Maintenance and power-by-the-hour parts and support contracts are increasingly becoming the deciding factor in deciding which engines and which airplanes will be ordered—it’s no longer a matter of engine price or even operating costs, customers of Airbus and Boeing tell us.
Ten years ago, 30% of engine selection had power-by-the-hour (PBH) contracts attached to them. Today, 70% are connected, says one lessor that has Airbus and Boeing aircraft in its portfolio, and which has ordered new aircraft from each company.
“We’ve seen a huge move in maintenance contracts,” this lessor says.
Even though Airbus and Boeing have increasingly moved toward sole-source suppliers for their wide body offerings and Boeing’s 737 has for decades been the exclusive domain of CFM International, which is 50% owned by GE, even the sole-source engine suppliers have increased their leverage over customer choices for airframes.
Single Aisle Engine Competition
The Airbus A320 family, both with the Current Engine Option (ceo) and the New Engine Option (neo), is the only single-aisle airplane (other than the Irkut MC-21) offered with an engine choice.
The C919 and MC-21 are largely home-market airplanes in competition with the globally-accepted A320 and 737 families. Outside the home markets, the C919 and MC-21 are non-factors today. The competition between the A320 and the 737 families is fierce. So is the competition on the engine side.
Airbus is often frustrated with its relationship with CFM vis-à-vis Boeing. Officials at Airbus will often vent their frustration privately, and sometimes even publicly. They believe CFM tilts toward Boeing: if the 737 wins an order, CFM is 100% assured of the engine sale. If Airbus wins, CFM only has a 50-50 chance of winning the order, the Airbus officials complain.
Boeing has a different view. Some officials complain that without an engine competition on the 737, CFM has little incentive to step up and grant concessions along side Boeing to win a tight competition.
We’ve never heard CFM comment one way or the other, privately or publicly, on the two views of their airframe partners.
The A320neo family is PW’s prime platform back as a major engine supplier. Although it’s on the Bombardier, Embraer, Mitsubishi and Irkut airplanes, Airbus’s neo is where the principal action is. While the competition with CFM is not nearly as openly bitter as it is between Airbus and Boeing, behind the public face is a contest that is every bit as take-no-prisoners as it is with the Big Two airframe OEMs.
PW and CFM have long not only promoted the attributes of their technologies for the GTF and the LEAP, each has also engaged in denigrating the other’s approach—something that surprises neither the customers nor industry observers. It’s largely the nature of the game.
PW and CFM each claim their engine is a percentage point or two better than the other in terms of fuel burn. Airbus, the only OEM to use both engines (on the A320neo family) previously (and publicly) said the GTF, with a slightly larger fan, was about 1.5% better on fuel burn. Taking this statement public reflects the frustration some Airbus officials feel about CFM.
Evening the Performance and Costs
Initially, customers we talked with as long as three years ago (2011), told us that they liked the GTF design and economy better than the LEAP but they were more comfortable with the better customer service and reputation for reliability of CFM, based on its superb history of the CFM56 compared with what they considered a spotty history of PW support for its engines.
But as the designs of the LEAP and GTF matured in advance of entry-into-service (or, in the case of the LEAP, initial entry into testing), airlines that closely evaluated both engines now tell us the competing engines are comparable for fuel, maintenance and materials costs. Deals, airlines tell us, are now largely coming down to commercial terms.
PW’s design is such that the company is being “more conservative” on some maintenance intervals for parts, initially projecting out at higher costs than on similar parts on the LEAP, one airline told us. The expectation is that as the GTF gains in-service experience, intervals will lengthen but in projecting costs, the airline has to go with the more conservative figure rather than an expectation.
“The two engines are more-or-less equal,” one fleet planner told us last week. American Airlines told us much the same thing in June, before placing a large order for its A319/A321neos with CFM. AA’s chief financial officer in June told us the decision would come down to commercial terms.
Until the American order, CFM and PW had about a 50-50 market share powering the A320neo family. CFM now leads with a 54% share. A large number of customers have yet to make an engine choice.
Overall, CFM now holds a comfortable lead in industry market share because of its exclusive position on the 737 MAX and the COMAC C919 and strong customer base with the A320ceo family.
When a customer talks about “commercial terms,” it’s more than price—much more. It’s the engine maintenance, repair, overhaul and parts support now offering in PBH contracts. If this stopped with the A320 families, CFM and PW would probably be on about equal footing. But CFM has a huge advantage over PW when “commercial terms” are offered.
CFM has a majority market share of the A320ceo family, though PW/IAE dominate the A321ceo engine market share. When it comes to competition to provide the power for the A320neo family, CFM can offer its larger installed base PBH deals retroactive to the A320ceo, or offer to restructure existing deals.
PW is fighting back. Having bought out Rolls-Royce’s partnership share of the IAE consortium, PW is now able to offer combination PBH packages to potential A320neo GTF buyers. It’s also offering a PBH package for new V2500 purchasers as well as the installed base.
