Premium #224 – Rolls-Royce and the commercial engine market

Rolls-Royce has seen its stock price swing a lot in recent times. The company is a leading aero-engine maker with a reputation for building fine products. In the next chart Rolls-Royce shows up as a key player in what is in essence a three horse race. Rolls looks pretty strong and stable. It is P&W that has been losing share to the other competitors. However, as the next chart shows, Rolls-Royce was doing much better (in market share terms) when it was part of the IAE consortium. Selling its stake to P&W meant giving up a lot of business. Clearly the chart above is going to see big changes as P&W claws back even more share. Today Rolls-Royce is dependent on Airbus. It is most dependent on the A330 program. While that program is stable and has a future under the neo guise, it has a definite horizon. The A350 looks good and offers a potential strong program. The A380 - who knows? Other than Airbus, Rolls-Royce does have a lot of spares and MRO business with its own older engines. But some of those programs are running down fast. For example, the 747 and 767. Even its 777 fleet has to be winding down. Rolls-Royce does however have a substantial role on the 787. But it has fallen behind GE and if it were to win all the orders that still need to make engine orders, it would still be behind GE. Only 13% of 787 orders have no engine selected. GE holds a 52% market share compared to Rolls-Royce 35%. So Rolls-Royce, for now, is probably focused and clearly heavily dependent on success at Airbus. Of the programs it is on, the A330neo should be able to generate 500 orders with 1,000 engines. The A350 is likely to be a larger program, as it will have more models. The A350 program should generate 1,000 orders and 2,000 engine orders. The A380 program has a less certain future. Rolls-Royce must have made an irresistible offer to win the recent Emirates business. We believe this order was done at exceptionally aggressive pricing levels. Certainly levels that require profits to made up elsewhere. This means Rolls-Royce is likely to be make profits on two of the three programs at Airbus, as matters stand now. Indeed looking at the active widebody fleet, Rolls-Royce is strong on only a few programs. There are 1,434 Rolls-Royce engines on the active widebody fleet as of 1Q16. Of these, 973 or 67% are on current programs. Only 10% are on Boeing's 787. Rolls-Royce is developing two new engines. These engines are an evolution of the three shaft Trent design. The first is the Advance, which Rolls-Royce claims will offer at least 20% better fuel burn, a bypass ratio over 11:1, overall pressure ratio exceeding 60:1 and and lower CO2 emissions than the Trent 700 and will be ready for service from the end of this decade. The second is the UltraFan, which is a geared design with a variable pitch system and is based on technology that could be ready for service from 2025 and will offer at least 25% improvement in fuel burn and emissions against the Trent 700 and is expected to have a 15:1 bypass ratio and overall pressure ratio of 70:1. The image below illustrates how Rolls-Royce envisions this evolution. Rolls-Royce therefore will apparently continue to focus on wide bodies and will have one engine ready around 2020 and the other in 2025. Although both engines promise impressive improvements, which programs might they be used on? This applies especially to the Advance. Market expectations are that the A330 will see a 30% decline in deliveries in 2017. This program is Rolls-Royce's bread and butter. The A350 program is unlikely to be delivering fast enough to make up for that shortfall, and even adding the A380 is unlikely to make it up. Looking at the company provided chart below it appears Rolls-Royce believes the widebody market is going to be robust. It appears that Rolls-Royce has all its eggs in one basket. This may not be a great bet. But it will be interesting.

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