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Anonymous

Former VP, Marketing and Sales at GECAS

Challenges for Aircraft Lessors

Aircraft Lease Factors and Return

Former VP, Marketing and Sales at AerCap

AerCap & Aircraft Leasing

{audio:0:00:03} Doug, could you please provide some history on the relationship between GE and Safran and the CFM entity?

{audio:0:00:14} Let me start by defining what CFM is. CFM International is a 50/50 joint venture, between GE Aviation, which is a division of the General Electric company, in the United States, and Safran Aircraft Engines, which was formerly known as Snecma, back in the days, a division of Safran of France. I’d really like to explain a little bit about the history of how CFM became what it was and also some of the early struggles and the launch of this first commercial engine. It was never easy. I’d like to add a not very well-known anecdote of the role of a legendary astronaut, Neil Armstrong, in the launch of this first CFM engine.

{audio:0:01:12} The joint venture was conceived back in 1971, during the Paris Air Show, between Gerhard Neumann, president of GE Aviation and René Ravaud, the president of Snecma, at the time. They decided to work together and go after this so-call 10-ton engine program, which was aimed at the single-aisle market, which was completely dominated by Pratt & Whitney, at that time. There was quite a bit of excitement on both sides and they quickly formed working teams, to define and test the first demonstrator engine. GE brought the military and commercial engine experience that they have. Whilst Snecma had a lot of technical expertise, mostly in the military, they had some limited exposure to commercial, thanks to the joint venture they had with Rolls Royce, on the Concorde. Snecma had to create, literally, the sales department and the customer support department, from scratch. GE helped them a lot, in this regard.

{audio:0:02:25} In spite of the early excitement on both sides, then next few years were filled with a lot of political drama in the world stage, before they could officially incorporate CFM International, in September 1974; that’s the official date for CFM. To put some context into the scene, at the time, the two countries, the US and the French government, had to give the green light for this joint venture to move forward. One of the complications was, for example, that the core of the proposed engine was using the core of GE’s F101 engine, that powered the B1 bomber, which was a very sensitive military application. The US government was very reluctant to give the okay due to the risks of possibly even sharing technologies between both countries.

{audio:0:03:26} If that wasn’t enough, a lot more was happening around the world. I’m talking about 1973, 1974. It was the end of the Vietnam War, the Watergate scandal was at its peak in 1973 and 1974. The Yom Kippur War started in October 1973, followed by the infamous oil embargo that many of us remember. The US and France were not really seeing eye to eye on some of the international issues, especially when France was not supporting the US, in the Middle East, against the oil embargo. Nevertheless, President Richard Nixon and President Georges Pompidou shook hands early in 1974, during their meeting in Iceland and gave the okay for GE and Snecma to move forward, but not without some major, last-minute diplomatic efforts. Nothing is easy.

{audio:0:04:29} Now that the CFM entity was incorporated, another five frustrating years ensued, as the partners truly struggled to launch its new turbofan engine. Many studies were conducted, with Boeing, on re-engining the 707. Other studies were conducted with French manufacturer, Dassault and even one concept with McDonell Douglas. All these projects pretty much stalled and an engine customer never materialized. To add insult to injury, Jimmy Carter cancelled the B1 bomber program, sending the GE F101 engine program to a full stop. As I said before, the core of the CFM demonstrator engine is derived from military F101. This new development really put a lot of additional financial strain into the program.

{audio:0:05:33} Slowly but surely, all these developments were beginning to cast very serious doubts that a CFM program was ever to launch. The mood, certainly at the GE side of the headquarters, was very low. By pure coincidence, around that time, the FAA was pursuing more stringent noise regulations for the early commercial aircraft, like the 707 and the DC8. This was great news for Snecma and GE, since the CFM engine was designed to run quieter than other similarly sized engines. Just a couple of weeks before pulling the switch on the joint venture, retired president of Douglas Aircraft, an individual called Jack McGowan, anticipating the FAA’s requirements, started an informal dialogue with GE leadership and decided to lead a technical proposal to re-engine a large fleet of DC8 airplanes, owned primarily, by United Airlines, Flying Tigers, which is a cargo company, and Delta.

{audio:0:06:50} In spite of the CFM engine fuel efficiency advantages, and the lower noise and durability, United and Delta were more attracted to Pratt’s JT8D engine commonality and the huge fleet that they have. There’s a lot of commonality there. That was not working, for CFM. In the end, United, with the largest DC8 fleet of the three operators, was going to determine CFM’s fate. Here’s where Neil Armstrong, a member of the board of United Airlines, enters the scene. Neil Armstrong is an aeronautical engineer, a fearless astronaut, as we know and was the first man to step on the surface of the moon, in 1969, which was 10 years before. After he retired from active duty at NASA, he was also an engineering professor at the University of Cincinnati, from 1971 to 1979, before joining the board at United.

