Opinion: Can Rolls-Royce Survive On Its Own?
Airbus’ discussions with General Electric on a possible new engine for the A350XWB, revealed by Aviation Week (AW&ST Nov. 25-Dec. 8, p. 14), threaten Rolls-Royce’s most important platform. The value of forecasted Trent XWB deliveries is greater than Rolls’ other commercial engine applications combined, so losing it would be catastrophic.
These discussions, coupled with Rolls’ decision to not offer an engine for Boeing’s proposed new midmarket airplane (NMA), also come after a decade of very difficult times for the company. Broadly speaking, there are three possible long-term outcomes, the last of which would be an engine-industry game changer.
The first scenario is simplest: Rolls-Royce improves its performance on its current products, particularly the Trent 1000, and is able to convince Airbus that its UltraFan is the best engine for any future A350XWBneo. Rolls would continue to power 100% of all Airbus twin-aisle jets. The status quo would be maintained, with Rolls-Royce holding on as the third-largest civil engine prime, just behind Pratt & Whitney. If the UltraFan is a big success, Rolls could even regain the second spot.
The second scenario would see Rolls-Royce losing the XWB application but remaining viable as a distant-third market player. It would simply trudge along, diminished, and increasingly dependent on UK defense spending and the high-end business jet market. It might be forced to defer or cancel UltraFan.
This scenario would not be immediately fatal. The 2030s will likely see a new round of single-aisle product launches at Airbus and Boeing, and while CFM and Pratt would have the advantage as incumbents, engine company fortunes can change quickly. As Pratt’s experience in the 1990s and 2000s showed, it is possible for aero-engine companies to make a remarkable recovery, even after decades of misinvestment, execution problems and other setbacks.
The third scenario is the most intriguing. For at least three decades, there has been speculation about a merger between Pratt and Rolls. GE is the dominant single-aisle engine-maker and the second-largest twin-aisle player, but Pratt and Rolls are perfectly complimentary, with the former strong in single-aisles and the latter in twins.
The latest big complication with this possible tie-up is the United Technologies-Raytheon merger now underway. While United Technologies on its own might have been a conceivable buyer of Rolls one day, the much larger Raytheon Technologies would have a very hard time convincing regulators in the U.S. and Europe to approve the acquisition. The UK government would fear Rolls-Royce being under the complete control of a much larger U.S. behemoth, particularly if the acquisition were to take place with Rolls in a greatly weakened position—the loss of its biggest platform. Indeed, a Rolls-Royce sale to a large U.S. corporation could rival the political controversy over the sale of Westland to Agusta that beset the Thatcher government in the 1980s.
But an alternative view of the Raytheon-UTC merger presents an opportunity. What if the new company decides that Pratt offers few synergies with its other aerospace units? Jet engines are their own industry segment, with discrete supply chains, business models and technologies. Spinning off Pratt, combining it with Rolls-Royce and listing the new entity on the market or placing it with private equity might offer a rational solution that would be acceptable to regulators and politicians.
But would Raytheon Technologies want to monetize Pratt? There are two possible areas of synergy between Pratt and the rest of the company. The first is the aerostructures division, in the event integrated propulsion units gain traction. But it is far from clear that primes really want integrated units from one provider, as evidenced by Boeing’s decision to bring 777 and 737 MAX nacelle work back in-house.
The second possible area of synergy is hybrid propulsion systems, in the event the jetliner industry embraces these in the next few decades. This remains speculative, and it is not clear that a company that designs the systems and architectures cannot just work with an independent engine company.
It is hard to handicap these three outcomes for Rolls, but the merger scenario is most rational. If Rolls loses the XWB, merging may be the company’s best hope for a recovery. And Rolls’ difficult position was perhaps inevitable: The aero-engine business remains a triopoly, serving a duopoly that has a diminished interest in new product launches.