Aero-engines: Join the team December 2014
With seemingly insatiable demand for jets, aero-engine manufacturers should be sitting pretty. In fact, three of the big four manufacturers are facing problems.
The engine market divides into two: narrowbodies and widebodies. The former has been dominated for decades by the unlikely pairing in CFM International of the US industrial giant, General Electric (GE), and the flower of French state capitalism—Snecma (now partly privatised in the Safran group). The joint-venture pools revenues and divides costs, according to which firm makes which parts of the engine and which completes final assembly; it has operated since 1974, with an exclusive franchise on 737s for decades and roughly half the A320 market. In the process, the Franco-American pairing virtually drove Pratt & Whitney out of the single-aisle market it had dominated since the birth of the jet age in the mid-1950s.
P&W was in effect forced to join a rival consortium with Rolls-Royce, Japanese and German manufacturers — International Aero Engines (IAE). After some squabbling over patents and strategy, Rolls-Royce sold out of IAE a few years ago, leaving P&W dominating IAE and well placed to plan its return to strength.
Meanwhile, Rolls-Royce bizarrely sits on the sidelines of a market that accounts for 80% of large aircraft sales. A joint venture with P&W was supposed to follow the exit from IAE, but that was abandoned in mysterious circumstances. The firm stood aside from the competition to re-engine A320s, reckoning that the game was not worth the candle: that was before the phenomenal success of the re-born Airbus.
CFMI’s success gave it dominance in the total market, with 54% in 2009-2013 (see chart), but even this is now open to serious challenge. CFMI’s share is forecast to fall to 45% over the next four years, because of the return of P&W with its Geared Turbofan (GTF) engine and its control of IAE. (The gearing apparently allows the fan and the turbine parts each to run at their optimum number of revolutions, producing a major gain in fuel efficiency.)
But CFMI for its part is bringing to market the LEAP-X engine which uses advanced lightweight materials to produce an equally impressive gain in fuel economy. So there is now real competition to get on the wings of new-engine versions of both the A320 and the 737.
For widebody aircraft the picture is simpler. P&W clings on here only through its partnership in the Engine Alliance with GE, waved through anti-trust concerns by the US Administration in the 1990s to allow the development of the biggest engines for the emerging 777s. GE secured its position as the 777s grew their load and range, by helping Boeing with the development of the 777-300ER, the most successful iteration of an already winning product.
This saw the development of the team concept whereby a new aircraft comes with an exclusive engine supplier: the 777 fleet came to be nearly 100% GE-powered in recent years, while the new A350 (built to rival both 787s and 777s) will be exclusively powered by Rolls-Royce. The re-engined A330 will also be a Rolls-Royce monopoly.
The only aircraft where competition remains open and heated is the 787 which looks like continuing a 60/40 split in favour of GE, and the A380 (50/50), though that could switch to a Rolls-Royce monopoly if Airbus responds to Emirates’ call for new engines in a desperate move to keep the project alive into the next decade.
The leading position of GE is underscored by its profit margins which are around 20% in its aviation business compared to 13% at Rolls-Royce. Rolls-Royce had ten years of success and fast growth until early 2014, but during those boom times costs rose to an unsustainable level, as Chief Executive John Rishton acknowledged recently when he announced 2,700 redundancies including engineering teams.
GE is the only engine manufacturer with a strong position across the board; its share of the market (by volume) is poised to rise from 15% to 22%, even without counting in its half share of CFMI. But even GE is facing tough times emerging from the economic and financial crisis. It is hiving off its financial businesses (for long the source of much of its profit) in response to regulatory pressure and would have long shed its consumer business (washing machines and other white goods) had the crisis not wrecked that deal. Meanwhile, capital spending and dividend payouts are under pressure as it seeks to re-invent itself as a vibrant industrial conglomerate, but its recent purchase of the French Alstom group (power turbines and trains) will absorb much management time and money in the next couple of years.
Conglomeration is also a concern at P&W and Rolls-Royce. P&W took a mighty step by spending $16.5bn to buy aerospace equipment-maker BF Goodrich in 2012, turning itself from a broad conglomerate (Otis Lifts and air conditioning are two other big parts) into a group more focused on aerospace. But the CEO has just been replaced by the CFO, who at his first appearance before analysts in mid-December poured cold water on the prospect of spending heavily on aero-engine R&D to make the GTF technology suitable for larger engines. Analysts note that Gregory Hayes, the new CEO and ex-CFO, had worked for Harry Stonecipher who was famously focused on short-term financial gain when in power at McDonnell Douglas and Boeing.
Rolls-Royce, for its part, cannot seem to make up its mind whether it is an aero-engine group or a power systems conglomerate. It fumbled an attempt to buy the Finnish Wartsila marine engine group: the deal fell through after being leaked. But Rolls-Royce continues to develop revolutionary technology for specialised vessels, through marine subsidiaries in Nordic countries that it acquired with the Vickers group in the 1990s. It is getting out of gas turbine businesses supplying the energy sector (selling to Siemens) while buying the Tognum business of Daimler group, which makes giant diesel engines for ships.
Rolls-Royce has new engines under development for launch in 2020 and 2025, partly with the single-aisle market in mind. But investors fret about recent profit warnings, caused by defence cutbacks and problems selling to Russia during sanctions, and analysts frequently moan about the group’s vague sense of direction: is it a jet engine business with some add-ons, or a full-blooded conglomerate built around gas turbine technology?