{audio:0:07:55} In 1979, Neil Armstrong led United’s propulsion evaluation team, to evaluate the competing re-engining bits, from both CFM and Pratt, for the DC8 fleet. In the end, United, Flying Tigers and Delta, collectively owned the world’s largest fleet of DC8s. Together, they finally agreed to replace the fleet. The original Pratt JT3D engine, with a CFM-2 turbofan. The first contract was signed with United, to re-engine 28 DC8s, followed by 13 from Delta and 18 from Flying Tigers. That program was called the DC8 Super 70 series. If you add them all up, from the beginning to the end, they probably re-engined about 110 DC8s which, ultimately, were converted to freighters.

{audio:0:09:00} With the first CFM customers secured, finally, CFM continued to work with Boeing on re-engining the 707. It resulted in a game-changing decision, the following year, by the US Air Force, to power the new KC-135 tanker, with CFM engines. The KC-135 is a variant of the 707; it’s a military tanker. The CFM re-engining program on the tanker, would continue for decades. Within six more years, CFM engines also secured positions on the Boeing 737 Classic, which started operation in 1984, 1985 and soon after that, on the Airbus A320. Today, CFM International is the most successful producer of commercial jet engines for airlines, in the history of aviation.

{audio:0:10:02} What are the respective responsibilities for GE and Safran, in the current CFM business?

{audio:0:10:13} On the production side, GE is responsible for the core engine and the high-pressure modules, whilst Safran is responsible for the low-pressure modules. The engine full assembly production is split between the US and France. Each partner ships its own modules to each other, and both have the capability to assemble the engines. Typically, for simpler logistics, Safran assembles the engines that go to Airbus platforms or applications and GE does the same thing when the engine goes to Boeing.

{audio:0:10:50} On the sales and customer support side, GE is responsible, geographically speaking, for the Americas, Asia-Pacific and China. Safran leads the team in Europe, Middle East, Africa and India. However, they both collaborate with each other, as needed.

{audio:0:11:18} Are there any tensions in their relationship today?

{audio:0:11:22} No; on the contrary, their relationship has grown and matured. I think one of the most important pieces of this success, technically speaking, was that they really were a great match. But it wasn’t until you had the two leaders come together and talk to each other, that they decided, you know what, it makes a lot of sense for us to join forces and go after this market. It started with a very high-level agreement and then they found out that, technically, they complement each other. Since then, it has been evolving. I’m not saying that there haven’t been certain challenges, commercially speaking. Sometimes, they need to discuss, what is my content, the pricing and things like that. Every sales campaign out there has a lot of dialogue, discussion and debate. Sometimes they don’t agree with each other on a particular price, because each one has their own different commercial models. But at the end of the day, it is a consensus base. That makes it a very, very special joint venture.

{audio:0:12:45} Do you think this JV will be extended and there’s little risk to the relationship not being extended in the future?

{audio:0:12:54} The relationship, as such, was already extended until 2040. There is already an agreement, signed between the two, several years ago, that this relationship will continue on until at least 2040. I tend to think that, as new applications come to the market, CFM has a chance to continue and find a way. You have to understand that the agreement between the two is for engines, where neither of those two partners compete. That’s a range between 20,000 pounds of thrust and 34,000 pounds of thrust. I don’t see why that couldn’t stretch a little more than 34,000, to maybe 40,000 or even more. From there on, for example, GE makes engines to be on 55,000, 60,000, 70,000, 100,000 pounds, so there is no competition. With the very volatile model that we have, for aircraft and engines, there’s a lot of risk and these people that are in this business, they’d rather join forces, on a particular venture, than try to do it separately, because it really works against you, if you fail to make the right choice.

{audio:0:14:32} How do they split the responsibilities in the aftermarket and MRO?

{audio:0:14:38} Actually, before, each one was responsible for its own aftermarket and I’m talking about 10 or 20 years ago, before LEAP. Before LEAP, they both had their own aftermarket organizations; they could compete to win the overhaul and repair, from different airlines. They did that for many years. Then LEAP comes in and both partners decided they were just going to work together; they decided to offer one services proposal, to anybody interested in LEAP and they also decided that new CFM engines, meaning prior models of the CFM engines, would also go together, as one.

{audio:0:15:39} That must have given CFM a huge advantage, in the aftermarket, by combining the two forces?

