UBS

# UBS Investment Research

# UBS Business Jet Update

Americas

Aerospace

Sector Comment

# Used Inventories Hold, Pricing Falls Further

10 June 2009

# Used Inventories Hold, Pricing Falls Further (cont.)

## Available inventories look to be stabilizing

Okay, here's the markdown table based on the chart (which is not in the image).

There is no chart in the image. The image consists of a URL (www.ubs.com/investmentresearch) and names of individuals:

*   David E. Strauss, Analyst
*   Cristina Fernandez, Analyst
*   Darryl Genovesi, Associate Analyst


Available business jet inventories look to finally be stabilizing, albeit at record high levels both in absolute terms and at 18% of the installed base. While still 55% above prior year levels, available business jet inventories were roughly unchanged sequentially in May including a 1% decline in young available aircraft listings (less than 10 years in age). New delivery position inventories have declined sequentially in each of the past two months.

# Used Inventories Hold, Pricing Falls Further (cont.)

## • Excess supply to pressure backlogs, force further production cuts

We estimate average asking prices for most young aircraft models have now fallen 30-40% from peak levels, with pricing down another 3-4% in the past month. While our survey of industry professionals suggests some incremental interest at these levels, we think record high used available inventories will continue to overhang orders, pressure existing backlogs and force further production cuts.

# Used Inventories Hold, Pricing Falls Further (cont.)

## Expect weak orders & backlog risk to pressure valuations

Overall, we think the current business jet market is characterized by significant oversupply, weak pricing and tight financing. While our key indicators and contacts indicate a bottom is near, we think the potential for further production cuts along with the risk of an extended downturn limits upside for most of the stocks. We think TXT can trade higher on an improved liquidity profile post its recent capital raise and is our preferred bizjet play over GD.

Chart 1: Total Available and Young (less than 10 years in age) Aircraft Listings

3,600

3,200

18%

2,800

16%

14%

Inventory Level

2,400

12%

2,000-

1,600

May-04

10%

1,200-

8%

800-

400

6%

% of Installed Base

4%

0

Nov-06

May-06

Nov-08

May-08-

May-09-

2%

0%

0-10 Years

% of Fleet Available for Sale

10+ Years

Source. JETNET and UBS °striates

Thls report has been prepared by UBS Securities LLC ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 10.

IJBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of UBS in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at vAwcubs.comiindependentresearch or may call +1 877-208-5700 to request a copy of this research.

# Used Inventories Hold, Pricing Falls Further (cont.)

## Expect weak orders & backlog risk to pressure valuations (cont.)

Used Business Jet indicators

We believe the used business jet market serves as a leading indicator of the new business jet market. We closely monitor several key indicators of activity in the secondary market, including: I) inventory of available for sale aircraft including new delivery positions listed for sale, 2) age distribution of available aircraft and 3) pricingof available for sale aircraft.

We estimate 3,057 business jet aircraft available for sale at the end of May (including 2,878 used aircraft and 179 new delivery positions). roughly in line with the prior month, although still 55% higher from the prior year. While total inventory levels remain at all time record highs both in absolute terms and at 18% of the in-service fleet, we think the slower growth rate over the past few months indicates that inventories are beginning to stabilize.

Chart 2: Sequential Change in Used Aircraft Listings

| Date     | Sequential change in used aircraft listings (%) |
|----------|-----------------------------------------------:|
| May-2006 | 1.5%                                          |
| Aug-2006 | 0.5%                                          |
| Nov-2006 | -0.7%                                         |
| Feb-2007 | -1.2%                                         |
| May-2007 | -1.0%                                         |
| Aug-2007 | 0.8%                                          |
| Nov-2007 | -3.5%                                         |
| Feb-2008 | 2.5%                                          |
| May-2008 | 4.5%                                          |
| Aug-2008 | 10.0%                                         |
| Nov-2008 | 5.5%                                          |
| Feb-2009 | 2.0%                                          |
| May-2009 | 0.0%                                          |

Source: UBS estimates

Young available aircraft inventories (less than 10 years in age), which had driven the recent inventory build, have also shown much lower sequential growth rates over the past few months and in May actually declined by 1%.

Chart 3: Sequential Change in New and Almost New (0-5 Years) Aircraft Listings

| Month   | Sequential change in new/almost-new (0–5 yrs) aircraft listings (%) (approx.) |
|---------|--------------------------------------------------------------------------------|
| May-06  | 8%                                                                             |
| Aug-06  | 5%                                                                             |
| Nov-06  | 1%                                                                             |
| Feb-07  | -18%                                                                           |
| May-07  | 9%                                                                             |
| Aug-07  | 12%                                                                            |
| Nov-07  | 6%                                                                             |
| Feb-08  | -10%                                                                           |
| May-08  | 8%                                                                             |
| Aug-08  | 25%                                                                            |
| Nov-08  | 18%                                                                            |
| Feb-09  | 5%                                                                             |
| May-09  | -2%                                                                             |

Source: UBS estimates

New delivery position inventories have declined sequentially in each of the past two months.

