Aerospace Supply Chain Review Sept 12, 2013

7/29/2019 Aerospace Supply Chain Review Sept 12, 2013

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AEROSPAA First Class Look At The Most

A Bi-Mon

1. The AIRLINE INDUSTRY travel &strength since January. However, the

previous 2-3 months. Total revenue pa

2. Our TITANIUM contacts have reportoverall order entry rate is estimated @remains exceptionally weak for the ups

3. The NICKEL-BASED ALLOY checkcomp for 2Q. The relative strength hademand rather than changes to the jet e

4. We came away from our new AEROfundamentals. The data points surroindustry will likely benefit from an acestimate current demand @ +8-10% ve

5. We did not make any changes to ourwork suggest there could be upside togrowing probability for Boeing (BA) tdesigns. Our industry model suggests

Company Ticker Price

1 Universal Stainless & Alloy USAP $31.99

2 Heico Corp. HEI $64.49

3 Kaiser Aluminum KALU $71.45

4 Precision Castparts PCP $228.63

5 Carpenter Techno logy CRS $57.39

6 Boeing BA $109.23

7 Wesco Aircraft Holdings WAIR $20.618 Hexcel Corp HXL $37.35

9 Allegheny Technologies ATI $29.21

10 RTI International Metals RTI $32.19

11 S&P 500 SP50 $1,689

12 EADS EAD-PAR $46.01

13 B/E Aerospace BEAV $73.31

14 Alcoa AA $8.19

15 Triumph Group TGI $75.50

16 A.M. Castle CAS $16.19

17 Cytec Industries CYT $77.64

18 Spirit Aerosystems SPR $23.97

Average AERO SUPPLY

Aerospace Materials Peer Group - Recent Sto

Important Disclos

E SUPPLY CHAIN REVIE Important Issues For The Specialty Material

thly Update Report September 12, 2013

apacity data has been more favorable over the past feoverall global industry data points for July were somew

ssenger miles (RPM) growth was reported @ +5.0%

ed shipment levels (and order entry rates) running in-l+1-2%, which is steady with our 2Q results (1Q was @tream markets heading into 2014 contract negotiations.

s came out more positive. We estimate the 3Q growthbeen generated by renewed growth in service centers, e

ngine landscape.

PACE FASTENERS update with a generally favorableunding demand, full-year expectations, lead times, ancelerated period of demand in 2H13 and 2014, with inrsus +7-9% in 1H.

AEROSPACE DELIVERY forecasts, but the data poithe production outlook between 2016 & 2017. Specifi

o raise its 737 delivery targets in order to facilitate the seal commercial aerospace demand growth is @ +6-7% f

Mkt Cap ($000) 30 Day Chg. 3 Month Chg. Industries

224 17% -16% Nickel-Alloys

3,424 9% 78% Jet Engine Replacem

1,337 8% 23% Aluminum

33,274 5% 43% Forging & Special M

3,035 4% 10% Nickel-Alloys

82,408 4% 53% OEM

1,941 2% 47% Aerospace Distributi3,716 2% 60% Composites

3,153 1% -12% Forging & Special M

1,009 0% 38% Titanium

0% 18% Index

35,806 0% 61% Parent of Airbus - O

7,682 0% 86% Interiors & Fastener

8,760 0% -12% Aluminum

3,927 -2% 27% Forging

378 -3% 26% Specialty Distributio

2,833 -3% 16% Composites

3,467 -4% -4% Tier 1 Aerospace

11,551 2% 30%

k Movement

ures Found in Appendix

Forging Markets

w months, showing relativehat disappointing versus the

ine with expectations. The2-3%). Market pricing still

@ +1% versus a down 1%nergy, and power generation

view on underlying marketinventory all suggest the

reasing pricing power. We

ts collected throughout ourally, we are focused on therong demand for the MAX-r 2013.

Current Out Year

-59% -27%

ent Parts 3% 2%

-5% -1%

etals -1% 0%

-5% -2%

1% 0%

on 0% 2%

1% 1%

etals -73% -37%

-21% -4%

EM -1% -2%

1% 2%

-30% -26%

0% 0%

n 94% -14%

4% 6%

-83% 3%

-10% -6%

Earnings Changes


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erospace Supply Channel Update Reporteptember 12, 2013age 2

TABLE OF CONTENTS

#1- Macro Demand OutlookA Review Of The Production Outlook

#2- Airline Travel Data SeriesIATA Travel Growth, Global DemandIndividual Domestic & Global AirlineCross-Atlantic & Cross Pacific TravelLatin American & Regional Aircraft TCargo Traffic Momentum

#3- Interesting News

Releases & Articles That Caught OurA Review Of The Global Airline EquitJet Fuel & Commodity Prices

#4- CRC Research Recaps

Quarterly Titanium Survey HighlightsQuarterly Nickel-Based Alloy UpdateEnd-Market Demand Breakdown ForAerospace Fastener Survey

Key Industry Drivers Recap

Aircraft Production Outlook

Airline Travel Data (JetCapacity Driver)

Jet Fuel (Airline Margins)

Commodities (RawMaterials)

The Cleveland Research Company Aerospac

Chris Olin, Sr. Research Analyst (2Kevin Money, Research Associate (2Curt Siegmeyer, Research Associate (2

Updates On 787.

Highlightseportsrends

ends

ttentionTrading & Estimate Changes..

...etals..

Titanium Trends(Upstream)

Nickel-Based AlloyTrends (Upstream)

Aero Fasteners(Downstream Demand)

Equity Trading (HealthIndex)

Materials Coverage Team

16) 649-7212 colin@clevel16) 649-7254 kmoney@cle16) 649-7208 ciegmeyer@c

....3

..4...5

........6.......7

....8

..89.....10

.1112..13..14

nd-research.comeland-research.com

leveland-research.com


3/17


AIRCRAFT DELIVERY OUTLOOK THROUGH THE CYCLEWe did not make any changes to our aerospace delivery forecasts, but the data points collected throughout our work suggest therecould be upside to the production outlook between 2016 & 2017. Specifically, we are focused on the growing probability for Boeing(BA) to raise its 737 delivery targets in order to facilitate the strong demand for the MAX-designs.

Our current cyclical demand outlook implies a very mild correction could occur over the next 3-4 years (in between 2015-2017)before another period of acceleration, which is consistent in the data presented by the Airline Monitor. A majority of the new aircrafdemand is expected to come from the shift toward more fuel-efficient aircraft, assuming 3,000 jets are retired over the next four years(roughly 12% of the existing fleet of 23,000).

The outlook is very bullish for the part makers, forgers, and specialty material producers. In addition to the increased volumes, mosof the companies in our watch group should also benefit from greater content of premium materials and service (secular growthevident through 2018-2020).

Our current 2013 delivery outlook is 1,390 jets, which represents +6.6% growth. We assume BA represents 46% of the totaproduction this year @ 640 units (@ +8.8%), Airbus will represent 610 deliveries (@ +3.7%), and the regional market contributes thefinal 115 units (+1.8% growth). We are assuming a near-term production peak @ 1,630 units in 2015.

