The launch of a new generation of aircraft is setting up a “once-in-a-lifetime” tussle over how billions of dollars of future revenues will be divided within the aviation sector, with planemakers eyeing a slice of engine makers’ lucrative service fees.
With planemakers sold out and the industry working through lingering supply snags, aviation players gathered at this week’s Farnborough Airshow near London were figuring out how to share the spoils of a new generation of jets with ambitious fuel savings.
The expected replacement of a generation of best-selling narrowbody models by around 2040 has brought to a head a long-discussed topic — the chance for planemakers to structure new deals to tap into engine makers’ repair, or aftermarket, revenues.
“There’s probably a once-in-a-lifetime opportunity to rebalance the business model and to participate in the three to four decades of aftermarket,” Airbus Commercial CEO Lars Wagner told analysts.
DIFFERENT MODELS
Both planemakers like Airbus and Boeing, and engine makers like GE Aerospace and Pratt & Whitney, invest heavily in technology, but the way they get their money back differs starkly.
While planemakers get paid on delivery of new jets, engine makers sell their engines at or near a loss and wait years to make money back on high-margin repairs and services.
Planemakers argue they open the door to profits for engines that have barely any other use, and as such deserve a slice of those fees. They are also likely to wage similar battles over other components.
“They are the route to market. They aim to use that power to get some of the profit of suppliers,” said Agency Partners Managing Partner Nick Cunningham.
“The airframers have only got leverage over the supply chain when they’re launching a new programme,” he added.
Engine makers argue they take bigger risks for longer and deserve a higher share of the cake. That is compounded by the fact they also often absorb extra risk by offering fixed costs per flight hour, effectively running an insurance business.
The CEO of Pratt & Whitney parent RTX , Chris Calio, responded swiftly, appearing to call for more cash upfront.
“We’ve been pretty steadfast in our belief that the next generation single-aisle, especially on the propulsion side, will need to have a different business model,” he told analysts.
“I think we need to smooth out some of those cash flows and some of that investment, and we’re open to any number of ways to do that, and we’ve had some preliminary conversations”.
WILD CARD
Currently the busy narrowbody market is served by the GE Aerospace-Safran venture CFM, which powers the Boeing 737, and Pratt, which competes with CFM on the Airbus A320neo.
This week’s public jockeying for position comes as engine makers are already pressing to be rewarded more for earlier investments, prompting friction with airlines over prices.
A wild card may be the third player, Rolls-Royce.
The UK company has for the past 15 years been locked out of the narrowbody market and has been developing a new engine technology programme, the UltraFan, with the aim of getting back in, with the help of partnerships.
It has more incentive than its rivals to agree to shake up the existing way of doing business. “We talk to multiple parties,” Rolls-Royce CEO Tufan Erginbilgic said.
Engine industry experts said it would be hard to find a solution that did not simply involve one half of the industry taxing the other. Jefferies analyst Sheila Kahyaoglu wrote that sharing R&D and capital might be the most realistic answer.
RISK-SHARING
The tug of war over cash flows coincides with an interlocking debate over engine designs.
CFM’s goal is a radical “open-fan” design that would be harder to offer as a choice alongside a competing model and may lend itself more easily to risk-sharing, industry sources said.
Both Pratt and Rolls favour a more conventional design, but all are exploring alternatives, Leeham News has reported.
Until now, the debate has been on paper. Future engine technology existed mainly in computerised images presented at air shows or in scaled models in wind tunnels.
On Monday, GE Aerospace and BETA Technologies stole the opening of the show by flying a turboprop fitted with a hybrid-electric engine across the Atlantic at commercial altitude and displaying it in the prestigious Farnborough flying display.
Hybrid-electric technology is one of several pillars expected to contribute to the ambitious 20% fuel savings.
Pratt & Whitney Commercial CEO Rick Deurloo said it was ground-testing its own system and would fly it next year.