large twin aisle, and large quad. As the name suggests, single aisle aircraft have a single aisle permitting up to 6-abreast seating in a cabin less than 13 feet wide. Single aisle aircraft typically range from 60,000 kg to 97,000 kg in MTOM. Small twin aisle aircraft are jet airliners having a fuselage wide enough to accommodate two passenger aisles, typically with seven to eight abreast seating configuration that seats around 230-300 passengers. Small twin aisle aircraft typically range from 186,000 kg to 308,000 kg in MTOM. Large twin aisle aircraft also have two passenger aisles, however typically with larger fuselage diameter that can accommodate an eight to ten abreast seating configuration that seats up to 400 passengers. Large twin aisle aircraft typically range from 233,000 kg to 351,534 kg in MTOM. Finally, large quad aircraft are twin aisle airliners that require four engines as power plants, with ten abreast seating configuration that seats up to around 575 passengers. Large quad aircraft typically range from 442,252 to 575,000 kg in MTOM. 1,400 large jets were produced in 2016 at a value of $102B. Of these, 72% of units produced were single aisle aircraft, 10% were small twin aisle airplanes, 15% were large twin aisle aircraft, and 3% were large quad aircraft. However, despite having the majority of production by units, single aisle aircraft only constitute 45% of production by value, followed by large twin aisle aircraft with 30%, small twin aisle aircraft with 17% and large quad aircraft with 8% of production value.

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Exhibit 3.1: ICAO In-Scope Large Jet Production Outlook by Aircraft Size Category

#Units $B

As shown in Exhibit 3.1, the large jet production market that currently produces 1,443 units will peak in 2021 at 1,789 aircraft then will decline to 1,530 units in 2026. In terms of production value, the large jet market will remain relatively flat over the ten-year forecast period, rising from $102B in 2016 to $103B in 2026. In the next 10 years, large quad aircraft will be such as A380 and 747-8 will be going out of production, while the bulk of growth in production will come from single aisles.

2. Key Market Trends There are currently four main trends impacting the large jet transport supply chain:

2.1 Flattening Production

Exhibit 3.2: Large Jet Production Transition Gap Examples

#Units #Units

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Aircraft production is currently achieving envisioned rates, but it will be flattening in the next several years due to several transition gaps. As shown in Exhibit 3.2, Boeing is facing a transition gap from the current 777 to the re-winged 777X due to enter service in 2020 while Airbus is grappling with a transition gap from the current A330 to the re-engined A330neo. Compounding this situation, twin aisle aircraft orders slowed down in 2016; as a result, twin aisle aircraft production will flatten from 2017-2019.

2.2 Declining New Program Development

Exhibit 3.3: Aircraft Development Product Map

As shown in Exhibit 3.3, aircraft development activity has occurred at an elevated level this past decade, with the entry into service of clean sheet, re-winged, and re-engined aircraft. However, by 2017, most large air transport programs will have been redesigned, leaving no other programs to redesign. As a result, we do not expect a new or significant redesign program for a long time. (There has been speculation that Boeing will launch a New Midsize Airplane (NMA), an aircraft designed to address the 180-230 seat, 3,000-5,500 nautical mile market. However, the platform requires a newly designed engine so we do not expect this to enter service before the mid 2020s – assuming it is launched, that is.)

2.3 Financial Pressures With the new development cycle ending, the coming decade is expected to be one focused on lowering production costs. This shift is already under way. With the high development costs of clean sheet programs such as 787 and A350XWB, and the development and production cost overruns, aircraft OEMs turned to the supply base to lower their costs and improve profitability.

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Airbus and Boeing implemented supplier cost reduction programs such as Scope+ and Partnership for Success. With the Scope+ program, Airbus had requested price concessions tied to increased production rates, as well as a 10% cost reduction goal by 2019. With the Partnership for Success program, Boeing targeted a 15% cost reduction program and included a supplier “new business withhold” list (i.e. No Fly List) for suppliers unwilling to cooperate. Additionally, Boeing is also stretching payment terms to 90 days, which is causing additional cash pressures for its suppliers. This demand for longer payment terms is likewise being passed down through the supply chain.

Exhibit 3.4: Airbus and Boeing Operating Profit

Despite OEMs successes extracting costs from the supply base, OEM profits have fallen. Exhibit 3.4 shows that in recent years profits have gone down to single digits, while tier 1 equipment suppliers enjoy an average of 15% operating profit margin.