# Used Inventories Hold, Pricing Falls Further (cont.)

## Expect weak orders & backlog risk to pressure valuations (cont.)

We estimate average asking prices for most young aircraft models have now fallen 30-40% from peak levels, with pricing down another 3-4% in the past month. While our survey of industry professionals suggests some incremental interest at these levels, we think record high used available inventories will continue to overhang orders, pressure existing backlogs and force further production cuts.

Overall, we think the current business jet market is characterized by significant oversupply, weak pricing and tight financing. While our key indicators and contacts indicate a bottom is near, we think the potential for further production cuts along with the risk of an extended downturn limits upside for most of the stocks. We think TXT can trade higher on an improved liquidity profile post its recent capital raise and is our preferred bizjet play over GD.

<u>Chart 4:</u> GD and TXT Forward PIE Multiples

30x

25x

Forward P/E Multiple

20x

15x

10x

5x

Ox

Jun-91

Jun-92-

Jun-93-

1 of 5

Juniors

Jun-96-

Jun-97-

Jun-98

Jun-99

Juno

Jun-01

Jun-02-

2025

Juno

JUN-05

Jun-06-

Jun-07-

TXT

JUN 88

GD

Jun-09E

Note: Forward PE using rolling 12-month (actual) EPS through May 2009 and UBS estimates for future periods. TXT PE multiple for the current period reflects our 2010 estimate. Source: UBS estimates

# Used Inventories Hold, Pricing Falls Further (cont.)

## Expect weak orders & backlog risk to pressure valuations (cont.)

# Used Inventories Hold, Pricing Falls Further (cont.)

## Available Inventory Levels

We estimate 3,057 business jet aircraft available for sale at the end of May (including 2,878 used aircraft and 179 new delivery positions), roughly in line with the prior month, although still 55% higher from the prior year. While total inventory levels remain at all time record highs both in absolute terms and at 18% of the in-service fleet, we think the slower growth rate over the past few months indicates that inventories are beginning to stabilize.

Of the five major manufacturers. Bombardier had the highest percentage of its respective fleet available for sale at 19%, followed by Cessna at 18%, and Dassault, Gulfstream and Hawker Beechcraft all at 16%.

Chart 5: Business Jets Available for Sale and as a Percentage of the Installed Base

Available inventory levels are
stabilizing at record high levels

3,600

3,200

2,800-

16%

Inventory Level

14%

2,000

% of Installed Base

2,400

400

0

18%

1,600

1,200

800

12%

10%

8%

6%

4%

2%

0%

Source: JETNET and UBS estimates

Chart 6: Absolute YoY Growth In Available For Sale Aircraft Listings

| Date     | YoY Growth in Used Inventories (%) |
|----------|------------------------------------|
| May-97   | -5                                 |
| Nov-97   | -12                                |
| May-98   | 5                                  |
| Nov-98   | 30                                 |
| May-99   | 35                                 |
| Nov-99   | 45                                 |
| May-00   | 50                                 |
| Nov-00   | 55                                 |
| May-01   | 45                                 |
| Nov-01   | 30                                 |
| May-02   | -2                                 |
| Nov-02   | -8                                 |
| May-03   | -12                                |
| Nov-03   | -10                                |
| May-04   | -6                                 |
| Nov-04   | -5                                 |
| May-05   | -3                                 |
| Nov-05   | -2                                 |
| May-06   | 0                                  |
| Nov-06   | 3                                  |
| May-07   | 8                                  |
| Nov-07   | 12                                 |
| May-08   | 30                                 |
| Nov-08   | 65                                 |
| May-09   | 60                                 |

(Values estimated from the chart image.)

Source. JETNET and UBS estimates

By age class, we estimate the 0-5 and 6-10 year classes now have 11% (612) and 16% (543) of their respective fleets available for sale as compared to 5.10% a year ago. Meanwhile, business jets 20-30 years old now have roughly 30% of their fleets available for sale, above the recent average of 20%.

# Used Inventories Hold, Pricing Falls Further (cont.)

## Available Inventory Levels (cont.)

Chad 7: Available Inventory by Age Class and as % of Fleet in Age Class

| Age Class (yrs) | Used Available (#) | % of Age Class (approx) |
|---:|---:|---:|
| 0–5 | 612 | 12% |
| 6–10 | 543 | 18% |
| 11–15 | 373 | 25% |
| 16–20 | 194 | 16% |
| 21–25 | 271 | 20% |
| 26–30 | 683 | 35% |
| 30+ | 381 | 22% |

Legend: black bars = Used Available (#); gray line = % of Age Class (approx).

Source: JETNET and UBS estimates

Currently, 38% of jets available for sale arc less than 10 years in age, well above
the 20-25% average over the last several years.