{audio:0:15:47} I’d like to think so. When you look out there, airlines love to have competition. The first reaction was, by joining forces, you are eliminating one competitor. The answer to that is, quite frankly, at the end of the day, they make a better job and a better offer, with more synergies, because both have shops. You have airlines located in Asia, in Europe, in the Americas, and the engines can be repaired anywhere, depending on what the logistics are. I was there when that happened and I think it was, ultimately, better for the customer.

{audio:0:16:36} I guess the move, for CFM, with the LEAP, is to own more of the aftermarket and bringing the two forces together and that helps them, typically, increase that market share or take back ownership?

{audio:0:16:51} Yes. You go for the first phase, which is selling new engines, then you tackle the aftermarket and you provide the services. That is really important in the early years of an engine launch. That’s where you have the the possibility of offering those services later and, I think, doing that together just proves to be fantastic.

{audio:0:17:33} Can we walk through the decision-making process of airframers choosing engines for a new platform and how, specifically, an airline or lessor influence the decision?

{audio:0:18:04} Airframers, such as Boeing and Airbus, are regularly in touch with their airline customers and leasing companies, because their influence is very significant, in aircraft design. Before aircraft manufacturers launch a new aircraft, typically, they consult with major influencing customers, around the world and form a customer committee that serves the purpose of gathering opinions about aircraft design criteria; not only size and range but also what their opinions are about the engines, the amenities that they’re going to offer, special features and so on. However, these airline customers and leasing companies do not have a direct vote on what engines would be powering a particular aircraft. Nevertheless, there have been some instances, in the history of commercial aviation, where some big and reputable airlines have voiced their opinion and insisted that a particular engine is put on an aircraft type. And they succeeded, interestingly enough.

{audio:0:19:18} In more recent times, airlines and lessors continue to voice their opinions, although not necessarily in favor of a specific engine but, for example, on whether there should be multiple engine choices for a particular aircraft platform. That’s because airlines want competition and they want leverage, when the time comes and they have to select their engines on that given platform. Ultimately, the decision lies with the airframer because it’s a very complex technical and commercial evaluation, where you balance risks and overall cost.

{audio:0:20:06} Given the option, aircraft manufacturers would also prefer multiple engines; that would be a normal commercial approach. However, this is a very high stakes business. Engine makers also make their own assessment as to whether a $1 billion or $1.5 billion investment makes sense and if they can also get a decent return. It’s not as simple as getting an off-the-shelf engine and plugging it into an airplane. It takes many millions of dollars and, as I said, also exceeding a billion dollars in investment.

{audio:0:20:51} I’ve witnessed this, several times in my career. For example, when GE seriously considered, and even proposed, an engine to an aircraft manufacturer. But in the end, they decided to walk away from that particular project, simply because they believed the market didn’t affordably sustain more than one engine model. A recent example of this was the A330 neo, a couple of years ago. When it was launched, in Paris, GE decided to get off that program. GE had the engine but they decided that two engines, for this small niche, was not justified and they thought they could lose their shirt there, so they walked away.

{audio:0:21:45} Also, not long ago, with the A380 neo, I don’t know if you remember but Emirates was looking for a refresh of an A380 but, again, investing in a new engine for a program that you’re not certain is going to be there for a long time, it didn’t work. So GE also walked away from this and, quite frankly, time proved them right.

{audio:0:22:17} Why is the A320 split 40% GTF and the rest CFM and the 737 is sole source CFM?

{audio:0:22:47} Why is the A320 split between the two, between Pratt and CFM? Airbus decided, very early on, that they would go to market on the A320, with two engine choices. They were very adamant, since the early 80s, on having a dual-source engine, especially when you’re talking about a single aisle market, which is the biggest one. You have a lot more airplanes of this size, carrying 150 to 180 passengers. Also, because Boeing had already made the decision to go sole source, with CFM, on their 737 offering, the classic, in the early 80s. For clarification, in the early A320 aircraft, Airbus was offering two engine types, the CFM and the IAE. IAE, known as International Aero Engines, was a joint venture of five different companies, including Pratt & Whitney of the United States, Rolls Royce of the UK, Japanese Aero Engine Corporation of Japan, MTU Engines of Germany and Fiat Avio of Italy.

{audio:0:24:11} Avio dropped from the joint venture, early in the IAE program and, in 2011, Rolls Royce announced the sale of their participation, their shares, to Pratt. That meant that Rolls Royce, exclusively from there on, dedicated their efforts into the wide-body market. I don’t mean exclusively, because I know that they’re going to try to get back on the narrow bodies, in the next generation.

