MARK PILLING / LONDON
Middle-tier engine manufacturers are being squeezed by their big three customers and smaller rivals. Are specialisms and strategic partnerships the answer?
The industry's engine component suppliers are feeling the pressure. It is pressure that has always been applied at different times and to varying degrees, but in today's poor business climate it is becoming more intense from above and below them in the supply chain.
From above, it originates from their main customers, the big three engine manufacturers General Electric, Pratt & Whitney and Rolls-Royce. "The original equipment manufacturers [OEMs] are more and more aggressive on costs," says Fred Bodin, president of Sweden's Volvo Aero, which supplies components for all three. Theirs is a constant battle to drive down the cost of producing engines, and suppliers providing from the smallest bolt to an entire module are expected to play their part.
From below, the pressure on the component makers comes from companies aspiring to join them as suppliers of increasingly complex parts. "At a level below us I see forgers and casters, which have normally stayed at that level, showing signs that they want to climb the ladder," says Bodin.
It will not be an easy ascent however. Not only is the cost of attaining the expertise in hi-tech engine components a daunting barrier, but the current generation of suppliers have built a network of close relationships with the big three. For example, Germany's MTU Aero Engines, Spain's ITP and Snecma of France are strategic partners with P&W, Rolls-Royce and GE respectively. Volvo, Italy's FiatAvio and Japan's Ishikawajima-Harima Heavy Industries (IHI) prefer to work with each manufacturer on various engines either as risk-sharing partners or straight subcontractors.
These players and others play a crucial part in providing technology, manufacturing capability and upfront investment to the engine makers. And the bond between them seems destined to become even tighter. "The role of component suppliers is becoming increasingly important," says Dr Klaus Steffens, chief executive of MTU. "Our financing, development and production role is such that we can become an indispensable partner. The OEM can build you into his strategy," he says.
Technologies
In MTU's case it is being encouraged by P&W to specialise in certain technologies, such as an engine's low-pressure turbine (LPT). MTU has risk and revenue sharing deals with P&W on the PW2000 and PW6000 engines, which power the Boeing 757 and Airbus A318 respectively, and with International Aero Engines for the V2500 that powers the Airbus A320 family.
MTU has become a strategic partner for P&W on these components, which means that P&W does not have to invest heavily in LPT research and development. But MTU is not exclusively looking to P&W for its business. It also has a 20-year relationship with GE on the CF6. In this it makes high-pressure turbine (HPT) and compressor parts in a risk-sharing deal, and intends to take stakes with both GE and P&W on their parts of the GP7000 engine that will power the A380, says Steffens.
Although the contracts are not yet signed, MTU will be a manufacturing partner with GE on the HPT for this engine, and a development and production partner with P&W for the LPT, says Steffens. This, he believes, demonstrates that its close association with P&W does not preclude it from working with GE as well.
Volvo's Bodin says that in the past manufacturers did not like their component suppliers working on similar parts for one of their rivals. At the module level - such as an entire LPT - this is still true, but at a component level this attitude is changing, he says.
"Our experience is that there is less conflict for us to deal with more or less the same component with all three OEMs," says Erling Vister, head of aerospace components at Volvo. "They are more concerned about price, quality and delivery and are less aggressive on intellectual proprietary rights," he adds.
This is good news for Volvo, and others such as FiatAvio and IHI that follow a similar strategy of working with all the manufacturers. Their aim is to develop "centres of excellence" in particular components, and then to apply this expertise across as many engines as possible to achieve high production volumes.
For instance, Volvo has focused on seven components, such as several casings, the shaft and vanes, while FiatAvio concentrates on gearboxes, transmissions, accessories and drive trains. Last year ITP signed a deal with 46.8% shareholder R-R to become its sole supplier of LPTs for civil engines over 35,000lb (156kN) thrust.
This agreement results from ITP's work on developing the LPT for the Trent 500 that powers the Airbus A340-500/600. It will cover the Trent 900 for the A380 and the Trent 600 for the proposed Boeing 747-400X Quiet Long Range. According to ITP: "For Rolls-Royce the agreement means entrusting a strategic engine module toa sole supplier and the transfer of its technical and manufacturing capacity in this area to ITP."
With the manufacturers increasingly happy to outsource the development of these components, suppliers are eyeing the opportunity to expand into new areas of the powerplant, and especially towards core engine parts. "If we want to grow we have to increase our share of an engine, and to do this we have to move to other parts," says Luigi Romano, marketing manager civil aero-engines at FiatAvio. The company is looking for example at expanding its competence in LPTs and the intermediate turbine, he says.
IHI is already active in the LPT field, as well as in fans and low-pressure compressors, and would like to see opportunities in other engine areas too, says Hiroshi Suzuki, IHI's manager business planning group. In addition to its 60% share in the Japanese Aero Engines' 23% stake in the V2500, IHI is a risk-share partner on the GE90-115 and GE CF34-8/-10 and a machining subcontractor on the Trent 900.
To get aboard future programmes, suppliers know it will take more than just money. "The direction we have to go is to take more development responsibility for these components," explains Bodin. "But this approach needs money, and a shareholder who can wait for the return."
The time and effort needed means that companies weigh up moving into a new component area very carefully. "Volvo has developed a healthy position on engine programmes in the commercial arena over the last 25 years - and that is about the time its takes to develop such a portfolio," says Vister. "We are in a good position to take advantage of opportunities that arise in the next three to five years."
