The Underlying Catalysts of The U.S. Economic & Financial Crisis

March 2009

The Economy and Airline/Air Cargo Industry is in Relative Freefall

The speed and magnitude of the decline in the global economy, triggered by the onset of the U.S. financial crisis, implies that major catalysts to U.S. economic growth over the past decade were temporal in nature.

SkyWorks believes these to be the peaking of a “Generational” Risk Cycle & “Baby Boomer” Spending Wave—both of which are now acting in reverse.

Catalyst I: The “Generational” Risk Cycle

Individuals that experience a major crisis will naturally become risk-averse.

After approx. 40 years a majority of the risk-averse generation will exit the active economy and be replaced by a generation with "risk-amensia".

Such “generational” risk cycle is evidenced by the DJIA over 40‐year periods – underperformance followed risk cycles ending in 1929, 1968 & 2007.

A strikingly parallel set of geopolitical events were central to the development of the last two generational risk cycles.

Performance of the Dow Jones Industrial Average

The peaking of the risk cycle in 2007 is evidenced by the borrowing binge and bubble in asset prices created by a generation suffering risk-amnesia.

The wealth effect created by the bubble in asset prices is now working in reverse—with collapsing asset prices and skyrocketing unemployment causing consumers, lenders and investors to become stigmatized.

 

U.S. Historical Private Debt

Catalyst II: The “Baby Boomer” Spending Wave

Consumers in their 40’s spend at a much higher rate than individuals in other age brackets.

The rise of the 77 million “baby boomers” into this age bracket resulted in an unprecedented demographic spending wave over the past 15 years.

This bracket has plateaued and is now moving into decline, representing a significant loss of momentum to the U.S. economy.

U.S. Population by Age Category (1990 vs. 2000)

The Economic Crisis is Impairing Aircraft Values and Lease Rates

SkyWorks’ Aircraft Valuation Index, based on the difference between growth rates in passenger traffic and aircraft seat supply, indicates a downturn in the aircraft market that will be at least twice the order of magnitude of other downturns experienced in recent decades.

Aircraft Vaulation Index 1970 to 2013F (At Year-Ends)

Outlook

The economic and financial crisis will likely continue to rage until a leveling-off of asset prices and unemployment is achieved…

…with the possibility of a substantive short-term "bounce" after the crisis abates, similar to what occurred in the middle of the Great Depression.

With the possible exception of a "bounce", the U.S. is likely to experience substandard economic growth for an extended period due to an aging population and permanently reduced appetite for risk among the current generation of consumers, lenders and investors.

Social and cultural conditions in the U.S. are likely to undergo a shift similar to those seen when entering the 1930’s and 1970’s.

Frugality and eco -/ community-mindedness may represent dominant themes of the 2010’s.

Global trade is likely to see reduced growth rates for the foreseeable future…

…due to a more frugal U.S. consumer, a heightened sensitivity to risk, and the implementation of protectionist actions by policy makers to alleviate short-term "suffering".

For the aviation industry in particular, the following measures are critical if the fallout from this crisis is to be minimized:

Capacity, cost and balance sheet discipline by operators; and

Production restraints by OEM's.

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