Tronos Aviation Consulting Inc. PEI, Canada / Atlanta USA / London UK Demystifying the Commercial Air Presented by: Transport Seat Gary Weissel Managing Officer Market Tronos Aviation Consulting MARCH, 2017 LOS ANGELES, CA Agenda 1. Understanding Commercial Air Transport seating 2. Interiors industry key players 3. Major trends shaping the seat market 4. Challenges & Opportunities of the aircraft seat market 2 Understanding Commercial Transport Aircraft Seating 3 Complexity of Aircraft Seating 4 Why are seats so critical to airline success? IT’S ALL ABOUT REVENUE GENERATION . Distinguishes Airline Brand . Is the Primary Passenger “Touch Point” . Impacts First and Lasting Passenger Impressions . Can Drive Customer Loyalty . Supports Marketing Initiatives 5 Seat Market segmentation Premium Value LCC ULCC Carriers Carriers Carriers Carriers International International First , Premium Economy Business, Premium Economy Long Business, Premium / Domestic First Economy & Economy & Class & Economy Haul Economy Economy Domestic First Business & Premium Economy Medium Premium Economy Premium Economy & Economy & Economy Economy Haul & Economy Domestic First, Domestic First, Ultra light weight Short Premium Economy Premium Economy Economy & Economy Economy Haul & Economy Domestic First & Domestic First & Ultra light weight Economy Economy Regional Economy Economy Source: TAC Analysis 6 Seats must meet two (2) levels of certification . Seat assembly certification - Technical Standards Order – TSO-C127(b) . Installation certification - Type Certificate (TC) - Supplemental Type Certificate (STC) 7 Seats for new delivery aircraft can be purchased in one of two ways… . Buyer Furnished Equipment – purchased by the airline and delivered to final assembly line . Seller Furnished Equipment - Purchased by aircraft OEM 8 Why do airlines upgrade their seats? . Product obsolescence . Market positioning . New routes / markets . Branding changes . Fleet commonality . New fleet types 9 SECTION 2: Seat Market Outlook 10 Ten Year Global Air Transport Fleet Growth Compliments of: 40,000 North America 38,100 CAGR Asia Pacific Europe 4.1% 35,000 Latin America 6% Middle East 5.0% Africa 8% 30,000 28,000 3.4% 5% 23% 25,000 8% 2.4% 20,000 25% 4.8% 15,000 33% 28% 10,000 25% 1.3% 5,000 30% 0 3.2% Avg. 2016 2026 11 Ten Year Commercial Air Transport MRO Growth Demand Compliments of: $USD Billions Modifications $100.6B CAGR $100 Airframe 5.2% Line $90 Component 12% 2.8% $80 Engine $67.6B $70 16% 3.2% $60 14% 22% 4.2% $50 17% $40 22% $30 41% $20 4.5% 40% $10 4.1% Avg. $0 2016 2026 12 Ten Year Interiors Commercial Air Transport MRO Forecast $USD Billions Interiors Spend $6.00 $5.00 $4.00 $3.00 $5.5 $2.00 $3.1 $1.00 $0.00 Source: TAC Analysis 2016 2026 13 Seat Aftermarket key attributes . There is virtually no difference between a seat manufactured for new production aircraft line fit or an aftermarket reconfiguration . Airline personality, financial position and product focus will drive seat replacement behavior. Replacements will also vary significantly by seat class . Seat overhauls is a very low margin / low skill business . Seat overhaul intervals will vary greatly and depends on airline product focus . Seat modifications on newer aircraft types can be difficult due to certification regulations . There is a robust second-hand seat trading market in the second and third tier airline community 14 & Seat Production Forecast ~8.5M Seat Places required over next 10 years 1,000,000 900,000 800,000 CAGR 700,000 4.4% 600,000 500,000 400,000 2.9% 300,000 3.0% 200,000 100,000 Number Places Number of Passenger 0 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Economy Premium* Source: Tronos and Aerodynamic Advisory Analysis * Premium includes F, DF, J, True PY 15 Seat Production Forecast & Line Fit v. Retrofit (Aftermarket) ~50/50 split New to Retrofit deliveries 1,000,000 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 Number Places Number of Passenger 100,000 0 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Retrofit New Production Source: Tronos and Aerodynamic Advisory Analysis 16 Premium Seating Product & Distribution (Lie-Flat v Recline) 120 100 Thousands 80 60 40 20 Total PremiumTotal Seat Places 0 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Lie-Flat Premium Recliner Premium* Source: Tronos and Aerodynamic Advisory Analysis * Recliner Premium includes F, J and DF 17 Seat Production Value Forecast & Line Fit v Retrofit (Aftermarket) ~$64B in seat production over the next 10 years $8 $7 Billions $6 $5 $4 CAGR 4.5% Avg. $3 $2 Total Value of Seats (USD) Seats of Value Total $1 $0 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Retrofit New Production Source: Tronos and Aerodynamic Advisory Analysis 18 Premium Seating makes up ~74% of the total value of seating & market $8 $7 Billions $6 $5 $4 $3 $2 Total Value of Seats (USD) Seats of Value Total $1 $0 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Premium Y Source: Tronos and Aerodynamic Advisory Analysis 19 SECTION 3: Seating Industry Key Players 20 Seat Market Share Estimates B/E Recaro, 10% Zodiac Recaro B/E, 47% HAECO Thompson ZIM Geven Stelia JAMCO Others Zodiac, 31% Source: TAC Research and Analysis 21 . Recently announced purchase by for an estimated $10.5B . 