Impact of

COVID-19 on
Aerospace &
Defence

22nd July 2020

Roland Berger presentation team

Robert Thomson Manfred Hader Rahul Gangal Neranjana De Silva

Managing Partner Senior Partner Partner Principal

London Hamburg Toronto London

Robert.thomson@rolandberger.com Manfred.hader@rolandberger.com Rahul.gangal@rolandberger.com Neranjanade.silva@rolandberger.com
+44 20 3075 1120 +49 (40) 37631 4327 +1 416 915 4294 +44 20 3075 1114
Contents

A
Impact of COVID-19
B
Outlook for
C
Impact of COVID-19
D
How companies can
on Civil Aerospace Civil Aerospace and outlook for survive and thrive in
Defence the "New Normal"
Aerospace

page 4 page 12 page 18 page 23

A. Impact of COVID-19 on
Civil Aerospace
COVID-19 has caused a major drop in travel demand and is significantly
impacting both the aviation and the aerospace sectors
COVID-19's impact on aerospace

1 Virus progression 2 Mitigation actions 3 Demand for travel 4 Aviation impact 5 Aerospace impact
Number of regions/ Government restrictions Drop in air traffic (RPKs2)) Fleet grounding, early Drop in MRO3) and other
countries affected retirement of aircraft, services activity
Corporate travel policies employee layoffs, etc
COVID-19 induced
deaths1) Individual travel reduction Drop in aircraft production

Secondary drivers and feedback loops also exist; they complicate the interaction and make it less predictable

1) Death rates also vary between countries due to variations in the breadth of testing efforts; 2) Revenue Passenger Kilometers; 3) Maintenance, Repair & Overhaul
 3 Demand for air travel

COVID-19 seems to be a "perfect storm" when compared to previous air

travel shocks
Factors impacting demand for air travel in Previous crises in aviation
previous crises [YoY changes in RPK by month after crisis start]
Economic Health Travel YoY- RPK Index (crisis month=100)
downturn Fear risk restrictions Geography
120 9-12 months
First oil Global 110
Other epidemics1)
shock 100
90 9/11
1980s oil Global SARS
crisis 80
APAC
SARS
70 China
First Gulf Global 60
War
50
9/11 Global 40
30
Financial crisis
Global 20
(2008/09)
10
6+ months
SARS Regional 0
-3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12
COVID-19 Global
Months before and after the start of the crisis
 3 Demand for air travel

Passenger volumes in China are on the rise but remain significantly below
2019; air traffic in the US & Europe has started to recover
YoY change in daily domestic + international air passenger volume [%] Updated 20th July 2020

20% US and Europe data prior to

14 March is monthly YoY change
10% 2
0%
1
-10%
-20%
Ministry of Transport of China has
-30% stopped releasing weekly traffic data
since the start of June
-40% -48
-50%
-60%
-72
-70%
-80%
-88 -79
-90% -96 (lowest)
-100% -93 (lowest)
-99 (lowest) -98
15- 1- 14- 1- 15- 1- 15- 1- 15- 30- 14- 28- 13-
Jan Feb Feb Mar Mar Apr Apr May May May Jun Jun Jul

China US Europe1)
1) Includes EU, EEA, Switzerland and UK

Source: Ministry of Transport of China, Transport Security Administration of the US, Airlines for America, Roland Berger
 4 Impact on the aviation industry

The number of aircraft grounded has begun to reduce, but 55% of the fleet
remains grounded
Global aircraft groundings1), Jan-Jul 20202) [grounded % of in-service fleet] Updated 20th July 2020

January February March April May June July 20/07

6%
Global: 10%
1st January
12% Ø 12%
Global avg. for Jan 2020

China3)
30%

Rest of World
48% Global4): 55%
APAC
54% (excl. China)
57%
57% Europe
North America
69%

73%
74% Ø 64%
80% 80%
Global avg. for
Apr-Jun 2020

1) Considering narrowbodies, widebodies and regional jets only; 2) Based on reported groundings data, adjusted based on press research from 4th March; 3) Based on reduction in passenger numbers and load factors, data available
until 5th June; 4) Assuming Chinese capacity constant since June 5th (after which the Chinese government stopped reporting pax volumes)
Source: China MoT, Cirium, Roland Berger
 4 Impact on the aviation industry