Strategy
As Volvo and FiatAvio ponder their next move, MTU has already taken the plunge into the core of an engine for the first time. It was the company's strategy to arrive at this position by 2010, but a train of events led it to be selected by P&W to supply its HDV12 six-stage high-pressure compressor (HPC) for the PW6000 in June.
"This is a very important milestone in our strategy," says Steffens. For the past two years MTU has been preparing its civil engine HPC design - building on its experience in developing compressors for military engines like the Turbounion RB199 and Eurojet EJ200 - with assistance from the government-sponsored Engine 3E technology programme.
Prior to it even considering a role on the PW6000, MTU decided to test its new HPC on a real engine - it was too expensive to build a demonstrator just for this component - and the PW6000 was the right size. Independent of MTU's efforts, P&W was finding that its five-stage HPC for the PW6000 was not meeting the fuel consumption targets set by Airbus. The problem meant that the PW6000 slipped from its position as lead engine on the A318, with the CFM International CFM56-5B pushing ahead to become the initial certification powerplant on the aircraft.
P&W's solution was to turn to its German partner to replace its own HPC with the HDV12. This design, with its 11:1 compression ratio, promises to offer lower fuel consumption and emissions, and the first production versions for the PW6000 will be delivered in 2005. With MTU also supplying the LPT for this engine, the company now has a 30% share in the PW6000, the highest MTU has achieved in commercial engines to date.
The move from LPT technology into the HPC is a critical one for MTU, says Steffens. "The LPT is one of the first rotating areas of an engine where competitors go after you. It is a cul de sac because it is a 'ripe product' open to this attack and the room to differentiate yourself by technology and manufacturing cost gets smaller and smaller," he says.
"We needed to think about a new product that was more complicated and investment intensive so that competitors would need 10 years or so to catch up with us," he says. In addition, the value of the LPT within an engine limited MTU's ability to increase the risk it takes on engines. "The HPC offers us a new playing field with a higher value part, giving us the opportunity to differentiate ourselves and giving us space for growth."
By moving into more complex components, companies such as MTU and Volvo hope to be less exposed to growing competition from lower-cost countries. Another way of protecting themselves might be for the second and third-tier suppliers to band together and create a larger force.
This would be in line with the engine makers' desire to work with fewer partners that take larger stakes in different powerplants. While this might be a logical approach, the tentative discussions between the component suppliers on co-operation have remained just talk for the time being.
In early 2000 Flight International reported on preliminary discussions between MTU, Volvo and FiatAvio on a possible tie-up to create a pan-European aero-engine concern to rival Snecma. These came to nothing. Today, MTU says it is still interested in getting closer to Volvo or FiatAvio, but admits that there are no more talks under way.
Barriers
One of the main barriers to consolidation is the "extreme complexity" of the existing relationships between the suppliers and engine makers, says MTU. Another potential blockage is what to do with the military businesses with which each of the suppliers is involved, and national govern-ments' view of greater integration.
In Spain, ITP is involved in a consolidation process, but with other aerospaceconcerns in the country. It will be part of Alerion, an aerospace entity being created from the aviation businesses of state holding company SEPI, aircraft component maker Gamesa and engineering firm Sener. SEPI and Sener have the majority stake in ITP through a company called Turbo 2000. Rolls-Royce is not commenting on reports that it is considering a sizeable stake in Alerion.
Of equal importance to the suppliers is the construction of a sound engine maintenance and repair business to run in parallel with the manufacturing side. IHI, for example, is seeking to double its annual revenues in civil engine maintenance to $400 million over the next five years to make up for a decrease in engine component manufacturing business. It will concentrate its efforts on engines where it already has a risk-share role such as the V2500 and CF34.
According to MTU's Steffens, a greater risk-share in an engine programme does increase the likelihood of a supplier winning more maintenance work on that engine due to its greater engineering capability on the type. But it is no guarantee. There is generally no contractual link between the supplier and the engine maker on the maintenance side, he says.
"When you negotiate a contract or risk-sharing partnership deal the answer to the request for a maintenance and repair licence is usually that they are quite different things and not connected," says Volvo's Bodin. Access to the maintenance market is crucial for both the engine makers and their major suppliers. Bodin warns that the trend of the engine makers to tie up airlines in long-term engine overhaul contracts is limiting access to a larger number of potential customers for the suppliers. It is an issue that concerns Bodin, but he concedes there is relatively little he can do about it - on its own Volvo simply does not have the muscle to influence the big three.
Prospects
As they fight for their share of the services market, the component suppliers have a mixed view of the prospects for new engine programmes. According to IHI's Hiroshi: "In the coming years we don't see any opportunities to become a risk-share partner because the current commercial aviation industry has been depressed." However, he says that IHI would welcome sub-contract business opportunities.
MTU's Steffens sees some opportunities taking longer to come to fruition, but adds that: "Basically the slots for a chance to apply the technology we are developing are more or less the same." There may be additional opportunities in the 70-100-seater market, he says, with Russian and Chinese proposals on the drawing board. "There is a real need for an aircraft in that market, and a need for a new engine. We are offering our new geared-turbofan engine technology."
However, it is a larger aircraft and engine combination that Steffens feels will kick-start the industry in the next couple of years. The GP7000 and A380 will provide a "marvellous driver and impetus to our industry", he believes, much as Boeing's 747 did when it arrived on the market in the late 1960s.
Source: Flight International
