A New Aero Engine Battle

by: Air Insight


P&WC has a ~90% market share.

The market is attractive to GE.

Aircraft makers and their customers are about to see positive outcomes.

The aero engine business is typically thought of as a three way race between Rolls-Royce (OTCPK:RYCEY), GE (NYSE: GE) and Pratt & Whitney (a United Technologies (NYSE:UTX) unit). This is true only for big turbines seen on civil airliners. There is another market that is about to attract a lot more attention.

The new battleground is in smaller turboprop engines. These are engines found on aircraft from Cessna, Piper, EPIC, Pilatus, Daher as well as ATR (OTCPK:EADSF) and Bombardier (OTCQX:BDRBF). The engines are small turbines that drive a shaft (just like big jet engines) but have a propeller at the end of the shaft. These engines are typically small but generate lots of horsepower.

I attended the EAA AirVenture event in Oshkosh, Wisconsin, this week and saw first hand the opening shots of the new engine battle. On Monday, Cessna (a Textron (NYSE:TXT) subsidiary) announced their new Denali. A single engined aircraft selling for ~$4.5m. In capacity terms, it compares with the Beechcraft King Air 350. Beechcraft also is part of Textron. This is the first time Textron has selected a turboprop engine from GHE. All previous turboprop power came from Pratt & Whitney Canada (PWC is a division of UTX).

The turboprop engine was first created after the invention of the jet turbine. The most successful turboprop engine ever is the PWC PT-6. This engine was first created in 1960. Since inception, over 51,000 engines have been delivered. The engine has produced 380 million flying hours. Since the start, PWC has coaxed power to weight improvements of over 50% and reduced fuel burn by over 20%. In short, the PT-6 is a legend in aviation.

The PT-6 is found on virtually every turboprop that is flying. PWC has steadily innovated over the years, staying in close concert with customers and aircraft maker needs.

This is precisely why GE decided to go after the market with its new ATP. GE is an aerospace giant and is without doubt a company at the leading edge of aero-turbine development. The company has been building turboprops for years. It steadily grew its turboprop capabilities, even buying Walther in Czech Republic. GE was not going to allow PWC to hold 90% share of a growing market.

While PWC quite understandably is wary of the GE move into what is essentially its turf, the outcome will be very good for both companies. GE officials I spoke with acknowledge that they have a very steep hill to climb. OEMs, owners and pilots are intensely focused on reliability and the PT-6 has a superb reputation. It is a simple engine with a global network of maintenance providers. Since many aircraft using turboprop engines have a single engine, there is no margin for uncertainty.

So what must GE do to change the environment? This is not unlike what Apple (NASDAQ: AAPL) has to do to face off against Microsoft (NASDAQ:MSFT). Readers will see parallels between the engine makers and these two tech giants.

GE officials say they must be innovative and react to the market faster. This means we can expect to see GE offer aggressive pricing. GE will seek to deploy their IP from big engines into these smaller engines. Indeed the ATP's sections and technology show clear signs of inheriting thinking from the GE90 and GEnx engines. GE will deploy Big Data to the ATP as well. The combination of GE's IP and industry experience mean that PWC is facing a level of competition it has never seen before.

And this is great news for everyone in the industry that use turboprops. PWC is clearly going to up its game. It too can deploy IP from "Big Pratt" whose engines, includng the formidable geared turbofan. PWC has been building turboprop engines for decades and did not become market leader by being lazy. But, it is clear that we can expect to see the company's innovation deliveries accelerate. Whereas PWC had to wait for the industry to catch up to what it could deliver, GE is going to help accelerate the industry. So PWC therefore also benefits. If both engine makers tell OEMs that they can use deploy more power, Big Data and the predictive maintenance this provides, OEMs should see rapid improvements in their own designs.

We have seen that among big jets, the engine makers enable Airbus and Boeing to offer step changes in performance. Now this is coming to the smaller aircraft market too.

Buyers of turboprops can expect much sharper pricing. I spoke with a number of the OEMs at EAA and everyone expressed their excitement about GE's market entry. None said they were going to switch from the PT-6 they were using today. But all will consider trading the PT-6 off against the ATP with new designs. And that is a big win for the OEMs who can now offer buyers very creative new aircraft.

In conclusion, it is useful to share a thought expressed by one of the GE officials. He said competition is good for everyone. Of course this is true. GE will have to work hard to take on PWC. PWC will work just as hard to hold off GE. This battle is going to be excellent news for the aircraft makers and buyers. Really, nobody is going to lose.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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