Our current delivery outlook does not include any announced delivery ramp for the 787 (to 12 per month). However, we see ahigher degree of likelihood that the management team increases its monthly production rate target during 1H14. This should representhe next major catalyst for the supply chain. Production is currently @ 7-8 per month, likely to hit 10 by year-end. The company hainferred that 12 per month is achievable. Our fastener contacts suggested the Japanese aero suppliers started increasing purchases inJuly/August, which could represent a strong positive leading indicator.

Deliveries 2012A 2013E 2014E 2015E 2016E 2017E 2018E787 (all models) 46 60 120 120 140 155 160A350 (all models) 0 0 0 50 70 110 140Source: CRC and Airline Monitor

0

100

200

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500

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700

800

900

1,000

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2,300

2,400

Commercial Aerospace Industry AnalysisTotal Jet Deliveries (Through 2020) Includes Regional Builds

Source: CRC and Airline Monitor


4/17


COMMERCIAL AIRLINE INDUSTRY DATA -- TRAFFIC ANALYSIS & HIGHLIGHTSWe monitor monthly IAIA airline traffic data for a read through to aerospace-related aftermarket demand (includes forged/machinedparts and metals). Bottom-line, the airline industry traffic and capacity momentum has been more favorable over the past few monthsshowing relative strength since January. However, the overall global industry data points for July were somewhat disappointingversus the previous 2-3 months. Total revenue passenger mile (RPM) growth was reported @ +5.0%, which compares to the averageMay & June comp of +5.8% (the 1H13 average was +4.5%).

The four most interesting data points within the July IAIA report include:o North American travel has been holding in a +2-3% range over the past three months. The July comp was reported @ +2.2%

versus +2.9% in June. Domestic travel has been slightly weaker with comps reported @ +1.5% versus +2.4% the previousmonth. The strength is coming from overseas travel (now running @ +3.6%).

o European growth was reported at +4.0%, which is down from the +5% run-rate over the previous two months. It is stilholding above the total 2013 average of +3.1%.

o The weakness has been most visible in Brazil. The trend has been negative for 5 of the past 7 months during 2013. Brazil itravel was down 0.6% in July.

o Global load factors remain high. The average capacity is calculated at 82.4% which is down just slightly versus the 82.8% inJune. Available seat mileage growth eclipsed passage traffic with new planes coming back into service.

Source: IATA

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Jan-06

Apr-06

Jul-06

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Oct-14

Commercial Airline Market AnalysisReported Passenger Traffic Growth (2006 To Present)

Available Seat Miles Revenue Passanger KilometersSource: IATA

Monthly Growth Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-

Total Market RPK 5.7% 8.6% 7.6% 6.1% 4.5% 6.2% 3.4% 5.1% 4.1% 2.8% 4.6% 4.2% 2.7% 3.7% 5.9% 3.2% 5.6% 6.0% 5.0%

ASK 4.2% 7.4% 4.4% 3.8% 4.0% 4.5% 3.6% 4.1% 3.1% 2.3% 3.2% 2.7% 2.2% 1.0% 3.5% 4.4% 5.2% 5.6% 5.5%

Load 78.1% 75.3% 78.3% 79.3% 77.6% 81.0% 83.1% 82.1% 80.0% 78.8% 77.3% 77.9% 77.1% 77.3% 80.3% 78.1% 78.1% 81.7% 82.4%

Africa RPK -5.7% 22.8% 12.5% 6.2% 9.5% 9.0% 3.9% 3.2% 5.0% 3.3% 5.5% 6.3% 9.7% 6.5% 8.0% 4.7% 9.4% 10.8% 7.2%

ASK -3.0% 19.2% 9.4% 7.3% 11.3% 8.6% 4.2% 5.3% 2.8% 2.4% 4.2% 3.7% 5.8% 3.1% 5.4% 3.3% 6.9% 6.2% 4.9%Load 64.7% 64.9% 66.1% 66.6% 63.5% 65.7% 73.3% 68.5% 71.9% 68.4% 65.9% 69.0% 68.0% 66.3% 68.9% 67.8% 67.5% 71.3% 74.1%

Asia/Pacific RPK 8.2% 6.8% 8.5% 8.7% 5.3% 6.3% 3.4% 4.8% 4.1% 2.9% 6.0% 6.3% -0.1% 7.8% 8.0% 2.4% 6.6% 8.3% 7.7%

ASK 7.6% 7.6% 5.9% 5.7% 5.2% 4.9% 4.4% 4.7% 3.7% 3.4% 4.4% 4.6% 1.3% 4.7% 5.2% 3.7% 7.1% 8.8% 8.7%

Load 77.1% 76.0% 66.1% 77.9% 75.4% 78.4% 79.8% 79.5% 77.5% 76.7% 76.6% 76.6% 76.4% 78.0% 79.3% 76.9% 75.3% 78.6% 78.5%

Europe RPK 5.9% 7.6% 8.3% 5.6% 4.1% 7.0% 4.4% 5.0% 4.8% 2.3% 2.9% 1.6% 1.5% 0.7% 3.6% 2.0% 5.3% 4.8% 4.0%

ASK 2.9% 4.8% 3.6% 3.1% 2.8% 4.6% 3.7% 4.0% 3.0% 1.5% 0.0% -0.2% -0.1% -2.0% 0.2% 2.9% 3.7% 3.1% 3.7%

Load 74.9% 73.9% 77.6% 79.9% 77.8% 81.6% 84.8% 83.9% 82.7% 80.0% 77.2% 77.4% 76.2% 75.9% 80.3% 79.4% 78.4% 82.6% 84.9%

Latin America RPK 9.3% 15.5% 6.8% 6.7% 8.0% 14.0% 9.4% 10.0% 8.5% 8.7% 11.3% 7.7% 6.3% 3.2% 7.5% 4.6% 7.8% 7.4% 5.9%

ASK 10.5% 15.4% 8.0% 5.2% 6.8% 10.6% 7.4% 5.8% 4.5% 6.0% 6.1% 4.4% 4.8% 1.8% 5.4% 7.9% 5.3% 5.1% 6.4%

Load 78.5% 74.4% 73.5% 76.1% 72.9% 75.6% 81.1% 76.7% 76.8% 75.3% 76.1% 76.2% 79.3% 75.4% 74.9% 76.0% 75.8% 78.1% 81.4%

Middle East RPK 15.1% 23.1% 21.6% 16.1% 16.1% 18.3% 11.3% 16.2% 12.4% 11.6% 9.8% 12.6% 13.2% 9.8% 14.6% 10.9% 10.5% 11.0% 6.9%

ASK 10.9% 16.1% 13.2% 13.1% 12.4% 13.6% 12.3% 13.0% 10.6% 10.9% 10.3% 11.8% 13.1% 9.0% 13.2% 12.9% 11.8% 12.4% 9.7%

Load 78.6% 77.1% 78.8% 78.3% 74.0% 78.8% 81.1% 78.3% 78.5% 75.3% 73.5% 77.3% 78.7% 77.8% 79.7% 76.8% 73.9% 78.7% 78.5%

North America RPK 0.2% 5.2% 2.4% 1.3% 0.5% 1.1% -0.9% 1.8% -0.1% -0.3% 1.6% 1.0% 2.6% -0.3% 2.8% -0.5% 2.9% 2.9% 2.2%

ASK -1.2% 4.4% -0.2% -0.8% 0.5% -0.1% -0.6% 0.7% 0.1% -1.5% 1.8% 0.2% 1.2% -3.3% 1.3% 1.3% 2.3% 2.6% 2.5%

Load 77.9% 76.7% 83.0% 82.7% 83.4% 86.5% 86.7% 86.8% 81.9% 83.3% 81.4% 81.5% 79.0% 79.1% 84.2% 79.5% 84.3% 87.0% 86.8%


5/17


Our analysis of the Big-7 airlines in North America is showing further deterioration in passenger traffic over the previous 30 daysWe calculate the average growth rate for the month of August to be +2.4% which compares to +3.3% growth in July. The data seriecontinues to support a more favorable outlook for Alaska Airlines (ALK) and U.S. Airways (LCC) which are showing +8.1% and+5.6% growth, respectively.