{audio:0:24:45} If you fast forward, two different engines now were offered on the A320 neo. The Pratt & Whitney, with their geared turbofan and the LEAP, from CFM. LEAP has about 58% or so of the market share on the A320 neo, today.

{audio:0:27:15} How does an airframer choose which engines to use on the platform?

{audio:0:27:20} The selection of engines, for a given platform, takes a few years with engines with competing bids. In the process, this can change and then they can continue on and the engine manufacturers can do something else. Another example, even more recently, is that Boeing was starting the launch of the so-called NMA platform; that’s the new middle of the market aircraft. A couple of years ago, they were thinking about a dual aisle fuselage, a bit like a 757 replacement, but bigger, and capable of flying more efficiently on the transcontinental routes and even the North Atlantic routes. There were several engine sized models, with derivatives being considered. This is only two years ago. However, fast forward, with the grounding of the MAX in 2019 put a big hold on this project, at least for a while.

{audio:0:28:19} In the meantime, the Covid pandemic hit aviation very severely and it’s making the industry leaders rethink about the future aircraft size. I’m pretty sure that the revised NMA criteria will be different from the original version. Things change, over time. Having said that, and back to your question, the airframers work very closely with engine manufacturers, while making an early assessment of what the engine specs looked like. More studies follow, until the engine specs are finally determined.

{audio:0:29:02} How do engine OEMs bid for the position on the platform?

{audio:0:29:09} Once the criteria and parameters are determined, for a particular aircraft, engine makers are formally invited to present their technical and commercial bids and negotiations begin. Engine proposals can be of an entirely new center line engine, a brand-new design. Or they could be a derivative of another existing model. Clearly, the latter is a lot less costly. The process can take years to fine tune, until the airframer is confident that the engine can do the job efficiently, reliably and at an affordable price. Although aircraft manufacturers lead, to launch new aircraft, the engine manufacturers make their own assessments of the market and, independently, invest heavily in R&D, to improve their own technical designs, such as more advanced materials. They test new technologies and engine sizes and they want to be ready, before they get the call.

{audio:0:30:18} Sometimes, certain technologies start being tested in military applications, way before they find their way into commercial use. The final decision will be a combination of technical and commercial terms. The other important decision could be whether to have a sole source or multiple source engines. The economics will dictate what to do. If the market is relatively small and risks are high, probably you would opt for a sole source. I’ll give you an example of the 777X. It was a relatively small market; not everybody flies a 777, in the same way not everyone flies 747s. It depends on the terms of the negotiation and, in general, when possible, airlines would prefer to have a choice of engines.

{audio:0:31:16} So you’re saying, the smaller the market and the higher the risk, the more likely they are sole source?

{audio:0:31:24} The reason being, if you have a big market, then you can justify having two engines or more. If the market is, as I explained before, like an A380, a niche, where not everybody has an A380 these days, but a lot of people have A320s and 737s. When you have a smaller market, risks are higher because it takes more time to, essentially, reach profitability, so it’s not so justifiable to have two engines, on that particular application.

{audio:0:32:11} So the engine OEM would be more aggressive in bidding for the sole source platform, to get that business?

{audio:0:32:20} As I said, it depends on the aircraft type. On the A320, that’s fine. You’re going to have airlines that are going to go one way or the other. Interestingly, you may argue, wait a second; why did Boeing choose one engine? They could have chosen two. I think it had to do, again, with the specifics and the terms and conditions and the history. When you start doing business on the 737 Classic, then on with the NG, you prove that the business model works well, for both, you both make money. You then have an additional argument when you launch the MAX. By the way, it’s not that Boeing didn’t consider having a dual source; they did. They decided simply to go sole source.

{audio:0:33:27} I don’t think that that will be repeated next time around. Most likely, they may be offering two engines, after the MAX.

{audio:0:33:41} Is that because it’s too risky?

{audio:0:33:43} No; it’s just because airlines and leasing companies love to have competition. They push the airframers to give them two, to have the two to compete against each other and so they can get a better price. That’s really the theme.

{audio:0:34:04} That’s why the A320 is split between the 40% GTF and the rest CFM?

{audio:0:34:13} That’s not necessarily the reason. It’s just that you have to prove yourself in commercial operation and I think that the market share is a reflection of the track record of each engine, quite frankly. The geared turbofan had some issues, early on and that didn’t help them in some sales campaigns. More recently, last year, there were some airlines that, literally, switched from the geared turbofan to a LEAP engine powered fleet. That was game changing for us; it was an interesting development. It really depends on how you are doing. If you’re doing well and you have a reliable engine and it’s doing well in service, you tend to go for that one, because airlines don’t like to hear about engines, believe me. They don’t want to hear about disruptions and the least they know about what’s going on, the better off they are. Disruptions create turmoil and they start questioning whether they made the right decision.