Chart 8: Available Inventory by Age Class (in years)

| Age class (years) | Available inventory (%) |
|-------------------|-------------------------:|
| 0-5               | 20% |
| 6-10              | 18% |
| 11-15             | 12% |
| 16-20             | 6%  |
| 21-25             | 9%  |
| 26-30             | 23% |
| 30+               | 12% |

Source: JETNET and U8S estirnates

Chart 9: Young Aircraft Available for Sale (less than 10 years in age)

1,200-

Inventory Level

1,000-

800-

600-

400

200-

0

NON-04

40%

35%

% of Total Available

30%

25%

20%

15%

May-08

10%

5%

80

May-09

0%

0-5 Years

6-10 Years

% of Total Available

Source: JETNET and UBS estimates

We  estimate the new/almost-new component of available aircraft inventories.
including new delivery positions and used aircraft five years old or younger,
declined by 3% in May to 612. roughly 2.5x prior-year levels.

# Used Inventories Hold, Pricing Falls Further (cont.)

## Available Inventory Levels (cont.)

Of the 612 0-5 year old aircraft available for sale, 179 are new delivery positions, 3% lower from April at 184, but still 2.5x higher from a year ago (ex Eclipse).

Chart 10: Historical New Aircraft Delivery Positions Listed for Sale

# Used Inventories Hold, Pricing Falls Further (cont.)

## Table 1: New Aircraft Delivery Positions Listed for Sale at May 31 and April 30

<table><tr><th>Model</th><th>May-09</th><th>Apr-09</th></tr><tr><td>Citation Mustang</td><td>34</td><td>32</td></tr><tr><td>Phenom 100</td><td>28</td><td>27</td></tr><tr><td>Phenom 300</td><td>10</td><td>10</td></tr><tr><td>Challenger 300</td><td>10</td><td>9</td></tr><tr><td>Challenger 605</td><td>9</td><td>11</td></tr><tr><td>Citation CJ4</td><td>9</td><td>9</td></tr><tr><td>Citation CJ3</td><td>8</td><td>10</td></tr><tr><td>Gulfstream G-550</td><td>8</td><td>9</td></tr><tr><td>Citation XLS+</td><td>7</td><td>10</td></tr><tr><td>Global Express 5000</td><td>6</td><td>7</td></tr><tr><td>Challenger 850</td><td>6</td><td>5</td></tr><tr><td>Global Express XRS</td><td>5</td><td>6</td></tr><tr><td>Gulfstream G-450</td><td>5</td><td>5</td></tr><tr><td>Citation Sovereign</td><td>3</td><td>5</td></tr><tr><td>Falcon 2000LX</td><td>3</td><td>3</td></tr><tr><td>Falcon 900EX EASY</td><td>3</td><td>3</td></tr><tr><td>Learjet 60XR</td><td>3</td><td>3</td></tr><tr><td>Lineage 1000</td><td>3</td><td>3</td></tr><tr><td>Airbus A318 Elite</td><td></td><td>1</td></tr><tr><td>Boeing BBJ</td><td>2</td><td>2</td></tr><tr><td>Airbus A319CJ</td><td></td><td></td></tr><tr><td>Learjet 45XR</td><td></td><td>2</td></tr><tr><td>Adam A700</td><td></td><td>1</td></tr><tr><td>Boeing BBJ2</td><td></td><td></td></tr><tr><td>Boeing BBJ3</td><td></td><td></td></tr><tr><td>Citation X</td><td></td><td></td></tr><tr><td>Diamond D-JET</td><td></td><td></td></tr><tr><td>Falcon 2000EX EASY</td><td></td><td></td></tr><tr><td>Falcon 7x</td><td></td><td></td></tr><tr><td>Hawker 900XP</td><td></td><td></td></tr><tr><td>HondaJet HA-420</td><td></td><td></td></tr><tr><td>Sino Swearingen SJ30-2</td><td></td><td></td></tr><tr><td>Premier II</td><td></td><td></td></tr><tr><td>Citation CJ2+</td><td></td><td></td></tr><tr><td>Gulfstream G-150</td><td></td><td></td></tr><tr><td><u>Legacy 600</u></td><td></td><td></td></tr><tr><td>Total</td><td>179</td><td><u>184</u></td></tr></table>

| Time Period | Total Ex Eclipse | Eclipse 500 | Notes |
|---|---|---|---|
| March 2006 - Jan 2008 | ~20-40 |  |  |
| Jan 2008 - July 2008 | | Increasing ~40-100 |  |
| July 2008 - Jan 2009 |  | Increasing ~100-190 |  |
| Jan 2009 - May 2009 |  | Stagnant ~190-200 | Eclipse Chapter 7 Liquidation |

The chart depicts delivery slots for sale for "Total Ex Eclipse" and "Eclipse 500" over time.

Source: JETNET and UBS estimates

We estimate young aircraft inventories (less than 10 years in age) declined by 1% in May. following steady increases over the past two years.

Chart 11: Young Aircraft (less than 10 years) Inventories as a % of Installed Base

1,400

1,200

7%

Inventory Level

1,000-

800-

600-

400

200

5%

6%

- 4%

- 3%

2%

% of Installed Base

1%

0

May-96

May-97

Nov-96

Nov-03

May-03

May-04-

Nov-04

Nov-04

May-05

May-06-

Nov-05

Nov-06

May-07

Nov-07

May-08

Nov-08

May-09

0%

0-10 Years

% of Installed Base

Source: JETNET and UBS estimates

Despite the sequential decline this month, young aircraft inventories are still roughly double prior year levels.

