Air Transport World

Power plant pricing polemics: as the market tightens, engine manufacturers are searching for collaboration to defray costs.

AT THE RECENT FARNBOROUGH AIR SHOW, MANUFACTURERS CLUCKED DISAPPROVINGLY AT U.S. AIRLINS' SUMMER OF HUGE LOADS, LOW FARES AND LOSSES. GE AIRCRAFT ENGINES PRESIDENT AND CEO BRIAN ROWE'S COMMENT WAS REPRESENTATIVE WHEN HE GRUMBLED: "ARE AIRLINES IN THERE TO MAKE MONEY OR CARRY PASSENGERS AROUND AT LOW YIELDS?" IF AIRLINES CONTINUE PRICING SEATS BELOW COSTS, THE CASH AND CREDIT AVAILABLE TO BUY THE PLANE AND ENGINE MAKERS' NEW GIZMOS, WILL SHRINK, TOO.

BUT THE ENGINE MANUFACTURERS HAVE LITTLE REASON TO FEEL SO SUPERIOR. PRICING POLICY IN THEIR OWN BUSINESS--WIN A SALE NO MATTER WHAT AND MAKE IT up in captive spares volume--is no model of rational business behavior. A United Technologies (UTC) manager suggests concessions are such that "the engine makers and to a lesser extent, the aircraft makers, are supporting the people who fly."

Rolls-Royce Chairman Sir Ralph Robins insists: "We do not give away engines," while simultaneously acknowledging that "spares margins are significantly different" from those of initial sales.

County NatWest's London-based aerospace analyst, Paul Ruddell, estimates that Rolls's engine sales margins are 3.5% and spares margins 28%, but hastily warns that splitting out the figures is difficult, because of the way Rolls accounts for its activities. "Rolls says their [profit] calculations are based on 25 years of supplies. That is ludicrous. In certain circumstances, they aren't making money on engine sales and potentially, they are losing money on some recent ones."

Paul Nisbet, PrttBache's aerospace analyst, is just as caustic. "It's the nature of the business that you make a sale and soak the customers afterward [on the captive spares market]. It's a profitable business but a crummy business, when you give away your best products and then make money from the grimy bits. I don't know how you turn it around."

Executives are reluctant to discuss pricing for attribution. They think the U.S. government will suspect them of price signaling if they suggest changes in structure. Given the concessions available even in boom years, that is ridiculous in the extreme.

Rowe speaks his mind. "We must reassess our strategy. Pricing has to change. Now, if we spend $1 billion over four years [to develop an engine], we'll probably break even in 17 years" on a prod- uct whose life may be 20 years. …

Log in to your account to read this article – and millions more.