June 1, 2017, © Leeham Co.: Pratt & Whitney, like the airlines, lessors, suppliers and competitors, awaits a decision by Boeing whether it will launch the New Midrange Aircraft for the Middle of the Market sector.
PW’s president, Bob Leduc, said the company is going through its business case studies
even as it provides information to Boeing.
In an interview yesterday with Leduc and PW Commercial Engines president Chris Calio at PW’s pre-Paris Air Show media days near its West Palm Beach (FL) engine production facility, Leduc says the market size and the assumption Boeing will choose two engine makers to power the NMA are among factors that will drive the business case.
Here is a transcript of the interview on the NMA and other topics. The lead into the NMA evolved from a question about the aftermarket services PW—and Boeing—have as strategic profit-center goals.
LNC: Last year, PW said that about 80% of the GTF contracts are on Power by the Hour (PBH) maintenance contracts. The aftermarket is a real objective for P&W to increase the revenue here. How’s the aftermarket program going for the mature engines at PW?
Chris Calio: As I was alluding to in the presentation today, those are critical for us. Those
aftermarket programs on the V2500 and PW2000/4000 are what is helping drive our profitability as we are delivering GTF engines.
We lose money on each GTF engine we deliver and we won’t see any aftermarket sales in EBIT (Earnings Before Interest and Taxes) before 5-6 years, when heavy shop visits come in.
Bob mentioned earlier on the V2500 that’s probably the driver on the mature engine aftermarket. We’ll see this year about 1,000 shop visits. On the V2500. That’s the biggest driver of our commercial aftermarket.
Bob Leduc: Chris said in his presentation the average age of the V2500 is about eight years. History would tell us between eight years and roughly 13 years is the sweet spot for aftermarket of any engine that we’ve ever done. The “V” will continue to be very strong for the next four to five years, which will bridge us to when the GTF starts to generate serious aftermarket revenue.
LNC: Boeing has made it a corporate, strategic goal to dramatically increase its aftermarket services. Are they going to be a competitor to Pratt & Whitney?
CC: Thus far, our understanding is that they are more on the systems side. It’s more of an issue for our brethren at UTC Aerospace Systems and how they are going to work on that. The engines thus far I don’t think has been a huge push for them.
But, look, at the end of the day our aftermarket is critical to us, so we remain vigilant about making sure we have as much aftermarket capture as we can.
BL: You’re going to have to ask Stan Deal that question. [Deal is the president of Boeing Global Services.] But Boeing is FAR 25 and we’re FAR 33. They know nothing about FAR 33.[“FAR” is Federal Air Regulations. FAR 25 is for air transports. FAR 33 is for engines.]
Nor do they have the facilities to basically overhaul, they don’t have the infrastructure, they don’t have any of that. I think it’s harder. I won’t say it’s impossible, but I think Chris’ point is that the way our business model works, it’s like razor blades. They get engines at a very good price in exchange for us being able to get the aftermarket stream.
If they take our aftermarket stream, and start to compete for it, they’re probably not going to like the engine price, because it’s going to go up. We have shareholders we have to satisfy.
LNC: The only engine you have on a Boeing aircraft right now is the [KC-46A] tanker.
BL: I don’t think they’ll come after the tanker.
LNC: The only near-term opportunity that Pratt has to put an engine on Boeing is the Middle of the Market airplane. Every market intelligence that I get is that they’re going to launch that program next year. I understand that all the engine manufacturers have receive RFIs (Request for Information). Would Boeing select engines next year as well, or would that come later? And what do you rate your chances?
CC: We would be very excited about engaging on a new Boeing platform on the commercial side. To get back into the Boeing game would be a huge opportunity for us. We have been engaging with them very closely, doing trade studies and technical studies about what we can do on the geared turbofan and what benefits we think that can bring the airplane that they are now sketching out.
We think the GTF provides significant technological benefits and, candidly, advantages. The discussions have been very good so far. We want to continue that dialog.
BL: Until we get an RFP (Request for Proposal), which we have not got yet, we’ve only gotten RFIs, nobody really knows what the timing is. They haven’t been very specific about the timing for the engine down-select programs.
They notionally say mid-2020s (for entry-into-service) I think until we get that RFP, we’re really not going to know the schedule for the engine down-select. No matter what that schedule is, we’re pretty sure we can meet it. I think the debate for us is going to be, do we have a business case that satisfies our shareholders? If it does, we’ll be there.
LNC: Do you think the business case can support two manufacturers on the airplane? What is your forecast for that market?
BL: their forecast is 4,000 airplanes. Ours is not quite that large. Not far away, but not quite that large.
There’s a big debate. [Airbus] A321 single aisle or A322, whatever Airbus is going to do. And then you’ve got 787-9. You kind of get this hole, if you will. Boeing is trying to figure out, how do you fill that hole? Is it a single aisle, is it a twin-aisle? What is it? Give me a range of thrust.
Airbus, on the other hand, hey have the luxury of sitting back and reacting to whatever Boeing does. They have time. We like being on the 321. The 321 wins 80-90% of that market against the 737. We get about 50-60% share of the 321. We like that market a lot.
It’s going to be a debate. We’ve had some airlines, who will remain unnamed, approach us and said they really want the airplane and they would love to see a GTF on it. We’ve been approached with several airlines with that.
At the end of the day, we need get our heads around it. It probably will be two engines [choices]. That’s our working assumption. We’ll look at the market and what we think the market will bear in terms of price, and decide, do I have a business case that works?
LNC: You said that the GTF is the future technology. We all know from public information that CFM and Rolls-Royce are working on geared turbo fans. Why would yours be better than theirs?
BL: I’ll answer that in two ways. We took 20 years and a billion dollars to develop the gear system. I think it’s really hard to develop a reliable gear system in five years.
Number two, we have 3,500 US patents on our gear system. We think it’s very difficult to design around those patents.
That’s why we think it’s better.
LNC: At the media day last year, Greg Hayes [CEO of United Technologies] said that 44% of the suppliers on the GTF were not performing to PW standards. What’s that comparison this year?
BL: I don’t know the exact percentage. The delivery assurance and the quality signature in the supply chain is significantly better than it was a year ago. When Greg said 44% were underperforming, he didn’t mean they’re bad suppliers. We have a program called Achieving Competitive Excellence. We considering performing suppliers doing over 90% on time with basically five Sigma qualities.
We had a lot of suppliers that were in that 85%, 80% range, not quite five Sigma quality. I can tell you it’s a lot better than it was a year ago. Just given the fact of materials flowing to our engine lines, given the fact that we’ve had very few quality recalls on the commercial side in the last year, it’s significantly improved.