Source: JetNet and UBS estimates

Chart 12: Absolute YoY Growth in Young Aircraft (less than 10 years) Listed for Sale

The chart displays the year-over-year growth in young used aircraft inventories, spanning from May 1997 to May 2009. There are significant peaks in growth around 1998-1999, 2000-2001 and 2008-2009. There is a period of negative growth from about 2002 to 2007.

Source: JETNET and UBS estimates

# Used Inventories Hold, Pricing Falls Further (cont.)

## Table 1: New Aircraft Delivery Positions Listed for Sale at May 31 and April 30 (cont.)

# Used Inventories Hold, Pricing Falls Further (cont.)

## A Look at the Newer Models

Of the 26 newer models that we track individually, 21 had at least 10% of their installed fleets available for sale at the end of May. Seven of these 26 models had higher inventory levels in May compared to the prior month, while eight were flat and II declined. All 26 models had higher levels ofavailable inventory compared to the prior year.

# Used Inventories Hold, Pricing Falls Further (cont.)

## Table 2: Used Aircraft Listings and Average Asking Price for Newer Models

<table><tr><th rowspan="2"><u>Aircraft Model</u></th><th rowspan="2"><u>Manufacturer</u></th><th>Used
Available
as % of
Model</th><th colspan="5"><u>Used Available (units)</u></th><th colspan="6"><u>Average Price (mil)</u></th></tr><tr><td>May-09</td><td><u>May-09</u></td><td>Apr-09</td><td>Change</td><td>May-08</td><td>Change</td><td><u>May-09</u></td><td><u>May-08</u></td><td>Change</td><td>Max</td><td>Change</td><td><u>Max Date</u></td></tr><tr><td>Long Range</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Falcon 900EX</td><td>Dassault</td><td>11%</td><td>26</td><td>26</td><td>0%</td><td>10</td><td>160%</td><td>$ 24.5</td><td>$34.5</td><td>-29%</td><td>$ 35.7</td><td>-32%</td><td>Oct-08</td></tr><tr><td>Global Express</td><td>Bombardier</td><td>10%</td><td>១៩ ៈ៨៥៩ 33</td><td>31</td><td>కపపడకక 6%</td><td>15</td><td>120%</td><td>$ 35.6</td><td>$48.9</td><td>-27%</td><td>$ 48.9</td><td>-27%</td><td>Jun-08</td></tr><tr><td>Gulfstream G-V/G-500</td><td>Gulfstream</td><td>7%</td><td>13</td><td>12</td><td>8%</td><td>6</td><td>117%</td><td>$ 30.6</td><td>$ 45.0</td><td>-32%</td><td>$ 45.0</td><td>-32%</td><td>Jul-08</td></tr><tr><td>Gulfstream G-IV</td><td>Gulfstream</td><td>20%</td><td>42</td><td>40</td><td>5%</td><td>26</td><td>62%</td><td>$ 14.3</td><td>$19.1</td><td>-25%</td><td>$ 20.1</td><td>-29%</td><td>Jan-08</td></tr><tr><td>Gulfstream G-IVSP/G-400</td><td>Gulfstream</td><td>13%</td><td>40</td><td>40</td><td>0%</td><td>17</td><td>135%</td><td>$ 18.4</td><td>$ 26.0</td><td>-29%</td><td>$ 31.5</td><td>-41%</td><td>Aug-08</td></tr><tr><td>Gulfstream G-550</td><td>Gulfstream</td><td>7%</td><td>19</td><td>19</td><td>0%</td><td>4</td><td>375%</td><td>$ 41.0</td><td>$56.0</td><td>-27%</td><td>$ 59.9</td><td>-32%</td><td>Jan-07</td></tr><tr><td>Large</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Challenger 604</td><td>Bombardier</td><td>13%</td><td>48</td><td>48</td><td>0%</td><td></td><td>153%</td><td>$16.2</td><td>$20.4</td><td>-20%</td><td>$ 22.3</td><td>-27%</td><td>Jan-08</td></tr><tr><td>Falcon 2000</td><td>Dassault</td><td>13%</td><td>30</td><td>27</td><td>11% 咨咨监咨</td><td>2236</td><td>150%</td><td>$ 16.4</td><td>$18.7</td><td>-12%</td><td>$21.6</td><td>-24%</td><td>Feb-08</td></tr><tr><td>Falcon 2000EX</td><td>Dassault</td><td>6%</td><td>88 11</td><td>12</td><td>-8%</td><td></td><td>267%</td><td>$ 25.6</td><td>$ 33.8</td><td>-24%</td><td>$ 35.5</td><td>-28%</td><td>Mar-09</td></tr><tr><td>Legacy 600</td><td>Embraer</td><td>13%</td><td>20</td><td>20</td><td>0%</td><td></td><td>900%</td><td>$ 