Aerospace sector in Colombia March 2018 Colombia has

Aerospace sector in Colombia March, 2018

Colombia has investment opportunities in aerospace sector Establishment of MRO service companies to serve the growing regional passenger and cargo transport market. ü Aircraft fleet in Latin America and Colombia is expected to grow in the next years. This implies a higher demand of aircraft maintenance and reparation services. ü The country is located in a strategic position in Latin America, which has allowed it to position itself as an important hub for the transport of passengers and cargo. El Dorado is the main cargo airport and the first in passenger transport in Latin America. ü Possibilities in technology transfer from international companies to local companies with experience in production of aircraft parts. Colombia has more than 100 aircraft maintenance workshops and an increasing workforce able to support the needs of aerospace companies.

Global trends in the aerospace industry Technological Production Political and legal • Manufacture of new models with new materials in order to lighten the weight and protect the environment. It seeks to reuse and recycle aircraft parts. • Cooperation between the government and the industry in order to create aerospace manufacture ecosystems. This cooperation allows job creation with high value added and exports. • Taxes for CO 2 emissions, noise pollution and any other kind of measure in favor of the environment. • Increasing use of sustainable technologies. • Increasing trend in the autonomous systems market. • Innovation in engines of newest generation. • The civil aerospace industry will be the segment with the most growth in the following years. • Increasing demand for civil airplanes by nongovernmental clients. • Increasingly collaborative approach inside the value chain. The OEM companies are giving more responsibility to their suppliers Tier 1, so they can focus in basic design and assembly skills. • Emphasis on actions to increase security and sustainability of air transport of people and goods in the different phases, from infrastructure and production to operation and maintenance.

Aerospace sector in the region

Latin America has great growth potential in terms of international air traffic By 2036 Latin America will need 2, 677 new passenger and freighter aircrafts to meet rising demand to replace the existing fleet (1, 211 aircrafts*). In the next 20 years, air traffic in Latin America will grow 4. 4% on average, higher than regions like North America (2. 4%) and Europe (3. 4%). Engines and components will be the most important segments of growth for the industry worldwide. In Latin America the industry of modifications will be the most representative. There are growing opportunities in intraregional travels due to ground infrastructure constraints in some countries. Nowadays there are six regional megacities: Bogota, Buenos Aires, Lima, Mexico City, Santiago and Sao Paulo. By 2036 Cancun, Panama City and Rio de Janeiro will join this group. These cities will account daily for 150, 000 long-haul passengers. Source: Airbus GMF 2017 -2036. * Passenger aircraft >100 seats

249. 6 million passengers were carried by Latin-American and Caribbean airlines in 2017 Passenger traffic in Latin America Passengers Total Intra Lat. Am Extra Lat. Am North America Europe Asia-Pacific Africa 2016 2017 Change 237. 466. 058 249. 587. 365 5, 1% 215. 553. 215 225. 803. 866 4, 8% 21. 912. 843 23. 783. 499 8, 5% 17. 940. 343 19. 131. 492 6, 6% 3. 464. 579 3. 980. 300 14, 9% 498. 517 609. 001 22, 2% 9. 404 62. 706 566, 8% Passenger flow in Latin America rose 10. 2 million. Passenger flow outside Latin America rose by 1. 8 million. Source: Latin American & Caribbean Air Transport Association - ALTA, 2018. Members of ALTA represent over 90 percent of the region’s commercial air traffic. 6

Latin American air fleet with high growth potential Air fleet breakdown by country in Latin America (%) Between 2000 and 2016, the number of planes in operation in Latin America grew 62. 5% reaching 1. 300 units (from 800 units in 2000). Mexico 17% Colombia 11% 28% Brazil By 2036 Latin America will need 2, 677 new passenger and freighter aircrafts. Chile Source: Airbus Market Forecast 7%

Expected aircraft growth will pressure demand for MRO services MRO value of demand for the next 20 years Demand of new technicians and pilots Airbus expects that the MRO business will double from USD 60 billion to USD 120 billion per year by 2036. Demand for MRO services in Latin America will reach USD 139 billion over the next 20 years; 8% of total global demand. The region will demand 10% of new technicians and 9% of new pilots entering the industry worldwide. Source: Airbus GMF 2017 -2036.

Latin America is host of various key players of the MRO market Key players in the MRO sector in Latinamerica Source: MRO Market Update & Industry Trends. ALTA.