The global airlines we track are showing much stronger traffic results since 1Q. We calculate the average growth for the month oAugust @ +7.5%, which compares favorably to the +5.1% growth in July (this excludes China Southern which has been the strongestairliner). The main driver behind the favorable traffic momentum has been supported by renewed activity in Northern Europe & The

United Kingdom. British Airways parent IAG, is seeing the most pronounced sequential movement.

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Revenue

PassangerMiles%Growth

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11Sep-11

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12Sep-12

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13Sep-13

Oct-13

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Southwest 13.2%13.0% 9.8% 8.7% 9.9% 7.5% 5.9% 3.9% 6.4% 3.5% 2.5% -0.3% -2.7% 3.8% -0.9% -2.2% -2.6% -0.1% 0.0% 0.1% - 2.1% -2.4% -1.5% -0.2% -1.7% -2.3% 4.0% 1.5% 4.2% 2.3% -1.5% -2.7%

Delta 2.3% 1.4% 0.5% 2.6% 2.2% -1.5% 0.1% -0.3% -0.9% -3.8% -1.9% -2.3% -1.5% 2.5% 2.0% 1.2% -0.6% 0.4% -2.8% 0.2% -1.1% 0.3% 1.2% 0.5% 0.0% -2.2% 0.1% -0.7% 1.4% 0.7% 1.7% 2.7%

United 0.9% -3.4% -2.2% 1.1% -0.3% -0.9% -0.1% -0.9% -1.7% -5.1% -3.6% -0.7% -3.2% 3.4% 1.0% 0.9% 0.3% 0.1% -3.3% -0.1% -2.1% -0.3% -2.3% -4.0% 0.9% -3.4% -1.2% -3.8% -0.8% -0.6% -0.6% 0.0%

US Air 3.9% 4.1% 3.9% 4.3% 7.4% 2.5% 5.1% 1.2% -0.9% -1.5% 3.4% 3.6% 3.7% 7.8% 4.5% 2.1% -0.9% 1.7% 0.4% 5.7% 1.9% 3.1% 4.4% 1.8% 5.0% 2.4% 5.2% 4.4% 5.7% 7.0% 6.3% 5.6%

Alaska 15.8%19.0%19.3%18.1%11.7% 7.9% 6.8% 7.6% 10.4% 6.0% 7.8% 6.2% 17.5%21.5%15.7%17.1%11.2%10.6% 8.8% 8.1% 5.1% 8.5% 9.4% 8.4% 11.5% 6.0% 9.4% 8.5% 6.8% 8.1% 9.2% 8.1%

Jet Blue 5.1% 9.0% 7.1% 6.1% 10.6% 7.2% 11.1% 5.8% 7.6% 7.6% 10.9%14.3%13.3%17.4%12.5%14.5% 7.4% 9.7% 7.1% 13.1% 6.1% 1.0% 5.7% 6.1% 11.2% 2.6% 8.6% 4.7% 9.4% 7.8% 7.3%

American -0.7% 0.0% - 1.7% -1.8% -0.9% -0.9% -0.7% -2.6% 1.7% -1.8% -1.7% -3.9% -1.1% 4.4% -0.1% -2.2% 1.0% -2.2% -2.9% -0.7% -7.1% -6.0% -1.2% 2.4% 3.0% -1.3% -1.3% -1.4% -2.1% 0.5% 0.3% 0.8%

Average 5.8% 6.2% 5.2% 5.6% 5.8% 3.1% 4.0% 2.1% 3.2% 0.7% 2.5% 2.4% 3.7% 8.7% 5.0% 4.5% 2.3% 2.9% 1.0% 3.8% 0.1% 0.6% 2.2% 2.1% 4.3% 0.2% 3.6% 1.9% 3.5% 3.7% 3.3% 2.4%

Commecial Aerospace Market AnalysisMonthly Reported RPM Growth (Domestic Airliner Rates) -- 2011 to Present

Source: CompayReport s

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RevenuePassang

erMiles%

Growth

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China Southern 16.7% 4.5% 4.2% 10.2%13.1% 8.6% 10.7% 6.0% 7.9% 9.0% 18.0%11.6%17.2%11.2%11.0%10.1% 7.3% 9.9% 10.3%12.3%12.5% 7.8% 8.5% 11.5%-1.1%18.0%15.1% 7.1% 10.9%12.4% 8.5%

IAG 4.5% 1.4% 8.8% 24.9%14.1% 9.2% 3.5% 2.2% 4.3% 1.9% 2.1% 12.2% 1.2% 1.6% 6.2% 4. 0% 6.6% 8.9% 5.1% 9.1% 5.1% 3.2% 3.6% 0.2% 0.7% -0.3% 0.1% -0.8% 7.4% 8.2% 6.6% 10.6%

Lufthansa 9.1% 13.1% 0.3% 24.4% 6.9% 4.9% 8.1% 5.7% 4.6% 2.8% 3.4% 6.8% 1.3% 2.5% 4.0% 0.5% -2.8% 1.2% -2.1%-0.2%-2.4% -2.8%-3.9% -5.0%-1.1% 0.7% 4.6% -25.5 5.2% 5.4% 3.6% 7.0%

Air France 4.8% 4.9% 1.0% 23.1% 4.9% 2.9% 6.9% 7.6% 9.3% 5.7% 2.5% 7.5% 3.6% 6.2% 6.8% 2.8% -0.1% 4.2% 1.2% 0.6% 0.9% -2.0% 2.8% 0.0% 4.8% -0.1% 2.3% 2.3% 4.7% 2.5% 1.8% 4.9%

Qantas 8.5% 5.1% 3.3% 10.0% 8.6% 4.8% 5.0% 4.0% -1.1% 5.3% 8.5% 9.4% 8.7% 0.8% -1.7% 1.0% 0.4% 0.1% 6.0% 1.3% -2.4%-4.9% -2.0%-0.2% -1.0%

Average 8.7% 5.8% 3.5% 18.5% 9.5% 6.4% 6.8% 5.3% 6.0% 3.7% 6.3% 9.5% 6.4% 6.2% 7.3% 3.6% 1.8% 6.0% 3.1% 4.4% 3.2% 2.5% 2.5% 1.7% 0.2% 2.7% 4.0% -3.4% 5.5% 7.2% 5.1% 7.5%

Commecial Aerospace Market AnalysisMonthly Reported RPM Growth (GlobalAirliner Rates) -- 2011 to Present

Source: Compay Reports


6/17


The Big-7 airlines are seeing much better cross-Atlantic traffic with the average growth rate now calculated @ +3.0%, whichcompares to an average comparison of +0-1% during the previous two months. The momentum has improved considerably versus the2011 & 2012 environment (down 2-3%), which could represent the next catalysts for newer jet entering service or re-starts.

