Manufacturers face tough times in a market where not only have new engine deliveries started to slump, but where the lucrative spares and repairs business is also being hit by cutbacks in flying.
In common with much of the rest of the aviation world, 2001 did not end well for the aircraft engine manufacturers. And 2002 is not likely to bring much relief either. No one has been immune from the woes. General Electric (GE) is typical in expecting output to be down by about 20% this year and next on the back of lower aircraft deliveries. Latest estimates from Airbus and Boeing suggest that between them they will produce around 680 units this year, down from a peak of 850 in 2001. They expect new aircraft orders to halve at best.
Alongside the decline in new deliveries, the engine manufacturers also face a major hit on spares and repairs. Such aftermarket services have always been the most lucrative part of the engine business and have risen sharply in importance over the last decade as manufacturers, led by GE, set about building sizeable positions in the maintenance market. Now, as the airlines rein back aggressively on capacity, so demand for aftermarket sales has also started to tumble. The impact is compounded by the fact that the majority of aircraft earmarked for early retirement are older, more maintenance-intensive models.
Spares slump
The consensus is that spares sales have been down 15-20% since 11 September and that maintenance services could be reduced by some 15%. Already there are moves by manufacturers such as GE and Honeywell to cash in on the airline industry's drive to par their costs, by raising investment in technology to repair rather than replace expensive parts. GE points to its new engine upgrade kits.
There is another way in which the crisis will hurt engine manufacturers, warns Tassos Philippakos, head of aerospace research at rating agency Moody's Investor Service: through the need for customer finance. As airline credit ratings continue to fall, they will require help, he says, and engine manufacturers will be required to share that burden with their airframers - involving finance equal to as much as 25% of the cost of each aircraft.
Rolls-Royce (R-R) has already warned that it expects aerospace revenues to be 25% lower in the year ahead as the whole business comes under pressure. It expects sales to be close to $1.5 billion below original forecasts. However, R-R is perhaps in a more robust position than it was for the previous downturn, having forged ahead with new engine sales across the aircraft ranges.
The UK manufacturer has delivered some 5,500 engines over the last five years as its strategy has come good. The Trent has captured around 30% of the open competition for widebody aircraft, as the latest market share statistics reveal (see tables opposite). Meanwhile, the former Allison Engine business has taken a strong second place to GE in the regional jet sector. Finally, the International Aero Engines (IAE) consortium, which is led by R-R and Pratt &Whitney (P&W), has also drawn more or less level with its arch rival the GE/Snecma-led CFM International in the battle for new orders on the Airbus A320 family.
However, R-R's mix of installed engines has its penalties, says Nick Fothergill, head of aerospace research at Bank of America. He points out that the traditional R-R products are on ageing aircraft types which are likely to be retired in the near future, while its recent wave of Trent powerplants are not due for major overhauls until 2005 or 2006. This could mean a few years of lean spares business ahead for the UK group.
P&W continues to be at most risk from the age of its installed base of JT8 and JT9 types, many of which are on aircraft that, once retired, are unlikely ever to return to service. In the last recession that followed the Gulf War, P&W suffered badly from an unexpectedly steep decline in parts sales, to the extent that its parent United Technologies group gave out regular bulletins on spares volumes to an anxious investor community.
P&W challenge
P&W has been holding its own in terms of PW4000 engines installed on the current generation of widebodies. However, its order book is now the smallest of the big three, only taking a lead in terms of new business on the Airbus A330 and the A318 with the PW6000 engine.
GE remains arguably the most comfortably positioned. Its CFM joint venture with France's Snecma continues to handle some of the industry's biggest production volumes, with exclusive positions on the Boeing 737 and Airbus A340-2/300. GE continues to lead in the regional jet sector. Its CF34 has been selected for key airframes by each of the big three regional jet manufacturers and has a commanding lead on new orders.
This downturn does catch GE in the middle of a heavy research and development spend, including new versions of the GE90. However, the company is quietly confident about its ability to adapt to the leaner times. It points to work on new efficiency measures, such as remote diagnostics, which can help yield savings, especially where GE is guaranteeing operating costs through power-by-the-hour deals.
Consolidation
The perennial question of consolidation among the major engine makers continues to hover in the air. But the fact that Brussels did not smile on GE's attempts to purchase Honeywell signals that future acquisitions of major competitors are unlikely to pass regulatory muster in the aerospace sector at large.
Instead, attention has focused on new project partnerships to reduce the damage of what one manufacturer admits can be a three-sided "dogfight". According to P&W: "You won't see the big three disappearing, but you will see more and more risk-sharing ventures."
While conceding that it does not produce the efficiency gains of full consolidation, Philippakos at Moody's says: "Project-by-project co-operation means that, in most product markets, there are only two competitors, which mitigates some of the competition problems the manufacturers face." Even so, the short-term outlook looks tough. "I wouldn't like to be an engine manufacturer in this environment," says Fothergill.
Source: Airline Business