Between 2010 and 2017, Latin America and the Caribbean received 143 investment projects in the aerospace sector Investment projects in aerospace sector by destination country, 2010 - 2017 (# projects) 85 Mexico 38 Brazil Source countries for Aerospace investment projects 2010 - 2016 (N ° projects) 54 United States 20 France Colombia 5 Peru 4 El Salvador 3 Spain 4 Chile 3 Israel 3 Panama 2 Germany 3 Switzerland 2 Paraguay 1 Sweden 2 Bahamas 1 Italy 2 Ireland 2 Aruba 1 Source: f. Di Markets Aircraft 43% 18 Canada Netherlands 16 UK 6 Russia 6 Other Investment sub-sectors 2010 - 2016 (% Part. ) 5 Aircraft engines, other parts and auxiliary equipment 57%

Aerospace sector in Colombia

Colombia shows a positive trend in its aerial connectivity indicators Frequencies and seats in international flights 50, 888 52, 896 Countries and cities with direct connectivity with Colombia 54, 213 46, 934 43, 021 36, 156 38, 860 5, 230 2011 34 5, 654 2012 6, 863 6, 304 2013 2014 Total frequencies 7, 543 2015 8, 006 2016 Seats (thousands) 37 34 20 20 2011 2012 22 24 26 27 27 2015 2016 2017 8, 504 2017 2013 2014 Countries with direct connection The number of international flights and seats has rose in last years. Source: Aerocivil and OAG Analyser 43 40 48 45 International cities

The United States, Panamá and México are the main origin countries of passenger inflows United States Panama Mexico Peru Ecuador Frequencies by country Spain of origin, 2017 Venezuela Chile Brazil El Salvador Dominican Republic Others Seats by country of origin, 2017 Source: OAG Analyser. United States Panama Mexico Spain Peru Ecuador Brazil Chile Venezuela Argentina El Salvador Others 12, 692 11, 858 4, 847 3, 971 3, 597 2, 639 1, 813 1, 781 1, 731 1, 665 1, 133 Total frequencies 2016: 54, 213 6, 486 1, 954, 978 1, 433, 608 742, 130 726, 576 617, 216 499, 345 381, 252 351, 297 262, 055 228, 495 210, 520 Total seats 2016: 8, 504, 220 1, 096, 748

Passenger traffic in Colombia is nearly 66 million Passenger traffic in Colombian airports Million 63. 7 53. 9 65. 9 58. 1 53. 8 51. 7 52. 2 47. 2 44. 1 9. 9 2013 10. 9 2014 12. 9 12. 0 2015 National Source: Aerocivil. 66. 8 International 2016 Total 13. 7 2017

By two years in a row, total traffic of cargo Colombia was over the million tons Cargo transport in Colombia Thousands of tons 901. 8 In 2017, a total of 1. 02 million tons of cargo were transported by air, 2% more over 2016. 599. 3 302. 5 2, 013 986. 3 936. 6 605. 2 2, 014 2, 015 National Source: Aerocivil. 629. 7 620. 7 365. 7 331. 4 1, 006. 4 International 376. 6 2, 016 Total 1, 022. 8 666. 7 356. 1 2, 017

Colombia has 16 international airports located in the main cities of the country URA International airports in Colombia • • • • Source: Aerocivil El Edén (AXM) – Armenia Ernesto Cortissoz (BAQ) – Barranquilla El Dorado (BOG) – Bogotá Palonegro (BGA) – Bucaramanga Alfonso Bonilla Aragón (CLO) – Cali Rafael Núñez (CTG) – Cartagena Camilo Daza (CUC) – Cúcuta San Luis (IPI) – Ipiales Alfredo Vásquez Cobo (LET) – Leticia Enrique Olaya Herrera (EOH) – Medellín Matecaña (PEI) – Pereira Almirante Padilla (RCH) – Riohacha José María Córdova (MDE) – Rionegro Gustavo Rojas Pinilla (ADZ) – San Andrés Simón Bolívar (SMR) – Santa Marta Alfonso López Pumarejo (VUP) – Valledupar BAQ SMR ADZ TLU MTR CZU ACD APO MTB MDE BSC NQU OTU ULQ MGN AGH OCV EBG EJA IBE AXM PPN PSO El Troncal PCR PAI BOG GIR EYP GAA PCE PDA SVI FLA SJE LMC MVP IPI PUU AUC VVC NVA PTX RVE SOX BGA TME CLO BUN CUC Amalfi PEI CPB LMA VUP CAQ EOH UIB COG TCO CTG RCH VGZ ACR LQM LCR LET

