The battle for aircraft engines in the narrow-body market has increased dramatically with the introduction of the PW1000G geared turbofan, which has emerged as a strong competitor to the CFM International LEAP engine that will replace its existing market share leader, the CFM-56. The LEAP-X prototype shown below illustrates the new technology composite fan blades that improve engine efficiency.
We’ve written several columns on the PW GTF, which we believe has stronger growth potential than the CFM LEAP based on its architecture, and will likely pull away in performance over the next decade. But currently, both OEMs are promising significant reductions in fuel cost and noise, and in the case of the GTF, reductions in maintenance costs as well.
Engine manufacturers tend to discount quite heavily when competing for aircraft orders and market share. An example of that recently became public knowledge from the judge’s Memorandum of Opinion regarding a motion to limit economic damages in the Rolls-Royce versus Pratt & Whitney lawsuit alleging patent infringements. In that opinion, certain facts emerged, including that in competing for A380 orders, Rolls-Royce discounted its engines by 87.3%, and absent competition, would only have to have discounted by 77%, which would have nearly doubled the price of the engine.
Such discounting is old news. We know of several examples where engines companies literally gave the engine to the airline with a contract requiring parts replacement and maintenance to be performed by the manufacturer, figuring the profits would be achieved here.
A similar competitive environment is emerging in the narrow-body market. But without court evidence, it is difficult to gather intelligence on exactly how the competitions evolve, especially with price. We can, however, shed some light on the practices used by the engine companies in their campaigns, and how GE utilizes its family ties to win orders for CFM/GE engines.
Both engine manufacturers make superb engines, and the next generation should be even better than today’s models. As technologies are introduced and refined, one manufacturer typically gains a slight economic advantage over the other. But that may not matter, as “pricing to the level of economic indifference” is an art form the engine companies have refined over the last decade, and commercial terms are often utilized to counter technical advantages. That’s why airlines love competition, and were pressing Boeing to include both engines in an all new narrow-body rather than maintain the CFM monopoly.
The PW GTF appears poised for a technological breakthrough. While it’s initial fuel burn reduction is the same as the LEAP, it does so with significantly fewer sections, and could be “heated up” for even more savings as PW decides to move in that directions. Instead, PW has focused on a 20% reduction in maintenance cost from the benchmark CFM-56, with the LEAP offering costs comparable to the existing benchmark. The GTF has a slight advantage today, and the potential to significant grow that advantage over the next decade, thanks to the innovative gearbox, shown here.
As a result, CFM is forced to more aggressively price their engines to compete, or find commercial terms in which to create economic advantage. These include GE Aviation, which produces engines and provides MRO services and parts, CFM International, a JV with Safran’s Snecma unit that produces narrow body engines, and GECAS, the mega-lessor that has more than 2,000 aircraft owned or under management. The latter business unit is a strategic tool used by GE to win orders it might otherwise lose. At a recent UBM Aviation conference, Sandring Lacorre of CFM said “what we can’t do technically, we will do commercially” to win deals. While both PW and GE deny that they “buy” business, the evidence in the industry is contrary, particularly for the LEAP engine on neo.
Republic Airlines, in its order for A320neo, selected CFM engines over the GTF. As Republic already had an order for Bombardier CSeries powered by the GTF, one would logically think that engine commonality would give PW the advantage. But the company is in financial difficulty, and, as reported in their 8K, GECAS cut current lease rates and CFM cut the financial terms on existing engines as part of what a Republic spokesman described as “great incentives.”
Virgin America’s CEO David Cush was very high on the GTF (see the earlier podcast on this site) and said it was ahead in the competition until CFM came in with an economic package that was superior. Air Asia was initially supported by GE Capital, and there was little question, given that history, that LEAP would win that competition.
While PW has technical advantages, CFM has the advantage of a large market share, including 100% of the 737NG and more than half of A320s, as well as a large leasing company with a policy of only financing its own products. As a result, it is well positioned to aggressively compete, and can utilize additional resources from the “family” of companies when necessary to restructure leases, restructure existing maintenance agreements as well as aggressively compete on price for new engines.
It is easy for PW to compete on price – but more difficult when the deals include other elements on which it has little visibility. We believe PW will begin to pull away from the LEAP engine in performance, especially fuel burn, over the next decade and gain a more significant economic advantage. But in the near term, it will face cut throat competition from CFM, which understands that keeping market share is 10% as expensive as regaining it once lost, and will pull out all the stops to maintain its current lead.
This can only mean good news to airline customers, who will benefit from the coming price wars on A320neo. Does having an engine choice provide Airbus a competitive advantage when compared with Boeing? Judging by recent incentives for deals, the success of the neo, and its massive lead in orders over Boeing, airlines think so.