Aerospace is a big business but it is an industry increasingly consolidated. Big business yes, but a shrinking industry for sure.
The recent July deal by UTC to sell its Sikorsky helicopter unit to Lockheed Martin for $9bn is an example of how the huge parts and pieces need to shift around to extract value. UTC says it will use the funds for share repurchases. But what about instead making an investment that could really shake up the industry?
How about merging Pratt & Whitney and Rolls-Royce?
This has been discussed in the past, and arguments go both ways. Also, the experience with IAE drove both sides crazy, and finally ended up with P&W having to buy out R-R to get their GTF technology into Airbus. There was also a lawsuit over fan designs. There has been a costly and nasty history that left a bad taste on both sides. Moreover, could a deal even get by the anti-trust regulators?
But even with these hurdles, the timing is propitious. R-R lacks in the small engine arena and P&W lacks in the big engine arena. If ever there was a time to give this idea a hard look, now is the time.
- Rolls issued three profit warnings between 2014 and 2015. Rolls is trading down. The stock is down over 25% this year. At current prices the company is worth £13.7bn (~$21bn).
- UTC, P&W’s parent company looks like to be following a similar path. UTC is worth ~81.6bn. UTC stock is also down this year. They are NOT flush with performing units, and are struggling; P&W gets its big revenues when GTF powered airplanes get delivered.
- R-R is a strong player in large commercial aerospace jet engines and competes against GE. Whereas GE is Boeing focused, Rolls is Airbus focused.
- GE has a partner in SNECMA and markets the best-selling jet engine in the CFM. R-R has no offering in the segment. P&W has the GTF which has proven very popular.
- R-R is not in the small engine business where the sheer volumes enable an excellent arena to undertake applied research which can then migrate to larger engines. Economies of scale are crucial to offset extremely expensive R&D.
- R-R may have a stiff upper lip, but things don’t look rosy. Its deal to win the Emirates A380 order must have come at a cut throat price (since we have heard that Engine Alliance offered their engines at cost and still lost). R-R is betting on the A330neo and A350, both which are not flying off the shelf when compared to 787 and 777.
- The lower fuel price outlook changes the economics of new fuel efficient aircraft relative to existing aircraft. For example, key R-R customer British Airways seems happy to keep its 747 fleet in service. This means spares sales for R-R but fewer new engine sales.
- It will be between 2025-2030 before Rolls gets a look into the next wave of the single aisle engine business. By then Pratt and CFM will have built a lead that will cost many billions more to overcome. It is unlikely Rolls will see that sort of cash from its investments in the A330neo, A350 and A380 programs over the next decade.
- Morningstar does not see R-R as having a strong defense (see small moat). RBC Capital also is sanguine about Rolls’ prospects. In July RBC said “However, with its medium term profit and cash challenges, the question has been raised as to whether Rolls could be an acquisition target.” RBC then goes on to state: “We think suggestions that United Technologies could be interested are baseless.” As we said, the idea has come up before.
- Meanwhile P&W has no big engine business outside of its USAF tanker order and EA for the A380. Its GTF on the other hand is doing very well and is found on five new aircraft programs. R-Rs is now looking at geared fan technology for its Ultra engine. With the ability to upscale the GTF to 100K, does P&W need R-R? They seem satisfied taking on 13 new aircraft from five manufacturers, and then moving upstream for the next generation of MOM and then widebody aircraft as a strategy, Would it be as fast? No. Could it work? Yes, it is quite plausible.
- P&W (through parent UTC) is more flush and can fund R&D. It is no secret that P&W is looking at ramping its current GTF design to 40,000 pounds and more. Its GTF design is capable of tremendous scaling – and R-R has to pay for all its own learning for the Ultra. There might even be more patent hurdles ahead which P&W will enforce with all its might.
- The MOM segment will require an engine in roughly the 40,000 pound category – R-R might be better off collaborating than going it alone against GE and P&W. GE and CFM may have to probably considerably modify the LEAP design or come up with something new. GE hinted at this at the Paris show where it seemed GE might do such an engine itself rather than with CFM.
- Put the P&W GTF technology together with R-R big engine plans and you have a compelling cocktail of talent and IP.
- To further demonstrate why consolidation is powerful, Reuters reports that Boeing is using its power to exercise veto approval over supplier consolidation. This means if R-R and P&W ever want to compete with GE and CFM for Boeing business they had better be very strong. Both firms are reasonable on their own, but together they can face off against GE and CFM. In this case, probably much to the joy of Boeing who would benefit from competitive offerings.
