Leeham News and Analysis
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Leeham News and Analysis
- Dissecting Boeing CEO’s statement next new airplane will cost $50bn April 15, 2024
- Bjorn’s Corner: New engine development. Part 3. Propulsive efficiency April 12, 2024
- A350-1000 or 777-9? Part 2 April 11, 2024
- Pontifications: Boeing “transparency”–not so much. April 9, 2024
- Airbus charges and write-offs since 1999: more than €33bn April 8, 2024
Pontifications: Engine makers’ business model needs overhaul
By Scott Hamilton
May 2, 2023, © Leeham News: The business models for engine makers for decades have been simple: deeply, deeply discount the engines on the sale and make up the revenue and profits on the maintenance, overhaul, and repair (MRO) contracts.
It’s a model that’s served engine makers and customers alike well. Customers save millions of dollars on the upfront purchase of airplanes. The engine companies win market share.
There are downsides for the Original Equipment Manufacturers (OEMs), though. The discounts typically are steeper than those offered by Airbus and Boeing (and Embraer and ATR). LNA has seen deals with discounts as steep as 80% on the sales price. We’ve even seen one deal in which the OEM gave (as in free) the engines in exchange for the MRO contract.
The big downside to this is that it can take 10-12 years, or more, for the OEMs to recover their research and development and production ramp/learning curve costs. Then as the CFM 56 matured into perhaps the most reliable jet engine ever, with more than 25,000 hours on-wing, followed by the IAE V2500, MRO services contracts didn’t return the revenue and profits as quickly as before.
But wait, there’s more
And that’s not all. The warranty and MRO contracts on today’s generation engines proved to be a huge liability for OEMs. The Trent 1000 powering the Boeing 787 had technical problems so severe that Rolls-Royce’s finances crashed like an airliner going through a wind shear. What’s especially troubling is that the problems emerged nearly a decade after service began.
At one point, there were about 50 787s that airlines had to take out of service with engine problems. Some regulators restricted the ETOPS operations. ETOPS is the amount of time a twin-engine jet can be from the nearest airport on one engine should another fail. This is critical for the shortest great circle routes.
Defective engines requiring shop visits overwhelmed RR, delaying standard MRO services for other engines such as the Trent 700 (Airbus A330) and Trent 900 (Airbus A380). This had a further negative impact on revenues, profits, and cash flow.
CFM and P&W engines
As noted, the CFM 56 engine became a super-reliable engine. (CFM is the joint venture between GE Aerospace and Safran.) Although this reliability extends the Time Between Overhauls (TBO), the sheer volume and longevity of engines meant a steady stream of aftermarket services for GE and Safran. The IAE V2500 provided a similar stream of revenue and profits for the partnership of International Aero Engines: Pratt & Whitney, MTU, and others. RR was a JV partner until it pulled out a decade ago in one of the stupidest corporate decisions made up until that time.
But the successor engines, the CFM LEAP and PW Geared Turbo Fan (GTF) proved to be exceedingly troublesome. Technical issues emerged for each engine that affected reliability and durability. On-wing time initially was in the 6,000-hour range for each. Components and advanced materials failed or wore out sooner than designed. Warranty work flooded the MRO shops of CFM and PW.
CFM is making good progress in resolving its problems. On-wing time is now around 10,000 hours, MRO advisors say. “Looking at LEAP, we have removal rates that are far better than we saw on CFM56 engines at the same time in the product lifecycle,” according to Becky Johnson, marketing director of CFM Commercial Programs at GE Aerospace, She spoke at the Aviation Week MRO Americas convention last month in Atlanta (GA).
PW is improving its fuel burn under its “Advantage” program, but it continues to be dogged by premature wear and tear. Normally, 75% of its GTFs are delivered to Airbus for the A320neo family. This has fallen to 50% as PW sends the other 50% to airlines with aircraft on the ground (AOG) due to engine failures. India’s Indigo Airlines became so frustrated with the GTF that in a follow-on order for A320s, it switched to the LEAP.
