A large banner hangs over workers at the CFM56 factory in Cincinnati, Ohio. It reads: "If we don't take care of the customer, somebody else will." One of a series of motivational signs dotting the production line, it is potentially ominous. For CFM International, the face of that 'somebody else' is changing as competition to power the world's narrowbody fleet becomes increasingly fierce.
CFMI, the joint venture company formed by General Electric and Snecma, has enjoyed spectacular success in the narrowbody market. Its exclusive position on the Boeing 737 and historically dominant position on the Airbus narrowbodies has fed the US-French company the majority of the single-aisle market. Last year was another good one, with a record 1,324 firm orders and production at an all-time high of 935 engines. But, as the salesmen at CFMI are discovering, the view from the top can be scary. Never before has CFMI had to look over its shoulder so often as the very real prospect emerges of there being three serious competitors in the market place.
The most serious and immediate threat comes from rival company International Aero Engines (IAE), which has been eating into sizeable chunks of the Airbus A320 family market place in recent years. Two massive orders - one from British Airways and another from a consortium of Latin American carriers - helped IAE secure 55% of this particular market in 1998. This year, IAE shows no sign of relinquishing its pole position. In March, Spanair selected IAE's V2500 to power the Spanish carrier's new A320s.
A third entrant
Hovering in the wings, meanwhile, and eager to take home its own slice of the future narrowbody market, is Pratt & Whitney, which was nudged out of this market when it failed to get on the 737 and has no intention of repeating the experience on future generation narrowbodies. If this US company's plans for a new engine fall into place, and if it can convince the airlines that a geared turbofan is the next technology leap, then the single-aisle powerplant market could turn into a three-horse race. More competition ought to mean more bargains, but CFMI is already warning that the company will not mindlessly chase market share in what has already become a cut throat business.
"The airlines today that are trying to buy as cheaply as possible have to be very careful," warns CFMI president and chief executive officer Gerard Laviec. "An industry that is losing money is not a sound industry. We prefer to remain a sound industry. We will need to educate the customer about the cost of ownership, over just the cost of the installed engine." Bill Clapper, CFMI's executive vice president, emphasises this message. "The market will set a price, but we won't go bottom fishing on pricing," he says. "Our product is a good product and it's reliable and cost effective. There is no reason to give it away."
Senior management at IAE counters that it has not been giving away the V2500 to gain market share over the CFM56. "We will not do bad business," insists Mike Terrett, who took over in November from Barry Eccleston as IAE's president. "No manufacturer should take market share at any price, but we will not get to that position. The V2500 is the favoured engine and we don't think we need to do anything bad to keep it that way. We will preserve our market lead."
The complication here, ironically, may come from inside the company. P&W, an IAE partner, seems determined to forge an independent path with its new PW6000 - which now has a home on the Airbus A318 - and the geared turbofan PW8000, which P&W will offer for next-generation narrowbodies. "What I really want is the large narrowbody market, and that's what the PW8000 will give us," says P&W president Karl Krapek. Seemingly fearless of any idea that three players might overcrowd the narrowbody market, Krapek adds: "I want to be back into the market of taking 60% of the total."
Why all this focus on the single-aisle market? The engine companies now regard this as the bread and butter business as they head into the new century. Each is also trying to prepare itself for the next industry downturn and they believe that the narrowbody market will be more resistant to an economic slump than the widebody sector. CFMI, for example, expects 70% of the future market to be for single-aisle aircraft. With its dominance in this area - since 1993 CFMI has taken 55% of the 100-plus passenger market and has accumulated firm orders for 61% of the total A320 family powerplant market - it should be well-placed to ride out the downturn. But its strength will depend on its ability to remain ahead. CFMI says there is nothing to indicate any change in the underlying trend, but it nevertheless has embarked on a three-year advanced technology programme that offers the reassurance to customers that there is ample growth left in the CFM56 family.
TECH56
CFMI must strike a delicate marketing balance with its TECH56 programme. Laviec does not believe that the time has yet come to launch a new product for future narrowbodies. At the same time, the V2500 is a much younger product and P&W has revealed an all-new-technology product - the PW8000 - that could be available not long behind the PW6000's planned 2002 in-service date. CFMI cannot afford to be seen lagging behind, but in promoting TECH56 it insists it will not pursue technology for technology's sake. "We believe the current CFM56-7 and -5C is state-of-the-art," says Clapper. "But we want to take it into the future and that is what TECH56 is all about. We want to build on the CFM56's demonstrated durability and reliability."
Now in the middle of its three-year programme, TECH56 aims to improve fuel burn by 4-7% over the CFM56-7 and -5B; lower ownership and maintenance costs by 15-20%; reduce noise levels to at least 20dB below Stage 3 and emissions to 40-50% below current ICAO levels. To reach those goals, CFMI says it is exploring a "market basket of technologies".
