We want engine choice, say airlines at IATA

Willie Walsh, CEO of British Airways, says sole-sourcing the engine on the 747-8 cost Boeing an order. BA bought the Airbus A380 instead. Photo source: SI.WSJ.net via Google images.

June 9, 2015, c. Leeham Co. Airlines want engine choices, not sole-source on airplanes, airlines said at the International Air Transport Assn. (IATA) Annual General Meeting in Miami Beach (FL).

Sole-sourcing cost Boeing a major order for the slow-selling 747-8, said Willie Walsh, CEO of British Airways. Relations at the time between British and GE Aviation, the sole engine provider on the 747-8, were so poor BA decided instead to order the Airbus A380, where a choice between the Engine Alliance GP7200 and the Rolls-Royce Trent 900 was possible GE is a JV partner in Engine Alliance with Pratt & Whitney. BA bought Rolls.

Walsh, Tim Clark, president of Emirates Airline, and Aengus Kelly, CEO of mega-lessor AerCap, complained that the absence of choice means higher maintenance costs as the engine OEMs jacked up prices on sole-source maintenance agreements usually required as part of an aircraft order.

Walsh said IATA’s board of governors agreed to hire outside council to examine the legalities of such agreements.

Increasingly the engine OEMs are relying more and more on MRO service agreements for their profits. A decade ago, a small percentage of aircraft orders included engine MRO agreements. Today, the percentage is around 70% and climbing.

Lessors and airlines like engine competition to drive pricing down on the original purchase and MRO agreements. Some carriers, notably Lufthansa, Air France-KLM and Delta Air Lines, demand the right to maintain engines and offer third-party service agreements before buying aircraft with sole-source engines. Air France famously, within the industry, held up an order for the Airbus A350 for nearly 18 months until sole-source engine provider Rolls-Royce agreed to allow the AF-KLM Group do its own work and offer third party service.

David Joyce, CEO of GE Aviation, said sole-sourcing increasingly is simply a matter of economics from the OEM’s perspective. It’s simply too costly for competing OEMs to develop engines for the same airplanes any more, he said.

Clark said Emirates has driven hard deals and has seen its MRO costs decline by 20%. He expects power-by-the-hour (PBH) costs to continue to decline. Joyce said engine reliability continues to extend the on-wing time (the CFM56, for example, remains on wing for about 25,000 cycles today compared with 5,000 cycles 30 years ago), which lowers cost.

But Kelly, of AerCap, said the debate over the use of PMA parts (parts manufactured by third parties, not the OEMs) and demands by OEMs that their parts be used if warranties are to be honored drives up costs.


22 Comments on “We want engine choice, say airlines at IATA

  1. I don’t think anyone believes Walsh when he intimates he would have bought the 747-8i is it offered a competing product…ie… a Rolls engine option. Or that he would consider a GE engine (the GE90 over the RR on the original 777 order was a surprise; since then, he’s been all RR except when he had no choice (777-300ER).

    But really? You would have bought the 747-8i if RR offered an engine? Don’t think so…..

    • So we are to believe you and not the executive of a major airline group? I dont think so.
      Why would any company put new business to a supplier with whom they have a very poor relationship. Maybe it works both ways, but there is the old story about who is ‘right’

    • Neutron, RR did offer to build a derivative of the Tent 1000 for the B747-8, but GE demanded that they be the sole engine provider.

      GE and Boeing are thick as theives and the result of this is that RR and Airbus seem to becoming much closer. Starting with the Trent XWB for the A350. Now the Trent 7000 for the A330NEO.. And I bet when time comes, the A380NEO will be powered solely by RR.

      With this, and Boeing / GE love fest over the B777X, no wonder Walsh & Co are getting annoyed.

      • GE refused to offer the engine Airbus wanted for the A350, leaving RR with a clear run. 780 orders for the A350 isn’t bad for an aircraft that GE didn’t believe in. They definitely missed out. The 787/A350 sales combined puts RR at 1150ish, GE at 549. That’s twice as much business for RR as for GE. Things are different with the new 777 of course, but the story of the 777 and A380 is not finished and GE are seemingly going to be walking away from the latter. If there ever is an A380neo that could be another few hundred orders missed. The 748 hasn’t worked out well for them either.

