Industry Analysis of Pratt and Whitney

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.

Industry Analysis of Pratt and
Whitney

A discussion of P&W’s industry, history, competition, trends and its
presence in China

Mukuka Chipanta & Jonathan Winn

10/22/2011


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CONTENTS

Page

Executive Summary










3

1.0

Description of P&W









3

1.1

Brief History of P&W








3

1.2

P&W Structure and Product Lines






3

1.2.1 Commercial








4

1.2.2

Military









4

1.2.3

Space Propulsion Systems






4

1.2.4

P&W
Canada








4

1.2.5

Power Systems








4

2
.0

Global Aerospace Manufacturing Industry






5



2.1 Airline Industry









5



2.1.1 Current Trends in the Airline Industry





5


2.2 Government Spending








6



2.2.1 Trends in US Federal
Government Military Spending



6

3.0 Prime Manufacturers


“The Competition”






6

4
.0 P&W's Presence in China









8

4
.1

China’s Commercial Airline Market

8

4.2

The Shanghai Engine Center


9

5
.0 Conclusion

10

References

11



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Executive Summary

Pratt
and Whitney (
P&W
)

is an aerospace manufacturing company known for its gas turbines which
power commercial and military aircraft. Most recently P&W designed and produced the engine for
Lockheed Martin
’s F35 Joint Strike Fighter
, a cross platform aircraft d
esigned for the US Army, Navy
and Marines. With the domestic economy struggling and defense budget cuts threatening, P&W along
with other aerospace manufacturers have turned internationally for sources of investment and
stable

markets. China represents the world’s fastest growing aerospace market and has become the favored
target, despite barriers to trade. Joint ventures with Chinese private and semi
-
private companies
help
overcome these barriers and give access to
markets a
s well as government tax breaks and financing.
P&W’s present position in China is strong for now, but their future will be determined by their ability to
maintain influence over future engine purchases as they support a fleet of commercial airplanes that
will
one day be replaced.


1.0
D
escription of Pratt and Whitney

Pratt and Whitney (
P&W
)

is a major US aerospace manufacturing company. P&W specializes in
commercial as well as military engine design and manufacture. P&W is one of six sister companies unde
r
the umbrella of United Technologies Co
rporation (UTC). UTC
is a
huge global engineering conglomerate
that boasted net sales of $55 billion in 2010 of which approximately $13 billion was contributed by P&W.
P&W employs 35,000 people across 128 countries.

(It should be note
d that UTC has recently
(2011) added to its portfolio of companies by acquiring
Goodrich Aerospace).


1.1
Brief History of P&W

P&W was founded in Hartford, Connecticut in 1925 by Captain Frederick Rentschler. The company was
founded based

on Captain Rentschler’s idea that future aircraft would require lighter
-

weight engines with
much greater power and reliability. To achieve this he designed a new light weight engine that relied on
air
-

cooling as opposed to the heavier conventional liqui
d cooling.

In the 86 years since the company was
founded, P&W has grown in strength to include a large presence in military front line fighters such as the
F35 Joint Strike Fighter, F22 Raptor and the F16 Fighting Falcon. The company also supports the larg
e
commercial and small regional jet markets. P&W has also increased its portfolio of products to include
industrial gas turbines as well as engines for space shuttle

vehicles. The company also makes large
investments in cutting edge engine technology such
as the Gear Turbo Fan ™ for next generation aircraft.


1.2
P&W
Structure and
Product Lines

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In order to effectively penetrate the wide spectrum of the aerospace market, P&W is structured into five
divisions that offer distinct products that cater to their c
ustomer
’s

needs. The five divisions are briefly
discussed below.

They are:

1)

Commercial Aircraft Engines

2)

Military Aircraft Engines

3)

Space Propulsion Systems

4)

Power Systems

5)

Pratt Canada


Small Aircraft Engines


1.2.1
Commercial Aircraft Engines

In the Commerci
al Aircraft Engines division P&W manufactures engines for narrow and wide body large
commercial aircraft. P&W currently boasts of having 16,000 engines installed on large passenger and
cargo commercial aircraft across the world today. They have also achiev
ed the milestone of 1 billion
engine flight hours on these engines. Some of their successful engines include the PW2000, PW6000 and
the joint venture V2500 which offers advanced low emissions technology

(P&W web page, 2011)
.


1.2.2
Military Aircraft
Engines

P&W supplies aircraft engines and maintains service agreements with 27 armed forces across the world.
Some of the notable engines in the P&W portfolio are the F119 for the F22 Raptor, F135 for the F35Joint
Strike Fighter, engines for the B52 Bomber

and the KC
-
135

(P&W web page, 2011)
. The service
agreements ensure that P&W maintains the vital engine readiness for their military customers.