Airlines around the world plan capacity increases during 2020, with many
carriers having now begun a moderate service
Selected airlines capacity in operation, 2020 Updated 20th July 2020

Asia
Europe Q1A Q2A Q3E Q4F
Airline Q1A Q2A Q3E Q4F China Eastern Airlines
IAG / British Airways AirAsia
AirFrance-KLM Cathay Pacific1)
Lufthansa TODAY
Alitalia
Norwegian
Ryanair
easyJet
Middle East
TODAY
Q1A Q2A Q3E Q4F
USA Qatar Airways
Turkish Airlines
Q1A Q2A Q3E Q4F
Emirates
American Airlines
United Airlines TODAY

Delta Air Lines

TODAY

Capacity operation: > 75% 50-75% 25-49% < 25% Unknown

1) Incl. regional wing Cathay Dragon
Source: Cirium, Press releases, Analysts reports, Roland Berger
 5 1 Impact on the aerospace industry – Civil OE

The civil aerospace orderbook has not been immune to COVID-19; the 737
MAX has been disproportionately impacted
Commercial aircraft cancellations & deferrals, YTD 2020 [# aircraft] Updated 20th July 2020

Airbus Deferred: 167

Cancelled: 66
Boeing Deferred: 239
Cancelled: 317
Embraer Deferred: 80
Cancelled: 0
Backlog as of Feb 2020
547 6,147 291 572 4,504 309 538 179 153
% of Feb 2020 orders deferred or cancelled
3% 3% 1% 7% 11% 3% 7% 11% 39%
505

192

172
313
143 39 35 20 60
18 4 16
16 29 4 17 22 16 31 20 60
A220 A320neo A330neo A350 737 MAX 777X 787 E170/175 E190/E195 E2

737 MAX monthly aircraft cancellations & deferrals, March 2019 – July 2020 [# aircraft] ∑ 505

75 150 202
0 47 3 1 3 2 19 0 10 1 4 41 94 29 68 11
0 0 39 8 71 4 3 0 0 1 3 0 2 0 19 10 0 1 0 0 4 41 0 150 0 108 14 15 68
0
0 11
Mar’19 Apr’19 May’19 Jun’19 Jul’19 Aug’19 Sep’19 Oct’19 Nov’19 Dec’19 Jan’20 Feb’20 Mar’20 Apr’20 May’20 Jun’20 Jul’20

Deferral Cancellation

Source: Airbus, Boeing, Cirium, Press search, Roland Berger

 5 1 2 Impact on the aerospace industry – Civil OE and Civil aftermarket

As a response to orderbook cuts and industry malaise, aerospace suppliers

across the value chain are cutting jobs
Selected1) Aerospace & Defence companies' redundancy announcements, 2020 [# workforce] Updated 20th July 2020
Estimated proportion of total workforce [%]
11% 8% 4% 4% 27% 18% 3% 15% 6% Registration for Roland Berger
15,000 A&D Skills Webinar
Please follow the below link or scan
13,000
12,290 the QR code to sign up for the
Roland Berger A&D skills webinar

9,000

3,000
2,500
1,800
1,000
500
https://tinyurl.com/y248l8y4
Airbus Boeing Bombardier Gulfstream GE Aviation Rolls-Royce Safran Meggitt GKN
Aerospace
Airframe OEMs Engine OEMs Tier 1/2 suppliers
1) Largest 50 A&D companies by employee based on publicly available information
Source: Press releases, Roland Berger
B. Outlook for Civil Aerospace
The two key indicators for the industry's future – level of the 'New Normal'
and the growth thereafter – are influenced by a system of 11 drivers
1 Economic growth
Level of the 2 Yield/ticket price Growth rate after
'New Normal' 3 Government influences
reaching the
'New Normal'
4 Consumer spending on aviation
Level to which Ongoing annual
5 Globalisation
aviation RPKs growth rate once
recover once travel 6 Environmental concerns travel demand
demand reaches reaches stability
7 Remote business practices
stability post-crisis post-crisis
8 Consumer health concerns
9 Government travel restrictions
10 Airline operations
11 Airport experience

Traditional drivers Long-term trends modified by COVID-19 New COVID-19 specific drivers Some link Significant link

