Pratt & Whitney: From the Deck to Angels Thirty

1. Evaluate Pratt & Whitney’s attempts to re-enter the commercial aviation engine market. What was successful and what would you have done differently? (25%)

2. Do you think Rolls-Royce should accommodate or prevent Pratt & Whitney’s re-entry as a stand-alone firm in the commercial aviation engine market? What about GE? (40%)

3. Given Rolls-Royce’s and GE’s possible actions/reactions to P&Ws new engine, what should P&W do now to provide itself with options for future competitive moves? (35%)

For questions 1 and 2, consider how financial pay-offs have influenced the behavior of these firms in selecting their competitive actions.

Pratt & Whitney:

With the changing dynamic in the aviation industry, Pratt & Whitney is not merely attempting to re-enter the commercial aviation market, it is hoping to completely re-carve its position in order to influence the direction of the industry.  The company’s attempt to renter the market hinges on three main factors: (i) adoption on the 737 and A320 (ii) buy in from Airlines and Leasing companies (iii) long term service contracts.  If success for Pratt & Whitney is measured purely by the number of engine order in 2010, then their 210 orders of PurePower® engine would be considered abysmal.  Players such as Bombardier, Mitsubishi, and Irkut who have committed to adopting the engine do not have the volume to drastically improve Pratt & Whitney’s market share position.  In addition, the lack of support from major plane manufactures (Boeing & Airbus) and commitment to adapt PurePower® by major airlines and leasing companies is hurting P&W. Out of total 3,474 A320 & 7373 orders, it is unclear if they will be using the technology.

However, rather than judging Pratt & Whitney based on the number of engines orders thus far, the technology and its effect on overall industry players must be considered.  The company has been extremely effective in communicating the advantages of the new technology to the key buyers in the industry, Airlines and Leasing companies.  The fact that the engine is fuel efficient, has high emissions standards, and is quieter could potentially present a very lucrative option to airline industry as they try to cope with rising fuel prices and more stringent government regulation.  In the ingenuity of the engine lies Pratt & Whitney’s greatest success, the technology itself.  While there are multiple aspects that make it appealing to airlines from an operational standpoint, the simpler design could allow airlines to reduce maintenance costs in the future.  Considering that many airlines are switching to or replacing their A320 and 737’s, having a more efficient, lower maintenance engine could be a competitive advantage in a volatile industry.  In addition, the timing of the engine launch not only give Pratt a competitive advantage over GE’s Leap-X technology, it begins a debate in the industry regarding the redesign or re-engineering of the Boeing 737 and Airbus A320. 

While Pratt & Whitney has been able to enter the market with what appears to be a great deal of reserved optimism from major airlines and leasing companies, they have taken some risks in the process.  In developing the technology on their own and attempting to go into the market on their own, they have taken the risk of upsetting the norms of the engine industry. Currently, the three main manufacturers have joint alliances that span the entire 20,000 lb to 120,000 lb thrust range.  The PurePower® technology is moving into the realm that has been dominated by the V2500, a joint effort through IAE between Rolls and Pratt.  In addition, they on trying to also take down the Engine Alliances CFM56 engine while trying to maintain their development on the GP7000 with GE.   By not taking the partnership approach and joining forces with GE or Rolls- Royce, Pratt & Whitney has taken a risk in getting the industry to adopt the technology.

GE and Rolls Royce are left in a difficult position as they see Pratt & Whitney trying to re-carve its position in the commercial space.  It appears that Rolls is seeing the partnership that they have with Pratt for the V2500 at risk in the future.  The lawsuit filed in 1999 was either a play to prevent the engine from reaching market or a warning shot to Pratt & Whitney to reconsider their intentions. Either way, Rolls Royce is left in a difficult position.  Their Trent900 engine suffered from a major design flaw that caused the grounding of the Quantas A380 flight. In addition, Engine Alliance (between P&W and GE) has secured the majority of A380 engine order in the near future. With the market shift towards Engine Alliance, Rolls also sees its position on the 787 deteriorating due to GE’s GEnx engine technology.  Due to current advances, Rolls would be left at a competitive disadvantage without the V2500 and with only a major position in the Trent700 and XWB.  The long term maintenance contract for V2500 are also at stake assuming P&W decides to provide services for V2500 engines.  Considering that PurePower® engine was not a joint venture, mass adoption of the PurePower® engine will put Rolls at a very disadvantageous position.  In engine services industry P&W has already set the precedent by undercutting GE on 200 of their CFM-56 engines (with United Airlines), thus it is likely possible that P&W may be able to carve out maintenance contracts that cater both to the V2500 and PW1000G family. 

GE’s Position: At present GE is the market leader in commercial engine market with their CFM engines, with 11,786 engines already in service and approximately 4,070 engines^†[1] on order (Exhibit 4 & Exhibit 20 of the case). GE is not reacting at the launch of PurePower®. Apart being the market leader in the commercial aircraft industry, GE has secured a sound financial standing. GE spent approximately $4.4 billion on their R&D efforts, approximately 23.5% (Exhibit A) of their total GE Aviation’s revenue. Considering GE has secured a significant portion of future supply of CFM-56 (for 2,035 Boeing 737 planes) and has LEAP-X in pipe line (scheduled to complete in 2016) that can potentially compete with PurePower®.