19.3</td><td>$ 20.0</td><td>-4%</td><td>$ 24.5</td><td>-21%</td><td>Dec-07</td></tr><tr><td>Medium Large</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Challenger 300</td><td>Bombardier</td><td>8%</td><td>22</td><td>22</td><td>0%</td><td></td><td>214%</td><td>$ 18.1</td><td>$ 24.8</td><td>-27%</td><td>$ 24.8</td><td>-27%</td><td>Aug-08</td></tr><tr><td>Citation X</td><td>Cessna</td><td>10%</td><td>2223 29</td><td></td><td>-6%</td><td>19 7959</td><td>53%</td><td>$ 10.9</td><td>$13.3</td><td>-18%</td><td>$18.8</td><td>-42%</td><td>Mar-06</td></tr><tr><td>Falcon 50EX</td><td>Dassault</td><td>20%</td><td>20</td><td>23</td><td>-5%</td><td>6</td><td>233 %</td><td>$ 10.0</td><td>$ 15.6</td><td>-36%</td><td>$ 18.0</td><td>-45%</td><td>Aug-06</td></tr><tr><td>Gulfstream G-200</td><td>Gulfstream</td><td>15%</td><td>34</td><td>35</td><td>-3%</td><td>19</td><td>79%</td><td>$13.7</td><td>$ 15.3</td><td>-10%</td><td>$ 17.6</td><td>-22%</td><td>Mar-08</td></tr><tr><td>Medium</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Gulfstream G-1002</td><td>Gulfstream</td><td>19%</td><td>15</td><td>16</td><td>-6%</td><td>14</td><td>7%</td><td>$ 5.9</td><td>$7.0</td><td>-15%</td><td>$ 11.0</td><td>-46%</td><td>Mar-06</td></tr><tr><td>Hawker 800XP</td><td>Hawker Beechcraft</td><td>14%</td><td>65</td><td>65</td><td>0%</td><td>24 128</td><td>171%</td><td>$ 6.7</td><td>$9.0</td><td>-25%</td><td>$ 9.7</td><td>-31%</td><td>Jan-08</td></tr><tr><td>Learjet 60/60XR</td><td>Bombardier</td><td>23%</td><td>84</td><td>80</td><td>5%</td><td>39</td><td>115%</td><td>$ 5.9</td><td>$7.6</td><td>-22%</td><td>$ 7.7</td><td>-23%</td><td>Jun-08</td></tr><tr><td>Super Light</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Citation Excel/XLS³</td><td>Cessna</td><td>11%</td><td>80</td><td>78 28</td><td>3%</td><td>37 53</td><td>116%</td><td>$ 6.0</td><td>$ 8.5</td><td>-30%</td><td>$9.5</td><td>-37%</td><td>May-06</td></tr><tr><td>Learjet 45/45XR</td><td>Bombardier</td><td>12%</td><td>850 47</td><td>50</td><td>-6%</td><td>24</td><td>96%</td><td>$ 5.4</td><td>$7.2</td><td>-24%</td><td>$ 7.8</td><td>-30%</td><td>May-07</td></tr><tr><td>Light</td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td><td></td></tr><tr><td>Beechjet 400A</td><td>Hawker Beechcraft</td><td>16%</td><td>56</td><td>58</td><td>-3%</td><td>41</td><td>37%</td><td>$ 2.1</td><td>$ 3.2</td><td>-35%</td><td>$ 3.5</td><td>-40%</td><td>Jan-06</td></tr><tr><td>Citation CJ1/CJ1+</td><td>Cessna</td><td>18%</td><td>53</td><td>56</td><td>-5%</td><td>34</td><td>56%</td><td>$ 3.2</td><td>$ 3.8</td><td>-17%</td><td>$ 3.8</td><td>-17%</td><td>May-08</td></tr><tr><td>Citation CJ2/CJ2+</td><td>Cessna</td><td>15%</td><td>58</td><td>63</td><td>-8%</td><td>26</td><td>123%</td><td>$ 4.6</td><td>$5.0</td><td>-9%</td><td>$ 5.3</td><td>-14%</td><td>Feb-08</td></tr><tr><td>Citation Encore</td><td>Cessna</td><td>11%</td><td>25</td><td>25</td><td>0%</td><td>16</td><td>56%</td><td>$ 5.9</td><td>$7.1</td><td>-16%</td><td>$ 7.4</td><td>-19%</td><td>Sep-07</td></tr><tr><td>Learjet 40/40XR</td><td>Bombardier</td><td>10%</td><td>3223233 12</td><td>14</td><td>-14%</td><td>8</td><td>50%</td><td>$ 6.1</td><td>n/a</td><td>n/a</td><td>$ 8.6</td><td>-29%</td><td>Jul-06</td></tr><tr><td>Premier</td><td>Hawker Beechcraft</td><td>13%</td><td>35</td><td>33</td><td>6%</td><td>26</td><td>35%</td><td>$ 3.7</td><td>$4.5</td><td>-17%</td><td>$ 4.7</td><td>-22%</td><td>Jan-06</td></tr><tr><td>Citation CJ3</td><td>Cessna</td><td>7%</td><td></td><td>26</td><td>-12%</td><td>11</td><td>109%</td><td>$ 7.1</td><td>$7.4</td><td>-4%</td><td>$ 8.0</td><td>-11%</td><td>Jan-08</td></tr></table>