2.4 Emerging Process Technologies The shift from unit production growth to cost reduction is occurring against the backdrop of emerging raw material and manufacturing process technologies that have the potential to disrupt the supply base.

2.4.1 Additive manufacturing: Additive manufacturing is a process by which parts are manufactured layer by layer to produce a final three-dimensional product. Additive manufacturing is highly beneficial especially in producing items with complex shapes, new designs that cannot be produced subtractively, parts with complex internal passages, to name a few. To date, many polymer additively manufactured parts have been approved and are flying on aircraft in the thousands. However, the current excitement is with respect to the ability to additively manufacture metal parts.

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2.4.2 Advanced materials: While the 2000s saw the development and entry into service of several new high temperature tolerant metal alloys for gas turbine engines, the development focus of this past upturn has been on new lightweight materials for aerostructures such as carbon fiber composites and aluminum-lithium. That said, next generation engines coming into service will feature the advent of ceramic matrix composites for high temperature applications as well as weight-saving titanium aluminides.

2.4.3 Automation: With the rise in production levels, automation has been introduced into aircraft assembly lines, conferring higher throughput as well as higher quality to these operations, yielding faster assembly times and lower work in process. Automation is also being introduced, albeit at a slower pace, within the manufacturing subtiers, usually in the form of material handling devices (e.g. automated loading and unloading of multi-axis machine centers).

2.4.4 Faster processing: Cutting tool technology has progressed significantly, with the result that metal removal rates of hard metals are actually growing, and growing geometrically, even for difficult to machine materials such as titanium.

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V. Regional Aircraft Segment of Commercial Air Transport Market

1. Market Definition and Size The regional aircraft segment of the commercial air transport market is comprised of two categories: regional jet and regional turboprop. A regional jet is a turbofan-powered, short- to medium-range airliner usually transporting 50 to 100 passengers. Regional jets have been growing in use since airline deregulation in the United States in 1978 but really took off with the introduction of more efficient smaller turbofan engines in the late 1990s. Regional jets typically range from 19,000 – 60,700 kg in MTOM. A regional turboprop is a propeller-driven air transport. Regional turboprop aircraft operate by converting the engine’s power to drive the propeller. That said, there is a limit to how much relative thrust it can provide (and the cruise speed that can be obtained) compared to a turbofan engine due to the jet thrust and bypass air thrust. This limitation lends the turboprop only to applications in certain regional markets. Regional turboprops typically range from 18,600 kg – 29,574 kg in MTOM. The industry produced some 267 regional aircraft in 2016 with production value of $6.3B. 57% of units produced were regional jet aircraft and 43% were regional turboprops. Regional jets accounted for 69%, and regional turboprops 31%, of production value.

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Exhibit 4.1: ICAO In-Scope Regional Aircraft Production Outlook by Aircraft Size Category

#Units $B

As shown in Exhibit 4.1, production of in-scope regional aircraft will be relatively stagnant over the next 10 years. Because of the E-Jet production gap in the near term and Mitsubishi’s MRJ entry into service delay, output of regional jets will decline until new models (Embraer’s E2 and Mitsubishi’s MRJ) enter service, at which point rates will climb again. Turboprop output is expected to remain at a fairly constant rate.

Exhibit 4.2: ICAO In-Scope Turboprop Aircraft Development Map

As shown in Exhibit 4.2, in the past 20 years, only a limited number of turboprops have entered the market that are subject to ICAO’s CO2 standard. Turboprop aircraft are most attractive to regional operators when fuel prices are high due to their high fuel efficiency relative to regional jets. Furthermore, these turboprop aircraft are limited in their ability to achieve high thrust and

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achieve high cruise speeds, limiting their adoption. Despite ATR and Bombardier continuing to propose new 90-seat turboprop designs, there have been no firm product launches. While Bombardier may be nearing the timeframe to develop its next generation transport turboprop, the need to ensure viability of the CSeries will divert resources from and likely delay a Q400 follow-on development program for some time to come. ICF believes that developing innovations in the turboprop market segment will not be a critical part of either Bombardier’s or ATR’s short-term strategy.

2. Key Market Trends There are currently two main trends impacting the regional aircraft aerospace production environment:

2.1 Blurring of single aisle and regional jet distinction

Exhibit 4.2: Regional Jet Aircraft Seat-Range Map

As shown in Exhibit 4.2, regional jet capacities are growing, blurring the distinction between regional and large jets. This upguaging trend was driven by a couple of factors. First, in the 2000s, pilot scope clause restrictions2 were relaxed from 50 to 76 seats. Second, high fuel prices stimulated the development of larger, more efficient regional jets. The 76-seat pilot scope clause is not likely to rise. Therefore, while this scope clause level will stimulate demand for 70-75 seat regional aircraft, it may hinder sales of larger regional jets (e.g. E2 EJet and MRJ90) in North America, where the market is concentrated.

