Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
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- Boeing unlikely to meet FAA’s 90-day deadline for new safety program April 18, 2024
Pontifications: One “good” engine in future for RR, faulty business strategy and model: JP Morgan
By Scott Hamilton
Feb. 7, 2023, © Leeham News: Our report last week about Rolls-Royce’s new CEO characterizing the company in dire straits is just part of the story. Shortly before that, on January 18, JP Morgan issued a 38-page dissection of the company that perfectly encapsulates what LNA has pointed out in the past about its commercial engine business.
JP Morgan’s assessment
JP Morgan looks at the entire company, while LNA focuses only on commercial engines. I’ll excerpt key points from JP Morgan’s engine section here.
- RR has only one successful in-production widebody engine: The Trent XWB (A350) is a successful engine. We see very little prospect of the Trent 1000 (Boeing 787) clawing back the market share it has lost to GE in recent years. The Trent 7000 (A330neo) is likely to remain a niche product in our view. The Trent 700 should generate good [profits] for many more years, but from aftermarket activities only.
- Some airlines might downsize from widebody aircraft to the A321 XLR: The Airbus A321 XLR is expected to enter service in 2024. This new variant of the A320 family will be capable of flying c4,700 NM, compared to c4,000 NM for the current standard A321. This is far less than the A330neo (powered by the Trent 7000) which can fly c7,200 NM. However, some airlines needing an aircraft to fly between 4,000 NM and 4,700 NM may now downsize from the A330neo and B787 to the much cheaper A321XLR. RR does not supply any engine for the A321XLR.
- IAE royalties will end in 2027/28: In 2012, RR sold its 32.5% stake in International Aero Engines (IAE), which made the V2500 engine for narrowbody aircraft, for £942m plus royalties over 15 years. We estimate the royalties will total >£3bn; RR has booked these…since 2012. These royalties were due to end in 2027, but we understand that other V2500-related profits may continue beyond 2027. In 2022, we estimate RR’s Civil Aerospace…will include c£150m of IAE royalties and that these royalties could be closer to £200m from 2023 to 2027 (due to higher levels of flying hours on the V2500). We then expect the royalties/profit contribution to drop substantially.
- No obvious route back into narrow body engines: RR still has ambitions to re-enter the narrow body market, saying it could enter a partnership with another company to do this. We see multiple challenges to this aspiration. (1) CFM International is already an established 50/50 JV between GE and Safran. (2) Pratt & Whitney has strong partners (MTU Aero Engines and Japanese companies) on its current narrow body engines…. (3) A partnership with a Chinese or Russian company looks unlikely given the geopolitical environment.
- Can RR afford to invest for the next generation? The civil aero industry is currently enjoying a period of lower R&D as neither Airbus nor Boeing has any desire to develop an all-new aircraft in the next several years. But this is a temporary state of affairs and later this decade we expect Airbus and Boeing will try to develop much improved (and maybe all-new) aircraft to enter service in the mid-2030s. These are more likely to be narrowbodies, so perhaps RR will not be involved in a major way. But at some point, Airbus and Boeing will need to enhance their widebody aircraft and RR will need to decide if it is still committed to the sector.
Long-Term Service Agreements
Engine makers, RR included, don’t make money selling their engines. They make money on the parts and Maintenance, Repair and Overhaul (MRO) contracts. Or at least they used to. This business model has been increasingly under stress.
OEMs sold their engines at steep, steep discounts—up to 80% and in some cases, literally gave them to the buyer—in return for Long Term Service Agreements (LTSA). These covered MRO and parts purchases under long-term contracts. Accordingly, it takes the OEMs 10-20 years to recover development and sales costs.
But the reliability of previous generation engines, while a major selling point, became a double-edged sword. The very reliability meant fewer engine shop visits. Hence, revenues and profits began to fall at a slow, drip-drip-drip pace. The CFM-56 engine could go as much as 25,000 hours on wing, an astounding number. RR’s own Trent 700 on the A330 was good for around seven years on-wing before requiring a major overhaul.
But today’s engines are anything but as good in this regard. The problems with the RR Trent 1000 are well known. At one point, around 50 787s were on the ground due to failures in the 1000. Overwater operations were significantly reduced to flying near airports that could be used in an emergency.