Source: Primary and secondary research, Roland Berger

Based on a review of these 11 drivers, Roland Berger Scenario 3A is
currently the most likely outcome, with a return to 2019 RPK levels by 2024
Potential scenarios for how global travel demand will recover post COVID-19
Revenue passenger kilometer, 2018-30 [RPK tn] Assumptions for scenarios
Scenario 1: Scenario 2: Scenario 3A: Scenario 3B:
14
Scenario 1: Baseline Rebound Delayed cure Recession Recession
Unrealistic Rebound
Duration of air
Scenario 2: – 2 months 4 months 6 months 6 months
12 travel restrictions
Delayed cure Default
Accelerated
Scenario 3: Fleet retirements Per usual ret. Accelerated for retirements of retirements
10 –
Recession during crisis curves older a/c old WB a/c follow pre-crisis
patterns
Split into 3A and 3B
8 based on a/c retirement "New normal"1)
– Winter 2020 Summer 2021 Summer 2022 Summer 2022
decision reached by:
Level of the
6 100% 100% 90% 80% 80%
"new normal"
Year of recovery
– 2020 2022 2024 2024
4 to 2019 RPKs
CAGR after
reaching the 4.6% 4.6% 4.1% 3.6% 3.6%
2 "new normal"
Indicative –
0 likelihood of
occurring Unrealistic Most likely
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Baseline Scenario 1 "Rebound" Scenario 2 "Delayed cure" Scenario 3 "Recession" Highly unlikely Highly likely
1) "New normal" defined here as the status of global travel demand once aviation RPKs stabilize following the COVID-19 crisis

Source: Primary and secondary research, Roland Berger Aircraft Production Model
New aircraft deliveries are thus expected to shrink by 25-50% over the next
ten years
New aircraft deliveries 2020-2028 [# of a/c]
Baseline Scenario 2 Scenario 3A Scenario 3B
Shut down period 3 months 6 months 6 months
Time to recovery Summer 2021 Summer 2022 Summer 2022
'New Normal' traffic volume 90% 80% 80%
Future growth CAGR 4.1% 3.6% 3.6%
17,500

-24% -43% -50%

New A/C deliveries
13,300
10,000
8,800
2020-2028
Most
likely
scenario

Source: Airbus and Boeing Global Market Forecast; Roland Berger (projection)
Global MRO spending by airlines on Large Commercial Aircraft is expected
to fall by 60-75% in 2020
Global Large Commercial Aircraft MRO market size development, 2019-20 [USD bn]
Baseline Scenario 2 Scenario 3A Scenario 3B
Shut down period 3 months 6 months 6 months
Time to recovery Summer 2021 Summer 2022 Summer 2022
'New Normal' traffic volume 90% 80% 80%
Future growth CAGR 4.1% 3.6% 3.6%
76

-60% -75% -75%

MRO market

31
19 20
2020
Most
likely
scenario

Source: Boeing, Aircraft Commerce, Cirium, IATA, RAND, Roland Berger

In addition, COVID-19 is expected to fundamentally change the industry by
influencing key industry trends paving the way to a "New Normal"

Launch of the next Globalisation of footprint Race to capture the Consolidation within
generation aircraft aftermarket aerospace

Emergence of Chinese Drive towards Automation

OEMs sustainability

Positive impact Slight positive impact Stable Slight negative impact Negative impact
C. Impact of COVID-19 and
outlook for Defence Aerospace
Major A&D companies with a primary focus on (US) defence have largely
fared better than their counterparts
Share price impact of COVID-19 on major A&D players – industry focus & listing
YoY change in average stock price, Q2 2020
30%
Ultra Electronics Lockheed Martin
20%
10% Northrop Grumman

0% BAES
L3Harris QinetiQ
-10% HEICO
Babcock General Dynamics
-20% TransDigm
Thales
-30%
Woodward Rheinmetall UAC1)
Crane Meggitt Dassault Saab
-40% Safran Moog Leonardo
-50% Airbus Textron
Raytheon Technologies2)
-60% Boeing
Rolls-Royce
-70%
R2 = 57%3) p-value < 0.001
-80%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Share of revenue from defence
US-listed: No Yes Area represents total revenue, 2019