{audio:0:35:26} It’s interesting how you think that, potentially, the new Boeing platforms, the narrow body platforms, will likely be dual sourced, which obviously gives Pratt & Whitney an opportunity to come into the frame?

{audio:0:35:39} It’s an opinion. Let me add this, for the next generation single aisle – and I’m not saying it’s going to happen any time soon; I’m thinking about the next decade, in the 2030s – I don’t discard the idea of having Rolls coming back to the market, competing in this market, because they have their own technologies. They didn’t, necessarily agree, inside the IAE joint venture, to offer a geared turbofan; that was part of the drama. They had their own concept.

{audio:0:36:33} Right now, it could be the Ultrafan. But what I’m saying is, these technologies evolve and you come up with new developments but I’m pretty certain that Rolls is not going to stay only in the widebody segment. They’re going to try to get back to the narrow body, because that’s where the bigger volumes of airplanes and engines is.

{audio:0:36:57} Do you think CFM need a geared engine, to compete?

{audio:0:37:03} Possibly. GE has done a lot of work in this, for many years, 20 or 30 years ago. The reason why CFM did not opt for a geared turbofan architecture is because they conceive the LEAP as a direct drive architecture, providing the same fuel efficiencies that both Airbus and Boeing were looking for, but in a more reliable manner. You have to understand that airlines, of course, they want to pay less for everything, like we all do, and we want to make sure that we make a good economic decision, but it doesn’t help you if you have a cheaper solution, if that cheaper solution doesn’t fly and help you operate efficiently. You’ve got to be careful; it’s a balancing act.

{audio:0:38:18} Can you share some background about your experience selling engines for CFM to airlines?

{audio:0:38:31} Engine selection goes hand in hand with aircraft selection; they go in parallel. Airlines are very sensitive to the selection process, because they understand that engines make up for 20% to 25% of the aircraft price and about 45% of overall aircraft maintenance costs. Those are big numbers. They want to make sure that they make the right decision, in terms of performance and the overall cost of ownership. Several departments, inside the airline, are involved in the engine evaluation, from fleet planning, finance, maintenance, engineering. Due to the financial impact of an engine selection, these decisions can go all the way to the board, more often than not. The final decision can take several months, after you decide what aircraft you want. But sometimes, both decisions are made at the same time, where the airline decides, this is the aircraft and this is the engine.

{audio:0:39:53} Interestingly enough, there are instances where the aircraft is decision is tentative or, should I say, subject to the airline reaching a satisfactory agreement with the engine manufacturer. They want to make sure that the combination of aircraft engine is the right economic decision. That’s why they both go hand in hand.

{audio:0:40:18} Because the engine is so expensive in the total cost of ownership?

{audio:0:40:22} Exactly. Depending on the sophistication of the airline, they would first want to understand the engine architecture. They want to go through the same process. They want to understand why one engine is better than the other one. They like to understand the features and what the track record is. At the end of the day, the engine evaluation consists, typically, of a net present value comparison of all engine related costs. Therefore, you evaluate the price, of course, plus whatever escalation factors you offer. In addition, they evaluate the engine fuel consumption performance. This is very significant because, as you know, 35% to 40% of an airline’s base cost, is fuel, so that’s very important; that’s performance.

{audio:0:41:24} Likewise, the airlines want to compare all the associated costs with reliability or lack of. For example, they tried to model what the reliability would be on a given operation, so they tried to model the dispatch reliability, delays and cancellations, in-flight shutdowns, statistically, shop visit rate. All these parameters are provided by the market, existing experience. The airframers know because they accumulate all these statistics and it’s provided there by different sources.

{audio:0:42:12} Another crucial component for this evaluation is the maintenance cost. This could be a more significant contributor than the install price itself because, remember, the install price was heavily discounted. When you look at the NPV analysis, it involves maintenance cost for the first 10, 12, 15 years of operation. Let’s not forget that you have standard warranties and special guarantees, terms and conditions. Ultimately, everything is practically monetized and compared.

{audio:0:42:52} The airline actually looks at NPV, as well as the lessor?

{audio:0:42:58} I need to explain the difference there. Leasing companies, of course, are extremely important players in commercial aviation, because they own, practically, 40% of all the aircraft flying and they represent 50% of all the aircraft orders, in a given year. Imagine that, for a moment, how important they are. They have a strong voice and influence. Lessors serve the industry well, because they help airlines that don’t necessarily have a strong balance sheet, so they can enter into an operating lease. It’s not a long-term debt; it’s an operating lease. They also help airlines bridge from old fleets to more modern ones. The process of selling to a leasing company is similar, but has certain caveats.