CFM’s LEAP engine (the successor to the CFM-56) and Pratt & Whitney’s Geared TurboFan (the successor to the V2500) entered service in 2017 and 2016, respectively. There are reliability and durability issues with both. On-wing time hovers in the +/- 6,000 hour range.
The warranty work is hurting profits at the engine OEMs and causing executives to rethink how these are structured. There’s been some discussion about selling the engines for a more reasonable discount than historically.
Mispriced LTSAs
JP Morgan sees RR’s LTSAs producing fewer profits going forward. “We are increasingly concerned that RR may have mispriced its long-term service agreements (LTSAs) and that the future profit on these contracts will disappoint, for two reasons. First, the costs to maintain its engines are likely to be higher than expected when it priced many of the LTSAs. Second, we see challenges with RR being able to fully pass on all of its cost inflation on LTSAs to its customers,” JP Morgan writes. And RR has higher exposure to LTSAs than its competitors.
All-in-all, the outlook is dismal for RR and challenging for GE and PW. A major makeover in the overarching business model is needed.
Most jet engine types evolve and increase MTBR “mean time between removals” as Service Bulletins are incorporated, just a typical P&W big engine like the JT9D-7 family or PW4060 started out really poor and as modifications were introduced did 18 000 – 25 000hrs on wing. So RR accountants calculate similar evolution that with long term Power by hour agreements and modifications their engines should stay on wing 30 000 – 40 000 hrs in long range operations and hence generate revenue for a long time after initial warranty period before RR shop visit costs. But you need good chief engineers and project people to make it happen as quickly as possible after certification. (Sir Stanley Hooker types.)
Very valid.
I would say there is an obvious route back onto narrowbodies. Merge with MTU. RR’s German links are already very significant. It would be junior but it was provide balance and cashflow.
The Pearl engines could get a gear + big composite fan with fan case and maybe evolve into a simple, light weight, reliable and cost efficient Tay engine of the 2030’s. Maybe Dahlewitz and Bristol could pull it off with German government money.
Precisely.
Woody:
MTU is tied up with P&W and I don’t see that partnership going away.
And keep in mind, RR is not just an engine builder, its got major fingers in diesel engines as well as various marine items like stabilizers.
And there is the US Turbine arm that factors into a merge as well as governments deciding if its in anyone interest (I don’t see that as a show stopper but its a non UK factor as well as a big center by itself)
No large EU country will let a strategic industrial partner like MTU is to Germany be taken over by RR.
UK is out of real Europe.
MTU would need to take it over. Same reaction from the UK.
The platform burns…
(ancient humourous quip) Transport links across the channel stop moving. Europe is cut off.
It’ll be interesting to see how things pan out. Certainly for the moment, these monstrously large joint industrial undertakings seem to be bigger than the (less than ideal) politics surrounding Brexit.
Rolls Royce already bought the non turbine business of MTU, diesel engines mainly and they still use that brand.
MTU turbines main stategic interest to Germany is the military fast jets- they partnered with Rolls on the EJ200, but were a junior partner there.
Same will happen for the new French-German-Spanish fighter jet . MTU will not be design lead
Pratt is of course the design lead on the GTF with MTU a junior partner, very junior at 15%. So dont kid yourself they some technology that is useful and a final assembly line is no big smoke as that would stay in Germany.
They bring nothing to Rolls is the real reason there will be no tie up, Rolls already has its own civilian turbo fan business in Germany
UK out of real Europe . Then why is Safran in partnership with GE then, or Boeings tie up with Italys Alenia on the 787
The aerospace sector uses world wide links , not based on ‘common Market’ ideas from the 70s
@Duke
Very good points and feedback. Thank you
I didn’t suggest it for MTU technology at all. I made it very clear: for “balance and cashflow”. Simply a financial/operational benefit.
And, same reply as to Ivorycoast “What rubbish. Of course the UK is in Europe. Europe is real, the European Union is a different real, EFTA yet another different real, EEA yet another, and all also under WTO.”.
I wrote “Merge”, not takeover. Joint jurisdiction companies have worked for years. In UK alone IAG, Unilever, Royal Dutch Shell etc.