2 Scope clause is part of a contract between an airline and a pilot union that is used by the union of major airlines to limit the number and/or size of aircraft that airline may contract out to a . The goal is to protect union jobs at major airlines from being outsourced to regional airlines operating larger aircraft.

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2.2 Smaller OEMs entering the regional market Compared to the large jet market in which Boeing and Airbus have very established market positions, barriers to entry in the regional aircraft market are lower. Recent years have seen an increase in the number of new OEMs trying to enter the regional aircraft space.

Exhibit 4.4: Regional Aircraft/Large Jet Product Map3

OEMs such as COMAC and United Aircraft Corporation (UAC) have entered with the government funding (e.g. ARJ21 and Superjet) and Mitsubishi will enter the market later in this decade with their MRJ. We see these new entrants largely vying for Bombardier’s share of the market once the CRJ ceases production in 2020.

3 Aircraft families highlighted in blue are in-production, while aircraft families highlighted in green are in development

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VI. Business and General Aviation Market

1. Market Definition and Size The business and aviation market is mainly segmented by the weight and size of each aircraft: very light jets, light jets, midsize jets, medium jets, heavy jets, and ultra-long jets. The only business jets that are subject to ICAO CO2 standard are ones that have MTOM larger than 8,600 kg. Very light jets are business jets that typically accommodate 5-7 passengers over <1,000 nautical miles average range, with MTOM typically <6,000 kg. Therefore, very light jets and a number of light jet aircraft models are not subject to the ICAO CO2 standard.

Exhibit 5.1: Business and General Aviation Segmentation Typical Passenger Aircraft Type Average Range MTOM Range Seating Capacity

Light Jets 6-8 passengers 1,900 nm 6,200 kg – 9,500 kg Midsize Jets 9 passengers 2,400 nm 9,200 kg – 21,000 kg Medium Jets 10-11 passengers 3,200 nm 13,700 kg – 18,400 kg Heavy Jets 13-14 passengers 4,300 nm 21,000 kg – 45,000 kg Ultra-Long Jets 13-19 passengers <6,700 nm 28,000 kg – 48,000 kg

Exhibit 5.1 shows the remainder of business and general aviation market segmentations that are subject to ICAO CO2 standards. 567 in-scope business aviation aircraft were produced in 2016 at a production value of $16.8B. Share of unit production is relatively evenly split among the in-scope size categories. However, due to the high production value of ultra-long jets, this segment constitutes 38% of total production value, while the remainder is relatively evenly split between the other aircraft size categories.

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Exhibit 5.2: ICAO In-Scope Business and General Aviation Production Outlook by Aircraft Size Category4

#Units $B

Production of in-scope business aviation aircraft is expected to grow strongly throughout the forecast period as shown in exhibit 5.2 above from 567 units in 2016 to over 800 units in 2026. Similarly, production value will grow from $16.8B in 2016 to more than $27.9B in 2026. The ultra-long jet segment will experience the fastest growth both in units and in production value, driven by Gulfstream’s offerings. Furthermore, we expect to see slower growth of light jets as globalization drives more passengers to travel longer distance with their business jets.

4 Narrowbody BGA include corporate jets such as Airbus Corporate Jets and Boeing Business Jets that are of the single aisle aircraft type, but utilized as a business jet

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Exhibit 5.3: BGA Aircraft Product Map5

Exhibit 5.3 shows a general product offering of the BGA market. Cessna, Bombardier, and Embraer have relatively extensive offerings across business aircraft types, while Dassault and Gulfstream are focused on mid-size or larger business jets.

2. Key Market Trends

2.1 New Life in Light and Midsize Jets After the Great Recession, light and midsize business jet demand plummeted and has not returned to 2007 levels. Heavy jet demand, however, continued to be robust, and only flagged after the economic reached China and the rest of the emerging world. Meanwhile, the light and mid segments continued their post-slump levels but have picked up in recent times. While we don’t see production returning to anything close to 2007 levels, we do anticipate better growth rates for the light and midsize jets, although not as robust as growth in larger jets.

5 Aircraft families highlighted in blue are in-production, while aircraft families highlighted in green are in development

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VII. Commercial Engines

1. Market Definition and Size There are currently three primary engine architectures in use in commercial engines (both for commercial air transport and business and general aviation market): two-spool, geared two- spool, and three-spool configurations.