{audio:0:44:03} Leasing companies are, primarily, focused on their ability to make a good return on their investment. They want to balance their aircraft and engine portfolio, to make sure that it reflects the market preferences and trends. This is an ongoing process for them. Therefore, upfront price is a very important factor, for them, as well as terms and conditions. Since they are purchasing aircraft engine fleets speculatively, way ahead of the demand, they tend to delay engine decisions, waiting for the market to determine what preferences there are, for engine makers.

{audio:0:44:51} Another important difference between selling to airlines and lessors is that lessors are not that interested in engine maintenance costs, because they do not have that responsibility. They lease them over to their lessees, and they leave that responsibility or that burden, to their clients, their customers; the ones that are going to operate decide the maintenance renegotiation.

{audio:0:45:27} How has the impact of lessors changed the demand for aircraft? I guess the airlines still demand the lowest maintenance cost, for their total cost of ownership, so the most fuel efficient or cheapest engine wins?

{audio:0:45:45} It’s not that they are only looking at the bottom-line numbers, but they are listening to the industry and that’s very key. Leasing companies are extremely well in tune with what’s going on, around the world. They have people in China, in India, in Europe, in the Middle East, in the Americas. They know what’s going on and they talk to customers, they talk to airlines and they get a feel for what the trends are. When they look at the proposals from engine manufacturers, they see okay, this cost me this, this cost me that. But sometimes, they need to make a trade off there. Sometimes they have to pay a little more, for a better engine.

{audio:0:46:44} If you’re selling me an engine and I’m an airline, in the financial planning department, do I have to then model out shop visit costs, powered by the hour, for the engines and make a calculation?

{audio:0:47:05} So they have to know, exactly, the life-limited part cost or the individual part cost?

{audio:0:47:14} We provide most of the information, but they need to model that. Again, it depends on how sophisticated the airline is, that they have their own modelling processes, to forecast what it’s going to cost to maintain an engine for the first 12 years. We provide some basic information; we do not provide our model. We provide the proposal; this is what we offer to you; this is the rate, per flight hour, for this given time and then we’ll take over the responsibility for maintenance and you relax. This is for a new airplane.

{audio:0:48:00} Let’s just assume that I’ve got an A320 and I’m choosing between a geared turbofan or a CFM LEAP. What are the major factors that drive the price of that maintenance? If I’m an airline procurement or financial planner, what do I need to focus on?

{audio:0:48:21} Maintenance is directly determined by the severity of the operation of the airline. You have to consider four key parameters. One is the annual utilization; another one is the flight leg, which means the average flight leg or the segments that you fly, in your network. The average D rate at takeoff that you exert, is the third one. That means that the pilot is in control of how much thrust they want to take off with and that depends on the payload. Normally, pilots are instructed not to use full throttle, but to use what is needed, according to the payload that you are carrying, both in fuel and passengers and freight. The fourth parameter is, what is the average ambient temperature, in your network that you are going to operate this engine in. Why is this important? It’s a different case when you fly in Canada, with relatively cooler average temperatures, than if you in fly in the Caribbean, where it’s hot all year round. You could also go to another extreme, and a harsher environment, like the Middle East or in China.

{audio:0:49:59} If you compare an airline that flies the same segments and have the same utilization, an airline in Canada, an airline in the Caribbean and an airline in China, they are all going to pay a different rate, because of the severity. If an airline that flies two hours, average, per segment, per flight, pays a rate, then an airline that flies 1.2 is going to get a different, more expensive rate. This is because when you fly more cycles, you take off more times a day and you are putting more cycles through the engine.

{audio:0:50:49} How do I choose between Pratt & Whitney and CFM? Do I look at the network? Do I look at the quality of how you can supply the parts? What type of detail do I need to get into, to make that decision?

{audio:0:51:01} I gave you some numbers because numbers is one aspect of it. But there are other elements in the evaluation. If I’m an airline in Africa, where am I going to get my support? Am I comfortable? Do I have an experience with either Pratt or CFM that says, I’m comfortable or I’m not? Those are factors that play into this. Of course, if you have a good experience, you tend to check that box and, certainly, give more credit to that particular engine manufacturer, depending on where you are in the world.

{audio:0:51:56} How would you compare CFM and Pratt’s aftermarket presence, quality and operations?

