GÜNTER ENDRES LONDON
The stakes continue to rise for the world's big three engine players, with new aircraft launches and further consolidation after GE's acquisition of Honeywell
One company's loss is another's gain. And that was never more so than in the ever tense battle between the world's big three aircraft engine manufacturers: General Electric, Pratt & Whitney and Rolls-Royce. So although engines may not have been the main event in last year's bidding battle for Honeywell, there was some added interest from the presence of heavyweights GE and P&W's parent group United Technologies (UTC) in the contest. In the event, GE emerged as the surprise victor, ousting an earlier bid from UTC after a short, sharp tussle.
Given that Honeywell was itself a sizeable powerplant player - a position inherited from the earlier merger with AlliedSignal - the latest deal leaves a lingering question over what this further piece of consolidation means in a market where three principal players are still considered one too many?
League table
Not only was the merger the world's largest ever industrial marriage, but in the process it helped to propel the combined group to fifth spot in the world league of aerospace companies, with annual sales of more than $20 billion. The bulk of that aerospace revenue is in a powerplant business now worth almost $16 billion a year. GE's engine business was already ahead of its rivals thanks to a massive maintenance business, but the acquisition extends the lead. P&W has sales of $7.7 billion, while R-R is at the $5.5 billion mark.
However, it is difficult to envisage a further slimming down in the market. The three principals are already linked in one form or another on joint programmes. Any further mergers would surely attract competition scrutiny on both sides of the Atlantic. One of the features of the GE tie-up with Honeywell is a surprising lack of overlap.
Where the merger makes the combination most dominant is in the market for small, high-bypass turbofans for business and regional jets. GE is already a major force in the 9-14,000lb thrust (40-60kN) range with its CF34. This engine is being boosted to 18,500lb for the new 70- and 90-seat jets, such as the forthcoming Embraer ERJ-170/190 and the Fairchild 728/928JET aircraft now under development.
Honeywell's range, formerly under the AlliedSignal name, fits neatly under the GE products. Its TFE731 covers the ground up to 5,000lb for small business jets, while the new AS900, which reaches up to 9,000lb, has been selected for Bombardier's new mid-sized business offering as well as the Avro RJX regional jet. Honeywell also brings market leadership to the table with its auxiliary power unit business and small turbines for military applications.
Figures from this year's engine market survey, again compiled from the Airclaims CASE database, demonstrate the group's dominance in the small engine sector (see page 58). GE already has 45% of the engines in service on regional jets and over half of those on order. Adding Honeywell into the equation brings those shares up to 60%.
Although the merger will cause no shifts higher up in the large turbofan sector, the danger of GE/Honeywell running away with the small turbofan market appears real. "The breadth of GE's market as a result of this merger is the widest ever managed by one company in terms of the thrust range available from its many variants of turbofan engine," says Carl Opdyke, senior power systems analyst with market research company Forecast International. Considering GE's now ample and growing revenue, P&W and R-R might find it compelling to unite at some levels to effectively counter further gains by GE, he suggests.
Tied power
One area where the fighting is likely to be fierce is in the lucrative aftermarket for spares and maintenance. GE was the first to stake its claim, building up a massive repair and overhaul arm through a sustained spell of acquisitions in the mid-1990s. That business is now worth $5 billion a year and extends well beyond engines built by GE or CFM International, its joint venture with Snecma.
Rivals have been quick to follow GE down the aftermarket route. The New Year started well for R-R. Fresh contracts worth nearly $2 billion were signed with British Airways for the maintenance of V2500s powering its fleet of Airbus A320s and with American Airlines for support of the RB211-535E4s fitted to 125 Boeing 757-200s. R-R says its aftermarket support business accounts for 40% of its turnover - or around $2.2 billion - and that it has captured over half of such business on its own products.
GE's latest successes for its maintenance cost per hour programme include support for 23 GE90s powering the nine-strong Boeing 777-200ER fleet of China Southern Airlines, worth $215 million, and a similar $140 million contract for the CFM56-powered Boeing 747-400s of Japan Airlines subsidiary Japan TransOcean Air. Both deals provide support for 10 years. Following these latest contracts, GE says its backlog of long-term engine service agreements now exceeds $16 billion.
P&W has signed new service agreements too. In January, it entered a 10-year agreement with Japan Air System(JAS) worth $360 million which covers 44 PW4000s for the airline's Airbus A300-600Rs. JAS already has a fleet management programme in place for its JT8D-200-powered Boeing/McDonnell Douglas MD-80s.
Another large contract, implemented last summer and with a value of $410 million, was to provide long-term support for JT9D-7A turbofans for 12 United Parcel Service 747-100F freighters. P&W aftermarket services are worth around $1 billion a year, but the company aims to grow this sector of its engine business to $4 billion.
Another area where competition is beginning to heat up is over the new breed of large widebodies emerging from Airbus and Boeing. Battle has been joined in earnest to power the new Airbus A380, following its formal go-ahead last December. Customer airlines now have a choice between the R-R Trent 500 and the GP7000 from the Engine Alliance, a joint venture between GE and P&W.
New widebody battles
While some customers have yet to decide, early commitments for the Trent have given R-R a head start. Worth $40 million for the four engines for each aircraft, the stakes are high. Even taking a conservative average of 750 potential aircraft sales, the engine business would be worth at least $30 billion, not including spares and aftermarket contracts.
Yet this represents only a small part of the overall market for the latest-generation widebody aircraft. Airbus has the new A340-500/600 models coming on line with extended range and higher weight. Then there are the latest and proposed developments for the Boeing 747 and 767 models.
With last July's agreement with Boeing to offer the Trent family for the 747/767 developments, R-R now claims access to 90% of this sector. The Trent family spans the thrust range of 53,000-95,000lb and has built-in flexibility for further expansion. At the same time, GE is pushing the frontiers of performance for the GE90, taking the engine to 115,000lb for the long-range 777-300ER. GE expects to launch that project by late 2002, around the same time it plans to test the first GP7000. The GE90 currently covers the 76,000-94,000lb thrust range, while the GP7000 will initially launch at around 75,000lb, but with growth potential to 80,000lb.
Market outlook
According to the latest long-range outlook forecasts from R-R, large high-bypass turbofan powerplants for these latest widebody aircraft will account for 20,380 units over the next 20 years. This market alone is worth an estimated $200 billion. Overall, R-R predicts that the market for commercial aircraft with more than 100 seats will come close to taking 48,000 engines over the next two decades, representing potential business of $337 billion.
The regional sector too is described as "extremely robust", with total engine business worth $28 billion anticipated over the next couple of decades. That would average out to revenues of $1.4 billion a year, although R-R is well behind GE/Honeywell in capturing that niche. While not covered in this analysis, it is worth mentioning that another $32 billion is expected to be spent on 20,800 engines for corporate jets.
Forecast International, which keeps its predictions to 10 years, projects a market of just over 24,400 engines for commercial turbofans. It is also much more conservative in its estimate for the likely value to the engine manufacturers. Opdyke has put the value at $130 billion, suggesting that heavy discounting on many engine orders is balanced out by the value of spare engines and aftermarket support. Therefore, he says, the figure "is a fair indicator of revenue for an engine maker."
Whichever forecast is closer to reality, what seems certain is that the battles for dominance in the large engine market will remain as tough as ever.
Source: Airline Business