El Dorado International Airport is the largest air cargo airport in Latin America 31. 0 BOGOTA - ELDORADO 7. 6 RIONEGRO - JOSE M. CORDOVA 5. 0 CALI - ALFONSO BONILLA ARAGON Main airports by passenger traffic. Million, 2017 4. 7 CARTAGENA - RAFAEL NUQEZ BARRANQUILLA - E. CORTISSOZ 2. 6 SAN ANDRES - GUSTAVO ROJAS. . . 2. 3 SANTA MARTA - SIMON BOLIVAR 1. 7 BUCARAMANGA - PALONEGRO 1. 6 PEREIRA - MATECAÑAS 1. 5 706, 803 BOGOTA - EL DORADO 126, 703 RIONEGRO - JOSE M. CORDOVA Main airports by cargo transport. Tons, 2017 CALI - ALFONSO BONILLA ARAGON BARRANQUILLA - E. CORTISSOZ 32, 284 LETICIA - ALFREDO VASQUEZ COBO 19, 243 SAN ANDRES - GUSTAVO ROJAS PINILLA 18, 540 CARTAGENA - RAFAEL NUQEZ Source: Aerocivil. 38, 663 12, 161 El Dorado International Airport is the main airport in Colombia

El Dorado Airport in Bogota is the best airport in Latin America Source: Skytrax, World Airport Awards 2018 World Ranking 1 2 3 4 5 6 7 8 9 10 Singapore Changi Incheon Tokyo Haneda Hong Kong Doha Hamad Munich Centrair Nagoya London Heathrow Zurich Frankfurt 46 Bogotá 47 49 70 94 Quito Lima Guayaquil Panamá Airport

11% of the Latin American aircraft fleet is located in Colombia 175 aircrafts 18 aircrafts Operating fleet of main commercial airlines in Colombia 16 aircrafts 13 aircrafts 11 aircrafts 50 new aircrafts will start arriving from 2018. Source: National Department of Planning, 2017; and Airlines web pages

Colombia is less than 6 hours away by airplane from the main cities in the Americas Londres Moscú Berlín (14 hr 05 min) (17 hr) (14 hr 10 min) Toronto (8 hr 54 min) París Nueva York (5 hr 35 min) Madrid (9 hr 40 min) (13 hr 20 min) Estambul Beijing (15 hr 25 min) (24 hr 40 min) Dubai Los Angeles Hong Kong (19 hr 40 min) Miami (9 hr 25 min) (24 hr 15 min) (4 hr 30 min) Mumbai 5, 317 domestic frequencies per week 1, 039 international direct frequencies per week 24 Airlines with direct connection 26 Countries with direct connection (24 hr 30 min) Ciudad de México (4 hr 20 min) Lima (3 hr 10 min) (5 hr 50 min) Santiago de Chile (6 hr 55 min) Source: Pro. Colombia. Connectivity Report, February 2018 Sao Paulo Tokio (25 hr 05 min) Seúl (23 hr 35 min)

New low-cost airlines have chosen Colombia It has been operating for 5 years in the country and has performed more than 80, 000 flights It began operations on December 2016. By March 2017 it had transported about 200, 000 passengers and in April it will open the route between Bogota and Caracas, after the flight between Cartagena and Panama opened in February. It is a low cost airline from Canada with three approved routes: Montreal-San Andres-Montreal; Montreal-Cartagena-Montreal and Toronto-Cartagena-Toronto

Airbus has its eyes on Colombia Since 2015 Airbus Group has commercial presence in Colombia, and the company has its eyes on Colombia as a potential supplier for the aeronautical sector in the long term.

