May 9, 2023, © Leeham News: Last week, I provided an overarching view of the business model the engine makers used for decades to sell their engines and services to the airlines and leasing companies. Today, we discuss this in more detail and move to other issues facing engine makers as well.
Aviation Week’s MRO Americas last month was the venue for the engine panel.
The panelists include two from the manufacturers, Becky Johnson, I’m the Director of Marketing for CFM commercial programs at GE Aerospace, and Sam Raby, who is Associate Director at Pratt & Whitney for aftermarket marketing and strategy. Two other panelists were from the MRO sector: Russ Shelton, president of GA Telesis Engine Services, and Sebastian Torhorst, Head of Sales for Energy Services for the Americas for Lufthansa Technik.
As LNA wrote last week, the business model relies on selling engines at a steep, steep discount—sometimes up to 80%, and in rare instances, the engine maker gave (as in free) engines to customers. In either case, the quid pro quo was to enter into long-term service contracts for parts and maintenance, repair and overhaul (MRO). Deeply discounted sales meant it could take 10-15 years for the engine makers to recover development costs.
But MRO services were turned upside down in recent years. New generation engines proved to be troublesome with technical issues. Warranty work on these engines filled the MRO facilities, displacing profit-making MRO work and depressing profits. CFM, PW and Rolls-Royce each suffered from technical fix-it issues.
Revamping service contract terms and conditions now is a necessity. But this doesn’t attack the underlying business model flaw: selling the engines for a song.
Are the OEMs going to begin to actually sell the engines at compensatory levels? That’s question number one.
“I think we’re going to drive in towards that,” Raby said. “It’s always a trade-off in the market. You have the front payment and the tail in terms of power by the hour, the long-term agreement, and then the life cycle value of the airplane. If you ask me if we’d love to get more money upfront, the answer is yes. I think we work very hard to leverage our aftermarket product along with the new engine purchase decision to create the highest value for both us and the customer, but markets move slowly sometimes and this one is.”
“I would agree completely,” Johnson said. “We’re going to work with our customers to make sure that they recognize the value the product delivers in terms of durability and reliability, safety, time-on-wing, everything we’ve talked about, fuel efficiency. Hopefully, that means we get more price as the market evolves.”
We’ve seen technological challenges on the Trent 1000, the GTF, the LEAP, and the forthcoming GE9X, warranty costs are impacting MRO shop availability and certainly the profit and loss lines. Tim Clark, the president of Emirates Airline, said that he doesn’t want to take delivery of the 777X until there’s engine maturity on that airplane because of all these issues.
So, what do the OEMs do about having engine maturity for that next round of new technology engines so that everybody doesn’t suffer from these technological issues we’ve seen from these four engines?
Johnson said that If you look at GE and CFM, “we have a decades-long history of introducing new engine programs. We’ve introduced more than any other OEMs out there in the market. 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. That’s because we have learned from every engine program that we’ve introduced over the years, and we’ll continue to do so. On the Boeing 777-9X, we’re incorporating new testing that’s not done on other programs.”
Johnson said that GE is making more improvements to the product before another entry into service. “We expect to see that trend of improving the global rates for a new engine entering service to continue.”
“I think from the craft perspective, there is always learning not only from previous engine programs but throughout the new engine program. To the extent possible, we’re testing that ability to try to increase that learning speed so that we remove some of the issues as quickly as possible. I think the other part of that question is how we work with our customers to solve issues as they move forward, how quickly we can respond to the challenges, but also how we take care of them as challenges occur. I think those are the things that we’re focused on,” he said.
“I think as we move into the Advantage program a lot of the learnings that we’ve had on the GTF will be applied to that and have a more robust extension of the program rather than a new program going forward,” Raby said.