Exhibit 6.1: Primary Commercial Engine Architectures

The two-spool engine architecture couples the low pressure turbine and fan modules. As a result, the fan rotates faster than is optimal and the low pressure turbine rotates slower than is optimal. In recent times, the development focus of this architecture has been to improve thermal efficiency through higher temperatures/pressures. As a result, this architecture has been a driver of more advanced materials. This has been the predominant engine architecture for GE and Pratt & Whitney since a turbofan was added to a turbojet. Currently, all GE models (including newest generation) use this architecture, along with legacy Pratt & Whitney and non- Trent / RB211 Rolls-Royce engines. The geared, two-spooled engine architecture de-couples the low pressure turbine and fan module, enabling a more optimal slower-rotating fan and a faster rotating low pressure turbine. The low pressure turbine needs fewer stages than the traditional two-spool architecture, saving weight. This architecture was pioneered by Pratt & Whitney for large engines. The three-spool engine architecture has three shafts with different rotational speeds to help optimize fan and low pressure turbine speeds. This architecture adds two new modules, the intermediate pressure compressor, and the intermediate pressure turbine, which drives additional efficiency in fan and turbine, but also increases weight. The focus for this engine architecture is on the use of new materials and manufacturing processes to reduce the engine weight. Rolls-Royce pioneered this engine architecture for its large turbofan engines (35,000 lbs thrust and larger).

5,390 commercial engines (on aircraft subject to the ICAO CO2 standard) were produced in 2016 with a total production value of $38B. Large jet transports accounted for 64% of the units produced, followed by business and general aviation (BGA) with 24%, and regional aircraft with the remaining 12%. In terms of production value, large jets accounted for the majority of production value with 89%, followed by BGA with 7%, and regional aircraft with 4%.

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Exhibit 6.2: ICAO In-Scope Commercial Engine Production Outlook by Aircraft Size Category

#Units $B

Commercial engine production is driven by aircraft production, and is thus expected to grow at 1.4% per annum from 5,069 units in 2016 to 5,817 in 2026. Production will grow faster in the first half of the forecast period then decline in the second half. Business jet powerplants are expected to grow the fastest both in terms of units and value. However, slower growing large jet transport engines account for a large portion of production value and are expected to remain the majority of production value over the next 10 years.

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Exhibit 6.3: Major Commercial Engine OEMs Product Map6

Exhibit 6.3 shows the engine types that each of the four major OEMs offers. Pratt & Whitney and GE Aviation have the most extensive offerings. Rolls-Royce is mostly positioned in large engines, while Safran mostly produces LEAP (which is a small turbofan engine) and BGA engines.

2. Key Market Trends

2.1 Differing Technology Approaches Engine OEMs are pursuing two main approaches to improved efficiency: thermal efficiency and propulsive efficiency. Thermal efficiency aims to obtain higher engine pressures and higher temperatures. This approach will require high temperature tolerant materials as well as lightweight materials. On the other hand, propulsive efficiency aims to increase fan diameter (and therefore bypass ratio) by using a reduction gearbox. This approach not only reduces the diameter of the low pressure turbine but also eliminates the number of low pressure turbine stages, and uses lightweight materials. Pratt & Whitney is known for pursuing this approach with its geared turbofan engine that improves efficiency at current generation pressures and temperatures.

6 Light grey check marks indicate less extensive offering in the engine group; APU refers to Auxiliary Power Unit

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2.2 Market Positioning Exhibit 6.4 below shows further breakdown of product offerings by OEM based on thrust class. There are several thrust ranges where engine OEMs compete head-to-head, but other thrust classes are less competitive.

Exhibit 6.4: Civil Gas Turbine Engines Competitive Landscape

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VIII. Market Participants

1. Aircraft OEMs in Commercial Air Transport and Business and General Aviation Segments that have Aircraft Subject to the ICAO CO2 Standards

1.1 Boeing

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1.2 Airbus

1.3 Embraer

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1.4 Bombardier

1.5 Gulfstream

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1.6 Other Aircraft OEMs

Commercial Air Transport OEMs

Business and General Aviation OEMs

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2. Engine OEMs for Commercial Air Transport and Business and General Aviation Segments and Aircraft Subject to the ICAO CO2 Standards

2.1 Pratt & Whitney

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2.2 GE

2.3 Rolls-Royce

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2.4 Safran

2.5 Other Engine OEMs

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