2015/2016 FY revenues in seating of ~US$1.47B which was about 43% of total sales for Zodiac’s interior products division . Three main seating divisions 1. Zodiac US – (formerly Weber) focuses on all classes of seats 2. Zodiac France – (formerly Sicma) focuses on all classes of seats 3. Zodiac UK – (formerly Contour) focuses exclusively on international first and business class seats Source: Zodiac Aerospace and TAC analysis 22 . Purchased by in 2016 for ~$6.4B . FY2016 total revenues of $2.9B while in FY2015 commercial seat sales were ~$2.1B . Two main seating divisions 1. Main & Business Class seats (NC and Ireland) 2. Super First Class & Business Jet seats (FL and AZ) Source: B/E Aerospace and TAC Research 23 . FY2015 forecasted revenues of ~$432M . Main production facilities in TX and Germany . Known recently for exceptional economy and domestic first class seats Source: Recaro and TAC Research 24 . Main production facility NC . Economy, premium economy and domestic first class focused . Approved for Boeing line fit Source: HAECO and TAC Research 25 . Main production facility Italy . All classes of commercial aircraft seating . Serious delivery and design issues over past 3-4 years and lost a lot of market share from 6-7 years ago . Not currently offerable on line fit Boeing or Airbus Source: Avio Interiors and TAC Research 26 . Main production facility Germany . Currently in production of new, larger production facility . Focus on economy and domestic first class seat products . Offerable on both Boeing and Airbus line fit Source: ZIM Flugsitz and TAC Research 27 . Main production facility in Italy . Focus on economy and domestic first class seat products . Offerable on Airbus line fit Source: Geven and TAC Research 28 . Main production facility in UK . Focus exclusively on First and Business class products . Started as design firm . Offerable on both Boeing and Airbus . Purchased at end of 2016 by AVIC Source: Thompson and TAC Research 29 . Main production facility in France . Focus exclusively on First and Business class products . Started as design firm . Formerly EADS - Sogerma Source: Stelia and TAC Research 30 . 1H2016 seat sale revenues of $55M . Seat production in facility in Japan . Focus exclusively on premium first and business class seats . Started in seating about 10 years ago . Long history in galleys, monuments and cabin structures Source: JAMCO 31 . Main production facility in CA . Focus exclusively on narrow body economy class products . Start-up was heavily supported by Boeing . Offerable on Boeing Source: Lift and TAC Research 32 . Main production facility in UK . Focus exclusively on economy class seat . Short-range, light weight economy class seat with minimal options . Offerable on Airbus Source: Mirus and TAC Research 33 . Main production facility in UK . Focus exclusively on domestic first and economy class seats . Pushing market for ultra light-weight minimalistic seats . Offerable on Airbus Source: Acro and TAC Research 34 . Main production facility in Italy . Focused on business class and economy class seating . First significant win was Hawaiian Airlines A330 business class retrofit program Source: Optimares and TAC Research 35 The rest of the field…. ComFly Source: TAC Research 36 SECTION 4: Major Trends SHAPING THE SEAT MARKET 37 Major Trends . OEMs pushing SFE and limiting customization . Continued supplier consolidation . Airline profitability drives investment in new interiors 38 Major Cabin Modification drivers . In-Flight Connectivity and Entertainment upgrades . Entry of 787 and A350 into service . Business and First Class product upgrades . Cabin density upgrades . Used aircraft trading (Entry into Service mods) . Premium economy product evolutions . Airline mergers / acquisitions . Alliance growth 39 Material Developments . Lightweight materials . New manufacturing techniques . Reduction in # of parts . Higher reliability . Maintain ability to customize 40 SECTION 4: Challenges & Opportunities OF THE AIRCRAFT SEAT MARKET 41 Airline demands provide challenges for interior OEMs . Airlines want customization for product differentiation . Airframe and seat manufacturers want standardization 42 Summary of Challenges . Customization program to program . Significant variation on seats even within the same aircraft . Certification is not always black & white on seats and is constantly evolving . Some jurisdictional variation in installation approvals . BFE v SFE decision . Each airline handles their sourcing and selection of seat products differently . High capital investment is a barrier to entry 43 Opportunities in Interiors . Large growing market . Significant aftermarket opportunities . Seats normally has a shorter finite lifespan than other aircraft systems . Will get upgraded much more than other systems and parts on an AC throughout its life . Changing AC ownership lifecycle drives increased opportunities on interiors 44 Tronosjet Aviation Consulting Inc.