The cross-Pacific travel growth continues to suggest that travel to-and-from-Asia has stabilized. Overall growth appears to be runningin the +3-4% range for 3 straight months, which compares to an average 1H13 growth rate of +1.8%. A majority of the improvementhas been coming from strong market share gains for American Airlines. These cross-Pacific reads are consistent with the Europe-toAsia traffic updates released by Air France (+7.6% versus +4.6% in July), IAG (+8.9% versus +6.4%), and Lufthansa (+5.3% versus

+3.8%).

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Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Jul-12Aug-

12Sep-12

Oct-12

Nov-12

Dec-12

Jan-13

Feb-13

Mar-13

Apr-13

May-13

Jun-13

Jul-13Aug-

13Sep-13

Oct-13

Nov-13

Dec-13

Delta 8.8% 6.1% 4.0% 19.6% 0.8% -1.1% -1.1% -2.4% -7.6% -10.3 -11.0 -7.3% -4.2% 3.0% -0.4% -6.1% -4.4% -5.5% -6.7% -5.1% -0.3% -3.0% -3.1% -4.3% -6.4% -8.8% -5.7% -3.2% 2.0% 4.8% 5.1% 6.0%

United -4.7% -9.2% -1.3%18.3% 1.4% -2.0% -2.4% -2.0% -2.1% -7.9% -4.1% -1.1% -1.9% 0.8% 1.4% -6.0% -1.7% -1.4% -5.8% -2.4% -5.3% -9.6% -7.2% -4.6% -4.7% -9.2% -6.8% -4.1% -1.3% 1.0% 2.5% 7.2%

US Air 21.9%24.3%13.5%21.3% 9.3% 2.3% 6.3% 4.0% 3.1% 5.4% 5.6% -0.3% -0.3% 3.6% 6.4% 0.3% -5.5% 4.5% -0.1% 2.8% -0.2% -3.5% -8.3% -6.4% -1.2% -1.5% -2.2% -2.0% 8.4% 5.5% 6.6% 6.9%

American -5.7% -4.6% -8.1%19.1% 2.3% 1.5% 2.1% 2.5% 0.5% -0.6% -2.8% 4.8% 3.2% 8.0% 2.0% -2.7% -9.6% -5.5% -3.3% -0.6% -0.7% -8.5% -7.8% -4.9% -6.8% -11.0 5. 0% -4.8% -0.1% -1.8% -3.1% -1.1%

Average 1.5% 1.5% -1.0% 19.5% 3.8% 0.8% 2.0% 1.8% 0.5% -0.9% -1.0% 2.1% 1.0% 5.1% 3.0% -2.8% -6.6% -2.0% -3.1% -0.2% -1.7% -7.5% -7.7% -5.2% -4.9% -8.2% 0.3% -3.9% 1.7% 0.7% 0.7% 3.0%

Commercial Aerospace Market AnalysisMonthly Reported Cross-Atlantic RPM Growth (Domestic Airline Rates) -- 2011 to Present

Source: CompanyReports

-6.0%

-5.0%

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-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

18.0%

19.0%

20.0%

21.0%

22.0%

23.0%

24.0%

RevenuePassengerMiles%

Growth

Jan-

11

Feb-

11

Mar-

11

Apr-

11

May-

11

Jun-

11Jul-11

Aug-

11

Sep-

11

Oct-

11

Nov-

11

Dec-

11

Jan-

12

Feb-

12

Mar-

12

Apr-

12

May-

12

Jun-

12Jul-12

Aug-

12

Sep-

12

Oct-

12

Nov-

12

Dec-

12

Jan-

13

Feb-

13

Mar-

13

Apr-

13

May-

13

Jun-

13Jul-13

Aug-

13

Sep-

13

Oct-

13

Nov-

13

Dec-

13

Delta 19.6%13.6% 0.6% -3.0% 5.5% 3.9% 9.5% 14.8% 0.8% -6.0% -7.0% -3.6% -2.5% 2.1% 12.6%16.3%12.2% 7.3% -2.0% 0.7% 5. 3% 7.5% 11.5% 6.5% 0.9% 6.0% 3.8% 5.1% 0.5% -2.7% -1.4% -1.0%

United 4.8% 2.5% -6.6% -8.4% -1.6% -2.0% -1.1% -2.0% -3.6% -1.9% 1.8% -4.3% -5.6% 3.5% 7.9% 13.0% 6.2% 3.4% 0.0% 3. 8% 5.2% 2.0% -0.4% -0.6% 4.8% 2.5% 2.6% -3.2% -1.0% 1.2% 0.3% -2. 7%

American 12.3%13.9%13.9% 8.9% 16.8%14.8%22.7% 23.5% 5.7% 2.4% -4.9% 8.7% 17.2% 15.8%13.4%18.9%13.0% 9.1% -4.4% -3.9% 7.2% 8.8% 17.3% 8.3% -2.1% 1.5% -0.9% -4.7% 6.7% 12.2%12.5%15.4%

Average 12.2%10.0% 2.6% -0.8% 6.9% 5.6% 10.4%12.1% 1.0% -1.8% -3.4% 0.3% 3.1% 7.2% 11.3%16.0%10.5% 6.6% -2.1% 0.2% 5.9% 6.1% 9.5% 4.7% 1.2% 3.3% 1.8% -0.9% 2.1% 3.6% 3.8% 3.9%

Commercial Aerospace Market AnalysisMonthly Reported Cross-Pacific RPM Growth (Domestic Airline Rates) -- 2011 to Present

Source: Company Reports


7/17


The Latin-American airline travel numbers reported by the Big-7 shows continued strength -- with the average growth rate holding inthe +8-9% rate for the last three months. August came in @ +9.4%, which is the highest calculated RPM comp reached over the pas3 years. Delta is showing the market leadership in southbound travel, with American Airlines running a close second.

The small-aircraft regional traffic has been a headwind for the domestic airlines. The average growth rate has been negative for 6 ouof the last 7 months, including down 2.3% in August (versus down 2.9% in July). U.S. Air seems to be losing market shareUltimately, we believe this data series reads fairly cautious for the smaller aircraft market.