What rubbish. Of course the UK is in Europe. Europe is real, the European Union is a different real, EFTA yet another different real, EEA yet another, and all also under WTO.
“UK is out of real Europe”
Certainly, Angela Merkel thought so when she vetoed BAe taking over the military side of Airbus.
You could see that thinking (from the UK) when BAe sold their stake in commercial Airbus to pivot to the US.
No EU state will let strategic companies be taken over by one in the UK today. After the UK left Europe trust will take a generation to be rebuilt. The clock has not even started.
By the way, true mergers don’t exist. One side always takes over.
correct. Merger is just a political word to make a buyout more palatable.
examples: Boeing’s “merger of equals” with McD-D which resulted in a complete McD-D management and board takeover of Boeing.
UTC’s “Merger of Equals” with Raytheon which resulted in a complete UTC takeover of Raytheon management and board
America West/US Air/American Airlines… each time the “surviving” company was actually taken over by the management and board of the “not surviving” company.
My recollection is that quarter of a century back the LTSA was highlighted as Rolls’ game changing CA over GE/P&W but also that it relied on a superior data capture & analysis set up from in field engines than GE or P&W had. Maybe they’ve let this advantage waste away.
It is also the case that Rolls’ big turbine industry improvements have come when their backs have been against the walls. May not hold this time but they do have work on at least 2 potentially game changing technologies. First is Reaction Engines’ thermal management. Second is incorporating electricals in the centre of the engine. So there is a chance that a Rolls’ narrobody proposal would win a place purely on merit.
Third is Ultrafan. Ok, so none of the basic ideas in it are original, but so far they are the only one of the companies looking at combining a gearbox, very large fan, and very thin CF fan blades all in one engine, with the bulk of the R&D all completed.
Certainly of GE and RR, I’d prefer to be RR because they at least seem to have a big leap coming up, and GE don’t. GE also seem stuck with Boeing, which rather tarnishes any technological advantage its designs may or may not have over RR’s. If Boeing aren’t delivering aircraft, GE isn’t making money (I assume), and right now GE have a ton of money tied up in 777X which may never actually enter service…
Ultra Fan is in the test article stage, not even prototype yet.
RR has to design a full engine to go with the Ultra concept and then needs a platform to put it on, even if there was, P&W has real world experience with GTF now.
And its possible that GE/PW or PW/RR could do a joint venture like GE and PW did (or IAE).
RR may be open to collaboration again under new management.
GE is likely madly working on GTF and they get free research money in the RISE Turboprop.
Thats what a test article is , a prototype.
You dont want to be the situation GE is with GE9X where they had to redesign at the 777X test flight stage.
I would say a lot of the delays to that program are from GEs end, but all the blame is on Boeing
there were problems on the test stands, problems on the flight test on a 747 and again when the 777X flew
https://www.flyingmag.com/boeing-777x-test-flights-suspended-over-engine-issue/
Funny that the american aviation media only give this GE product only *minor* coverage. Safran too only had minor comeback when their newest engine flopped because of various issues.
What about their contract to build hundreds of small nuclear reactors throughout the UK? Shouldn’t that be enough to make killer profits in a few years?
There are no *contracts*, yet . I dont think a prototype is even built back in UK
They are just offering like a number of other companies a newer quicker approach to nuclear electricity generation.
Nuclear power is even worse as regards consuming a companys capital than aero engines and has bought low some major names before
This article is not about GE and the 777X, it’s a nice deflection thou. Still won’t change whatever is going on at Rolls Royce.
At least GE engines have proven to be more reliable in the past few years compared to their Rolls Royce counterparts.
At this point I would not be surprised if Boeing drop Rolls Royce when the re-engine the 787 in the early 2030s and go all GE, like they did with the 77W and 77L.
Seems GE is running away with the 787 market anyways
Rolls Royce should get it’s act together or else they will lose significant WB market share to GE.
The 777X is in a much better position than Rolls Royce, that’s for sure. At this point we are not even sure if the ultrafast will enter into service either.
See , you have made my point.
GE engines havent been shown to be that more reliable, just you havent had to dig deeper to find out like I have to.
