A recent report by Bernstein Research takes an in-depth look at Safran, the French company that is the parent of Snecma, a joint venture partner with GE to form CFM International.
CFM, of course, is the sole-source engine provider on the Boeing 737 and has about half the market share on the Airbus A320 family.
In the January 17 note, Bernstein looks at the after-market engine business of Safran, which is dominated by the CFM56. There are nearly 17,000 CFM 56 engines in service today, mostly what Bernstein calls the second generation.
Bernstein’s report illustrates what we have occasionally written: the importance of after-market parts sales and MRO (maintenance, repair and overhaul) is to the engine market.
We’ve noted previously that the after-market is more important than the sale price of the engine where there is competition for a power plant.
As we’ve previously noted, it is not unknown for engine makers to deeply discount engine prices even more than the airframers discount their airplanes. In the lawsuit between Pratt & Whitney and Rolls-Royce over patent claims for the engines powering the Airbus A380, court documents revealed discounts as steep at 80% or more.
It is also not unknown for engine makers to actually give the engines to the customer free in conjunction with an after-market and MRO contract. These services are where the profits truly are.
The Bernstein report takes a deep dive into crunching the numbers about the CFM contribution to Safran revenues and profits, calling the after-market “the most significant driver of Safran” growth for the next four years. Aerospace propulsion accounted for 52% of the revenue in 2010 and 68% of the profit. Commercial aircraft engines were 23% of the revenues.
The commercial engine after-market revenue are forecast to grow at a compounded annual rate of 12% over the next four years, Bernstein writes. The CFM is principally responsible for this. (Safran gains some revenue from GE’s large engines, but not much, Bernstein writes.)
After-market revenue growth will represent nearly 40% of the 4bn euro increase during the next four years, Bernstein says.
Even though the CFM 56 second generation engine now has a 10-year time-on-wing, Bernstein says this won’t depress after-market revenue growth because first generation engines have shorter lifetimes and the sheer volume of airplanes and CFM engines entering the market means a continuous growth and revenue stream.