-13.0%

-12.0%

-11.0%

-10.0%

-9.0%

-8.0%

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

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-1.0%

0.0%

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3.0%

4.0%

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17.0%

RevenuePassangerMiles%Growth

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Jul-12Aug-

12Sep-12

Oct-12

Nov-12

Dec-12

Jan-13

Feb-13

Mar-13

Apr-13

May-13

Jun-13

Jul-13Aug-

13Sep-13

Oct-13

Nov-13

Dec-13

Delta 19.5%12.1%15.7%15.2% 2.1% -1.3% 0.1% 7.3% 1.2% -2.7% -0.6% -2.1% -4.7% -0.7% -4.1% -2.2% 4.6% 4.8% 3.7% 5.7% 3.2% -1.3% 0.6% -2.2% 0.5% -3.5% -0.8% -3.1% -5.9% -4.9% -4.6% -1.6%

United 2.8% -2.9% 3.0% 11.3% 5.5% 2.7% 6.2% 2.7% 8.5% 1.2% 1.4% 4.5% -0.6% 8.3% 6.5% 1.5% 2.9% 8.1% 0.0% 5.6% 2.2% -0.7% 4.0% 0.3% 2.8% -2.9% 6.1% -1.4% 3.4% 3.4% 0.9% -0.2%

US Air 0.7% -8.9% -11.5 -0.7% -1.1% -5.2% -0.6% -7.7% -7.9% -1.3% 3.4% -3.2% -7.1% 2.0% 4.7% 3.1% 3.4% 8.3% 1.4% 9.0% 3.8% -3.5% 2.8% 4.9% 5.8% 5.4% 8.5% -2.4% 2.3% 12.2%10.9% 9.5%

American 11.9%10.2%12.1% 5.3% 4.2% 5.2% 3.4% -2.3% 3.0% -0.2% -0.1% 1.8% 3.2% 7.3% 1.9% 1.1% 2.5% 2.7% 1.2% 3.4% 6.1% 4.2% 9.7% 4.8% 4.2% 3.5% 5.5% 4.0% 9.3% 10.3%10.8%11.3%

Average 2.0% -3.3% -1.0% 3.8% 3.2% 0.5% 1.8% -3.0% 4.3% 1.6% 2.6% 2.5% -1.7% 5.0% 4.5% 1.2% 3.3% 6.3% 0.4% 6.3% 6.7% 2.9% 8.1% 5.6% 5.4% 3.4% 7.1% 0.7% 6.4% 8.0% 8.3% 9.4%

Commecial Aerospace Market AnalysisMonthly Reported Latin American RPM Growth (Domestic Airline Rates) -- 2011 to Present

Source: CompayReports

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-13.0%

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14.0%

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16.0%

17.0%

RevenuePassengerMiles%Growth

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11Aug-

11Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Jul-12Aug-

12Sep-12

Oct-12

Nov-12

Dec-12

Jan-13

Feb-13

Mar-13

Apr-13

May-13

Jun-13

Jul-13Aug-

13Sep-13

Oct-13

Nov-13

Dec-13

Delta -4.6% -6.4% -2.4% -3.9% 1.3% -1.9% -2.0% -2.0% 2.3% 0.7% 0.6% -3.4% -2.1% 5.7% 1.1% 1 .4% -3.7% -3.3% -7.7% -4.7% -12.1 -7.5% -9.0% -7.9% -7.1% -13.3 -10.4 -8.7% -6.0% -7.3% -6.9% -3.2%

United 2.8% -1.3% -1.2% -3.1% 0.9% -0.1% -1.0% -0.1% 0.2% -2.1% -0.6% 3.8% 1.3% 9.8% 1.3% 1.0% -2.3% 1.8% 0.0% 0.0% -1.2% 24.9% 1.4% -3.6% 2.8% -1.3% 2.4% 1.4% 4.1% -1.3% 0.3% 1.9%

US Air 14.3%16.3%13.5% 7.9% 13.1% 2.4% 1.2% -2.2% -3.8% -5.1% -2.3% -2.0% 0.6% 4.7% -3.1% 2.4% 0.3% 2.6% 8.6% 16.8% 5.6% 6.7% 14.2%15.4%11.7% 7.0% 9.3% 5.4% -0.4% -1.8% -7.5% -10.5

American 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 3.0% 2.9% -0.6% 3.6% -1.4% -2.0% -1.1% -0.4% 1.7% -1.1% 2.2% -1.4% 1.5% 0.2% 2.6% 2.6%

Average 3.1% 2.2% 2.5% 0.2% 3.8% 0.1% -0.5% -1.1% -0.3% -1.6% -0.6% -0.4% 0.0% 5.1% -0.2% 1.2% -0.7% 1.0% 0.1% 3.9% -2.3% 5.5% 1.4% 0.9% 2.3% -2.2% 0.9% -0.8% -0.2% -2.5% -2.9% -2.3%

Commercial Aerospace Market AnalysisMonthly Reported Regional RPM Growth (Domestic Airliner Rates) -- 2011 to Present



8/17


CARGO MARKET UPDATEThe reported cargo market for the domestic airlines continues to show negative comps, now @ 12 consecutive months (and 26 of thelast 28 months). The August volumes were reported down 4.2% versus down 5.6% in July. The trend-line appears to be turningslightly more favorable as the comparisons are getting easier. Absent a greater pull from the cargo markets, it is unlikely the wide-body market (A380 & 777) will see much more order growth over the next 1-2 years.

SOME NEWS ITEMS THAT CAUGHT OUR INTEREST OVER THE PAST 30-60 DAYSCould Be Impactful For Future Forging Or Metals Demand -- Modeling Assumptions= *****

This Is Now On Our Radar = ***

A Developing Situation = **

Something That We Consider Interesting Information = *

*****The Justice Department has filed suit to block the merger between US Airways & American Airlines. It has allegedviolations of the federal anti-trust laws, which is interesting considering the recent mergers between Delta/Northwest (2008)United/Continental (2010), and Southwest/AirTran (2011). This newest proposed combination would create the worlds largest airlinecontrolling roughly 15% of total fleet capacity (10% for American and 5% for US Airways). The last attempt to block an airlinemerger came in 2000 with US Airways & United. It took about 13 months to determine that final outcome this trial will start onNovember 25. The domestic fare inflation (on 1,000 routes) and possibly the Latin American route concentration could be thesticking points. Conversely, the airline management teams have argued that the merger could generate at least $500 million in annuacost savings. From a market impact, many of our specialty mill and forging contacts had previously suggested the recent materiainventory drawdown throughout the jet engine channel has been partially attributed to American and US Airways already acting in

concert.

*United Airlines recalled 600 pilots back to work. All pilots have now returned from furlough for United or United Express. Thecompany estimates there to be approximately 12,000 active pilots currently working in the country. This implies the recent labomove represents a rough 5% increase to the active workforce. We believe this announcement improves the likelihood of airlineoperators being more aggressive in driving future seating capacity and new route introductions. We estimate United Airlines torepresent about 10-11% of the commercial airline fleet (about 725 aircraft).