A220 affected, too
The Airbus A220 is powered by a smaller version of the GTF. It, too, is plagued with engine issues. Air Baltic, Egyptair, and Air Senegal have AOGs. Delta Air Lines complains about dispatch reliability.
The warranty work for the LEAP and GTF hurt revenues for GE, Safran and PW and displaced normal shop visits, exacerbating the financial hit.
The business model needs its own overhaul. Changing the business model will be tough. Next week, I’ll report on what the OEMs and some MROs think must be changed, discussed during the MRO Americas convention.
There’s a discussion in the comments section of the recent Bjorn article about the possibility of Airbus (and, potentially, other companies) using fuel-cell driven electric motors on a portion of future narrowbody product offerings (starting with 100 pax and ranges up to 1500 nm).
Technical challenges aside (superconducting components, high-temp SOFCs, LH2 infrastructure), and in addition to producing truly zero emissions (no CO2, no NOx, no contrails), one can see the commercial appeal: independence from external engine suppliers, increased in-house revenue, reduced MRO complexity/costs.
One can imagine that Airbus, in particular, is sick to the teeth of the problems at engine OEMs. And, in that context, one can fully understand why Tim Clark said that he won’t take his ordered 777Xs until he’s fully satisfied that the GE9X delivers the promised spec — though that can still backfire if the engine delivers problems further down the road.
And, just after posting this comment, I see that LNA has published an article on a similar ZeroAvia / Alaska project.
There’s also a similar project being undertaken by a consortium in The Netherlands.
https://www.theguardian.com/environment/2022/jun/13/dutch-group-targets-hydrogen-fuelled-commercial-flight-in-2028
In his informative series from 2022, Bjorn said that this type of propulsion could best be attempted in clean-sheet designs (the Airbus approach) — but there are evidently players who want to give it a shot in the form of converting existing airframes.
Maybe in the fierce sales battle of the last 15 years, engine OE’s had to overpromise on-wing time, sfc and MBTF to secure market share..
Yes, the sales people. Keeping engineering managers at home and letting them know later what the sales and project guys/girls with their bonuses promised and signed for.
Fresh from the press today:
Hype Aviation: “Go First Airline files for voluntary insolvency resolution proceedings before NCLT, suspends flights. Airline cites Pratt & Whitney engine availability for downturn.”
https://simpleflying.com/go-first-cancels-flights-declares-bankruptcy/
It would seem that there’s more than one US aerospace company that can’t get its act together…
“GoFirst has filed an emergency petition in Delaware Federal Court.
“The airline is seeking enforcement of two arbitral awards that order a Pratt & Whitney partner to immediately supply serviceable engines to the airline.”
https://twitter.com/ArenaJet/status/1653294723170439168
“Go First said it had ‘had to take this step due to the ever-increasing number of failing engines’ supplied by American manufacturer Pratt & Whitney. The airline said these failures had led to the grounding of 25 aircraft as of May 1.”
“The airline said it had been ‘forced’ to apply for insolvency as P&W had ‘refused to comply with an award issued by an emergency arbitrator’, which directed the supply of 10 engines by April 27 and 10 more per month till end-2023.
“Go First also said P&W had so far ‘failed to provide any further serviceable spare leased engines’; P&W said they had no engines available at this time.”
“Go First has also sued Pratt & Whitney in a US federal court over the non-supply of engines and has sought enforcement of the Singapore arbitral award”
https://www.hindustantimes.com/india-news/cashstrapped-go-first-airways-suspends-flights-for-may-3-4-101683022996775.html
“The airline said the percentage of grounded aircraft due to Pratt & Whitney’s faulty engines grew from 7 per cent in December 2019 to 31 per cent in December 2020 to 50 per cent in December 2022. It said this was despite Pratt & Whitney making several ongoing assurances over the years, which it repeatedly failed to meet.”
https://www.aninews.in/news/business/business/go-first-has-lengthy-history-of-missing-financial-obigations-says-pratt-amp-whitney-official20230503095149/
When IndiGo switched to LEAP, that told me what I needed to the know about the PW GTF “wonder engine”.
Smart of Delta to get on the MRO work, will be profitable for them.
GTF is the wave of the future. P&W has issues and there is no question.