Colombia has an educational offer that respond to requirements of aerospace companies 4, 625 students graduated in programs related to aerospace industry from 2010 to 2016 Graduates by type of educational formation 2, 004 TECHNOLOGICAL 1, 537 UNIVERSITY 695 SPECIALIZATION PROFESSIONAL TECHNICAL TRAINING MASTER'S DEGREE Source: Ministry of Education 386 3 Nearly 1, 135 students have graduated from Aeronautical Engineering

More than 60 training centers for the aerospace industry Some of the training programs include: • • Private pilot course Commercial pilot course Helicopter pilots Auxiliary services on board Aircraft technician Motor repair Electrical and electronic systems The National Learning Service opened in 2016 an instruction center with technology such as simulators and communication and navigation equipment, which will serve to train technicians in aircraft maintenance. Barranquilla (4) Medellín y Rionegro (7) Bucaramanga (1) Manizales (1) BogotáCundinamarca (41) Pereira (1) Cali y Palmira (4) Villavicencio (2) Source: Aerocivil, SENA

Colombia has more than 100 aircraft maintenance workshops Valledupar (2) Barranquilla (2) Medellín y Rionegro (10) Avianca, one of the most important airlines in Latin America, set up its new maintenance and repair center in Rionegro, Antioquia. Bucaramanga (2) Pereira (1) BogotáCundinamarca (63) Ibagué (1) Cali y Palmira (5) Villavicencio (10) Source: Aerocivil

Avianca opened the most modern aeronautical center of Latin America In 2016, Avianca made a USD 50 million investment to build its MRO facility. A total of 44, 300 m 2 and a capacity to attend up to 5 single-aisle aircraft or 2 twin-aisle aircrafts. More than 600 technicians and certified engineers able to work on Boeing and Airbus aircrafts. The Avianca Aeronautical Center is supported by certified aeronautical workshops and the latest technology for aircraft repair. Source: Avianca

Colombia has potential to develop value added products to supply the aerospace sector Radio navigation equipment Landing gear and rotors Sistems Compass Engines Cundinamarca, Risaralda Rods and pipes Antioquia, Bogotá, Meta Propulsion Aircrafts Electrodes Resins Antioquia, Bolivar Glass Antioquia, Atlántico, Bogotá, Cundinamarca Current capacity Structure Potential capacity Aluminum sheets Bogotá Source: National Department of Planning, 2017

The manufacture of aircraft parts is an emergent industry with the capacity to evolve and embrace technological advances Production value of parts for aircrafts USD 289, 892 233, 860 2015 2016 Some potential advantages are in the metal mechanic sector Main products Departments with competitive advantage Iron and steel Meta Norte de Santander Engines and parts thereof Risaralda Bogotá Bars, rods and profiles, of cooper Norte de Santander - Rolled, stretched or bent products, of iron or steel Atlántico Norte de Santander Paints and varnishes Bogotá Valle Source: National Department of Planning, 2017 Source: DANE. Annual Manufacturing Survey Potential departments

Exports show an increasing trend, especially in the parts and components segment Exports of aerospace industry in Colombia Million 50. 5 33. 4 30. 5 59. 8 53. 4 Spain 1% Other 4% Panama 4% 33. 9 Canada 5% 43. 6 32. 1 24. 8 Poland 1% 16. 2 21. 3 28. 3 Exports of aerospace industry by destinations countries, 2017 Israel 7% 16. 6 2. 9 3. 5 2013 2014 2015 2016 Other parts for aircrafts and helicopters* 2017 Other Bogotá is the main origin of exports with a share of 96. 5%. Other departments includes Atlántico, Valle del Cauca and Antioquia. Source: National Department of Statistics, 2018 * Subheading 880330 United States 77%

Some initiatives have been created for the development of the sector Strategic technological initiative formed by companies, industries, universities, research and development centers, as well as different public and private entities. This regional strategic initiative includes companies, industries, universities, research and development centers, as well as different public and private entities, which are located in the valley of the Cauca River. This regional initiative is led by the Chamber of Commerce of Dosquebradas. The cluster conformed by local companies engaged in the manufacture of some aircrafts parts. It seeks to promote the integration, development, growth, defense and organization of the Colombian aerospace industry, as well as promoting research and technological development in the sector. Colombian Aeronautics Industry Corporation. Created with the primary purpose of operating repair, maintenance and aircraft services centers and construction of aircrafts. In 2015 it achieved certification by AIRBUS as an MRO Service Center for its aircrafts C-295 and CN-235. The Aerospace Technological Development Center for Defense seeks to reduce the country's technological gap in the aerospace sector, through the appropriation of knowledge, through the integration of the public and private productive sector, universities and the State.