- Airbus could also benefit from a combined P&W and R-R engine offering. It means less dependence on R-R (as Boeing is with GE) which may be running into challenges with the big engines it supplies Airbus. Moreover, with the A380neo clearly under consideration, the idea of a R-R solution that deploys patented P&W GTF technology almost certainly gets much closer to Tim Clark’s economic goals. Meeting Emirate’s goals of 10-13% reduced costs per seat mile will depend a lot on engine performance. P&W, through its relationship with Engine Alliance, knows the A380 just as well as R-R. The only way the A380neo really moves ahead of the 777-9’s expected economics is to deploy the latest geared technologies and composites. P&W owns the former space and R-R is a leader in the latter.This is possibly one of the most disruptive moves that could occur on commercial aerospace today. There are big hurdles to overcome and the two firms will likely dismiss the idea. It would be the equivalent to two tectonic plates combining to form a new continent. But that would change the landscape. Big time.
No matter how much I would love to see a three-spool GTF engine, it will never happen. RR will have to develop its own GTF and P&W will have to stick with its two-spool design. It is true that technologically speaking it would be an extraordinary merge; for the two companies are complementary, and if combined could offer tremendous synergy. But technology is only part of the equation in a gigantic merger of this nature. First there are cultural considerations. What we have here are two quite dissimilar corporate cultures and two very different nations that have little in common except for the language they speak and their visceral love of money. Not to mention their nationalistic pride. To merge RR with P&W would be like merging Airbus with Boeing: simply unthinkable. Besides, who would buy who? Based on financial performance there is little RR can do at the moment. On the other hand UTC is not only bigger, but with the GTF about to enter service it will soon start to generate the cash they need to develop bigger engines and/or make acquisitions. So it is obvious to me that P&W would be the one buying RR. Which would be unacceptable for the British. Both companies are extremely prestigious names in their respective countries and around the world. So much so that the new company would have to retain both names: Rolls-Royce Pratt&Whitney or Pratt&Whitney Rolls-Royce. That is a lot of syllables for a corporate name! Unless they call it PWRR or RRPW. But that would evoke little in the public’s imagination. If Rolls-Royce gets into trouble the British government would not let a foreigner acquire the company. They would support them like they did in 1971, or they would force another British aerospace company, like BAE Systems for example, to take them over. For Bombardier to acquire Shorts was not only logical but also feasible, despite the political context at the time. On the other hand even if it makes a lot of sense on paper for Pratt&Whitney to acquire Rolls-Royce it would have no political traction whatsoever: neither left or right nor liberal or conservative.
RR is a proud British Company and no matter what this merger will never happen in the interest of all the parties and aerospace industry.
Both P&W and RR are doing well, both have their chess pieces well (prudently, efficiently) deployed, The respective TECHNOLOGICAL CORES (know-how, R&D, patents …) have been established independantly … for the outside observer, a merger would entail a loss of strength for the Industry. Better to apply corporate strategy toward the aim of better Market coverage (going for an advantage OUTSIDE, not rebuild based on synergies, which really eliminates redundancies inside).
Better try other concentrations :
P&W + Russian aero-engine makers or
RR + chinese aero-engine makers
Lets see, P&W gives their technology to Russians and RR gives it to the Chinese?
The Nene engine fiasco all over again. No thank you.
RR and P&W are a good link up, probably won’t happen but it makes sense.
Interesting comments. But a takeover of UT of RR is not unthinkable. A total lack of foresight on RRs’ behalf that it left the narrow body segment, is leaving the company far too exposed. Both companies could keep their names but in small print at the bottom of the page ‘a united technologies company’ But, at the end of the day it would all be rather boring wouldn’t it? Actually, RR have now partnered with Liebherr in Germany to make gearboxes for the Ultra. That is a good move.
As a current employee of Rolls-Royce Canada in Lachine , Quebec I have recently heard rumors of a potential Pratt and Whitney takeover of Rolls-Royce as mentioned the stock values are down . It is a very scary time for shop floor employees as they are doing everything within their power to try and cut and sub-contract everywhere they can . You may even notice now that our BMW engine stands (BR700 series goes on 717 and Global Express…) seem to all be made in China these days….. It comes down to the dollar signs now and our loyalty and long years of service means nothing when the head-count choppers are on the prowl . Stay tuned………..
Without hostility, let’s try to kill a few “received” & pre-conceived ideas or flawed generalisations. No apologies for the length of this. The above article is long & “rich”.
RR is not for taking-over. UK Govt. has a golden-share. If, e. g., P&W & / or GE attempted to take over GE, the UK Govt. would wade in.
RR is not Airbus-focused. Currently, there is strong Airbus focus, by dint of circumstances.