But CFM still retains an advantage PW can’t match. CFM, as part of the GE family, isn’t shy about relying on Big Brother to step up and offer PBH deals on GE Engines used by the Boeing 777-300ER, the 777-200LR, the 747-400/8, the installed 767 operators and the 787 customers. Existing deals can be restructured and new PBH packages offered. GE Engines are also on a small share of the Airbus A330ceo.
PW is a miniscule presence in the wide-body market today. It has a small share of the 767s and 777s. That’s it.
If this CFM advantage isn’t enough, sibling GECAS, the mega-lessor with around 2,000 airplanes owned and managed, can be called upon to help win a deal. Several years ago when Frontier Airlines, then owned by Republic Airways Holdings, was in dire financial straits, the order placed for A319neos and A320neos came with the LEAP engines. Republic acknowledged the engine selection came with restructuring some GECAS A320ceo leases and a PBH contract.
PW doesn’t have a leasing sibling to be in a position to offer a similar “global” deal.
Wide-Body, Sole Source Leverage
Airbus and Boeing have been gravitating for some time toward sole-source supply to power their wide bodies. Although the 767 and 777 originally were offered with engines from GE, PW and RR, today GE and PW are the only suppliers for the 767—and once the commercial 767 is finally phased out, only PW will be the supplier on the KC-46A tanker.
RR and GE dominated early 777 orders, with PW pulling up the rear. But Boeing eventually entered into an exclusive supplier deal with GE on the 777-300ER and the 777-200LR. GE won a sole-source position for the 777X in competition with RR. PW withdrew from this competition well before Boeing made a selection. The 747-8 is a sole-source GE supplier. The 787 has GE and RR engines; GE dominates the market share.
Over at Airbus, the A330 also originally was a tri-supplier airplane. Today it’s largely RR with GE a distant second. The A350 XWB is sole-source RR.
In the recent A330neo bake-off, GE initially was a serious player in competition with RR. The 747-8 program proved a huge disappointment and GE wanted to put the GEnx on the A330neo to help recover the R&D costs, those familiar with the behind-the-scenes thought process tell us.
But GE withdrew, believing the potential market for the A330neo didn’t support two engine providers, so RR won by default, according to those familiar with the situation.
As sole-sourcing becomes more prevalent, conventional wisdom might suggest the choice is easier for airlines: just negotiate an airplane/engine deal with Airbus or Boeing and be done with it. Not so.
Many airlines want not only the best PBH deal it can get, regardless of sole-source engine supply, some want the ability to service the engines in their own shops or even to be a third-party MRO for other customers.
For engine OEMs, allowing third-party MRO is an anathema. And since much of the engine OEM profits come from the after-market support, allowing the airlines to do their own engine MRO is also a major stumbling block.
RR held up an A350 deal between Airbus and Air France for around two years over these very points. Lufthansa not only demands its own MRO ability, it wants Lufthansa Technik to have the ability to be a third-party MRO.
The increasing influence and leverage growing for the engine MROs presents airframe OEMs with other dilemmas.
Airbus and Boeing have been pretty open about saying their neo and MAX products are good to 2030. Our Market Intelligence paints a different picture at Boeing, however, one that we have written about on several occasions. We are told repeatedly Boeing wants to proceed with a new, clean sheet 737/757 replacement with a program launch around 2018-2019—shortly after the 737 MAX enters service—for an entry-into-service around 2025-2027. Airbus would surely be forced to follow.
But CFM will be early in a position to begin recovery of its R&D costs for the LEAP-1B on the MAX, and, should Airbus follow, the LEAP-1A for the neo (the LEAP neo is scheduled to enter service in 2016). PW will be is better shape, with its GTF entering service in 2015 on the CSeries (if there isn’t another delay into 2016) and the A320neo (in October 2015). Also, with the GTF spread across the MRJ and E2, PW’s recovery of R&D for the GTF variants will be on a faster track than CFM.
PW, which says its GTF has growth capability, no doubt will be fine with competing for a clean-sheet replacement for the A320/737 sector. Industry officials tell us the LEAP doesn’t have the same growth capability and CFM would have to come up with a new engine—at a time when LEAP costs are yet to be recovered.
Adding another choice
While sole-sourcing is becoming more common, this doesn’t mean the airframe OEMs don’t dance with competition. Boeing seriously flirted with GE, RR and PW for the 777X, and PW and CFM for the 737 MAX. As noted, GE and RR faced off for the A330neo.
Leeham News learned that Bombardier has talked with CFM about the possibility of powering the next, larger version of the CSeries, commonly called the CS500, but any prospect of proceeding with this project is probably years away. Such discussions are considered routine, we are told, and not an indication of dissatisfaction with the GTF.
Boeing and Airbus will certainly talk not only with CFM and PW about the next new single-aisle airplane, RR is developing an engine that will compete in this sector. When Airbus gets around to designing a replacement for the A330, PW will have a large-engine GTF ready—but so will RR, which is working on a new, big engine.