**Indigo Partners is said to be in talks to acquire Frontier Airlines from parent-Republic Airways. Speculation is runningthroughout various trade journals & the WSJ that a Bill Franke-lead investment firm has targeted Frontier Airlines for a new growthopportunity. This could result in Frontier becoming introduced as the third major ultra-low cost airliner in the U.S. (behind Spiri

-15.0%

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17.0%

RevenuePassengerMiles%Growth

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11Aug-

11Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Jul-12Aug-

12Sep-12

Oct-12

Nov-12

Dec-12

Jan-13

Feb-13

Mar-13

Apr-13

May-13

Jun-13

Jul-13Aug-

13Sep-13

Oct-13

Nov-13

Dec-13

Delta 19.5%12.1%15.7% 15.2% 2.1% -1.3% 0.1% 7.3% 1.2% -2.7% -0.6% -2.1% -4.7% -0.7% -4.1% -2.2% 4.6% 4.8% 3.7% 5. 7% 3.2% -1.3% 0.6% -2.2% 0.5% -3.5% -0.8% -3.1% -5.9% -4.9% -4.6% -1.6%

United -11.8 -15.7 -8.7% -5.8% -18.4 -16.9 -14.1 -16.9 -15.7 -14.9 -14.3 -8.5% -11.9 -6.6% -5.7% -12.8 -7.4% -2.3% -6.2% -2.6% -0.3% -10.3 -5.3% -10.9 -11.8 -15.7 -13.2 -9.0% -8.3% -10.2 -18.0 -16.5

American -0.4% -2.7% -2.1% 2.2% -6.6% -7.8% -5.6% -9.2% -5.2% -12.0 -9.4% -5.2% -1.5% 1.4% 3.6% - 1.0% -2.0% 1.1% -4.9% 0.3% -8.3% -7.6% 0.8% 3.7% -9.3% -10.2 -4.6% -3.2% 4.1% 8.0% 5.7% 5.7%

Average 2.4% -2.1% 1.6% 3.9% -7.6% -8.7% -6.5% -6.3% -6.6% -9.9% -8.1% -5.3% -6.0% -2.0% -2.1% -5.3% -1.6% 1.2% -2.5% 1.1% -1.8% -6.4% -1.3% -3.1% -6.9% -9.8% -6.2% -5.1% -3.3% -2.4% -5.6% -4.2%

Commercial Aerospace Market AnalysisMonthly Reported Cargo Tonnage Growth (Domestic Airline Rates) -- 2011 to Present



9/17


Airlines & Allegiant Travel). We are watching this event as it could push more LT jet orders from Frontier. Franke is the former CEOof America West Airlines and recently sold his positions in Spirit Airlines.

*Boeing says China could drive demand for 5,580 jets over the next 20 years. Some pretty bullish figures coming out of theimportant OEM in early September. The company expects Chinese air traffic to grow by 7% (annually) driven by tourism and intraAsia travel. The 5,000+ delivery target for the region would represent about 16% of the LT global fleet growth. Within the presenteddata, BA is more bullish on the upside potential for the single-aisle or narrow body market, including incremental demand for the 737and 737-MAX (which will be a titanium and nickel-based alloy intensive jet). They are projecting 3,900 deliveries versus 1,200 widebodies over the same time period (supported by 7.2% international traffic growth).

*Delta made a fairly sizeable order with Airbus for the first time in 20 years. The airline operator ordered 10 A330-300 widebody jets (to be used on international flights) and 30 A321 models (domestic travel). Consensus thinking has Airbus using price to goafter the BA market share. Airbus share gain is something to consider going forward.

*Embraer sees strong demand for the executive jet market in China. The company recently announced a LT demand outlook of805 executive jets to be delivered into the Chinese market (between 2014 & 2023). The large-cabin business jet class is expected torepresents about 51% of the demand. The two main drivers to this forecast are current demand growth (+27%) and upside in thenumber of the wealthiest population (+26%).

Equity Trades & EPS MovementWe are seeing mixed signals from the global airliner peer group. In general, current and out-year (2014) earnings forecasts have beencut by 11% and 10%, respectively. However, there has been positive trading activity over the past 30 days, with the peer groupoutperforming the S&P 500. We attribute the revised numbers to the rising jet fuel cost environment and travel weakness into theAsia-Pacific markets. Here are some things that stand out:

o The global shares are up 1% over the past month and +56% over the past three months. The domestic operators haveincreased by 66% over the past three months lead by DAL.

o The 2013 earnings outlook for the companies levered to Asia-Pac have fallen by 30%.o Delta Airlines shares have increased by 10% over the past 30-days and +144% over the past three months.

Company Ticker Price Mkt Cap ($000) 30 Day Chg. 3 Month Chg. Description Current Out Year

1 Qantas Airways QAN-AU $1.41 3,150 19% 0% Australia-Based Airliner -70% -48%

2 Air China 753-HK $5.78 75,630 13% 26% Chinese-Based Airliner -22% -24%

3 Delta Airlines DAL $22.42 19,235 9% 142% U.S. Airline Operator 6% -1%

4 China Southern 1055-HKG $3.07 30,141 7% -8% Chinese-Based Airliner -37% -31%

5 Jet Blue JBLU $6.48 1,829 3% 30% Discount Airline Operator -14% -13%

6 Air France AF-PAR $6.76 2,031 2% 53% French-Based Airliner nm -34%

7 Alaska Airlines ALK $60.77 4,246 1% 76% U.S. Airline Operator -11% 0%

8 Southwest Airlines LUV $13.85 9,781 1% 55% U.S. Airline Operator -10% -8%

9 Allegiant ALGT $98.28 1,855 0% 51% Discount Airline Operator -9% -4%

10 Singapore Airlines C6L-SES $10.03 11,777 0% -7% Thailand-Based Airliner -22% -12%

11 Japan Airlines 9201-TKS $5,570 n/a 0% n/a Japan-Based Airliner 0% 1%

12 S&P 500 SP50 $1,689 0% 18% Index

13 Easy Jet EZJ-GB $13.25 5,247 -2% 135% U.K.- Based Airliner 10% 12%

14 United Airlines UAL $32.66 11,624 -3% 65% U.S. Airline Operator -16% -9%

15 Spirit Airlines SAVE $32.96 2,394 -4% 68% U.S. Airline Operator 2% 2%

16 Republic Airlines RJET $12.06 595 -4% 151% Discount Airline Operator 3% 0%

17 U.S. Airways LCC $17.72 3,403 -5% 52% U.S. Airline Operator 12% 5%

18 Lufthansa LHA-ETR $13.97 6,423 -6% 36% German-Based Airliner -12% -18%

19 Ryan Air RY4B-DUB $6.18 8,802 -14% 59% U.K.- Based Airliner -4% -1%

11,657 1% 56% -11% -10%

Average Domestic Airlines 6,452 0% 66% -5% -7%

Commercial Airlines Peer Group - Recent Stock Movement Earnings Changes

Average For All Global Airlines


10/17


Jet fuel will likely be a headwind for airline profits: The average price for jet fuel (we watch Gulf Coast Kerosene-Type) hasrebounded from the April/May lows. The current price quotes in holding around $3.08 per gallon, which is up 13% over the past 4months and up 6.6% versus August). Fuel represents roughly 70% of the actual flying costs with flight crew costs 25%. Fuel alsorepresents 50% of the total operating cost (including maintenance and depreciation).

