1. SpeedNews Regional & Corporate Aviation Suppliers Conference A View From Wall Street
Ronald J Epstein

2. Overview Discuss market trends from an investor perspective
Equity market conditions
Review regional jet market conditions and opportunities
ML regional jet forecast
Review business jet market conditions and opportunities
ML business jet forecast
Disruptive products developments
Conclusions

3. Equity Market Performance
YTD, Aerospace & Defense has outperformed both S&P 500 and DJ Industrial
S&P Supercomposite A&D Index
S&P 500
DJ Industrial Average
Source: Bloomberg

4. Commercial Aerospace Beats Defense in 2005

5. Aerospace/Defense Valuation

6. Civil Aero OEM Stock Performance Since 2001
Since 2001, Aircraft prime manufacturers have appreciated. Bombardier’s shares; however, continues to lag the group
EADS
Embraer
Boeing
Bombardier
Source: Bloomberg

7. Civil Aero OEM Stock Performance YTD
YTD civil OEMs outperform the S&P (down 0.8%)
Bombardier
Boeing
EADS
Embraer
Source: Bloomberg

8. Business Jet Manufacturer Stock Performance
Business jet OEM appreciate since 2001
Textron
General Dynamics
Raytheon
Embraer
Bombardier
Source: Bloomberg

9. Business Jet Manufacturer Stock Performance
Mixed performance so far in 2005
Bombardier
General Dynamics
Raytheon
Embraer
Textron
Source: Bloomberg

10. Regional Jet Concept is Evolving
What is a Regional Jet?
Capacity: 50-Seats, 70-Seats, 100-Seats
Range: 1000 NM, 1500 NM, 2000 NM
Can be very confusing to investors
Next Generation Aircraft = Small Narrowbody Jets
E-170/-190 Family
C-Series
RRJ and ARJ
All potential competitors with Airbus and Boeing products in the small narrowbody market

11. Airline Bankruptcy Creates Opportunities
Impact of airline bankruptcies
“Bankruptcy = Scope Clause Relaxation”
Scope arbitrage
Arbitrage is a mispricing in the market
In most cases short lived and corrected by market forces
Competitive response to US Airways, JetBlue, Air Canada, United and Delta
Continental and American
Quicker than expected transition in the North American fleet to 70 to 100 seat jets

12. “Re-Gauging” of Fleets
Rationalization of pilot pay structures and “re-gauging” on domestic routes will drive E-Jet market share gains
An ERJ-190
ERJ-170 Interior

13. Theory of Innovation: Disruption
LCCs are a disruptive business model to the Legacy airlines (incumbents)
Disruptive business models typically take time to gain a critical mass
When confronted with disruptive forces incumbents typically move up market (international long-haul)
Incumbents pull out of contested markets (domestic – outsourcing to regional carriers)
Points to further rationalization of pay scales and re- gauging of the fleet

14. Changing Fundamentals for 50-Seat Jets
Is there a glut of 50-seaters?
Cannibalization by larger aircraft
Bombardier “temporarily” halts production
When does the ERJ-145 production halt ?
Without the US Army ACS program, keeping the line open will be more difficult
Emerging market joint ventures: China, Russia
Traditional secondary markets not developed - yet
Impacts on OEMs (Bombardier, Embraer)
Income statement considerations
Balance sheet considerations

15. Regional Jet Market Conditions
Stored fleet of RJs remains low
Orders moving towards larger aircraft
Fleet skewed towards 50-seat aircraft

16. 50 Seat Fleet Evolution

17. Merrill Lynch Regional Jet Forecast

18. Business Jet Market is Thriving
Demand continues to be robust in all market segments
Deliveries could peak in 2007/2008
“Available for sale” fleet as % of fleet at 15 year average levels
Historical data suggests bottom in “available for sale” fleet leads peak in new deliveries by 1 to 2 years
R2=0.49 for lights, R2=0.52 for mid-size, R2=0.32 for heavies
Potentially disruptive forces on the horizon for light jets and avionics

19. Regression Analysis

20. Potentially Disruptive Market Forces
New Competitors
Embraer, Grob, Others?
NOT TO BE IGNORED: Embraer will be first BJ OEM with emerging market economics (major aerostructure done in Brazil)
Introduction of Very Light Jets (VLJs)
New generation of low cost avionics suppliers

21. Very Light Jets Are Coming
Impact of VLJs on market and OEMs
Another source of lift or incremental lift
Bridging corporate aviation and owner/operator GA
Serving a market that is starved for innovation
Possible market size for VLJs
Number of aircraft transactions in the $0.5 million to $4.0 million range
New or used transactions
~2000 Used Transactions
~400 New Aircraft
Total: 2400 (20% to 40% share shift) -> 480 to 960 with mid-point of 720 Jets

22. Low Cost Avionics Market Emerges
The Emerging Avionics Suppliers
Garmin, Avidyne, Rooted in consumer electronics
Potential Low-End Disruptors
Could take share at low end of integrated avionics market from Rockwell Collins and Honeywell
Highly integrated, FAR Part 23, Inside the cockpit
Aspirations for FAR Part 25 Certification
Garmin
Mustang certifications being done on CJ2

23. Incumbent Response Develop competitive systems Honeywell APEX
Acquisitions
Pricey valuations
Move up market
Garmin, Avidyne -> Rockwell Collins -> Honeywell
Could the business jet market become dominated by Garmin at the low end and Rockwell Collins at the high end?
Honeywell focuses on large civil?

24. Merrill Lynch Business Jet Forecast*
*Does not include Embraer VLJ or LJ

25. Conclusions From an investor perspective
Equity market conditions – volatile, but aerospace has done well
Regional jet market conditions and opportunities
Next generation of small narrowbody jets
Embraer vs. Bombardier
Business jet market conditions and opportunities
Disruptive products developments
How much better can it get?

26. Disclosures

27. Disclosures