Back when two-way radios the size of bricks were the closest things to cell phones, and beepers the equivalent of texting, a 20-something manager of a General Motors chassis line in Montreal ducked out of work to run an errand. As luck would have it, a glitch shut down the auto line just as he reached the checkout counter. Suddenly, a gargantuan belt strapped around his waist came to life, with two beepers shrieking and flashing and the radio squawking. The cashier, startled by the cacophony, looked up at the towering French Canadian with the half-tucked shirt and crooked tie and blurted out, “Who the hell are you, G.I. Joe?”
In 2011, nobody had to ask who Louis R. Chenevert was. The 54-year-old chairman and CEO of. (UTC) rocked the aerospace and defense (A&D) industries with a string of bold moves that improbably came together in a single year. His dogged, year-long pursuit of succeeded when UTC reached an $18.4 billion deal in September to buy the company and create an aircraft “super-supplier” that will offer a vast product line of systems and parts. Meanwhile, a billion-dollar geared turbofan (GTF)—the centerpiece of Chenevert's decade-long fight to make UTC's Pratt & Whitney unit a player again in commercial jet engines—struck gold after it was offered as an option on 's hot-selling . Pratt has received 410 firm orders for 820 engines for NEO aircraft.
In October, the company shook up the status quo with a double move that seemingly came out of the blue. In a challenge toand its CFM partner, , Pratt and formed a new joint venture aimed at developing engines for the next generation of midsize commercial jets. Rolls also agreed to sell its 32.5% stake in International Aero Engines (IAE), giving Pratt commercial control of the consortium.
In the helicopter industry, the X2—a revolutionary high-speed helicopter, developed by UTC'sAircraft unit, capable of cruising at 250 kt.—won the 2011 Collier Trophy for great achievements in aeronautics and astronautics. And in defense, Pratt prevailed in a nasty, years-long lobbying battle to kill an alternative General Electric/Rolls-Royce engine for the Joint Strike Fighter, cementing its position as the sole engine supplier on the $380 billion program and as the strongest U.S. manufacturer of military aircraft engines. The sum of those achievements, which will reverberate for years to come, is why Aviation Week's editors selected Chenevert as the person who had the most impact on the industry in 2011.
With annual sales approaching $60 billion and three major aerospace businesses—Pratt, Sikorsky and Hamilton Sundstrand—UTC has long been a force to be reckoned with. But aerospace seemed in recent years to take a back seat to the Hartford, Conn.-based company's other businesses, Carrier and Otis Elevator. UTC had not made a major aerospace acquisition since 1999, when it bought Sundstrand, and aerospace sales had dipped well below half of revenues. That all changed in 2011. “The importance of aerospace is back at UTC,” says Edward A. Kangas, a member of UTC's board since 2008. “The GTF was a big bet by Louis and the board, and that has breathed a whole lot of life back in.”
But the story is about more than one bet. Just as the GTF began to pay off, UTC made another huge wager with the Goodrich acquisition. It was, by far, the biggest A&D deal of the past decade—and one that will take years for Chenevert to prove was worth the price. But running a giant company requires a willingness to take calculated risks to have an impact. “I made the decision that if I was going to take this company to the next step I had to go after a complementary property,” he says. “If you run a $60 billion company and you do deals that are $200-500 million, it's a yawner. So I had to go after a big property. . . . I was really focused on Goodrich as a prize. We didn't have landing gear, brakes or nacelles.”
It was a deal he personally initiated and brokered. He first approached Goodrich Chairman and CEO Marshall O. Larsen at an industry event in September 2010 and asked to talk in private. When Larsen telephoned him several days later, Chenevert said UTC was willing to offer $100 a share for Goodrich, which was trading at around $70. Larsen told him the company was not for sale, a position he had steadfastly maintained for years.
Two months later, Larsen agreed to meet with Chenevert in Charleston, S.C., where the offer was repeated. But by then, Goodrich's stock had embarked on a sustained uptick that would take it to $92, rendering UTC's $100 bid inadequate (see graphic below).
Chenevert put the idea on ice for a few months, but he never took his eyes off of Goodrich. In June 2011 he phoned Larsen to offer $110 a share, and the talks began anew. During the next two months the two men haggled back and forth, over the phone and in secret meetings in Cleveland, New York and Nantucket, Mass. “There are only two roles that made the difference in getting this deal done, and they were Louis's and mine,” says Larsen. “The two of us did all of the talking and negotiating. It wasn't until we got right to the end where we brought everybody else in.” Goodrich's board demanded $135-140 per share. Chenevert offered $125. Goodrich said it would accept $127.50, and the deal was signed on Sept. 21.