There has been some early stabilization in the commodity markets. Nickel and aluminum have found a price floor during themonth of August. These represent key cost inputs for the forging and component markets.

o The current nickel price is holding @ $6.30 per pound, which is down slightly from the August average of $6.47, but up fromthe $5.90 bottom in mid-July.

o Aluminum is trading at $0.81 per pound, which is down 1.2% to an average of $0.824 in August. Prices have also reboundedfrom the mid-April low of $0.79.

o Molybdenum prices are trading near $9.84 per pound, which is up from the average August transaction of $9.41. The markebottomed in early August @ $9.34.

$0.00

$0.25

$0.50

$0.75

$1.00

$1.25

$1.50

$1.75

$2.00

$2.25

$2.50

$2.75

$3.00

$3.25

$3.50

$3.75

$4.00

Aug -03 Aug- 04 Aug-05 Aug-06 Aug-07 Aug- 08 Aug-0 9 Aug-10 Au g- 11 Aug-12 Aug-13 Aug-14

Jet Fuel Price TrendMonthly Spot Quotes (Per Gallon)

Source: EIA

$0.00

$1.00

$2.00

$3.00

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$24.00

$25.00

Jan-02 J an-03 J an-04 Ja n-0 5 Jan-06 Jan-07 J an -08 Jan-09 J an-10 J an-11 Ja n-12 Jan -13 Jan-14

perpound

Source: metalprices.com

Monthly Commodity Nickel PricesLME Monthly Average (2002 - Present)

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

5,500,000

Jan-90 Jan-92 J an-94 Jan-96 Jan-98 Jan-00 Jan-0 2 Jan-04 Jan-06 Jan -08 J an-10 J an-1 2

MT

Source: Metalprices.com

Aluminum Prices (LME)Monthly, 1990-Present

I nv en to ry L ME P ri ce M id w es t Pr em iu m


11/17


TITANIUM MARKET UPDATEOur titanium industry contacts (buyers within distribution, forging and processing channels), reported downstream shipment levels(and order entry rates) to be running in-line with expectations (the number of contacts reporting a miss has fallen to 6% versus 30% in2Q). The overall order entry rate was estimated @ +1-2%, which is steady with our 2Q results (1Q was @ +2-3%). We maintain arelatively positive outlook for aerospace demand over the next 6-9 months. Current aerospace demand was calculated @ +1-2%which is driven by +2-3% growth in airframe and renewed strength in fastener feedstock.

Titanium prices are still falling. We estimate the average price for 64 spot ingot @ $9.50 per pound, which compares to a $10.00average in 2Q. The average transaction price is now down 11% versus last year and off by 24% since the last 2011 peak ($12.5012.60 per pound). Titanium scrap had brought the market down (off by 35% versus last year) but there has been some trading stabilityduring the months of August and September @ $1.75 per pound.

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

18.0%

19.0%

20.0%

1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14

CRC Titanium Quarterly - Demand UpdateNT Order Growth Trends (%, y/y)

Source: CRC Survey

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

$18.00

$20.00

$22.00

$24.00

$26.00

$28.00

$30.00

$32.00

Titanium 6'4 Ingot/Scrap PricesMonthly Average Quotes

T it an ium Ingot P ri ce s 6 '4 BW S crapSource: metalprices.com


12/17


NICKEL-BASED ALLOYS MARKETOur 3Q nickel alloys update suggests the next earnings report(s) for Allegheny Technologies (ATI), Carpenter Technology (CRS),Haynes International (HAYN), and Precision Castparts (PCP) may start to reflect mill volume stability. These checks came out morepositive in relation to titanium. We estimate the 3Q downstream order growth @ +1% versus a down 1% comp for 2Q. The relativestrength has been generated by renewed growth in service centers, energy, and power generation demand rather than changes to the jeengine landscape.

There is no stability evident within the nickel-based alloy price environment. The average spot market price has now fallen steadilysince 3Q11, with a current quote of $13-15 per pound versus $14-17 last quarter. A large component of the mill reductions have beenthe lower commodity nickel input costs (which drives the surcharge), with prices now holding in a $6-7 range per pound (versus $8-10for most of 2011 and 2012).

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14

CRC Nickel-Based Quarterly - Demand UpdateNT Order Growth Trends (%, y/y)

Source: CRC Survey

$6

$7

$8

$9

$10

$11

$12

$13

$14

$15

$16

$17

$18

$19

$20

$21

$22

$23

2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13

CRC Quarterly Nickel-Based Alloy Price UpdateEst. Quarterly Pricing Band

Source: CRC Research


13/17


END-MARKET ANALYSISWe are using the results from our specialty materials research to provide an initial view into the core demand outlook for each of themain end-users of titanium and nickel-based alloys. This includes a breakdown of the main aerospace drivers. Over the next 2-3months, we will be introducing new surveys/updates which should give us alternative views into underlying consumption at differentpoints in the supply chain.

We estimate the core upstream aerospace demand @ +2-3% (for the second straight quarter), which is down from the +4% growth werecorded in 1Q (most of the sequential weakness was evident in the nickel-alloy markets). Again, commercial airframe represents themain demand-pull for titanium aerospace. We have not seen any improvement in the order trend for jet engine (nickel-alloyintensive), or regional aircraft. The fastener feedstock data points are stronger, which was also confirmed by the downstream fastenedistribution channel update we released (see next page).

The end-markets that represent industry laggards in 3Q are: military & defense (now looking down 2-3%); nuclear (down 1-2%)power generation (down 0-1%), power generation (down 0-1%)), and now desalination (down 0-1%).

2.2%

2.5%

3.9%

2.4%

-0.8%

1.6%

-0.6%

-2.4%

0.9%

0.0%

-0.4%-0.6%

1.0%

1.6%1.8%

2.4%

0.9%

1.3%

1.9%

-0.3%

-1.6%

1.1%

-0.4%

0.5%

-1.8%

0.0%

CRC Quarterly Specialty Materials Update2013 End-Market Demand Breakdown (% Growth)

2Q 3Q

Source: CRC Survey


14/17


AEROSPACE FASTENERS UPDATEWe came away from our 3Q aerospace fasteners market update with a generally favorable view on underlying market fundamentalsThe data points surrounding demand, full-year expectations, lead times, and inventory all suggest the industry will likely benefit froman accelerated period of demand in 2H13 and 2014, with increasing pricing power. In general, we believe the suppliers into thechannel are better positioned due to the shortage of inventory and downstream desire to build. Over the near-term the distributorseem to be benefiting from slightly better growth rates relative to the manufacturers as the channel is going through a mild inventoryadjustment. We have re-listed the seven most interesting take-aways from the August channel discussions (see our note from 8/19).

1. 3Q demand improved versus the strong 1H run-rate. We estimate the underlying growth rate for aerospace fasteners hasimproved to +8-10% versus the average 1H comp of +7-9%. The incremental volume contribution has been generated byOEM demand and the supplier preparation for future aircraft deliveries. The aftermarket and military/defense marketremain the laggards over the past 3-4 months, partially offset by demand pull from the BA pipeline. Fastener shipments havesurpassed aircraft delivery growth, which is running @ +6-7% for 2013. This suggests the supply chain is staring to preparefor a strong 2014, with new jet deliveries expected to hit 1,500 units (+11-12% versus 2013).