Source: JETNET and L8S estrrates

# Used Inventories Hold, Pricing Falls Further (cont.)

## Table 2: Used Aircraft Listings and Average Asking Price for Newer Models (cont.)

# Used Inventories Hold, Pricing Falls Further (cont.)

## Pricing Trends in the Secondary Market

Rather than look at average pricing for the entire population ofavailable aircraft. which can be distorted by monthly changes in its composition, we monitor four models that we believe capture pricing trends in their respective categories.

# Used Inventories Hold, Pricing Falls Further (cont.)

## Super Light

We estimate the average asking price for a Citation Excel declined roughly 4% sequentially in May. and is now off 37% from its recent peak, while available for sale inventory increased by three aircraft.

Chart 13: Citation Excel Rolling Three-Month Average Asking Price

$10

50

R3M Avg Asking Price (SM)

40

Used Inventory Level

30-

S9
S8
S7

20

10

0

Nov-01-

May-03

Nov-02-

Nov-03-

May-04-

May-02

Nov-04-

May-05

Nov-05-

May-06-

Nov-06-

May-07-

Nov-07-

May-08-

Nov-08-

May-09

May-01

$5

Available Inventory

R3M Average Asking Price (RHS)

Source: JetNet and UBS estimates

# Used Inventories Hold, Pricing Falls Further (cont.)

## Medium

We estimate the average asking price for a Hawker 800XP declined roughly 3% sequentially in May, and is now off 31% from its recent peak, while available for sale inventory levels were unchanged from the prior month's all-time high.

Chart 14: Hawker BOOXP Rolling Three-Month Average Asking Price

Used Inventory Level

80

70

60

50

40-

30

20

10

0

Nov-03-

May-03-

Nov-04-

Nov-02-

May-04

$10.0

$11.0

$10.5

$9.5

NOV-08

May-05-

Nov-05-

$8.5

$9.0

May-06-

May-07-

$8.0

Nov-07-

May-08-

$7.5

$7.0

R3M Avg Asking Price ($M)

May-09

Available Inventory

R3M Average Asking Price (RHS)

Source: JetNet and UBS estimates

# Used Inventories Hold, Pricing Falls Further (cont.)

## Medium (cont.)

# Used Inventories Hold, Pricing Falls Further (cont.)

## Medium Large

We estimate the average asking price %r a Citation X declined roughly 4% sequentially in May, and is now off 42% from its recent peak, while available for sale inventory declined by two aircraft from the prior month's all-time high.

<u>Chart</u> 15: Citation X Rolling Three-Month Average Asking Price

S18

35

30

$17

25

$16

$15

20-

15

10

S14

May-01

5

0

Nov-01-

May-02-

Nov-02-

May-03-

Nov-03-

May-04

Nov-04-

May-05

May-06-

S13

Nov-05

Nov-07-

May-08-

$12

$11

May-07

May-09

Nov-08

Available Inventory

R3M Average Asking Price (RHS)

Source: JetNet and UBS estimates

# Used Inventories Hold, Pricing Falls Further (cont.)

## Large

We estimate the average asking price for a G-IVSP declined roughly 4% sequentially in May, and is now off 41% from its recent peak, while available for sale inventory levels were unchanged from the prior month's all-time high.

Chart 16: Gulfstream G-1VSP Rolling Three-Month Average Asking Price

40

35

R3M Avg Asking Price ($M): $20, $22, $24, $26, $28, $30, $32, $34

30

10

5

0

May-01

May-02-

Nov-02-

May-03-

Nov-03

Nov-01

Nov-04-

May-05-

Nov-05-

May-04

Nov-06-

May-07-

Nov-07-

May-08-

Nov-08

$18

May-06

Available Inventory

R3M Average Asking Price (RHS)

Source: JetNet and UBS estimates

# Used Inventories Hold, Pricing Falls Further (cont.)

## Large (cont.)

# Used Inventories Hold, Pricing Falls Further (cont.)

## Statement of Risk

The business jet market is cyclical in nature, largely driven by the general economic environment. Business jet manufacturers' earnings and cash flow are dependent on end-user demand, availability of customer financing, program execution and inventory management.

# Used Inventories Hold, Pricing Falls Further (cont.)

## Analyst Certification

Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1 ) all of the views expressed accurately reflect his or her personal views about those securities or issuers; and (2) no pan of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.

# Used Inventories Hold, Pricing Falls Further (cont.)

## Analyst Certification (cont.)

# Used Inventories Hold, Pricing Falls Further (cont.)

## Required Disclosures

This report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS.

For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past perfomtance is not a reliable indicator of future results. Additional information will be made available upon request.