Strategically, the two companies appear to be a near-perfect fit with little overlap, and this is one reason the merger is widely expected to pass muster with antitrust authorities and close by May. Assuming that happens, the combined aerospace operations—which will be based at Goodrich's headquarters in Charlotte, N.C., and initially run by Larsen—will offer everything from Pratt engines to Hamilton Sundstrand control systems to Goodrich's landing gear, nacelles and electric braking systems. Both companies already are leading suppliers on the, and the combination would put UTC in a stronger position at Airbus with Goodrich's strength in nacelles. “This is a pretty sizable bet on commercial aerospace,” says Bank of America Merrill Lynch analyst Ronald J. Epstein. “It makes them a more substantial subsystems supplier. Some people will scratch their heads over the price, but strategically it makes a lot of sense.”
But it is not risk-free. Combining companies with different cultures and processes is hard to do, as many aerospace giants found out after the industry's merger binge in the 1990s. In some cases, it took almost 10 years to fully merge the cultures of multibillion-dollar enterprises, costing valuable productivity and employee morale. Epstein estimates that UTC concentrates most of its engineering in the U.S. but performs roughly 80% of manufacturing in lower-cost countries. “Goodrich is nowhere near that,” he says. “I mean, why are they building nacelles in California?”
Indeed, Chenevert believes he can squeeze more profit out of Goodrich's operations by applying the UTC formula. “They don't have ACE,” he says, referring to Achieving Competitive Excellence, UTC's proprietary operating system that maximizes quality and efficiency. “They don't have a single IT platform. Imagine the leverage I get” by implementing those efficiencies.
Chenevert spent the first 14 years of his career honing his production management skills in the automobile industry. Shortly after he joined Pratt & Whitney Canada in 1993 as vice president of operations, he implemented SAP software to improve efficiency. “It all started with Louis in Canada,” says Marty Phillips, the head of KPMG's global A&D advisory practice. “He led what was really the first successful aerospace industry implementation of SAP. They drove it into manufacturing, supply chain, distribution and logistics.”
But as UTC prepares to integrate Goodrich, Chenevert also knows he has to reassure the company's 26,000 employees—including those at the nacelle plant in Chula Vista, near San Diego—that the sky is not about to fall. He understands their worries, having begun his career as an assembly-line foreman, where he earned a reputation as a well-liked team builder. “We won't show up and say, 'We don't like Chula Vista and we've got to go somewhere else,'” he says. That factory has “the talent and expertise that makes the nacelle work for the end customer. It's not going to be the overnight change that Goodrich people might fear. We're going to evolve.”
While snaring Goodrich may prove to be the signature deal of Chenevert's career, the GTF is undoubtedly his signature business accomplishment. The engine's design decouples the fan from the low-pressure turbine, enabling the fan to turn slowly to achieve high efficiency and the turbine to turn fast to be aerodynamically efficient. The result, Pratt says, will offer a 15-16% improvement in fuel burn—a gain Chenevert believes can be boosted to 25% within a decade with the advent of advanced materials that would allow the engine to burn hotter. And as the economics of high-priced fuel and environmental regulations increase the benefit of moving to ever-higher bypass ratios, Pratt's bet on decoupling the fan is likely to pay a premium as it is extended to newer, bigger engine designs.
Chenevert, who ran Pratt from 1999 to 2006, never strayed from his belief that the GTF was the key to getting the company back into the high-volume narrowbody jet market, a sector it once dominated but abandoned in the 1980s. As early as the 2001 Paris air show, he was promoting the geared concept as the next big thing. It was not an easy task. “Ten years ago, people thought Pratt was done,” he says.
Indeed, Pratt's competitors derided the geared concept as a half step that would be rendered obsolete by more advanced concepts such as an open rotor. Airbus andshared their skepticism. By the 2007 Paris air show, Chenevert was showing his pent-up frustration at the challenges of bringing the technology to market. Pounding his fist on the table, rattling glasses of orange juice and champagne, he told journalists, “We have a lot of airlines that have piled in behind Pratt to say, 'We support the GTF, we want to see it come to life sooner rather than later.' What we need at this point is an OEM [original equipment manufacturer] to launch the GTF technology.”