        So what is it about RR that enables them to offer engines for everything and what is it about GE that makes them feel unable to do the same? Is RR’s three spool architecture much more easily tweaked for different applications?

        • I’m not sure Matthew. Sure seems like RR’s three spool architecture is more adaptable, or maybe they just more hungry than GE? If you look up the Trent development, it does seem they have offered and worked on a larger number of Trent variants than they have ended up actually building.

          I believe overall, RR enjoy a 40% market share of the wide body engine market. However I’m not sure if that is a recent statistic, and if it takes into account the 780 A350 orders you mentioned.

          I agree that is a whopper of a market for GE to just ignore. Me thinks a few heads got banged together at GE for passing up on the A350 (or should have been).

          GE generally seems to do better than RR when they do go head to head. Take the B787 as an example. However, Emirates recent swap to RR for the last 50 of its mega order of the A380’s, might mean that’s about to start changing.

          • With regard to RR displacing GE on Emirates A380s, there is indeed a risk for GE losing even more business. Emirates might just decide that they quite like flying RR, and might start wondering why they didn’t do it earlier. Given that Emirates have swapped, once can infer that they currently regret having chosen GE in the first place.

            Having the biggest customer there is in the world regretting having chosen GE in the past is hardly a good place to be when it comes to selling them more engines. If RR do a good job for Emirates that must surely count in their favour. Especially if future acquisitions are to be based as much on in-service improvements as initial factory fresh performance.

            I wonder if Emirates could do a deal with RR to re-engine the A380s they already have? If Airbus don’t do the neo, putting RR across the existing fleet gives them a 4% improvement straight away. I wonder if that’d be worth it?

  2. It seems, at least on large aircraft where the total fleet size of any given aircraft seems to be limited to under 1500 (and therefore total # of engines in fleet 3k given the ascendance of Twins) it is very hard to recoup R&D costs on half the market and even harder when due to competition you have to drop your price.

    the manufacturers don’t really give a flying fig if the Airlines want direct competition, in fact, they want to avoid it at all costs. Correctly the Engine OEMs have determined that it is cheaper/lower risk to pay the Airframers a vig in order to hold a monopoly position on an airframe than to risk competing on cost/performance for a smaller share of the pie.

    the idea of engine competition has already been reduced to where only the A320, 787, A330 and A380 even offer competing engines, and that is going the way of the Dodo with the A330NEO and the Engine Alliance throwing in the towel on the GP7200.

    again, the engine makers see no value whatsoever in competing on a given airframe when they can simply “risk share” with the Airframer and have an exclusive with lower risk, higher margins and the entire market for cost recovery.

    • Bottom line is pretty much as above.

      Clark would ruin RR or GE or PW if he could getting a good deal.

      He would do the same to Boeing and Airbus.

      At one time you picked the best quality and paid a price for that, now people like Clark et all want the quality and cheap pricing (which eventually gets you junk).

      I grew up knowing you don’t get something for nothing.

      engine and aircraft mfgs have to make a profit or they go out of business and its a very high tech and costly enterprises (es) they deal in, its not bargaining for apples.

      And in reference to the CEO of IAG, not I don not believe him for a minute.

      they all spin the top, he just wanted better prices from Airbus for the A380, had nothing to do with engines.

  3. Airline: “I want engine choice to use as stick for lower costs leading to more $$$”.

    Engine manuf: “I want no choice so I can price MRO up to get more $$$”

    Airframer: “I want no choice so I only have to integrate one engine, leading to more $$$”.

    Airlines should remember that for ever $ paid by the airlines to airframer/engine manuf. that is invested in R&D will lead to end benefits for them down the road. [Obviously a $ paid out in dividends or similar is wasted as far as the airlines care.]

  4. Good that we finally hear the truth about BA’s A380 vs. 747-8 order after all these years. At a-net few very prominent American members have all this time fallaciously claimed that the reason 747 lost was because Airbus priced the A380 so low.

    • I think BAs 747-8 would be complementary to the A380, just like Lufthansa, Korean Air

      • And all based on an engine choice for a good engine (which on the 787 I believe is outperformed RR?)

        Korean probably got an insanely good deal, they are a pretty heavy Boeing user.

        Maybe with the 787 and engine commonality it works but most ops are trying to simplify fleets not make them more complicated.

        Has to be an awfully good case to run both or not as competitive a market.