UBS Investment Research: Global Equity Rating Allocations

<table><tr><th>UBS 12-Month Rating</th><th>Rating Category</th><th>Coverage</th><th>IB Services</th></tr><tr><td>Buy</td><td>Buy</td><td>51%</td><td>36%</td></tr><tr><td>Neutral</td><td>Hold/Neutral</td><td>37%</td><td>31%</td></tr><tr><td>Sell</td><td>Sell</td><td>12%</td><td>22%</td></tr><tr><td>UBS Short-Term Rating</td><td>Rating Category</td><td>Coverage</td><td>IB Services</td></tr><tr><td>Buy</td><td>Buy</td><td>less than 1%</td><td>43%</td></tr><tr><td>Sell</td><td>Sell</td><td>less than 1%</td><td>36%</td></tr></table>

1:Percentage of companies under coverage globally within the 12-month rating category.

2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months.

3:Percentage of companies under coverage globally within the Short-Term rating category.

4:Percentage of companies within the Short-Term rating category for which Investment banking (IB) services were provided within the past 12 months.

Source: UBS. Rating allocations are as of 31 March 2009.

UBS Investment Research: Global Equity Rating Definitions

<table><tr><th>UBS 12-Month Rating</th><th>Definition </th></tr><tr><td>Buy </td><td>FSR is &gt; 6% above the MRA.</td></tr><tr><td>Neutral </td><td>FSR is between -6% and 6% of the MRA.</td></tr><tr><td>Sell </td><td>FSR is &gt; 6% below the MRA.</td></tr><tr><td>UBS Short-Term Rating</td><td>DefinMon </td></tr><tr><td>Buy </td><td>Buy: Stock price expected to rise within three months from the time the rating was assigned
because of a specific catalyst or event.</td></tr><tr><td>Sell </td><td>Sell: Stock price expected to fall within three months from the time the rating was assigned
because of a specific catalyst or event.</td></tr></table>

# Used Inventories Hold, Pricing Falls Further (cont.)

## Required Disclosures (cont.)

# Used Inventories Hold, Pricing Falls Further (cont.)

## KEY DEFINITIONS

Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months.

Market Return Assumption (MRA) is defined as the one-year local market interest rate Pus 5% (a proxy for, and not a forecast of, the equity risk premium).

Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case.

# Used Inventories Hold, Pricing Falls Further (cont.)

## EXCEPTIONS AND SPECIAL CASES

UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management. performance record. discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors such as structure, management, performance record, discount.

Core Banding Exceptions (CBE): Exceptions to the standard +1-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply. they will be identified in the Company Disclosures table in the relevant research piece.

Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not registered/qualified as research analysts with the NASD and NYSE and therefore are not subject to the restrictions contained in the NASD and NYSE rules on communications with a subject company, public appearances, and trading securities held by a research analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any. follows.

UBS Securities LLC: David E. Strauss; Cristina Fernandez; Darryl Genovesi.

# Used Inventories Hold, Pricing Falls Further (cont.)

## Brazil Regulation 388 Analyst Certification

Except as provided above, each research analyst primarily responsible for the content of this investment research report, in whole or in part, certifies that: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers, and such recommendations were elaborated independently, including in relation to Banco UBS Pactual S.A. and/or its affiliates, as the case may be; (2) no relationship is maintained with any person who works for the subject companies which securities are mentioned on this research; (3) Banco UBS Pactual S.A. and/or its affiliates (including the funds, portfolios and investment clubs in securities managed by them) do not own directly or indirectly 1% or more of the total capital of the subject companies or are involved in the acquisition, alienation or intermediation of such securities in the market; (4) does not hold, directly or indirectly securities of the subject companies which represent 5% or more of his or her net worth, and is not involved in the acquisition, alienation or intermediation of such securities in the market; (5) neither the analyst nor Banco UBS Pactual S.A. and/or its affiliates receive compensation for any services rendered or presents any commercial relationships with any of the subject companies or person, entity or any kind of funds which represents the same interest of the subject companies; (6) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the pricing of any of the securities issued by any of the subject companies and/or to the specific recommendations or views expressed by the research analyst in this research although part of the analyst's compensation comes from the profits of Banco UBS Pactual S.A. and/or its affiliates and, consequently, revenues arisen from transactions held by Banco UBS Pactual S.A. and/or its affiliates.

# Used Inventories Hold, Pricing Falls Further (cont.)

## Company Disclosures

<table><tr><th>Company Name</th><th>Reuters</th><th>12-mo rating</th><th>Short-term rating</th><th>Price</th><th>Price date</th></tr><tr><td>General Dynamics Corp.' 16</td><td>GD.N</td><td>Neutral</td><td>N/A</td><td>US$59.25</td><td>09 Jun 2009</td></tr><tr><td>Textron Inc. 2, 4, 5, 6a, 6b, 6c, 7, 16, 18, 22</td><td>TXT.N</td><td>Neutral</td><td>N/A</td><td>US$11.95</td><td>09 Jun 2009</td></tr></table>

Source: UBS. All prices as of local market close. Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date

2. UBS AG, Its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securities of this company/entity or one of its affiliates within the past 12 months.

