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Power play: implications of the GE/Boeing deal August 1999 Download PDF

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General Electric’s winning of an exclusive deal to power the proposed long–range versions of Boeing’s 777 took the breath away from rival engine makers Pratt & Whitney and Rolls–Royce. They hadn’t believed the original proposal from GE’s chairman Jack Welch to his opposite number at Boeing, Phil Condit, when the story first leaked in February. They were stunned by the eventual deal, announced in early July.

GE will develop a new 115,000lb thrust version of the GE 90 engine to power two versions of the new long–range 777. The 777–200X will be able to carry 300 passengers in three classes up to 10,100 miles and the 777–300X will be able to carry 360 passengers in three classes up to 8,300 miles. But this deal has much greater significance to the future of both engine competition and Boeing’s battles with Airbus Industrie than any previous contest to power an aircraft. It’s what Jack Welch is calling a boundaryless (a favourite word of his) deal.

Welch made enormous efforts to win this deal, pressuring Condit heavily. He told Condit (in his weakened state as head of the manufacturer, following major production problems over the past 18 months) that he needed the backing of the world’s most prestigious brand name, GE. Then he offered a deal that it would have been hard to reject.

Costs and details of the deal

GE has made a heavy commitment to the new 777 programme. GE will pay up to half of Boeing’s expected $1bn development cost of the aircraft, in addition to the $500m or so it is expected to cost to increase the engine’s power to 115,000lbs of thrust (20% more than any engine now in service). From the start of the contest all three engine makers were offering to pay around $200m to cover the cost of an updated engine pylon and other engine related structural changes, plus half the certification cost of the new plane. GE offered to absorb up to another $300m of Boeing’s costs. The deal dumbfounded Pratt & Whitney’s Bob Leduc when he went to Seattle to make a last–minute, sweetened — but still inadequate — final offer.

Under the exclusive arrangement, Boeing alone will sell the aircraft–engine package, although Welch insisted that the agreement restricts Boeing’s ability to discount prices outside preset limits. GE will take a fixed share of the revenues, and will share any financial risk involved if the new 777 fails to live up to any of its performance guarantees — not just engine–related problems.

A great concern has been whether the airlines would accept being offered only GE 90 engines on the 777. Earlier versions of this engine had caused trouble, and British Airways for one planned to switch to Rolls- Royce engines. So far Rolls–Royce has the lion’s share of 777 engine orders (47%), with Pratt & Whitney getting 25% and GE 28%. To allay airline fears, GE will offer fixed–price off–wing maintenance of the new GE 90 engines, including spare parts, at a pre–set cost of so many dollars per flight hour. It’s what Boeing engineers say amounts to power by the hour.

Since the announcement, several airlines have been moaning about the switch to exclusive GE power for the new 777. We’ll see over the coming year or so whether large piles of GE’s dollars will change their tune.

New 777 development, new threat to A340

There are fascinating technical elements to the deal, too. Boeing was attracted to the GE 90 not just by Welch’s largesse. Seattle was convinced that GE was the most likely of the three engine makers to get a 115,000lb engine into service in time to head off competition from Airbus’s A340–500 and A340–600. GE has cleared up its earlier technical problems with the engine and is applying the latest computerised 3–D aerodynamic modelling to smooth airflow inside the engine, plus new composite materials for the main, front fan of the engine. (The notion that Boeing picked the GE 90 because of low noise, as reported by the Financial Times in London, is a poor joke.)

What Airbus probably does not yet appreciate is that GE and Boeing have their eyes on an even bigger GE 90 that will power an ultimate long–range 777 intended to demolish the A340 as a competitor. The front fan of the new GE 90 has already grown in diameter much more than has been admitted. This means that the new GE 90 engine will have the potential to produce even more than 115,000lbs of thrust, and will eventually be used to power a 777 that will combine the 360 seats of the 300X version with the 10,100 mile range of the 200X version.

The next step is an actual launch of the new 777. That will wait until Boeing/GE have around 40 orders. One likely launch customer is Air France (more or less a tied customer since Snecma is a partner in the GE 90). Boeing/GE also hope for an Asian launch customer too, maybe Cathay or perhaps Singapore. The leasing companies, especially GE Capital, will come later. Which version of the new 777 will be launched first depends on what the airlines order; the first will launch in late 2003 and the second in January 2004.

Welch: an industry icon

Why was Welch so keen to win this order? After all, it was not that long ago that he was so cross with his jet engine operation over the GE 90’s embarrassing troubles that he told them not to spend another cent on its development. Now he’s stumping up a billion dollars to add to the $2.2bn so far invested in the programme.

First there is the prospect of $20bn in engine sales over the next 20 years or so. But probably more important is what would have happened to the GE 90 without this deal. The engine can only be used on the 777 — no other aircraft is large enough to need it. Without this deal, Welch faced the prospect of having to write off all that $2.2bn (he has in fact already written off $275m of it).

Second, Welch, an icon of American business, has to step down as chairman of GE in the next year or two. The last thing he wants is to risk going out with a massive loss tarnishing his image. In this regard, another billion dollars is a small price for GE to pay to preserve the reputation of a hero of American capitalism.

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