Pratt/Rolls parry GE with engine shake-up

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Engine makers Rolls-Royce and Pratt & Whitney have pulled back from a damaging rift to prevent rival General Electric from running away with the heart of the $40 billion jet industry.

The two companies have been pushing different ideas about how engines should be designed for the most popular jetliners and looked set to break up one of the most successful trans-Atlantic business partnerships, which makes engines for the Airbus A320.

But Pratt & Whitney and Rolls-Royce have struck a pragmatic deal that hands the U.S. company the reins at International Aero Engines while keeping Rolls a long-term place in the busiest part of the market, pushing up its shares to an all-time high on Thursday.

By doing so, they have also spread the huge risk of aircraft engine development even as they compete elsewhere in an industry riddled with overlapping and shifting alliances.

IAE has for years competed with another trans-Atlantic partnership, CFM, owned by GE and France’s Safran (SAF.PA), to sell engines for the A320. CFM is sole supplier for Boeing’s 737. Sales of these 150-seat aircraft are expected to reach $2 trillion including their engines over 20 years.

Under the deal announced on Wednesday, Pratt will pay $1.5 billion plus royalties to buy out Rolls, which will remain an industrial partner of IAE, assembling half of its engines.

It means Pratt & Whitney will be able to make crucial use of the existing customer list for IAE’s V2500 engines to support sales of its latest fuel-efficient engine, the geared turbofan, which is an option for a revamped Airbus A320neo.

Rolls had refused to allow the IAE consortium to offer the new Pratt engine, saying it did not back the business case for so-called re-engining. But the historic industrial groups have also been at odds over key concepts of design.
“It could be this was the only way to find an accommodation, leaving Pratt & Whitney free to proceed and think about future collaboration,” said aerospace analyst Richard Aboulafia of Virginia-based Teal Group.

The two companies will meanwhile forge a new venture aimed at co-operating on the next generation of engines, which are expected to be introduced in the second half of next decade.

The venture will pay attention to two types of technology that threatened to blow apart a nearly three-decade relationship between Pratt and Rolls: geared turbofans launched by Pratt & Whitney and the open rotor, an inside-out design that Rolls says could safely deliver huge fuel savings.

The move is seen as an important concession by Rolls since it had not warmed publicly to the geared turbofan doctrine, which calls for a gearbox to make parts of the engine move at different speeds and help cut fuel burn by 12 percent to 15 percent.

Indeed many experts believe one of the company’s reasons for shutting Pratt’s new engine out of IAE was to avoid validating technology that could be used against it. Rolls, Pratt and GE form a complex triangle of alliances and rivalries from fighters to jetliners and city-hoppers to the superjumbo.

However, aerospace experts say recent developments in the industry have left neither engine maker a great deal of choice.

BOEING CATALYST

Airbus prodded IAE into existence in 1983 to boost competition, but the catalyst for the latest restructuring deal was not Airbus, which uses its engines, but arch-rival Boeing.

Its decision in July to follow Airbus by putting new engines on its medium-haul 737 took the industry by surprise.

Boeing had previously been talking up a radically new plane that would be delivered later in the decade and be open to all engine makers. In those circumstances, it made sense for even long-standing engine partners to keep their options open.

Instead the decision to revamp the 737 handed a quick win to CFM, which powers the current model and flipped this into a deal to be sole engine supplier for the revamped 737 MAX.

As a result, the next opportunity to get on the most-sold Boeing model might not come for another 15 years. And given the opportunity for cross-marketing, that may not be good for Pratt’s prospects on the Airbus platform either.

With production slots running out, airlines are increasingly likely to split big orders between Airbus and Boeing, and CFM would be in a powerful position to cut deals spanning both platforms and damage Pratt’s share of the A320.

Gaining control of IAE and its existing parts contracts gives Pratt the flexibility to cue in more marketing muscle.

Without it, Pratt faced the risk of getting engineering awards for its design but seeing the financial rewards go to its competitor.

Rolls-Royce, meanwhile, may have calculated that it can afford to work with Pratt & Whitney on future engines, leaving its erstwhile partner in command of IAE and the short-term market, because the battle over a successor is further off.

Since Boeing and Airbus have bet on a re-engined aircraft in mid-decade, the timetable for a replacement is expected to slip back to at least 10 years after that. And while it was prepared to miss out on a short-term trend, 15 years may have seemed an uncomfortably long time to sit out the competition.
“Rolls can’t afford to be out of the narrowbody market. These aircraft fly more and burn spare parts more aggressively, and you have to be there,” an industry executive said.

Trans-Atlantic engine alliances have been remarkably stable and operated below the political radar even as bitter public trade confrontations raged between Airbus and Boeing.

But it is often publicity-shy engine makers that decide what kinds of planes are built, rather than the other way round.



The peace deal accordingly came as a relief to Airbus, which presided over IAE’s birth and feared a disorderly break-up.
“This is good news for the A320 and the neo. It gives IAE customers the assurance of seamless service and a single point of contact for potential fleet transitions from V2500 fleets to geared turbofan-powered A320neo fleets,” the company said.