Here are some additional thoughts about the Rolls-Royce/Pratt & Whitney deal announced yesterday.
PW is a real winner in this set of transactions.
- Buying RR out of the International Aero Engines partnership gives PW far more latitude in making deals for the V2500 engines and the ability to connect V2500 transactions to transitions to Geared TurboFan orders. RR had no incentives to make connected deals, since there was nothing in it for them if a customer ordered the GTF instead of the V2500. CFM had the competitive advantage in offering the CFM56 for legacy airplanes and the LEAP for the A320neo. With PW now controlling the V2500 partnership, PW has come closer to leveling the playing field.
- PW has greater flexibility to wheel and deal on competition involving only the V2500. It was widely reported in aviation circles but never confirmed that RR’s recalcitrance to go along in one A320 legacy engine competition caused one customer to switch from V2500 to CFM56 in a follow-on order situation.
- Sam Pearlstein of Wells Fargo observes, “We believe this should be a high return investment because UTX is making use of foreign cash that would be subject to repatriation, it is gaining a larger share of a long-term spare parts stream and it clears up customer confusion for the selection of engines for A320 & A320NEO airplanes.”
- Pearlstein also observes, “By consolidating the IAE venture, we believe it makes for more simplified discussions with airline customers for both existing A320 and A320NEO orders essentially prior to this agreement, Rolls-Royce’s interests would have been to sell more V2500 while Pratt & Whitney preferred selling more PW1000G’s. This now makes for a more unified approach to selling engines to existing customers, new ones and conversions, in our view.” This is reflected in other quick analyst takes.
AirInsight has this additional analysis.
AeroTurboPower, which is based in Europe, has this very good take on the deals.