(Redesigned with an analysis tag in the title) by Tim Hepher
A debate over engine performance has highlighted a dilemma facing aerospace companies at this week’s Dubai Airshow: The hottest part of the jet market is also the hottest part of the world.
Airlines want to save fuel and minimize maintenance costs. But these forces oppose each other in sandy or dusty environments like the Gulf and India.
“Therein lies the problem for Rolls-Royce RR.L and Airbus AIR.PA , because this is the region that is buying these planes and will buy them in large numbers if the engine problem is resolved,” said Tim Clark, chairman of Emirates Airline, to the press this week.
The head of the world’s largest airline was speaking as negotiations to purchase dozens of Airbus A350-1000s powered by Rolls-Royce’s XWB-97 engine have so far failed due to maintenance issues and pricing.
Emirates and Rolls masked their differences on the site by striking a last-minute deal for a smaller quantity of the shorter A350-900, whose engine maintenance is seen as easier to predict.
The rare public dispute comes as engine makers want to be better rewarded for their investments in new technologies, given the fuel savings they offer airlines on every kilometer of flight.
GE Aerospace GE.N set the tone under the leadership of Larry Culp. “We will continue to look for opportunities to be paid fairly for the value we create,” he told Reuters after the release of half-year results in July.
Rolls-Royce Chief Executive Tufan Erginbilgic, who took office in January this year, indicated that the company would no longer enter into unprofitable contracts in a bid to win new business, having already provisioned 1, £4 billion for loss-making contracts.
Critics say engine makers are paying for the hubris they displayed in the past, when they aggressively courted airlines with promises of huge fuel savings and impeccable performance.
The airline industry, whose margins are thinner than those of most of its suppliers, is generally not friendly.
“I really don’t want to have planes breaking down all the time. I happen to be a service provider,” Tim Clark, chairman of Emirates, told reporters this week.
Rolls-Royce said it was looking at ways to improve durability, but denied its XWB-97 was “defective”.
At the heart of this week’s negotiations is a high-wire act between energy efficiency and sustainability.
To achieve the fuel savings promised to airlines when the engines were sold, generally around 15 to 20%, they must operate at higher temperatures and push the new materials to their limits.
But this causes additional wear and tear.
Sand and dust can clog cooling ports and erode the leading edges of the blades, reducing performance and requiring additional repairs.
This is especially a problem for new types of engines which tend to be sold as part of guaranteed service offerings, according to delegates.
INSURANCE-TYPE CONTRACTS
If the face of engine makers is technology, the way they generate much of their revenue is akin to insurance.
Jet engines are typically sold at a loss, but their designers make money from repairs and maintenance spread over 20 years.
Rather than billing for repairs as they occur, engine manufacturers are increasingly entering into long-term contracts billed by the flight hour, agreeing to assume the cost of planned and unplanned breakdowns.
“It’s an insurance policy,” said an engine industry source.
For airlines, this means predictable costs.
For engine manufacturers, this means generating cash as soon as the engine enters service, rather than waiting for workshop visits.
It is in the sandy or dusty regions of the Gulf and India that these complex calculations have become increasingly bogged down.
With each “stack” of life-limited parts costing millions of dollars, it is critical to accurately predict the number of organ transplants each engine will need over its lifetime.
An errant or maintenance-prone engine can become a financial time bomb, an industry executive said. Emirates’ Mr Clark said Rolls wanted to increase hourly pricing to adapt to these higher costs. Rolls-Royce declined comment on pricing.
Rolls now faces a dilemma: should it invest more in the XWB-97 to help Airbus better compete with the Boeing 777X, after Emirates ordered 90 more GE-powered planes?
A refusal would underline Erginbilgic’s firm stance on profitability for investors, but would risk leaving part of the wide-body market to Boeing BA.N and GE, and antagonizing Airbus.
Some analysts think the money would be better used elsewhere.
“Rolls-Royce has stopped chasing market share at all costs: it has learned not to do it and no longer needs to,” said Nick Cunningham, an analyst at Agency Partners.