They will solve them and they have a much higher upside than the LEAP.
Its not the first time an engine has had issues on introduction nor will it be the last.
And then RISE of course will (well rise) Phoenix like from the Ashes of Jet engines and be perfect from the git go.
# TW
You seem so eager to make excuses for P&W while always slagging off RR, even though RR has essentially fixed the issues affecting its engines, primarily the original Trent 1000. Yes RR cost their customers money, but at leasst they compensated all of them, fixed or replaced the engines, and most important of all, non of the customers filed for bankruptcy because of RR.
P&W GTF engines on the other hand are doing very poorly across the board, especially in hot, high,dusty and tropical conditions. In Africa and Asia it has hurt airlines operating A220s and A320s operations powered by their engines. Many of these aircrafts are in nonflying conditions because of lack of parts for their failing engines.
CFM Leap engines are also having problems in the same climatic conditions I discribe above, but at least CFM appears to be doing a better job of repairing their engines or replacing them for airliners in operation.
Indeed.
The current problem at PW appears to be a shortage of “engine castings”. Sounds like a pretty basic — and preventable — issue.
I think one can surmise that AB will never again be doing business with PW on any new program.
There are only a few companies making big superalloy precision castings of aerospace quality. PCC is one of them owned by Berkshire Hathaway since some years. Maybe its CEO Warren E. Buffett were too greedy in the downturn and have problems staffing all shifts when it is boom time again causing P&W and its customers lots of pain.
Claes, you aren’t the only one thinking so.
It certainly seems implausible that the woes of today’s engines are not related to the business model under which they’re created, “sold” and supported. It is a competitive business, so it is supposed to be, “the best supplier wins”. Thing is, they’re all about as bad as each other at the moment, on and off, now and again. So something has clearly gone wrong.
Question is, what to do about it?
Here’s a wild idea I don’t necessarily believe in!
For the larger airliner manufacturers, there is an effective duopoly, and it’s possibly headed towards a monopoly (Boeing aren’t in great shape). The aviation industry is a truly vital component of the global economy. At what point do various governments agree that there has to be a minimum industrial capacity and diversity in the market, and intervene?
One argument against government intervention is that that guarantees inefficiency. Well, one could argue that the current (mostly) commercial arrangements have not exactly lead to efficiency either – AoG, program delays, etc. Really, which one’s worse?
Perhaps this ends up being an extension of the regulatory framework? A “minimum” price for aviation?
Actually how this would come about – that sounds tricky. It couldn’t be Europe and the USA striking a cosy deal – other countries would complain.
Another thing to throw into the mix: the semiconductor business is also vital to the world economy. There’s heaps of government intervention in that; a bit ad hoc, primarily the USG enticing TSMC. So, if semiconductors, why not aviation?
There’s another element of a broken business model to acknowledge: assuming that Boeing someday launches an all new airplane (a very big assumption, I know), one wonders about the willingness of any of the engine companies to allow themselves to be extorted out of a nine figure sum for the privilege of powering a 797, as has been the case of recent programs. I suspect there may be some resistance.
One correction to the article is needed: the Trent 1000 entered service in 2011. Its problems became apparent far, far sooner than “nearly a decade” after that. And those problems don’t even account for the fact that the EIS standard of engine began a planned replacement program immediately (Package B, Package C, and then the -TEN).
The “extortion” aspect is important I think. The result of course is that RR now seem reluctant to work with Boeing, and so Boeing are stuck with just GE.
Boeing might regret that, if suddenly all Airbuses sprout Ultrafan engines beneath their wings, and Boeings don’t.
So you are implying that GE can’t match the ultrafan ?
GE already have the GE9X , which is 5% more efficient than the most efficient engine in production (Trent XWB) , they will just need to get another 5-6% for a smaller 787 derivative , to achieve 10% lower TSFC than today’s engines .
Mind you RR is also targeting a 10% lower fuel burn than the Trent XWB, with their Ultrafan WB derivative.
Most BCA products are powered by GE anyways and they will do just fine even without RR.
