This analysis was published on GLG news by Ernest Arvai earlier today and is reproduced here for our AirInsight blog readers.
Rolls-Royce is facing the potential of a declining market share in the aircraft engine business in the near term, with no viable offering for narrow-body aircraft on the horizon, while facing public relations issues over difficulties with its Trent 1000 engine for the Boeing 787. Each will likely impact cash flow and the former will likely result in lower earnings over the next decade.
With the recent news of difficulties with the Trent 1000 engine for the 787 program, no new technology for International Aero Engines, and a patent infringement lawsuit and countersuit from Pratt & Whitney, Rolls- Royce has become a hot topic for discussion, as concerns emerge about its long-term future.
Is the number two player in the aircraft engine industry suddenly trending towards number three? While we are not predicting an upheaval in the near term, the outlook for the next decade indicates that a transformational change is occurring in the aircraft engine business that will negatively impact Rolls-Royce market share.
The Trent 1000 and Boeing 787
Recent events causing concern for the Boeing 787 program include an uncontained failure of a Trent 1000 engine on a test stand, as well as a more recent “surge” from an engine installed on a flight test aircraft that resulted in an unexpected engine change. Rolls-Royce has identified and solved the problems associated with the test stand engine failure, as well as the power surge, has delivered additional engines to Boeing, and has indicated that the engines will not be the source of further program delays.
Boeing, in a contrasting public statement, indicated that the engine issues and other problems (including quality control issues with Alenia) would delay the program. Rolls-Royce quickly produced a replacement engine, indicating that the program is on track.
From our sources, we understand that the fuel burn for the Rolls-Royce Trent 1000 is not quite at the efficiency level projected for the 787, and while Rolls is working on improvements that are expected to reach the promised performance, that deficiency enables Boeing to shift the blame for its latest delay from itself to a supplier.
We believe that the Trent 1000 issues have primarily been solved, and that Rolls-Royce will meet the performance targets for this application at or through retrofits shortly after introduction of the aircraft, which may depend on the timing of this current and other potential 787 program delays.
Wide Body Engine Market
Rolls-Royce is currently well positioned in the wide body aircraft market, with its Trent family of engines on several major programs, including the forthcoming Boeing 787 (competing with GE) and Airbus A350XWB (exclusive). Applications on current aircraft include the Airbus A380 (competing with GE/PW joint venture), Airbus A340-500/-600 (exclusive), Airbus A330 (competing with GE and PW), and 777-200 (competing with GE and PW).
Rolls-Royce is a solid number two in this market, behind GE, and well ahead of PW. With their positions on the 787 (just under 40% share) and A350XWB (exclusive), the two best selling future programs, the company will be well positioned for coming decade.
The next major program competition will be the Boeing 777 replacement. For that competition, it is likely that Pratt & Whitney will introduce its GTF technology for wide body engines, as that concept is full scalable. Given its strong fuel burn advantage, a formidable competitor may leapfrog the Trent technology in the wide body market before 2020.
Narrow Body Market
Rolls-Royce currently participates in the narrow-body market through International Aero Engines, a joint venture with Pratt & Whitney and other partners. The IAE V2500 has been successful on the A320 family, splitting the market with the CFM-56 from the GE/Snecma joint venture. IAE has no presence on the Boeing 737, and about a 25% share of the narrow-body market today.
Airbus will introduce the A320NEO later this year, NEO standing for new engine option. The re-engined A320 family will utilize both the PW1000G geared turbofan from Pratt & Whitney and the Leap-X from CFM International as its engine choices, with IAE out of the picture.
Pratt & Whitney offered the GTF technology to the IAE joint venture, but Rolls-Royce preferred its own three-spool RB285 design. The Rolls-Royce offering has not been viewed favorably in the industry, and the bottom line is that Rolls Royce will be essentially out of the narrow-body market for the foreseeable future. The GTF has been selected by Mitsubishi, Bombardier, Irkut and Airbus, and the Leap-X by Comac and Airbus. No manufacturer has selected the Rolls-Royce offering.
Some industry experts have speculated that the Rolls-Royce patent infringement lawsuit against Pratt & Whitney may be more about attempting to raise questions about or slow the introduction of a new technology with which they cannot effectively compete, as PW has asserted in their countersuit. Whatever the courts decide, the GTF appears to be a far superior solution to the RB285, as demonstrated by the marketplace.
Rolls-Royce is touting the open rotor engine for future narrow body applications, but that technology will not be ready before 2020, and has issues with size, noise, and lower speeds that the PW GTF does not. With PW predicting a 30% fuel reduction over today’s engines as the GTF evolves, the open rotor concept will need at least a 35% reduction to maintain parity, given the changes required to aircraft design to mitigate the size, speed and noise issues.
The Bottom Line
Rolls-Royce is well positioned in the wide body market, but about to lose 25% of the narrow body market in which it has a 40% joint venture share by 2015. That will impact cash flow and profitability. With respect to the 787 and Trent 1000, it appears that Rolls-Royce has solved any potential safety issues, and will solve performance issue in the near term. The key question, yet to be resolved, is whether any performance guarantees or penalties for Boeing’s assertion of Rolls-Royce culpability for program delays will be incurred, and how those impact Rolls Royce bottom line in the near term.