By Tim Hepher
DUBAI, November 17 (Reuters) – A debate over engine performance exposed a dilemma facing aerospace firms at this week’s Dubai Air Show – the hottest part of the jet market is also the hottest part of the world.
Airlines want to save fuel and have the lowest possible maintenance costs. But these forces pull against each other in sandy or dusty environments like the Gulf and India.
“Therein lies the problem for Rolls-Royce RR.L and Airbus AIR. PAbecause this is the region that buys these planes and will buy them in large numbers if the engine problem is solved,” Emirates Airline president Tim Clark told reporters this week.
The head of the world’s largest international carrier spoke amid talks to buy dozens of Airbus A350-1000 jets powered by Rolls-Royce’s XWB-97 engine, which have now collapsed over maintenance and pricing issues.
Emirates and Rolls papered over differences with a last-minute deal for a smaller amount of the shorter A350-900, whose engine maintenance is seen as easier to predict.
The rare audience dispute comes as engine manufacturers want to be rewarded more for investments in new technology given the fuel savings they offer airlines on every mile flown.
GE Aerospace GE.N set the tone under CEO Larry Culp. “We will still seek to find opportunities to be fairly paid for the value we create,” he told Reuters after a half-year gain in July.
The CEO of Rolls-Royce Tufan Erginbilgic, who took over in January this year, indicated that the company would no longer write unprofitable contracts to win new deals, having already provided 1.4 billion pounds in loss-making contracts.
Critics say engine makers are paying for the hubris of past shows when they aggressively wooed airlines with conflicting promises of drastic fuel savings and trouble-free performance.
The airline industry, which operates on slimmer margins than many of its suppliers, is generally not sympathetic.
“I really don’t want to have planes that are going to break down all the time. I happen to be a service,” Emirates President Tim Clark 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 fuel efficiency and durability.
To achieve the fuel savings promised to airlines when the engines were sold, typically around 15-20%, they have to run hotter and push new materials to the limit.
But doing so imposes extra wear and tear.
Sand and dust can clog cooling holes and erode the leading edges of blades, reducing performance and forcing extra repairs.
That’s a problem especially for newer types of engine, which tend to be sold with guaranteed service agreements, delegates said.
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While the visible face of engine manufacturers is technology, the way they generate much of their revenue resembles insurance.
Jet engines are usually sold at a loss, but their designers make money from repairs and servicing spread over 20 years.
Rather than paying for repairs as they arise, engine manufacturers are increasingly striking long-term deals priced by the flight hour, agreeing to swallow the cost of planned and unexpected outages.
“It’s an insurance policy,” said a motor industry source.
For airlines, it means having predictable costs.
For engine manufacturers it means generating cash as soon as the engine enters service rather than waiting for shop visits.
Where these complex calculations have become increasingly unglued is in the sandy or dusty areas of the Gulf and India.
With each “stack” of life-limited parts costing millions of dollars, accurately predicting how many such organ transplants each engine will need over its lifetime is essential.
A wandering or maintenance engine can become a financial time bomb, said one industry executive. Emirates’ Clark said Rolls wants to increase hourly pricing to accommodate such higher costs. Rolls-Royce declined to comment on pricing.
Rolls now faces a dilemma over whether to invest more in the XWB-97 to help Airbus better compete with the Boeing 777X after Emirates ordered 90 more of the competing GE-powered aircraft.
Refusal to do so would underscore Erginbilgic’s hardline stance on profitability for investors, but risk leaving part of the wide-body market to Boeing. B.A.N and GE, and upset Airbus.
Some analysts believe the cash would be better used elsewhere.
“Rolls-Royce has stopped chasing market share at any cost: it has learned not to, and it no longer needs to,” said Agency Partners analyst Nick Cunningham.
FACTBOX-Who said what in Dubai Airshow engines dispute ID: nL8N3CG6P9
(Reporting by Tim Hepher; Additional reporting by Alexander Cornwell, Pesha Magid, Sarah Young and Rajesh Kumar Singh; Editing by David Evans)
((tim.hepher@thomsonreuters.com; +33 1 49 49 54 52; Reuters Messaging: tim.hepher.thomsonreuters@reuters.net))
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