{audio:0:52:06} Honestly, I think both are very good. They both have worldwide reach; they’re all over the place. I don’t think that there is a place in the world that you can say, I don’t see either of these companies present. That will not be the point. The point, I think, is about the engine that you’re going to choose, has the projected reliability, is affordable to me, at the price they are selling it and for the maintenance cost, I can trust that that is the number that it is going to stay at, for all these years. I think it’s a matter of reputation and track record; that also plays a big role here.

{audio:0:53:04} I’ve seen situations that have gone one or way or another. You have that and then you get to the board level and then there are other things. Let me add another dimension to this, which happens in real life. In the negotiations, we’ve been talking about evaluating one engine versus the other. In one airline, you may have a lot of Pratt engines, and they can add value in a different way, unrelated to the geared turbofan. The same thing goes with the LEAP. If you have an airline that has a lot of CFM engines and they are a relatively happy customer, they’re going to look at, what did CFM do for them when they were in crisis? Or, more importantly, what other things they can do to help, such as retrofit the existing engine fleet and provide some incentives in other ways. There are ways to influence an airline decision to go either way.

{audio:0:54:36} Can we move onto pricing and, specifically, how do you manage pricing of new engines and aftermarket services?

{audio:0:54:50} Approximately 20% to 25% of the value of an aircraft corresponds to the value of the engines. It’s a very significant component of the economics of buying a new airplane. The engine business model is a bit unusual. You sell a new installed engine, heavily discounted, upfront, in order to encourage airline customers to buy your product, with a notion and the expectation that you will recover that profitability in years to come, by selling parts and services to them. To put it another way, engine manufacturers make their money over the long run. Perhaps that is an entry barrier for newcomers, who would like to compete in the engine business. It’s a business where you take enormous risks, by investing in expensive technologies and new products that you hope you will sell for many years. It’s so complex, that China and Russia prefer to buy Western built aircraft and engines.

{audio:0:56:12} However, cracking the code of engine design, for safety, reliability and performance has proven more difficult than aircraft manufacturing. Therefore, they seem to be more inclined to put Western engines on their own indigenous airplane platforms. I’ll give you a couple of examples. The Comac C919 from China is their own airplane design, but they decided to put the LEAP engine on that airplane. More recently – and this is something in progress right now – is the CR929, which is a proposed widebody development, between China and Russia. They are going to challenge the duopoly between Boeing and Airbus. They have not decided on the engine yet, but I know that GE has been invited to compete. You never know what they’re going to do, but when you look at what’s happening in technology, you can manufacturer an aircraft but you’ve got to make sure that you have the right propulsion system behind it. So far, they have gone towards a Western made engine. That may change in the next 15 years; I don’t know. But it’s not going to change in this decade.

{audio:0:57:53} Back to your question; it doesn’t come as a surprise that airlines tend to buy new fleets whilst, at the same time, contracting the maintenance for the first 10, 12, 15 years, with the engine manufacturers. It’s a good move for the airline, because it’s a way to protect their investment. At the same time, it provides the OEM, the engine manufacturer, a path for profitability. As I said before, the model of the engine business doesn’t stop at 15 years. On the contrary; it’s expected that the engine lifespan goes beyond 30 or 40 years of operation, although the economics of selling parts and services changes, over time, depending on engine aging. For example, they have availability of so-called used serviceable material. All this is important to sustain the business, as we know it.

{audio:0:59:05} Can we just walk through it then? You’re selling me an engine and do you come with an itemized invoice of every part that’s going to be in the aftermarket, plus the upfront cost? How exactly is the engine priced?

{audio:0:59:25} You offer the upfront price, on a given platform. From there on, when we talk about the aftermarket and the service solutions you provide for them, that includes and incorporates spare parts consumption, along the 10, 12, 15 years that I mentioned before. That’s part of the service. That is particularly relevant for airlines that are starting a brand-new aircraft design. There are leading edge risks associated with that and so on and so forth. They secure both aspects, where somebody is buying the engine, but they are also attaching a long-term services agreement to it. It’s not that they have to know, at the time that they make the decision, how much the spare parts are going to cost them. They don’t have to go into such detail.

{audio:1:00:32} Airlines are really only interested in operating their airlines and their airplanes, from point A to point B.

{audio:1:00:38} How does the engine OEM price the service and spare parts?

{audio:1:00:45} I cannot describe exactly what the process is to get to a particular spare parts price. But I will say that it certainly has a direct relationship to the cost of making that part and the process of certifying that part. OEMs come up with a price catalogue every year, with a pricing for pretty much all the parts that you would need and their associated delivery time. Prices increase every year. I want to leave a message here; spare parts is not an isolated situation. They help the engine manufacturers to provide funding for product improvements that occur in the life of that product and even for future upgrades that you offer on that engine.