RR could well end up overtaking GE on B787. Wherever there has been a true competition, RR has won 10 of the last 13 campaigns. Where it was a question of repeat business for GE, RR has still won 12 of the last 19 competitions. RR “overturned” GE, when Ethiopian recently chose RR T-1000 over GEnx-1B for its latest order of B787’s. GGE has never overturned RR on B787.
Fact is that GE heavily funds Boeing’s Aircraft development programmes. RR does not. That is how GE won exclusivity for GE90-115B on B777-300ER, whilst RR had come from behind to take a 50% market-share on B777-200’s (GE & P&W having to share the remaining 50%).
Moreover, GE’s GECAS fully funds (with or without Ex-im bank “fronting”) aircraft purchases, Boeing or Airbus, provided the aircraft customer buys GE engines. RR cannot & does not go in for such arrangements. That explains to a large extent why GE took a head-start in gaining positions on early B787 orders ; and, also, why most cancellations have been on those powered by GEnx-1B.
RR was in advanced talks (not exclusive ; reportedly, GE & P&W were, too ; RR does not particularly like exclusivity situations, preferring competition) with Boeing on NSA (New Small Airplane), when that was put on the back-burner, as Boeing felt the need for a riposte to A320-NEO with B737-MAX.
The three engine makers are, doubtless, in talks with Boeing on MOM. GE was not on B757. And RR ended up well ahead of P&W on B757. RR is progressing on its “Advance” & “Ultra-Fan” concepts.
GE refused to compete on the A350-XWB-1000 offering, announcing that it was “protecting its investment in the B777-300ER programme”.
RR is not ignorant on GFT, far from it. Decades ago, RR deliberately chose not to go down the GFT (Geared Fan Technology) route, when P&W went for GTF (Geared Turbo-Fans). A major reason is that, in RR’s eyes, GTF power-plant’s “raison d’être” is in the high-thrust bracket (100,000 lbs & above ; obviously, an engine of the 100,000 lbs class could be optimised at, e.g. 95,000 lbs, especially with RR’s proven scaling skills, upwards or downwards ; one can check this out with RR).
P&W has to pitch its GTF in the mid-thrust brackets, because they are, to all intents & purposes out of high-thrust ; and P&W would have had no credibility in attempting to re-enter it with a GTF offering. In the market place, P&W does not have RR’s proven up-scaling skills.
P&W & RR could find common ground on a “next generation” GTF. And P&W could well b pleased to partner with RR, to help sort out one or two of its problems on its current-generation GTF’s.
RR is not in to-day’s most active single-aisle airliner market. As RR’s new CEO confirmed, RR is not currently interested in about a quarter-to-third share in 25% of this market. When current regulatory issues are out of the way, a new version of IAE, articulated around a JV of P&W & RR (evoked above), but currently postponed “sine die”, could be resuscitated, but, I repeat, not based on the present “1st. generation” GTF concept.
There was no need for RR to sacrifice price to win the Emirates latest order for RR T900. EA were over-turned. The key reasons, self-evident in any case, were published. It was not a question of price.
RR does not bet on A330-NEO. No need to. There was / is a market. RR was the best choice for it. It is an excellent deal for RR, profitable “from day 1”. That programme’s cash-flow will be handsome from early on, & will keep flowing, as long as Airbus & the market want to keep the A330 (NEO, & CEO, too, notably in its “Regional Version”). Investment in RR T-7000 is not demanding (think why).
RR is very comfortable on the B787. The A350-XWB is doing fine. And there is no guarantee that the B777-NEO will outgun A350-XWB-1000 or any big-twin development of this. After all, B777-9X & -8X are no more than a NEO programme, with re-heated 1990’s airframe technology, which cannot draw the quintessence out of a true, modern-generation wing.
Cash flow will soon be fine for RR engines on A350-XWB, and A380, too.
RR is poised to remain leader in the Corporate Biz-Jet market for a number of years to come. But P&W has some excellent offerings there, and these will get better. RR has challenges to face for its new offerings in the pipeline.
BA is more interested in acquiring 2nd-hand A380’s (powered by RR T-900) than keeping B747’s.
RR is a long way ahead of both GE & P&W on high-thrust. P&W is not there, and after the EIS difficulties on the A320-NEO, its GTF offerings are not going to have automatic credibility for many, many years in any attempts at up-scaling.
GE is already feeling the consequences of not having a valid TXWB-generation rival. Readers could ask themselves why Airbus mention from time-to-time the A350-XWB-1000’s 5% inherent advantage in fuel-burn efficiency over the B77-9X. It is engine-rooted. That is a point worth keeping for later.
Tim CLARK / Emirates are fully aware of the reasons for which RR is the candidate likely to meet the demands of their “economic goals”.