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.
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.
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.
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.