        • Once that mattered, as the TBO was short by todays standards.
          But now you can get a fully maintained deal from manufacturer and having full fleet commonality is hardly a consideration, while it makes sense to stick with one engine on a type but on larger orders they can switch

  5. A lack of competition is bad for everyone.

    It is unwise for an airframer to accept exclusivity demands from an engine manufacturer. Ultimately they have no way of knowing whether or not the engine really is the best. All they have to go on is the engine manufacturer’s PR. But all that PR counts for nothing; the actual performance (and of course there’s a lot of financial inducements that can, at a cost, be applied to improve ‘performance’) is what the airlines will go by, and if the PR is simply not true then the aircraft will not sell.

    In the long run it’s bad for the engine manufacturers too. Exclusivity means they can afford to get lazy, and they will inevitably will. That’s bad for them if and when the exclusivity deal is broken / outlawed / terminated; they might find they transition from an exclusive market to no market at all.

    A manufacturer that will survive is the one that chases every possible opportunity. A manufacturer that declines to do so will lose out eventually, though probably only after the chairman-at-fault has retired and cashed in their share options.

    There’s also the paying passenger to consider. A keen young regulatory authority might get it into their head that passengers are being ripped off by engine exclusivity deals. In my opinion they would probably be right. They might just survive the intense lobbying that no doubt takes place above their heads. They could make a name for themselves by bringing legal action. Win or lose, that’s going to be bad for a share price.

    • Matthew , passengers can choose between airlines with a range of aircraft and engines. The 737 and the CFM being the biggest exclusive deal of all time and there has never been any possibility of regulatory action. Maybe if Boeing was making planes AND engines this might come into play, a bit like Microsoft using its browser to push others out of the market. As well, market dynamics with top level players is treated different to the retail level.

      • DukeofURL, yes passengers can choose between airlines, but only to a limited extent. If half the market (and hence half the capacity) is wilfully flying an unnecessarily expensive aircraft, that drives the ticket price up for everyone, not just those who have that aircraft. Somewhere along the line the cheaper aircraft has made someone a handsome profit because they can.

        Just because an exclusivity deal happens to be the biggest ever, that does not necessarily mean it is legitimate.

        There are also shareholders to consider, and they have far more teeth than a regulator. Long term shareholder value is not best served by an air framer deliberately choosing to give an aero engine manufacturer a clear run for the following reason.

        The engine company is not going to conclude a deal to their disadvantage. It is going to be in favour of their profit. So any improvement in that margin they can make, they keep. Meanwhile the airframer (and, more importantly, its shareholders) have no real stick with which to beat down the price, so they lose out.

        Sure, there maybe some words in the deal talking about profit sharing, etc. but those can never be as mind-sharpening as “We will take our business elsewhere”.

        • You can also destroy your business chasing every deal

          engine making is more complicated than a simple competition as its a hugely costly investment in each family.

          It only works if someone is willing to pay MORE for a better product, not less.

          At those costs you could destroy yourself in short order.

          They have to make strategic decisions when people don’t really want to pay for the actual costs, so they recover on service and parts.

          Its not the engine mfgs. that drive this, its the bargain hunters

          • Yes, the bargain hunters, they are usually called passengers.

  6. It is extremely logical for engine manufacturers to look to diversifying their profit streams from not only benefiting from an engine sale but to a longer term MRO income model. No one is stopping airlines from forming a block to drive down MRO costs by discussing costs as a bargaining council.

    Emirates can do so on it’s own. The others can form a group.

  7. What happens when an engine mfg looks at all that and realizes it can’t make money?

    That R&D cost have to be paid for and engine mfgs like all have to return a profit.

    Its not like making 100s of thousands of cars where you can amortize across the producing of 5 years and recover those costs.

    You may make 10000 of an engine for a twin aisle if you are lucky.

    Its all extremely high tech, low rate of production, high cost, its not something you can drive costs out of.

    Its not cars or shoes.

    • Car and shoe manufacturers would love a product life that stretches out to 20 years which they can make money from.
      Yes its an insane business to be in, but they all seem to be doing Ok. GE has bought out the former Fiat Avio so they arent drawing back. The UKs GKN has extended from its existing structures business to buy Volvo Aero engines.
      The real worry is if they made much better money Wall St would jump in and wreck it all with leverage

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