P&W’s Position: 

P&W’s PurePower® can potentially be used in place of CFM-54 (especially in Boeing 737) with reengineered or new planes. Due to its superior fuel savings capabilities (15%) and noise reduction PurePower® can be an obvious choice of airline manufacturers. Apart from above capabilities P&W also has a sound financial position. P&W spends $3.6 billion on their R&D efforts, approximately 29% of their total revenue (Exhibit A). Although there could be some potential advantages of partnership with Rolls, yet it should be carefully evaluated as Rolls does not have best possible financial standing in the industry.

Rolls-Royce’s Position: 

At present Rolls has somewhat struggling position in the industry. It is third player in the industry only 17% shares in terms of revenue (Exhibit D). Also, Rolls has very small R&D budget (Exhibit C). With this over all position of Rolls, P&W should be very careful in making strategic alliance with Rolls-Royce.

While Rolls-Royce initiated a patent lawsuit against Pratt & Whitney, it would appear to be in their best interest to create a partnership and help spur the adoption of the technology.  If Pratt’s technology isn’t adopted, than GE will maintain a competitive position in the marketplace.  However, the projected rising fuel prices (22.5% of total operating expense in 2009) and stricter emission control indicate that if they don’t have the technology, then they need to be aligned with someone who does.

Although financial side does not clearly indicates the alliance possibility, yet joint venture can be justified by some other arguments. For example, once the PurePower® is launched and Pratt’s technology isn’t adopted, than GE will maintain a competitive position in the marketplace.  However, the projected rising fuel prices (22.5% of total operating expense in 2009) and stricter emission control indicate that if they don’t have the technology, they will either develop it or collaborate with someone who has it. Considering Rolls Royce doesn’t have a direct partnership with GE, even if Pratt & Whitney’s PurePower®  engine play fails, GE, is poised to introduce their Leap X engine technology which will only create the same difficulties for them.  Thus, it appears that a partnership is in their best interest to grab a share of not only slim engine profits, but aftermarket maintenance contracts that are extremely valuable. 

For GE, their play on the PurePower technology is completely different.  Since they are already in development of introducing a competing engine in the form of a Leap X, it is in their best interest to prevent the adoption of the PW1000G family.  Considering that they operate a leasing company for aircraft, it is in their best interest to us the Leap X technology and to be the number one choice for both a redesign A320 and 737.  GE has already tried to send Pratt & Whitney a clear signal by entering into their turboprop market that generates $4B in sales annually for P&W.  While GE would like to be the dominant player in the 737 and A320 market, they also understand that there are typically two engines qualified to high volume commercial planes.  If there appears that the PW1000G is adopted, GE will have to ultimately compete with them anyway.  However, the key for GE will be to delay the installation of the P&W engine so that they do not get such a significant first mover advantage in the market.  Considering that they also have a vested stake in the GP7000, it would be in there best interest to maintain that relationship to prevent the engine manufacturers from becoming specialized.

While GE and Rolls Royce will most likely take competitive actions, P & W strategically has the upper hand along the entire commercial aircraft chain.  There appears to be significant divergence in strategy between Boeing and Airbus in terms of their most popular commercial aircraft offerings.  Airbus has indicated that they will be adopting new engine technology on a slightly modified A320 to meet fuel, emissions, and noise requirement.  This is a strategic play by Airbus to win more business for the A320 at a time when Boeing is considering whether to stop production of the 737 and replace it with another aircraft.  Since Boeing has struggled with the completion of the 787, the announcement of a new 737 which could take up to 20 years to get into the market place could shift airlines towards purchasing the A320.   By providing the PurePower® family of engines to Airbus, the two companies are effectively communicating to the industry that they have a cost effective solution now, rather than in an unforeseeable time in the future.  This play puts a considerable amount of pressure on Boeing to meet Airlines demands now, knowing fully well that they could lose a considerable amount of market share if they decide to redesign the 737. 

By forming a partnership with Airbus and getting their engines qualified for the A320, P&W will provide itself with considerable amount of leverage.  That leverage will not only be in the engine technology that they offer, but the service contract for the V2500 that they’ll be replacing.  By becoming the dominant player in that segment, they would carve out a profitable niche and build strong relationships that could help them prove the technology to the industry for decades to come.  In addition, the partnerships that Pratt & Whitney has already formed with Bombardier for the CS class of commercial planes will only enhance its reputation in that segment.  As indicated, Bombardier expects to become a major player in that market if Boeing opts for a redesign.  The leverage of already having the P & W engine technology would only enhance their offering and allow them to steal market share from the big two.  P & W should direct their efforts directly towards Airlines who have this unmet need and are still using older V2500 and CFM56 engines.  Ultimately, the airlines purchasing decisions will influence the direction of the broader industry and with those purchasing decisions will come the lucrative maintenance contracts.

[1] We are assuming only three biggest players in the industry. Revenue in the table 6 is the revenue of the corresponding aviation departments of respective companies.

^†[1] 2,035 Boeing 737 are on order and assumption is that every plane uses two engines.