Looking to the more immediate future, CFMI is bracing for the seemingly contradictory challenge of increasing the production rate while also being ready for a downturn. The manufacturer increased production by 25% in 1998 and expects another 20% jump this year. The strong backlog - 1,324 firm orders placed last year alone - compels the company to keep productivity high even with looming economic uncertainty. "When you have a firm order, it is a firm order until it is cancelled. It is a vicious circle," says Laviec.
CFMI's answer is to examine its backlog of options carefully to try and determine the likelihood turning them into firm orders, then working out the probability of those orders being delayed or cancelled. Laviec says a reduced production rate plan will be put on place based on the resulting numbers. "We are not forecasting a drastic change," he says. "The number of orders compared with aircraft in service is much less compared with 10 years ago, so there is much less volatility. The key question is how fast will Japan recover? Japan will be the driver. If it takes longer to recover than expected, then the US will be affected and the crisis will be amplified."
Early action
P&W's Krapek has a similarly close eye on the Asian situation. The company's dependence on the widebody market is the main reason why Krapek sees the engine order rate falling from 1,000 to 600 a year, although he believes the Airbus A330 will "stay strong" in Europe. "But we are ahead of this and have taken early action this time," points out Krapek. A union settlement, completed two months ahead of schedule, that includes early retirement and voluntary redundancy sweeteners, will slim down the workforce by 2,000 with relatively little pain. Now Krapek can focus on getting the PW6000 into service on the A318 in 2002, while also pursuing the PW8000 programme. The geared PW8000, he says, will be the "last great leap in turbofan technology" and the 150-seat market is the perfect place for it, although he sees the technology being incorporated into P&W's whole future product line. "This is our heated future," says Krapek.
Krapek is under no illusions, however, that technology alone will edge P&W back into the narrowbody market. The price must be right also. "This is a brutally competitive industry where both new and aftermarket prices keep falling," he says. "But I think our industry was late to recognise what the market price was. The good thing is that once you know it, you know what your break-even figure is. We might have been a touch late at Pratt, but cost reduction is a way of life for everyone in this industry and I am smiling because I now have 67% of our costs out. And I'm not done yet."
Stepping stone
Terrett, meanwhile, has taken the helm at IAE as the company bathes in the glories of its 1998 successes. His challenge is to maintain that momentum. "I inherited a fantastic programme, but I cannot claim much credit for 1998," says Terrett, who was promoted from IAE partner company Rolls-Royce, where he was director of the RB211 and Trent 700 programmes. "But what I will say is that, although 1998 was a great year, it was a not a great year in isolation, but a culmination of the progress that IAE has made over the years - 1998 was our stepping stone to the future and we are adamant that this is the indicator for the future."
In addition to the British Airways and combined LanChile/TAM Brazil/Grupo TACA orders, a large order from United Airlines helped to push IAE's 1998 figures into the record books, with over 440 units ordered and 265 engines produced. This is a strong performance given that the V2500 is only available on the A320, since Boeing discontinued the MD-90. Reflecting on how these and a host of smaller orders gave IAE 55% of the A320 market, Terrett comments: "Market share is one of those areas where all engine manufacturers like to strut their stuff. But it's important to also bring out that we took three quarters of new customer orders. It leaves us in a very strong position in the single-aisle market, which is by any measure one of the most important.We now have 2,600 engines in the programme with more than 75 customers in 30 countries. The V2500 pervades all parts of the customer base."
While Terrett believes the company is in a stable position to face a recession, with deliveries going out to 2006, he remains hungry for 1999's business. "I think 1998 was the peak, but 1999 will see some very vigorous campaigns. There are quite a few campaigns that are more than single figures and we are working those very energetically," he says.
Terrett insists that, while the company cannot afford to become complacent about its successes, price will not be the key issue in those campaigns. "In any competition, you have to end up with a price that is competitive," he says. "Price is a very significant factor in any deal, but it is not the only one in the deal. Ongoing cost of ownership is also very important and we think we compare very favourably withCFM on that point."
The prospect that IAE, having seemingly secured its market position, could face fresh competition, both from the TECH56 programme and the PW6000/8000 is downplayed by Terrett. He insists there is "strong commitment" from all the IAE partners, including P&W, and there is plenty of growth left in the V2500 to stay abreast of the technology game. "We feel we are a better match for the A320 in terms of freshness and longevity," says Terrett.
Technology improvements
But he adds that the company is not standing still. He points to an improvement that the company introduced on its V2500-A1. Called the Phoenix Standard, because it was introduced on Phoenix, Arizona-based America West's aircraft, the move involves taking technology improvements on the -A5 engine and putting them in the -A1. Air Mexicana and Southwest Airlines will now also adopt the Phoenix Standard. "Any technology that is available which will allow the business relationship to grow, we will access and implement," says Terrett. "What we want to do with our products is enhance our customers' ability to make money." Or in the words of the CFMI banner, it amounts to "taking care of the customer".
Source: Airline Business
