The British engine maker well known for its wide-bodied aircraft engines, Rolls-Royce (RYCEY, Financial), is facing the heat as airliners are reducing their investment in wide-body planes and are instead shifting their focus to single-aisle aircraft. This is a warning to the London-based aircraft engine manufacturer that has been manufacturing the best of the engines in the wide bodied aircraft segment. But for doing that Rolls-Royce needs a viable partner as its immediate competitor in making the engines for the narrow bodied aircraft is General Electric (GE, Financial).
Let’s take a look at the facts that were shared by CEO, John Rishton, on last Friday at a shareholder meeting in London.
The details shared so far
Last Friday, Mr. Rishton has emphasized upon returning to the market for engines for narrow-bodied aircraft and the requirement of competing with General Electric that dominates this market. Presently, the narrow bodied aircraft have grown to represent about 75% of the aircraft engine market by volume – this makes it more important for the London-based engine manufacturer to reassert itself and get back to this short-haul arena that it had left four years back.
In fact, Mr. Rishton stated that a partnership with United Technologies (UTX, Financial) is likely to happen to re-enter the short haul arena but the final decision is still in pending phase.
He further commented that the company did have the inherent technical skills to develop a new narrow-body engine on its own, but the changing market dynamics makes teaming up with some partner a major requirement of the day. It is to be noted that the Trent engines of Rolls-Royce are the favorites for several Airbus (EADSY, Financial) and Boeing (BA, Financial) aircrafts flying the skies, but all of this is pertaining to the wide-bodied aircraft segment where the British company holds over 50% market share.
By re-entering the narrow-bodied engine market, Rolls-Royce obviously could raise eyebrows to date; General Electric and its innovative engines hold around 75% share in this market. But this is a great move being planned by Rolls-Royce which had sold its 32.5% stake in the International Aero Engines consortium it shared with United Technologies' Pratt and Whitney for $1.5 billion in 2011 for exiting the market for narrow bodies.
Honing skills to fight competitor
Though Rolls-Royce is a prominent player in the wide-bodied engine market, its re-entry into the narrow-bodied market would happen amid intense competition from General Electric’s Aviation segment that manufactures aircraft engines for most of the Boeing’s commercial aircraft.
Hence to break into such a market, Rolls-Royce is considering partnership with United Technologies and Mr. Rishton said, “We know we can work well together, and I think we could work well together in the future. It is certainly a possibility…”
Pratt is currently the main rival of CFM International venture of GE and Paris-based Safran SA in the narrow bodied segment. So, partnering with UTC sounds appropriate at this juncture. However, besides making the alliance, Rolls-Royce might need a new aircraft that it can supply with its new engines –Â something that is not going to happen immediately in the near future or even before 2025. And keeping a note on this, Rolls-Royce's CEO added, “To get back into the market there needs to be a new platform, and there are no plans for a new platform in the foreseeable future…”
Parting thoughts
Although the partnership details are not very concrete at this juncture, the shift of demand from wide bodies to narrow bodies in the airlines segment will surely affect the demand for wide-body planes in the long run, thus negatively affecting Rolls-Royce’s aviation revenue in the long run. Bearing this in mind, the alliance might see the light of the day soon and maybe sooner than being expected we would have narrow-bodied engines from Rolls-Royce bagging orders from Airbus and Boeing in the future. Let’s stay tuned.