1) Revenue share estimated using 2017 aircraft delivery data and aircraft unit cost estimates; 2) Revenue share calculation excludes Otis and Carrier (spun off in April 2020); 3) Multi-factor regression gives adjusted R2 of 60%: share of
revenue from defence (p-value <0.001), revenue (p-value 0.10), US listing (p-value 0.12)
Source: CapitalIQ, DefenseNews, Roland Berger
Defence spend will be driven by (geo)politics, but tempered by economic
constraints post COVID-19; we have considered four scenarios
Key drivers of (UK) defence spend and scenarios post COVID-19 United Kingdom

High external military threat | Conflict | Defence high on national political

agenda | Commitment to international military alliances
Willingness/need to spend
High

21
Balancing act Prioritising defence of the realm
Pressure on defence budget balanced against need to Pro-defence political stance in light of aggressive adversarial
maintain capability and support UK industry; emphasis behaviour and commitment to military alliances results in
on doing 'more with less' defence spend growth
Deep recession,
Low High Fast economic
severe budgetary
rebound ('U'

34
pressure in
response to crisis
Ability to spend shaped recovery)
Retreating to domestic priorities Bouncing toward a new (geo)political order
Public spending review prioritises funding for Other domestic priorities subdue defence budget growth due
healthcare and crisis response; defence budget cut to political and geopolitical shifts
to/below NATO 2% GDP target
Low

Low military threat | Détente | Political focus on other domestic priorities

(healthcare, crisis response) | Scale-down of int'l military alliance targets

Source: International Organization, Roland Berger

UK defence spend is forecast to fall in all but the most bullish scenarios,
assuming fiscal policy is in line with previous years
Scenarios for UK defence spending post COVID-19 United Kingdom

UK defence spend3), 2016-24 [current GBP bn] Assumptions for scenarios

Recovery
70 Historical Forecast Real GDP to 2019 real
Scenario 1
Growth in GDP level Probability of
Baseline 2020 in Fiscal policy scenario
60 Scenario 2
Scenario 4 Baseline: Pre- 1.1% 2021 > Moderate borrowing
COVID
50 Scenario 3
1. Prioritising -13% 2021 > Increased borrowing
AME1) defence of the
40 realm
As per historical trends,
short-term changes in 2. Balancing act -13% 2024 > Increased borrowing
30 defence spend would likely
be AME-driven, but 3. Retreating to -13% 2024 > Increased borrowing in 2020
DEL2) constraints on DEL spend in domestic > Moderate borrowing after
20 priorities
the longer term will follow 2020

4. Bouncing -13% 2021 > Increased borrowing in 2020

10
toward a new > Moderate borrowing after
(geo)political 2020
order
0
2016 2018 2020 2022 2024
Highly unlikely Highly likely
1) Annually Managed Expenditure; 2) Departmental Expenditure Limit; 3) Fiscal years

Source: HM Treasury, Office for Budget Responsibility, Ministry of Defence, Roland Berger
US defence spending on the other hand is more immune to economic
pressures than other nations and is mainly driven by geo-political factors
US annual change in GDP and real defence budget1), 1953-20202) [%] United States

Korean War Vietnam War 1st Gulf War War in Afghanistan

1950-53 1965-73 1990-91 2001-Present

Cold War Iraq War

1947-91 2003-10
20%

15%

10%

5%

0%
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
-5%
2019-20 US
-10% GDP decline
estimate
-15%

-20%

GDP Defence budget Recession

1) National defence outlay (including spending by e.g. Department of Energy); 2) Fiscal year

Source: Bloomberg, DoD, Roland Berger

D. How companies can survive
and thrive in the "New Normal"
Majority of industry players have tackled the crisis management phase;
preparing for the 'New Normal' is the next priority
I. Crisis management II. Transition
Immediate future Rest of 2020 & 2021
III. 'New Normal'
2021+
Review supply chain strategy and configuration
Current focus area S
to fit with the defined corporate strategy
Revisit and revise corporate strategy to fit
Establish a crisis mgmt. taskforce to S Assess and revise operating model in line with
O with the 'New Normal' S
manage/monitor crisis response changes in strategy
Implement hygiene measures, ramp down Realign production and supply chain planning
O O
operations, secure continuity of critical functions in line with revised demand signal Monitor health and longevity of business &
O
supply chain operations
O Secure and monitor ongoing liquidity position Begin shifting operations and resources back
O
to new normal mode Optimise existing footprint in line with changes
O
Monitor health of critical suppliers, and provide in industry demand/landscape
O Secure operational ramp-up in a timely and
necessary support O
cost-controlled manner in both MAKE and BUY Implement restructuring and operations
Compress spend without destroying O
O efficiency programmes
the basis to recover Implement "No Regret" resizing and efficiency
O
measures
Ensure commercial continuity and
O
link with the customer
Prepare efficient Emerge stronger
LARGELY DONE restart after crisis out of the crisis
O Operational measure S Strategic measure
 I Crisis management phase