Our contacts are starting to see a small pull from the Boeing 787 supply chain. The current fastener shipment levels reflect amonthly shipment rate of 5-7, which has been somewhat disappointing for distributors. However, there has been a stronguptick in new orders from Japanese suppliers which is a positive leading indicator for future 787 production.

2. Expectations are moving higher for 2014 based on the confidence in aerospace build schedules . The 2014 outlook isbullish and expectations are moving higher. Current planning now incorporates +10-15% growth (moving toward the higheend of the range). The more positive producers, who are levered to commercial aerospace, have said out-year growth couldhit up to +20-30% on favorable inventory contributions (distributors are not building at this point).

3. Our contacts are starting to prepare for another 737 production increase. The supply chain is starting to prepare foranother BA737 rate increase based on communications with the OEM and the tier-1 suppliers. Current speculation has theproduction rates moving up to 47 units per month (564 annualized). Interestingly, BA recently increased the monthlyproduction rate to 42.5 by 2014 (up from 38 units) which is driving the peak 2016 delivery outlook of 510 (versus a 450 run-rate this year). A 47 per month production run rate would be an all-time high for BA, but it remains to be seen if the channecan sustain this level of production. Regardless, our channel work suggests the suppliers are getting ready for a formaannouncement. We do not believe the current discussion for 47 per month is reflected in the numbers.

4. The military & defense markets are showing slight negative comps, but underlying demand is still running aboveexpectations. The fastener channel is experiencing the negative demand effects from Sequestration. Total military &defense volume growth appears to be trending down in the low-single-digit range. However, this is slightly better versusplan with orders from Bell Helicopter (TXT) and Lockheed Martin (LMT) relatively stable. We estimate the defense marketo represent approximately 15-20% of aero fastener industry demand.

5. Lead times are extending; pricing power beginning to improve. We estimate the average lead time @ 25-30 weeks. Thisis up significantly since the beginning of the year. The producers with greater leverage to BA are quoting out 40 weeksDistributors typically see improved pricing power as shortages increase, which also allows suppliers to increase price. Theoutlook for pricing is to show notable improvement through 2014.

6. Boeing is trying to bring more fastener work in-house. One of the drivers behind BAs new Partnering For SuccessProgram is bringing fastener production in-house. BA is currently working with New Breed Logistics to better maintaincontrol of its internal fastener supply which includes the increased internal fabrication, better inventory management, andconcerted effort to reduce the number of SKUs. At this point, we have not seen the BA strategy impact the distribution

channel or supplier base. There are multiple contacts who do not believe BA is likely to be successful in controlling thefastener volume due to past failures at other companies who have attempted similar strategies like SPR.

7. The titanium mix shift continues to move toward greater use of titanium and stainless components, CRS is well-positioned. Our contacts are seeing greater use of premium fasteners made from specialty materials. These high-value rivetsand fastener components are used in airframe structures made from composite materials as the materials have similar physicacharacteristic (the materials expand at similar stress levels) and compatible chemical properties (reduced risk of galvanicreactions). As the mix shift continues, titanium wire feedstock demand growth is expected to outpace fastener demandAccordingly, we see good underlying demand drivers for the Dynamet operations. The CRS fasteners segment is running @$150-160 million in sales, with upside to the $200 million range, supported by the new capacity in place.


15/17


APPENDIX

Important Disclosures

Companies MentionedCarpenter Technology (CRS: $57.39 BUY)Allegheny Technologies (ATI: $29.21 BUY)RTI International (RTI: $32.19 Underperform)Boeing (BA: $109.23 Not Rated)Precision Castparts (PCP: $228.63 Not Rated)Spirit AeroSystems Holdings, Inc Class A (SPR: $23.97 Not Rated)Delta Air Line (DAL: $22.42 Not Rated)Alaska Air Group (ALK: $60.77 Not Rated)Southwest Airlines (LUV: $13.85 Not Rated)Republic Airways Holdings (RJET: $12.06 Not Rated)Allegiant Travel Company (ALGT: $98.28 Not Rated)US Airways Group (LCC: $17.72 Not Rated)Spirit Airlines (SAVE: $32.96 Not Rated)United Continental Holdings (UAL: $32.66 Not Rated)

Embraer SA (ERJ: $35.68 Not Rated)Textron (TXT: $29.38 Not Rated)Haynes International (HAYN: $46.16 Not Rated)Lockheed Martin (LMT: $126.57 Not Rated)

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Aug-11

Oct-11

Dec-11

Feb-12

Apr-12

Jun-12

Aug-12

Oct-12

Jan-13

Mar-13

May-13

Jul-13

30

40

50

60

70

BUY,

$80 BUY,

$75BUY,

$65

BUY,

$57

BUY,

$52

FactSet ResearchSystems

Allegheny Technologies Inc.


16/17


Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Aug-11

Oct-11

Dec-11

Feb-12

Apr-12

Jun-12

Aug-12

Oct-12

Jan-13

Mar-13

May-13

Jul-13

30

35

40

45

50

55

60

BUY,

$46

BUY,

$56

BUY.

$64

BUY,

$58


Carpenter Technology Corp.

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Aug-11

Oct-11

Dec-11

Feb-12

Apr-12

Jun-12

Aug-12

Oct-12

Jan-13

Mar-13

May-13

Jul-13

20

25

30

35

40

BUY,

$35

NEUTRAL

UNDERPERFORM,

$15


RTI International Metals Inc.


17/17


DisclosuresBuy: The stocks return is expected to exceed the market due to superior fundamentals and positive catalysts.

Underperform: The stocks total return is expected to underperform the market due to weak fundamentals and a lack of catalysts.Neutral: The stock is expected to be in line with the market due to full valuation and/or a lack of catalysts.

Valuation and Risk: Price targets are established under various valuation methods including P/E, P/S, EV/EBITDA on financial estimates based on forward earnings.

Price targets are not established for every stock. The price targets effectiveness may be affected by various outside factors. Risk assessments can be found in the mos

recent research on these stocks.

Other Disclosures: We, Christopher D. Olin, Kevin L. Money, and Curt A. Siegmeyer, certify that the views expressed in the research report(s) accurately reflect our

personal views about the subject security(s). Further we certify that no part of our compensation was, is, or will be directly or indirectly related to the specifi

recommendations or views contained in the research report(s). The analysts responsible for the preparation of this report have no ownership stake in this company

Cleveland Research Company provides no investment banking services of any type on this or any company.

Proprietary research and Information contained herein which forms the basis for findings or opinions expressed by Cleveland Research Company may be used by

Cleveland Research for other purposes in the course of compensated consulting and other services rendered to third parties.

The information transmitted is intended only for the person or entity to which it is addressed. Any review, retransmission, dissemination or other use of, or taking of any

action in reliance upon, this information by persons or entities other than the intended recipient is prohibited. If you received this in error, please contact the sende

and delete the material from any computer.Member FINRA/SIPC

BUY

36%

NEUTRAL

63%

UNDERPERFORM

1%

Cleveland Research Company - Ratings Distribution

Aerospace Supply Chain Review Sept 12, 2013

Documents

Transcript of Aerospace Supply Chain Review Sept 12, 2013