German aeroengine manufacturers are battling to lower costs and increase efficiency, while looking for opportunities to expand
While Germany has established itself as world-class player in aeroengine technology, its two major manufacturers face tough challenges amid a dearth of government research and development funding.
Outside the USA, the country is unique in having more than one significant engine manufacturer, forcing MTU Aero Engines and Rolls-Royce Deutschland to compete against each other for limited state support.
MTU is gearing up for an expected stock market flotation in 2006 after being acquired from DaimlerChrysler by US private equity firm Kohlberg Kravis Roberts (KKR). The Munich-based company's principal partner is Pratt & Whitney, for which it supplies major subassemblies, and is the world's largest independent provider of powerplant maintenance, repair and overhaul.
Germany is a good place for MTU to be based, says chief executive Dr Klaus Steffens, although there is "nothing special" about the country's industrial capabilities when compared with other European nations such as France or Italy. "There is really no national advantage," he adds.
Paradigm
However, Steffens warns that Germany's 35h working week is too restrictive and threatens to interfere with the company's expansion plans. He talks of the "German paradigm" where pay negotiations with the country's trade unions have historically taken place against a backdrop of strong industrial growth, which has recently stagnated.
"We are living a life we cannot afford anymore," says Steffens. "The unions say they can ask for more because there is always better efficiency. If you don't get more efficient you have to get more work, but in our industry we are going through a dramatic downturn."
The manufacturer depends on the experience of its engineers to keep it at the cutting edge of technology, but these employees are expensive too, because of the short working week.
"MTU is 60 years old and there are a lot of people in the company that have worked on three engine iterations," says Steffens. "To be a player in the market it's important to have these roots. The only answer is to keep the high level of skills, but you have to get the cost-per-hour down, and to do that you have to increase the working time per employee. Forty hours would be a good figure." Nevertheless, the company is cutting 7% of its German workforce as part of efforts to slash annual costs by c100 million ($122 million) over the next three years.
Struggling to sustain research spending, Steffens is understandably concerned about the low level of defence funding in Germany. "The technology of the aerospace business is to a large extent - especially in our case - derived from military programmes. The military programmes create technology," he says.
"My worry is that while we keep the company afloat with the programmes we have, such as Eurofighter and [Airbus Military] A400M, where is the future technology coming from in Germany?" Steffens adds.
An obvious solution to help mitigate the effects of Germany's low level of defence spending would be a merger with other European engine manufacturers, as has been achieved on the airframe side with the creation of EADS. However, Steffens does not expect full-scale mergers between European engine manufacturers, but rather minority equity investments structured around transatlantic co-operative programmes.
Snecma's forthcoming privatisation is widely expected to lead to General Electric- the French company's US partner in CFM International - taking a stake of around 10%. Avio in Italy has, meanwhile, been sold to the US-based Carlyle Group. MTU's major partner is P&W, although the German company also participates in GE and R-R programmes.
Financial opportunity
"There is an opportunity for [GE, P&W and R-R] to engage financially - to take equity in these companies - and they will probably take it to make sure that their interests are secured," says Steffens.
"Consolidation in the engine industry has to be different to EADS," he adds. "The engine guy has to be able to serve two customers [Airbus and Boeing] with his product. A European solution for me is not very likely because you have to be serving both airframers."
Meanwhile, there is no prospect of a domestic merger with R-R Deutschland, leaving MTU as "the only company having competition in its home country outside the USA", says Steffens. This means that the scarce government research and development funding has to be divided. "On the other hand, I think the competition is likely to make us stronger, and it's also beneficial for the German taxpayer," he says.
MTU has not so far moved to place significant production work overseas to save on labour costs, and so "more than 90% of our value-added manufacturing is being done in Germany".
The adoption of the euro by Germany was in principle a benefit for MTU, although the single currency's strength against the USdollar is giving cause for concern. "The strength of the euro is of course a problem for us, but the concept is favourable because it makes things more predictable," says Steffens.
In an important strategic move, MTU has broken into the US military market via its acquisition in 2001 of US-based turbine disk producer Caval from Chromalloy Gas Turbine. Caval manufactures engine parts for the Lockheed Martin F-35 Joint Strike Fighter and the Lockheed Martin/Boeing F/A-22 Raptor under subcontract to P&W.
"It will not be significant growth, but the unit will make an important contribution," says Steffens, who adds that the company has not witnessed any impact from the recent cooling in relations between the USA and Germany over the invasion of Iraq.
PW6000 prognosis
Steffens believes the Pratt & Whitney PW6000 engine for the Airbus A318, which has suffered a three-year delay to its service entry due to technical problems, "will be a very successful engine as soon as we demonstrate it". He says that it makes sense for MTU to assemble the engine in Hanover on a moving line rather than in the USA because of the site's proximity to Hamburg, where the A318 itself is assembled.
Another coup for MTU was securing the EuroProp International TP400-D6 turboprop assembly line, to be located at its Berlin-Brandenburg maintenance facility. The engine - Europe's largest ever turboprop - will power the Airbus Military A400Mtransport, for which Germany is the largest customer.
Steffens says that under KKR ownership the company will continue its "successful" strategy of focusing on military engine production and servicing in Germany, supplying civil powerplant compressors and turbines for partner P&W and its global network of MRO shops. A successful flotation in 2006 would "really be a model case for realising this transition" in Germany, according to Steffens.
ANDREW DOYLE / MUNICH
Source: Flight International
