Air Transport World

No more 'three on a wing.' (changes in the jet-engine market)(includes related articles on industry cooperation)

The decision by GE Aircraft Engines and Pratt & Whitney to join forces on a new power plant for the Boeing 747-500X/600X is in its way no less significant a turning point in the evolution of the jet-engine business than was the development of the high-bypass turbofan in engine technology. Industry. analysts view the alliance as a positive, if long-overdue development. "It's good news," states Roman Szuper of Standard & Poor's Corp.

"No question about it, it's the right thing to do," declares Tassos Philippakos, VP/senior aerospace analyst with Moody's Investors Service, adding: "For any engines in the future, [this kind of arrangement] makes a lot of sense."

Adds Phil Baggaley, also of S&P: "They've got to get to that type of cooperation or they are going to kill themselves."

Officials at both engine makers also suggest that this could become a blueprint for future programs. Robert A. Wolfe, president-Large Commercial Engines, Pratt & Whitney, tells ATW: "I think in every case where there is no advantage in technology by any one company and there is a need to develop a new engine, collaborations probably will be more of the wave."

GEAE Joint-Venture Project Manger Bruce Hughes agrees: "Certainly, for new centerline engines, you'd have to give very serious consideration to this kind of joint venture."

Nevertheless, the teaming of two archrivals is bittersweet, coming as it does primarily in reaction to the suicidal price competition raging among GEAE, Rolls-Royce and Pratt on their largest offerings powering the Boeing 777. Additionally, it reflects their long-delayed recognition of and response to the fact that fundamental forces have reshaped the jet-engine market, altering the historic formulas that determined pricing and profitability.

Engine makers are scrambling to find the solutions to the challenges posed by these new paradigms, which ironically, are in large part owing to their success in developing near-perfect engines. These solutions will take many forms: Alliances between competitors that reduce both development cost and market risk; new ways of pricing; increased participation in the MRO aftermarket and ultimately, a reduction in the number of engine types per platform as OEMs retreat from the 1980s strategy of developing an engine for every potential application.

"The fundamental dilemma is that where the engine makers are competing on a platform, which is most cases today, they increasingly are finding it very difficult to make money selling engines. And all the other trends in the business are making it harder for them to make money the way they used to make it, which is with the parts business," explains Roy Benveniste, vice president of Utah-based Canaan Group consultancy. Engine makers, he says, are all asking: "How do we change the rules so that we can make money in this business?"

Bill Vareschi, former CFO of GEAE and new president of GE Engine Services, agrees. "If you look at the aircraft-engine business, the development cost and the capital intensity has not decreased at all .... Competition is as intense as it could be. It really makes it difficult for the OEMs to recover an adequate return on their investment."

Although the challenges facing them are the result of secular trends, the roots of the current crisis lie in the brutal no-holds-barred battle to place the PW4084, Trent 800 and GE90 on the 777 platform. …

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