As it turned out, the first customer was not long in coming. Four months later, in October 2007, the GTF was chosen to power the(MRJ). It was a small beginning, but within two years the engine family, by now renamed the , had also been selected for 's and the 737-size MS-21 developed by Russia's . And then in December 2010 came the biggest prize of all, a position as one of two engines offered by Airbus on its reengined A320NEO narrowbody.
Analysts say the NEO win was the culmination of a brilliant strategy. By installing the GTF on Bombardier's CSeries—an upstart that is invading the A320 and 737 market space—Pratt was able to force Airbus and Boeing to update their existing narrowbodies with new engines as a defensive measure. “Louis had a plan on how to claw Pratt's way back into the single-aisle market,” says Cowen & Co. analyst Cai von Rumohr. “He got some of the new guys in town—the MRJ and the CSeries—as a way of [forcing] Boeing and Airbus to do something new. The CSeries was fine, but the game was bigger for him. It was to get on the NEO.”
By late 2011, combined orders and options for the PW1000G passed the 2,000 mark, while evaluation for the MRJ and CSeries engines was going on at full speed with more than 1,250 hr. and 2,800 cycles of full-engine testing racked up. Capitalizing on continuing volatility in fuel prices, Pratt continued to win orders in the face of fierce competition from arch-rival CFM's Leap engine. The GTF even won accolades from Time magazine as “the most important development in aviation in 2011.”
Meanwhile, the business deals with Rolls demonstrated mastery in strategic maneuvering. To the outside world, it seemed Rolls and Pratt had been drifting apart for years, wedded together through IAE in a marriage of convenience over theengine. The two were split over the best way to replace the V2500, with Rolls spurning the GTF, and were even embroiled in a series of bitter legal disputes over related fan design rights. Yet somehow, against the odds, the two reunited in a way to challenge CFM, and possibly the dominance of GE, something thought inconceivable only months earlier.
One GTF customer, Bombardier Aerospace President Guy Hachey, knows Chenevert well. He hired him out of college as a foreman on the General Motors assembly line in Montreal. “I was about a year-and-a-half ahead of him,” Hachey recalls. “Every time I got promoted, I promoted him to replace me. He's probably the best executive who ever worked for me.”
Hachey says Chenevert learned a lot from the auto industry. “We were producing one vehicle a minute,” he says. “There was so little margin for error. If you made mistakes, in an hour you could have 60 defective vehicles.” The two remain close friends. “Every time we see each other we tell funny stories and laugh so much we're crying,” Hachey says. “I remind him that he's a supplier [to Bombardier]. I love to do that.”
Karl J. Krapek, another General Motors veteran, helped convince Chenevert to make the jump to the aerospace industry in the early 1990s. He also believes the attributes that set Chenevert apart came from his auto industry experience. “Louis is bold and decisive and a great operator,” says Krapek, who retired as president and chief operating officer of UTC in 2002.
While Chenevert had a banner year in 2011, Pratt has not yet caught up with CFM's Leap engine. And one big prize continues to elude him. “The ultimate prize to me is to be on the next-generation 737,” he says, with a glint in his eye. That will be Boeing's decision, of course, but count on Chenevert to try as hard to make that happen as he did to chalk up all those wins in 2011.
Chenevert's Big Year
Chenevert set his sights on Goodrich and then spent more than a year in secret one-on-one talks with that company's CEO, Marshall Larsen, before sealing the $18.4 billion deal in September. The merger will create a super- supplier with a broad portfolio of commercial aircraft systems and hardware.
Geared Turbofan Engine
Initially scorned, Chenevert's $1-billion-plus pet project had a breakout year after being selected as an option on the Airbus A320NEO. The GTF has enabled Pratt & Whitney to reestablish a major role in the narrowbody jet engine market for the first time since the 1980s.
UTC stunned the engine market with the surprise restructuring of the International Aero Engines venture and creation of a new joint venture with Rolls-Royce to develop new engines for next-generation midsized aircraft. The agreement gives Pratt commercial control of the existing alliance and sows the seeds for the next IAE.
JSF Engine Victory
In December, Pratt & Whitney prevailed in a fierce, years-long lobbying battle when a General Electric/Rolls-Royce team threw in the towel in an attempt to force the U.S. Air Force to fund a second “alternate” engine for the Joint Strike Fighter, leaving Pratt as the soleengine supplier.
A Sikorsky team won the 2011 Collier Trophy for great achievements in aeronautics and astronautics for its development of the X2 high-speed helicopter technology demonstrator. Chenevert believes the X2 will revolutionize the industry with cruise speeds of up to 250 kt., about 100 kt. faster than current helicopters.