GEnx major problems which led to redesign and replacement/overhaul of the early engines and flight restrictions by FAA , you seem oblivious to and thats GEs strategy and it worked
The GE9X is having similar issues and only Boeings other issues have meant they havent been in service by now
Will you find a deeper story on GEs role in the 777X delays , no siree
We’re are currently developing new technologies for a complete new propulsion system as hybrid-Electric modular system including a gas turbine in the 1-2 MW range with RR and other partners.
This technology can later be scaled up. And business aviation is very successful (pearl) and profitable. It’s not all lost.
I’m not entirely sure that either the Leeham or JP Morgan analyses are quite as balanced as they could be. RR does have some real strengths: it IS sole supplier on the A350 programme (one of only the two ‘volume’ widebody programmes – with the 787 being the other). It also has a place on the 787, albeit with much less share than GE (and despite the difficulties on that platform, some new orders are still going RR’s way). The Trent 700 is also the dominant engine on the massive existing fleet of A330ceo. The newer A330ceos will be flying for a long time, while the older A330ceo is enjoying a new lease of life as a converted freighter. RR is the engine on most of those new and projected freighter conversions. So, taken together, whatever the issues, RR will have a very large installed base of engines, across those three platforms, that will generate income in the coming decades. Yes, the maintenance rectification on the T1000 has hurt badly. And, yes, there will be pressures on the TotalCare revenue streams, but it is not quite all doom and gloom, simply because the installed base of engines is so very large. That’s quite an asset for any company. And something that should be able to be leveraged, albeit perhaps better.
Already leveraged, that’s the problem
@jixer
Bravo! You stole my thunder and agree that this report by Hamilton is skewed. The engine OEM’s are frankly a victim of their own success, meaning the staunch reliability of on wing MTBR is amazing. As an airline operator managing our mx costs, we love this. Anyone in the engine world knows the key factor for engine removals is EGT margin.
Thanks for mentioning TotalCare program, again the airline operator enjoy the benefits of these financial gains with TotalCare and other power by the hour programs. What’s good for goose is good for the gander.
RR will be fine.
Jixer:
Its different than you are listing on the 787
In fact, RR built an 75% new engine, aka The Trent 1000- TEN for the 787. As I understand it, the TEN is the engine sold going forward. A huge loss with no future gain from what I see as they have to support the 1000 as well.
People always forget the business Aviation part (RR pearl) wich is doing very good too.
And one thing’s for sure – if analysts predict a downfall it’s time to invest.
See https://www.rolls-royce.com/products-and-services/electrical/our-electrical-portfolio.aspx?utm_source=LinkedIn&utm_medium=organic&utm_campaign=Electrical&utm_content=complete_system
Rolls WB market share is not so dire. Last time I saw numbers for the 787 in early 2020, 905 orders selected GE and 476 selected RR (the rest was undecided). With the 337 A330neo orders at the time (the trent 7000 is a trent 1000 variant), this adds to 813 orders for RR, 47% of the medium WB market at the time. For the large WB market, RR is leading with 925 A350 orders compared to 353 777X orders.
Obviously the RR airliner range is complementary with Pratt’s, but I’m not sure there would be any synergies between the two.
Agree, PW is NB focussed, RR WB and both have strong militairy branches. A merge seems unlikely.
keejse:
I would not say P&W is NB focused. It was more the last hurah that they pulled off the GTF.
They have aspirations for WB though its unlikely to see that due to the market of no new widebodies for the foreseeable future.
That said they do have the KC-46A engine program as well as quite a number of legacy engines. And it has the F-35 exclusive right now.
I’d say that P&W have set themselves up pretty well. They’re on both A220 and A320, which is a very large market to have got well into. That’s a last hurrah that could last, well, a very long time.
They did get kicked out of the large engine market by not competing technologically, but at least someone there finally remembered the maxim “Develop or Die”, and developed something (GTF)…
And keep in mind, P&W has partners and while they are not listed as part of the GTF (they were in the IAE) program, they are in the mix with agreements. That is not just MTU but I believe 5 Japanese companies.
MTU has 15% share , its chicken feed in the big picture
Pratt doesnt seem to have any issues with only ‘one airliner engine’ program.