Measures associated with securing liquidity and cutting costs have been
prioritised by suppliers during the crisis management phase
Actions taken by select suppliers during the crisis management phase Select examples

Implement hygiene measures, Monitor health of critical Compress spend without

ramp down operations, secure Secure and monitor ongoing suppliers, and provide necessary destroying
O continuity of critical functions O O O
liquidity position support the basis to recover
Airbus Safran Safran
Collins Aerospace
23 March 2020 01 May 2020 35% of global workforce furloughed (45%
29 May 2020
Withdrawal of 2019 dividend, worth EUR Safran has claimed it would be ready to in France)
Announced closure of International Trip purchase critical SMEs if necessary to
1.4 bn
Support (ITS) business, laying off 125 secure the supply chain
workers Rolls-Royce
TransDigm 26 May 2020
31 March 2020 Requested price cuts up to 15% from
Offered Senior Secured Notes Gulfstream ~700 suppliers
Boeing 27 May 2020
worth USD 1.5 bn in total
13 June 2020 Reached agreement in principle to
Operational freeze on Spirit's 737MAX Bombardier
acquire G650/G700 wing business from June 2020
programme following instructions from Hexcel, Moog
Triumph2) 12,400 employees furloughed (70% of
Boeing April 2020
Suspended quarterly dividend payment Canadian workforce); 2,500 jobs cut
and paused share repurchase

Temporary closures faced by most High liquidity prioritised by all Active supply chain support shown Cost cutting measures adopted by
competitors competitors/peers by select few all

Source: Factiva, Secondary research, Roland Berger

 II Transition phase

Roland Berger can support suppliers in preparing for the "New Normal",
among other measures, through our operational and strategic offerings
Relevant Roland Berger transition phase product offering

SC Monitoring, Recovery
Demand modelling and
Value Chain Recovery
Go-to-market strategy

AI predictive analytics

Digital transformation
Process automation
Negotiation support

Operational
Market opportunity

Scenario planning

Agile organisation
Scenario analysis

Production Model

capacity planning

& Transformation
Target screening

Rate readiness
Strategic

M&A support
War gaming

assessment

& Ramp-up
RB Aircraft
screening
Prepare for the "New Normal"
Redirect capabilities/resources to pursue opportunities during
COVID-19 crisis
Renegotiate favourable terms with suppliers
Spot and seize M&A opportunities
Identify potential divestment opportunities
Secure newly available talent in the market
Right-size business operations (manufacturing, supply chain, etc)
Secure operational ramp up in a timely and cost controlled
manner in both MAKE and BUY
Monitor health and longevity of business & supply chain operations
Begin shifting operations and resources back-to-normal mode
Re-align supply chain planning in line with revised demand signal
Explore measures available to adapt the business to be more agile
Reduce overhead and increase business efficiency
Roland Berger presentations at Stay up to date on the
FIA Connect impact of COVID-19 on
A&D and other topics
1 Aviation Sustainability:
Roadmap to True Zero
Tue 21st July
13.00-14.00 BST
Please register to keep up to date with Roland
Berger publications and events

2 COVID-19's Impact on A&D:

Update for FIA Connect
Wed 22nd July
09.00-10.00 BST
Today's presentation

3 Aviation Sustainability and

Market Based Measures
Wed 22nd July
12.00-13.00 BST

4 Global Urban Air Summit:

Future of UAM
Thu 23rd July
09:40-10.25 BST
https://rb.digital/Aerospace-Subscribe
For recordings of past webinars please visit:
https://www.rolandberger.com/en/About/Events/Recent-Events.html