# Used Inventories Hold, Pricing Falls Further (cont.)

## Company Disclosures (cont.)

4. Within the past 12 months. UBS AG, its affiliates or subsidiaries has received compensation for investment banking services from this company/entity.

5. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services from this company/entity within the next three months.

- 6a. This company/entity is. or within the past 12 months has been, a client of UBS Securities LLC, and investment banking services are being, or have been, provided.

- 6b. This company/entity is. or within the past 12 months has been, a client of UBS Securities LLC, and non-investment banking securities-related services are being, or have been, provided.

- 6c. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC. and non-securities services are being, or have been, provided.

7. Within the past 12 months. UBS Securities LLC has received compensation for products and services other than investment banking services from this company/entity.

16. UBS Securities LLC makes a market in the securities and/or ADRs of this company.

18. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position in Textron Inc.

22. UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month's end (or the prior month's end if this report is dated less than 10 working days after the most recent month's end).

Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report.

General Dynamics Corp. (US$)

Price Target (US$)

Stock Price (US$)

120-

100-

80-

60-

40-

20-

Buy 2

Buy

Neutral

01-Aug-04

10 JUL 10

- 01-Oct-04 -

No Rating

- 01-Jan-06

01-Aug-05

1803.01

- 01-Oct-05 -

-01-Jan-06-

- 01-Apr-06 -

T
01-Jul-06

10.08.19

-01-Jan-07

- 01-Apr-07 -

- 10-Oct-07 -

- 01-Jan-08

01-Apr-08-

- 01-Jul-08

- 01.03.08 -

- 01-Jan-09 -

- 01-Apr-89

Source: UBS: as of 09 Jun 2009

# Used Inventories Hold, Pricing Falls Further (cont.)

## Company Disclosures (cont.)

Textron Inc. (US$)

Price Target (US$)

Stock Price (US$)

80.0-

60.0-

40.0-

20.0-

0.0

Buy 1

Buy

Neutral

No Rating

0

부동산

3000

01-Apr-06

- 01-Apr-07

20-Oct-07

01-Jul-08

Source: UBS; as of 09 Jun 2009

Note: On August 4, 2007 UBS revised its rating system. (See 'UBS Investment Research: Global Equity Rating Definitions' table for details). From September 9, 2006 through August 3, 2007 the UBS ratings and their definitions were: Buy 1= FSR is > 6% above the MRA, higher degree of predictability; Buy 2 = FSR is > 6% above the MRA, lower degree of predictability; Neutral 1 = FSR is between •6% and 6% of the MRA, higher degree of predictability; Neutral 2 = FSR is between •6% and 6% of the MRA, lower degree of predictability; Reduce 1 = FSR is > 6% below the MRA, higher degree of predictability-. Reduce 2 = FSR is > 6% below the MRA, lower degree of predictability. The predictability level indicates an analyst's conviction in the FSR. A predictability level of '1' means that the analyst's estimate of FSR is in the middle of a narrower, or smaller. range of possibilities. A predictability level of '2' means that the analyst's estimate of FSR is in the middle of a broader, or larger, range of possibilities. From October 13, 2003 through September 8. 2006 the percentage band criteria used in the rating system was 10%.

UBS 14

# Used Inventories Hold, Pricing Falls Further (cont.)

## Company Disclosures (cont.)

# Used Inventories Hold, Pricing Falls Further (cont.)

## Global Disclaimer

This report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. In certain countries, UBS AG is referred to as UBS SA

This report is for distribution only under such circumstances as may be permitted by applicable law. Nothing in this report constitutes a representation that any investment strategy or recommendation contained herein is suitable or appropriate to a recipient's individual circumstances or otherwise constitutes a personal recommendation. It is published solely for information purposes, it does not constitute an advertisement and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments in any jurisdiction. No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, except with respect to information concerning UBS AG, its subsidiaries and affiliates, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the report. UBS does not undertake that investors will obtain profits, nor will it share with investors any investment profits nor accept any liability for any investment losses. Investments involve risks and investors should exercise prudence in making their investment decisions. The report should not be regarded by recipients as a substitute for the exercise of their own judgement. Any opinions expressed in this report are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of UBS as a result of using different assumptions and criteria. Research will initiate, update and cease coverage solely at the discretion of UBS Investment Bank Research Management. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. The analyst(s) responsible for the preparation of this report may interact with trading desk personnel, sales personnel and other constituencies for the purpose of gathering, synthesizing and interpreting market information. UBS is under no obligation to update or keep current the information contained herein. UBS relies on information barriers to control the flow of information contained in one or more areas within UBS, into other areas, units, groups or affiliates of UBS. The compensation of the analyst who prepared this report is determined exclusively by research management and senior management (not including investment banking). Analyst compensation is not based on investment banking revenues, however, compensation may relate to the revenues of UBS Investment Bank as a whole, of which investment banking, sales and trading are a part.

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UBS 15