{audio:1:01:53} It’s not as easy as saying, it cost me $120 to manufacture this; I’ll give it a profit of X. The key here is to price it in a way that gives life to the sustainability of the engine model.

{audio:1:02:20} What are the key parts of the engine, between the LLPs, the compressors and turbine, etc., for that aftermarket part?

{audio:1:02:56} You have the core parts which are probably the ones that you consume the most. Because they are exposed to higher temperatures, they deteriorate more because of erosion and so on. When you send an engine for restoration, after five or six years on the wing, you have to restore the engine to newer conditions. You replace some blades and turbines and what have you, because those are the things that are exposed to the severity of the operation. Then there are also the so-called life limited parts, the LLPs, that consist, primarily, of the discs, shafts and seals. They are expensive parts but they are certified by the FAA, for a given life. That means that when you are certified for 12,000 cycles, you need to replace that particular LLP, at that time. They are very important parts, as well. You don’t replace those, depending on the operation and how many cycles you operate in a given year, before 10 years.

{audio:1:04:48} So the engine OEM will have a catalogue of prices for the LLPs, which the airline will then replace, at the shop, after seven years, or at the first or second shop visit?

{audio:1:05:02} Those parts are priced to some process, but you can’t quite put your finger on it; it’s not perfectly defined. So how does the aftermarket service business work?

{audio:1:05:26} I think I mentioned before that the engine manufacturers compete to be selected by airlines and leasing companies, on a given platform. They have to offer heavy discounts to win their business, but what makes them whole, is the services piece of it; the aftermarket services. This, of course, entails selling parts and maintenance, through the lives of those engines, until they are fully mature and retired. The economics of the engine services business makes up for early concessions on price and, if everything goes well, can potentially assure the sustainability of the engine business, as a whole, while providing, as I said before, for new technology development and the future engine designs.

{audio:1:06:23} Then engine OEMs will be more than happy, frankly, to offer more discounted price on the back of the lifespan, in spare parts and services, but that can only happen if airlines accept paying higher engine prices, upfront. You have to trade off one for the other, at the end of the day. I will say, certainly from my end, I know that GE and CFM have made attempts with certain airlines, to change this model, but it hasn’t been successful. People want the best price upfront that they can afford. One of the learnings, for me, was that if you’re going to finance an airplane, you cannot offer an engine price that is off the market, because the financial institutions are going to see that as they get into the evaluation too. They’ll say, wait a second; I’m not going to finance this if you’re paying a little more than everybody else is paying. They don’t care what you are getting, in the back, for lower maintenance costs. They care what you’re going to pay for it, because they are the ones financing. That was a major challenge for us.

{audio:1:07:51} How has power-by-the-hour changed the landscape? How would you compare the model versus the traditional shop visit, for the CFM56?

{audio:1:08:03} Power-by-the-hour is a concept that is very popular among airlines, especially in the early years, following a new technology engine launch, like the LEAP and the geared turbofan. The reason is very simple. When you launch a brand-new engine to the market, there is a greater chance of experiencing infant mortality issues, such as engine failures, early on, and all kinds of engine-related problems that affect dispatch reliability, delays and cancellations and can actually drive premature engine removals and on-plan shop visits.

{audio:1:08:53} The OEMs, the engine manufacturers, came up with this concept of power-by-the-hour; CFM calls it something different. It calls it rate per flight hour solution, to address these same concerns. The airline pays a pre-determined flight hour rate and the OEM, pretty much, takes all of the engine maintenance work and overhauls, during a given period of time. Typically, 10, 12, 15 years of the initial services. The rates vary from airline to airline, depending on how severely they operate their engines. We went through this and I mentioned to you that is part of the evaluation that takes place. It depends on the operation severity, flight leg, ambient temperatures, and all that. They all need to be taken into account, in order to provide a proposal. One of the key things is that a rate per flight hour solution, helps the airlines mitigate their exposure to engine cost, in the early years of operation; it’s a risk transfer service product.

{audio:1:10:21} Conversely, the other solution is to pay for each individual shop visit. This is the so-called time and material solution, which is based on the work scope of a given engine restoration or overhaul and it’s directly proportional to the time and material that you put on the repair. This particular service solution is more suitable for engines that are already past the 10 years after they have been launched.

Former VP, Sales at GE Aviation 

CFM International: 37 Years Selling Aircraft Engines

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Competition between PW GTF and CFM56 & LEAP

Evolution of power-by-the-hour and time and material pricing

Benefits of CFM's open aftermarket network