They have been out of the big fan business for 15 years now ( apart from legacy planes)
Their 777 engines exploding still
Only one actor remains that can fill that void ….none other than Honeywell,
GE under Jack Welch made an offer for Honeywell in 2000, that was until EU blocked it because of overlap in jet engines especially. ( even though most of GE engines was in the bigger category then)
Same would happen again in the Honeywell Aerospace sector
When “An Airbus insider tells LNA that all scenarios are under consideration.” Is Airbus buying RR even a scenario? I thought the Air Mail Act of 1934 prohibits that.
Us law not applicable in EU
Well it is in a way un competition law
EU has blocked mergers between US companies where they have business in EU
Remember the EU essentially stopped the Boeing Embraer JV, and they werent based in europe either
US see mergers in a different way ….loosely ‘bigger is better’ for consumers. ( which is debateable) , while EU sees overlap of merged business as restricting choice in that market for the actual buyers …not consumers but airlines
And then there is why would Airbus want to?
Major cost, huge dist ration, divest all the other bit and pieces RR has got into, ungh and no profits as they have to sell engines to themselves at cost.
If done right jet engine models give great profits for 50 years, just look at the GE CF6-50 and CF6-80C2, RB211-535, PWC PT6-series. It can take 10-15 years to start making good profits and it is outside normal banks excel spreadsheet columns. So either you have existing models pumping in money or a friendly government that pump money into military programs you can cross use to your commercial design. The risk of designing a looser is big and happens all the time. (ALF502, PW6000, Silvercrest…) Airbus buying RR large commercial engines will not happen unless they are forced to do it even though they are used to the timescale and failure risks (A340-500, A380-800…)
I disagree with the assessment that Airbnus will do a new aircraft in the 2035 timeline.
They would put a new wing on the A320 series in response to anything Boeing did.
Then it was be a NG 737/A320NEO comparison as to how much a new wing got you vs say a TBW.
Remember when they wanted a simple re-wing of the a330 to compete against the clean sheet 787 over a decade ago? How did that work out?
Now the 787 is the current dominant midsize widebody
If airbus wants a re-wing vs a composite clean sheet 737 replacement, then Boeing is guaranteed to claw back significant market share in this segment.
I guess airlines will have to beg airbus to create a clean sheet just like many did with the a350.
A lot of this outlook from JP Morgan seems to be pretty short termist; if A330neo / A350 don’t sell in vast numbers, and RR don’t get 787 orders, then yes, the future would be gloomy.
But, Airbus clearly think that the A350 will sell well, and the A330neo is still in its infancy, really, and is apparently very nice. If RR don’t do well, it’ll mean that Airbus will have done very badly, and no one seems to think that’s likely.
The industry looks to be heading back up in terms of demand, so I don’t see why airlines would universally be looking to downsize from A330 to A320XLR.
Besides, airlines couldn’t downsize even if they wanted to. Airbus just cannot make many more A320’s / month than they already are. And there’s a lot of A330classics out there to replace; dump 1,486 orders into the A320 backlog and get them, well, when? Ever?
No, I think that the chances of A330 operators abandoning the A330neo / A350 in numbers dangerous to RR’s long term outlook is remote. Some may go to 787, but then again, why would they? It’ll take a long time for the entire A330 classic fleet to be retired (especially as they’re still building them: Wikipedia suggests that there’s still a backlog of 19), but RR / Airbus are in the front row to replace them over the coming decades.
It’s also interesting that JP Morgan don’t seem to mention Ultrafan. RR have already spent a large chunk of the R&D for that, it’s being built, there seems to be a lot of certainty around the performance of the engine, etc.
It’s quite an interesting question to ask, what’s it for? There’s no all new aircraft to fit it too, and it looks like it’ll be ready before there is one.
That encourages the conclusion that it’s to replace all of RR’s current in-service engines. One has got to admit that a 787, A350, A330neo, even A380 fitted with Ultrafan could mean pretty significant things to those aircraft. RR could offer to NEO-ise all of those (or NNEO for the A330), possibly even in-service aircraft.
It certainly seems unlikely that they’re going ahead with Ultrafan if there were no strong indication from Airbus and / or Boeing that they’d take it. Would either Airbus or Boeing dare not entertain the idea, in case the other does? Seems doubtful. That also fits with the view that for aircraft like the A350 there’s not really much room to make airframe improvements. What’s lighter than today’s CF? Not a lot. However, a big step in engine efficiency is the one thing that moves the whole package forward without the huge cost of incremental airframe improvements.
