Engine manufacturers are trying to weather the continuing downturn, while also preparing for the big competition ahead
The past year has not been kind to the commercial engine makers. And the consensus is that the market in the year ahead will be little better, with any real upturn in fortunes not now expected until 2005. Amid the gloom, however, not all manufacturers have suffered equally and there is still much to play for with the start of some new product campaigns that will help to shape the market well into the next decade.
The big three players - GE Aircraft Engines, Pratt & Whitney (P&W) and Rolls-Royce (R-R) - all concede that the ailing financial health of their airline customers has resulted in falling sales volumes and put pressure on prices. One market analyst suggests that it is not uncommon to hear of price reductions of around 25% as manufacturers seek to fill out production slots.
All the manufacturers also add that, save for the vitality of their defence programmes, times would be even tougher. GE, for example, says that it sold 1,035 jet engines to the airlines in 2001, compared with approximately 700 in 2002, and expects much the same again this year. Similarly, R-R expects production levels this year to be about 30% of what they were in 2001.
And even when the airline industry's fortunes improve, there is likely to be a lag before carriers begin to order new equipment. Harry Breach, analyst with Bank of America, notes that there are around 500 aircraft with Chapter 3 engines parked in the desert waiting for an improved financial climate to return to active service.
How well equipped each of the manufacturers will be to ride out this downturn in part stems back to the old issue of market share. Because the costs to an airline of switching engines on a sub-fleet are extremely high, that tends to make the initial competition a case of winner takes all. "Once you've chosen an engine you have to be extremely incentivised to switch. This makes the engine market in a way less competitive than that for airframes, as manufacturers have to discount less to get repeat customers," says Breach "It also means, however, that getting in early and achieving good installed-base market share is absolutely imperative."
A healthy installed base is also critical in ensuring a steady flow of spares and repairs business in a potentially lucrative aftermarket. However, such flows can dry up quickly as P&W discovered to its cost in the last downturn. Its JT8D was for years the world's best-selling engine powering Boeing 727s, early 737s and the McDonnell Douglas DC9. After-market sales had poured in at a steady rate up until the downturn of the early 1990s. Then with older aircraft being retired or cannibalised, volumes suddenly plummeted and P&W struggled.
Market share battles
An analysis of the market share positions on those aircraft/engine combinations that are currently still in the market, demonstrates the extent to which P&W's lead has been eroded. It is now CFM International, the consortium of GE and France's Snecma, which sits on the largest installed base with the CFM56. It is sole source on the latest two generations of the 737, as well as on the Airbus A340-200/-300, and holds over half the market to power the Airbus A320 family.
In the wake of the 11 September terrorist attacks, older aircraft were again put out to pasture by the hundreds, most of them unlikely to ever to return to active service. The great majority of these are powered by P&W engines, most of them the JT8D. The company did not initially develop a successor to its old champion, instead getting back into the game with the V2500, which it produces in collaboration with R-R, Japanese Aero Engines and MTU Aero Engines through their International Aero Engine consortium. After ceding the CFM-56 a five-year head start, the V2500 now holds 40% share on the A320 family and has become, according to Standard & Poor's analyst Roman Szuper, P&W's "only successful narrowbody product".
If P&W's installed base is too old, then for R-R the issue is the opposite. After dire troubles in the 1970s, R-R made a conscious decision in the late 1980s to regain a hold on the civil engine market. That led to the launch of the Trent programme aimed at the newest Airbus and Boeing widebodies among which it has gradually built up a strong following.
However, the relative youth of the aircraft that Trent powers means that a critical mass of the company's products has not yet come off warranty and into heavy overhaul, even if 35% of last year's group income came from its Total Care aftermarket services product. Although promising a bright future, it means that the UK manufacturer must rely on new engine sales for most of its revenue at a time when airlines are more interested in deferring orders than placing new ones.
For GE, the picture is brighter. The first in the market to recognise the revenue potential of after-market services, the company used its position to record $11 billion of business last year, generating $2.1 billion in operating profit.
Key to GE's success is its wide range of offerings: it has 24% of the installed base of all Western-built jet aircraft currently in production, a figure that rises to 55% if CFM products are included. And its installed base is constantly growing. In 1990, there were around 8,000 GE or CFM engines in service, there are now practically double that figure.
However, GE is not immune to the underperforming market. Because of the unanticipated retirement of large numbers of aircraft, the maintenance market is suddenly flooded with overcapacity. GE says that without the strong performance of its military unit, it would be hard-pressed to finance its research &development programme and is making sizeable employee cuts in any case.
Recognising the value of having engines on a variety of aircraft, GE is well represented in most classes. On regional jets, its CF34 is the only engine powering present and future Bombardier aircraft and Embraer's planned larger models, and it will be the sole power source for the planned Chinese regional jet. The CFM-56 still shines in the single-aisle category and its GE90-Growth model will begin to enjoy the fruits of its sole-source position on the longer-range 777s. The good news extends to the top of the range Airbus A380, where the GP7200 it builds in a joint venture with P&W has fought back to claim half the market after handing R-R's Trent an early lead.
R-R has also positioned itself across the range. The AE3007, which came with the acquisition of Allison in the 1990s, enjoys a dominant position on the smaller offerings from Embraer, and the IAE V2500 continues to perform well with the Airbus narrowbodies. In the large market it shines, with the versatile Trent performing across the Airbus range - A330, A340 and A380 - as well as Boeing's 777 and planned 747QLR.
P&W has fared less well. Its bet on the regional jet range - the PW3000 - became a loser when Fairchild Dornier's bankruptcy took the 328JET out of production. It has attempted to break back into the narrowbody market with the PW6000, which originally had a sole-source position on the Airbus A318. However, that has been plagued by problems, not least of which is the aircraft's flagging popularity. Also, delays resulting from unacceptable fuel-burn levels have since pushed orders over to the CFM-56.
And when P&W talks of the potential benefits arising from the PW6000, it cites the possibility of using the core in a power range for a future military product. Analysts have long argued that P&W's commercial-to-defence ratio is in permanent decline.
The battle ahead
But there is still at least one one big engine contest still on the horizon - that to power Boeing's mooted 7E7, the replacement for its 767. The market is deemed to be the biggest opportunity to arrive for some a while, with the aircraft's likely size and efficiency expected to generate volume sales.
There are some interesting differences in approach to this new big battle. R-R indicates that, while it is still early days, it has every intention of using its Trent foundation - coupled with the technological advancements which the next five years are anticipated to bring - to offer its own product.
Similarly, P&W, which has achieved its only recent successes through consortia, says that the market looks too big to justify partnering - a practice it describes as being for niche aircraft only - and that it too will head into battle on its own.
Interestingly, only GE, saying that the research costs of developing a new engine approach $1 billion, has indicated it will accept the challenge inco-ordination with a partner.
REPORT BY RICHARD PINKHAM IN LONDON
Source: Airline Business