Key entities for the aerospace industry in Colombia Comisión Latinoamericana de Aviación Civil Asociación de Transporte Aéreo Internacional – IATA Colombia Asociación Colombiana De Aviación Civil General

Advantages of investing in Colombia

Colombia has access to 47 countries and more than 1. 5 billion consumers through its network of trade agreements EFTA Canada European Union United States Japan South Korea Caricom* Mexico Guatemala Honduras Israel Cuba* El Salvador Costa Rica Venezuela Panama Nicaragua* Ecuador In force In negotiation Bolivia Paraguay Signed Pacific Alliance Brazil Peru Chile Uruguay Argentina *These are Partial Scope Agreements (PSA) - - - The dotted line refers to member countries of The Pacific Alliance other than Colombia. – Chile, Peru and México. Source: Colombian Ministry of Commerce, Industry and Tourism. 2015

Wages in the industrial sector in Colombia are the lowest in the region Monthly salary in the industrial sector in Colombia. USD Total hourly compensation in manufacturing sector. USD 25. 20 1, 070 Brazil 2. 52 Mexico 2. 41 Peru 1. 88 Colombia 1. 75 Industrial engineer chief 2. 89 621 Production Chief Argentina 431 Production analyst 4. 79 Operator Chile 2, 191 1, 562 19. 55 Specialized machine operator Canada 2, 020 Production engineer United States US$ 1, 75, average cost per hour. 35% lower than the average for Latin America. Source: IMD World Competitiveness Yearbook 2017 – Includes wages and supplementary benefits) Source: Human Capital – Total Rewards 2017. Includes social benefits.

0. 000 Source: XM 12/1/2017 11/1/2017 10/1/2017 9/1/2017 8/1/2017 7/1/2017 6/1/2017 5/1/2017 4/1/2017 3/1/2017 2/1/2017 12/1/2016 11/1/2016 10/1/2016 9/1/2016 8/1/2016 7/1/2016 6/1/2016 5/1/2016 4/1/2016 3/1/2016 2/1/2016 1/1/2016 Low energy prices for the industrial sector Energy prices in the non-regulated segment 2016 – 2017. USD/Kw 0. 300 0. 250 0. 200 0. 150 0. 100 0. 050

About 100 free zones in Colombia with available facilities for industrial developments City Bogotá Medellín Barranquilla Cali Location Industrial park class A+ Industrial park class A Industrial park class B Free Trade Zone Sale price, USD/m 2 Minimum Maximum Average cost $ 745, 5 $ 839, 3 $ 910, 1 $ 389, 7 $ 714, 3 $ 972, 8 $ 372, 7 $ 597, 6 $ 914, 9 $ 609, 9 $ 671, 9 $ 779, 4 n. a. $ 1. 016, 6 $ 1. 084, 3 n. a. $ 621, 3 $ 638, 0 $ 642, 1 $ 765, 1 $ 832, 0 $ 963, 1 n. a. $ 762, 4 $ 542, 2 $ 435, 7 $ 593, 0 Rent price, USD/m 2 Minimum Maximum Average cost $ 5, 1 $ 6, 6 $ 2, 2 $ 4, 8 $ 6, 9 $ 3, 0 $ 4, 4 $ 8, 0 $ 4, 9 $ 6, 4 $ 7, 9 $ 6, 1 $ 4, 3 $ 5, 6 $ 6, 3 $ 3, 9 $ 4, 8 $ 5, 9 $ 3, 7 $ 5, 0 $ 6, 3 $ 3, 7 $ 3, 9 $ 4, 0 $ 3, 7 $ 5, 0 $ 6, 0 $ 3, 6 $ 4, 3 $ 4, 9 $ 5, 6 $ 5, 8 $ 4, 2 $ 4, 8 $ 6, 8 $ 3, 1 $ 3, 4 $ 4, 1 $ 4, 9 Industrial park class A+: They have a logistical work orientation, wide access roads, parking for trucks, security, innovative access control systems, wastewater treatment plant and different services such as restaurants, nursing, scales, among others. The warehouses have a free height of 11. 5 meters minimum, resistance of floors of 4 Ton / m² or more and several loading docks. Industrial park class A: They are located near main access roads. The warehouses have triple height, high resistance of floors and other additional services. They have a significant area compared to the market average. Industrial park class B: Construction time over 15 years, located on secondary access roads, single or double height in storage and limited additional services. Generally, they have an area below the market average. Free Trade Zone: Territory with tax benefits for the development of productive activities. Source: Colliers International

Reduced income tax and VAT exemptions allow easier access to the local market Source: ANDI. Cámara de Zonas Francas There are no import duties. Exception of VAT for goods sold in Free Zones of Colombia. Benefits from international trade agreements. Free trade zones for different types of investors. Allows sales in the local market.