That’s a pretty big play – going for the entire (except 777x) global wide body market. If it comes off, well, the large amount spent on it would seem like peanuts in comparison.
This is a fairly long term view, but JP Morgan don’t seem to be thinking long term.
Good points
I’m confused with some of the arguments – throw enough muck and some of it will stick?
1) on one hand engines are getting more reliable, so need less overhauls – this is bad for Time and material and good for LTSAs
2) but RR is overly focussed with LTSAs – HOWEVER, the whole point of an LTSA is that it REWARDS the engine OEM for making the engines more reliable and staying on the wing longer. It aligns the engine maker’s interests with the airline’s – more reliable, the airline has less hassle, less AOG, less costs; the engine OEM spends less on the overhauls (which it now pays for under the LTSA).
3) I’ve got no idea of the relevance of the LEAP and GTF time on wing or warranty problems to the travails of RR.
RR got especially badly stung with covid as WBs flew less, plus airlines tended to stop flying LTSA engines earlier and fly the non-LTSA engines until they needed an overhaul. RR did not enforce the minimum monthly hours, but is now in negotiations to turn this goodwill into economic advantage in the future (such as repaying the underpayments over the remaining life of contract, encouraging airlines to extend the LTSA contracts, or to buy more RR engines when they order new planes).
WRT to only one good engine, maybe, but RR has 50-60% market share in WB’s – that may fall to ~50% when the 787 ramps back up and if/when the 777X ramps up. The Trent 1000 will probably never make much money, but the Trent 7000 has high commonality to the -TEN so piggy backs to improve the profitability of both. 30-35% share on the 787 plus 100% on the the A330neo gets you within spitting distance of GEnx levels (especially with the 747 finishing), while the A350 is at 5 per month, going to 7 (77 planes), vs the 777 at 2 per month, probably (possibly) going to 5.
Isn’t their contract to install hundreds of nuclear reactors throughout the UK good enough to turn big profits in a few years?
Most a330 operators will go the 787, not some. Already many major a330 operators operate the 787, e.g Turkish Airlines ( largest operator) , KLM, Air France, Lufthansa, Qantas ,Saudia, Air China, China Southern and Maybe Qatar Airways (just to name a few).
So for these airlines ordering more 787s becomes very straightforward for an a330 replacement , only Virgin Atlantic operates both the a330neo and 787, but that is a very very rare combination and only a few other airlines may follow this route.
With the 777/a330 full replacement cycle approaching soon, the 787 is the favourite to scoop a significant majority of those orders more especially with the 787HGWs around the corner.
So yes, looking at how sales for the 787 have favored GE, I think we know how things will turn out here
Switching from A330 to 787 isn’t as straightforward as sticking with another A330…
The primary purpose of the A330neo is to make the 787 unprofitable for Boeing. And according to articles published even by Leeham News, it does a pretty good job of that. Every dollar Boeing has to discount 787 to make it cost competitive with the A330neo is another dollar Boeing cannot spend building a new aircraft. Boeing doesn’t have a cheap aircraft with which it can apply price pressure on Airbus…
It cost Airbus very little to launch, and also it is actually a very good option all by itself.
The CFM56 was built without an airframe and got it break reengined DC8’s
The core of the CFM56 was a military engine F101 , a turbo fan for the B-1 bomber.
So a civil version was a low risk change for GE/Safran at the time .
It was also used on the USAF prototypes for a 4 engine short take off airlifter YC-15 but that whole program was cancelled.
Boeing also offered a new build 707-700 with the engine ( for lower noise reasons) but had no takers
But early on there were some serious engine failures , but being GE who remembers those
correct. Merger is just a political word to make a buyout more palatable.
examples: Boeing’s “merger of equals” with McD-D which resulted in a complete McD-D management and board takeover of Boeing.
UTC’s “Merger of Equals” with Raytheon which resulted in a complete UTC takeover of Raytheon management and board
America West/US Air/American Airlines… each time the “surviving” company was actually taken over by the management and board of the “not surviving” company.
@scott
this was a reply to IvoryCoast above, please delete