Strategic gambit offers potential mid-thrust engine 'win-win' scenario for Pratt and Rolls
For the past two years while Pratt & Whitney and / launched their next-generation mid-thrust engines, the big question throughout civil aerospace has been, what about ?
Seemingly lacking any other game plan since 2009, the U.K. engine maker's stubborn refusal to be part of Pratt'sgeared turbofan (GTF) through its International Aero Engines (IAE) partnership has baffled both airframers and customers. To insiders at and , it seemed inconceivable that Rolls would prefer to risk abandoning the lucrative narrowbody sector for a decade or more, rather than taking the option of a shotgun marriage on the GTF with Pratt and IAE.
However, the mystery was resolved on Oct. 12, when the astonishing rapprochement between Pratt and Rolls was revealed. In a bold double move that came seemingly out of the blue, the two partners shifted the chess pieces to challenge General Electric and its CFM partner Snecma with a new engine joint venture aimed at midsize commercial transports. At the same time, Rolls is selling its 32.5% share in International Aero Engines (IAE) to give Pratt commercial control of the consortium and provide it with a leg up in the battle against CFM's Leap for the.
At first glance, both deals seem uncomfortably one-sided in favor of Pratt. The new venture will initially focus on “high-bypass-ratio geared turbofan technology,” a concept that Rolls once scorned. Second, just when it can least afford to, it looks like Rolls is effectively bailing out of IAE, a dependable cash-cow with the second busiest commercial engine product line after CFM.
But closer inspection reveals that Rolls has not been fiddling while Rome burns. Describing the parallel agreements as a “win-win” for both companies, Civil Aerospace President Mark King says, “It's a very elegant solution.” Although it seems that Rolls is making an abrupt U-turn over its earlier negative stance on the GTF, King says this is not so. The deal does not represent a “fundamental change in attitude. We like our partnership with Pratt & Whitney, and we'd like it to continue if we can. We weren't compelled by the business case of reengining, and we're staying true to that principle,” he says.
In 2010, Market Strategy Vice President Robert Nuttall said that in Rolls's assessment, the size of the market did not justify the cost of involvement in an IAE-developed PW1000G for reengining projects. “It is short production runs and limited numbers. It has to make sense business-wise, and that's where we struggle,” he said. It is therefore possible the subsequent meteoric rise of the Airbus A320NEO orderbook to almost 1,250 has surprised Rolls as much as it has Airbus. Added to the later slip in development of the next-generation projects to later in the 2020s in the wake of A320NEO andMAX launches, these factors almost certainly played a role in forcing Rolls into action.
Yet the reality of the deal is that, even with potential involvement in the GTF, Rolls's main strategic goal remains fixed on the next generation beyond NEO and Boeing's 737 MAX. King says the inevitable growth of high-bypass engines for future aircraft means that “you get to the point where you need to gear that fan. Clearly what we are saying with the new venture is we'll focus our joint efforts into these geared solutions. That's the GTF for the near term, but we will look at alternative options and other geared [open-rotor] solutions.”
Rolls is currently engaged in several engine research efforts, including one of two European pusher open-rotor demonstrators being developed under Clean Sky's Sustainable and Green Engines (SAGE) initiative. Both SAGE engines will be geared; and if tests point to a potential production version for the next decade, then Rolls could certainly benefit from Pratt's geared technology under the new joint venture. The year-long SAGE 1 design phase is expected to begin late next year, with a preliminary design review in the third quarter of 2013 and critical design review in mid-2014. The engine will be assembled over the next 12 months, with ground tests starting in the second half of 2015, just as the PW1000G is set to enter service on the A320NEO.
The agreement specifically covers the establishment of “a joint venture company, in which each will hold an equal share, to develop new engines for the next generation of aircraft that will replace the existing mid-size fleet.” Although it highlights an initial focus on “high-bypass-ratio geared turbofan technology,” the venture will also “collaborate on future studies for next-generation propulsion systems, including advanced geared engines, open-rotor technology and other advanced configurations.”
As part of the IAE restructuring, Rolls will sell its equity and program shares to Pratt for $1.5 billion. Pratt will offer a portion of these shares to the remaining IAE partners MTU and Japanese Aero Engines Corp. (JAEC). In addition, Rolls will receive an agreed payment for each hour flown by the current installed fleet of V2500-powered aircraft for 15 years from completion of the transaction. Rolls will continue to be responsible for the manufacture of high-pressure compressors, fan blades and discs, as well as final assembly of 50% ofengines.
Todd Kallman, president of Pratt & Whitney Commercial Engines & Global Services, says the combined deal enables Rolls to continue supporting IAE while at the same time ceding commercial control to Pratt. The result, he adds, will boost Pratt's ability to be more competitive in the A320NEO reengining market against CFM's already successful Leap program. “We'd like to see JAEC and MTU participate in this [new] joint venture,” he says. “We're in the early stages of talking about that.”
Airbus, meanwhile, sees the restructuring as a competitive help for the A320NEO. “I think it is excellent news,” says Tom Williams, executive vice president for programs. Putting Pratt in charge of the IAE is better, he says, because “it will put IAE in a very strong position.” For customers that want the standard A320 and the NEO, CFM was able to offer package deals; now IAE can do the same. “Up to now, Pratt & Whitney was at a disadvantage.”
The joint venture is subject to regulatory approval but “we are confident it will go through,” states Rolls, which will also “modestly” financially support the ongoing development of the geared turbofan family for the A320NEO. At this stage, both parties say Rolls will not be directly involved in the development program, though King leaves the door ajar for greater things. “That's the deal we've got at the moment,” he declares.
“It's clear that we're [motivated] to see [the joint venture] be successful, and we'd like to see the GTF be successful, so we're taking an investment in it,” King says. The agreement does not extend to applications on the, or MC-21, although the engine for the MC-21 will be virtually identical to the A320NEO's. The focus of the joint venture will be on the next generation of engines beyond the upcoming generation, with the GTF the most likely starting point for the new projects.
The two companies will therefore target the 120-230-passenger aircraft that will ultimately succeed the A320, A321, A320NEO, 737 Next Generation family, 737 MAX, MD80/90 and 757. Between them, Pratt and Rolls estimate a worldwide demand for roughly 20,000 new aircraft in that category (or nearly 45,000 engines) over the next 20 years.
Initial market and analysts' reactions to the agreements appear favorable. Robert Stallard of RBC Capital Markets says: “This looks like a good deal for both parties, allowing them to focus on their current engine priorities [the GTF for P&W and the Trent for Rolls-Royce], while laying the groundwork for the successor to the V2500 on the next generation of narrowbodies in the middle of the next decade.”
The move may also bolster Pratt's sales drive on the A320NEO, notes Stallard. “Having one versus two engine original equipment manufacturers running IAE should make it easier to agree on model swaps for airlines. It also allowsto use $1.5 billion of cash on a profit-enhancing transaction.”
Ronald Epstein of Bank of America Merrill Lynch says that “by restructuring the IAE collaboration, Pratt removes the structural difficulties of swapping an A320 order with a V2500 engine to an A320NEO GTF order.” Epstein also points out that, under the deal, Pratt doubles its aftermarket content on A320s to roughly two-thirds of the market. “With 4,500 V2500s in service and 2,000 on order, this is a significant positive for Pratt & Whitney. We also view it as a vote of confidence in Rolls-Royce's future engineering capabilities.”