@Scott Hamilton
Do you have any data as regards what percentage of the current A320/A321 backlog has a PW as opposed to CFM engine choice?
I’m guessing somewhere in the 10% range…or is it even less?
@Bryce: I can dig that out.
Thanks, Scott, that would be very interesting/relevant info if you can get it.
Somewhat related question:
If I’m Airline X and I ordered some NEOs a few years ago with the PW engine option, I’ll presumably be contractually crucified if I want to dump the PWs in favor of CFMs — right? Do I have any realistic options at all in that regard?
I should have specified in this question that production of my NEOs hasn’t yet commenced.
It’s interesting that the only OEMs affected by the PW meltdown are all non-US — Airbus, Embraer, Irkut (although Irkut now has a homegrown replacement).
One could be forgiven for thinking that the issue is “staged”.
Lots of older Boeing staff was burned by P&W on the 757, 767/747 and 777 hence its hesitation of letting P&W in again, especially as sole supplier. Now Airbus has to feel the pain again as they did on the P&W powered A300-600/A310, they seem to forget faster than Boeing or MTU/Germany can twist Airbus arms to let P&W in again. Most likely will P&W solve its problems as they have done before on both commercial and military engines. The volumes are bigger today and hence the problems need solving faster than in the good old times.
It is ridiculous for the article to suggest the LEAP problems are comparable to the GTF. They are not close and never have been.
The technical assessment by the product strategy people at Airbus was clearly wrong on the GTF. Now Airbus has to live with the mess with NEO and A220 customers.
The Airbus “first mover advantage” on the NEO turns out to only have been an illusion.
“The Airbus “first mover advantage” on the NEO turns out to only have been an illusion.”
Not in terms of sales.
And most NEO customers appear to have chosen the CFM engine option.
The A220 is trickier.
I’ve read that a lot of the LEAP combustion chambers were awaiting replacement across the world.
The situation was observed a couple of years ago. I’m not sure CFM is in perfect shape right now. They’re just better at coping with difficulties.
Another PW victim on the growing list:
“(Bloomberg) — Deutsche Lufthansa AG said a third of its Airbus SE A220 fleet in Zurich has been temporarily grounded because of issues with Pratt & Whitney engines, the latest sign of airlines wrestling with defects ahead of the crucial summer travel season.
“The idling of the narrow-body aircraft is on top of three other “brand new” aircraft with Pratt engines that are also down, Lufthansa Chief Executive Officer Carsten Spohr said on call with analysts to discuss earnings.”
https://www.bloomberg.com/news/articles/2023-05-03/lufthansa-says-engine-woes-ground-third-of-a220-fleet-in-zurich
Engine makers’ business model needs overhaul: YES
It is a very risky business but some ways to improve EIS ( even after a longer development & test phasis ) might be :
– a larger pool of MRO shop ( like Delta , LHT, AF/KLM eng …)at EIS to cope with likely warranty work which means easier process to repair parts or earlier access to ” IP protected” engine OEM process to these MRO shops.
– Total care contracts proposed by “engine AND aircraft OEM together ” because at the very end the question is ” which airlines have the internal knowledge to evaluate engine performance on middle term ” ? : very few in fact . Risks should be shared by both parties .
Aircraft OEMs should be also involved in “Total Care” contract because they have the right engineering people and did the selection not only on EIS performance figures but also on reliabilty /durability /spare availability criteria at least for the first engine “estimated ” life ( first overhaul shop based on LLP parts replacement which are well known at EIS)
Thinking from a retired lonely maintenance /operation guy who thks you for your pontifications
How do engine makers need to rethink their business models in light of evolving market demands and technological advancements?
today article on a german site on the your subject :
https://www.aero.de/news-45032/Wir-sehen-mehr-Probleme-bei-Triebwerken-als-je-zuvor.html :
Indeed , More MRO shops approved by engine OEM at EIS is a good path to alleviate the difficult situation for “little” airlines . Airbus looks like not straightforward by discriminate airlines in favor of their bigger customers ( which often have their own engine shops…)
Airbus should have been more realistic by decreasing its own ramp up rate. Otherwise the situation might be more critical in the near future.