1.2.3
Power Systems

More recently, P&W has harnessed

its aerospace
engine technology to diversify
its

business
into the
design and manufacture of industrial gas turbines. P&W Power Systems (PWPS) offers 25MW to 60 MW
industrial gas turbines and currently has 2000 gas turbines installed in over 50 countries. In this new area
of business PWPS continues to innovate wi
th renewable energy resources such as geothermal and
biomass technology

(P&W web page, 2011)
. This is certainly a growth sector of the business.


1.2.4
Space Propulsion Systems
-

P&W Rocketdyne

This is a divis
ion of P&W that specializes in the design and
manufacture of engines for rocket propulsion

into space. Here P&W has an over

50 year history of supplying engines for numerous rocket propelled
space missions. Here P&W’s selling point is its complex “zero
-
fail” propulsion systems. P&W
Rocketd
yne conducts

research in areas
such as fossil fuels and clean energy solutions.

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1.2.5
P&W Canada



Small Aircraft Engines

P&W Canada is the division that focuses on the
small commercial aircraft engine market.
P&W Canada is
the leading supplier of the integrated turb
ofan power
-
plant systems in the business jet market
.

P&W
Canada also supplies engines for turboprop powered regional airliners. In addition, P & W Canada is a
leading turboshaft engine supplier in the global light
-
single, light
-
twin and medium helicopter m
arkets.
P&W Canada’s unique selling point is its reputation for supplying engines with great fuel efficiency, high
durability and reliability.


2.0
Global Aerospace Manufacturing Industry

The aerospace manufacturing industry can be g
enerally broken down
into comme
r
c
ial
programs
and
military programs.

Commercial programs are close
ly correlated to the airline industry whereas military
programs are subject to the ebb and flow of government spending. A closer look at the airline industry as
well as government

spending in the US will help shed some light on the industry in which PW plays a
role.


2.1
Airl
i
ne Industry

The airline industry has undergone numerous changes over the years. This paper focuses on the changes
that have occurred chiefly in the US and to
some extent in Europe. This paper also describes some of the
general trends occurring in the commercial airline industry around the world.

Prior to 1978, the US commercial airline industry was regulated by the federal government. With
deregulation came a l
owering of prices due to increased completion as well as a change in business model
for the legacy carriers. Many of the legacy carriers adopted a “hub and spoke” model in which they would
fly to a few major airport hubs and have small aircraft servicing t
he customers from the hubs to the
outlying areas.
Europe followed suit in 1987 when it too liberalized its airline industry. Liberalization of
the market
had the effect of establishing a common European market for aviation services, bringing to
Europe many

of the same benefits of increased service and more competitive pricing as were ex
perienced
in the U.S. market (US Department of Commerce, 2005)
. The industry stagnated in the early nineties due
to an economic downturn and the first Persian Gulf War.

The
late ninetie
s through to the early 2000s saw

the advent of the low cost carriers. These carriers offered
discount prices f
or touri
sts and other leisure seeker
s by offering flights into low traffic airports. Large
carriers responded by focusing on high cost

business travelers.

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The attacks of September 11, 2001 sparked a huge down turn in the airlin
e industry. The downturn
triggered

Boeing, a major supplier of the airline industry, to lay
-
off 25% of its workforce
(US Department
of Commerce, 2005)
.


2.1.1
Curr
ent Trends in the Airline Industry

As markets have evolved, new aircraft models

have been introduced to meet new market demands. In
particular, increasing liberalization of

domestic and international markets has been closely linked to
declining average
size and

increasing operating distance of commercial jet transport aircraft, including
rapid growth in the

use of regional jets

(US Department of Commerce, 2005)
.
Some of the latest trends in
recent years are to create cleaner, quieter, more efficient engi
nes. This is being driven by the
environmental pressures form campaigns against Global warming as well as concerns about the future
scarcity of fossil fuels. This has direct implications for engine manufacturers such as P&W. A recent
quote from Brazilian a
ircraft
manufacturer,

Embraer, exemplifies the recent trend: “
More stringent limits
on noise and emissions will mandate the development of cleaner
-
burning fuel and quieter aircraft”.
Embraer continues to say, “The family of E
-
Jets already reduces carbon di
oxide (CO2) emissions by up to
50%, compared to older
-
generation aircraft. Some 1,100 jets operated by scheduled airlines in the 30
-

to
120
-
seat category are over 15 years ol
d and will need to be replaced”
(PR Newswire, 2011).


2.2
Government Spending

Government spending chiefly affects an aircraft engine manufacturer like P&W in the area of military
and
space
programs. Gover
nment spending policies vary fro
m nation to nation. Also, even though
government spending does have an effect on the commercial ai
rline industry, this paper narrows its focus
on government spending

on military programs

in the US.

It is fair to say that the US Federal government spends heavily on defense. In the $3.8 trillion 2011
budget, defense spending accounts for $1 trillion

(US
Government Spending web page, 2011)
. Defense
spending has been robust with understandable spikes during heightened security times such as the Cold
War period, the Persian Gulf War and the two wars being fought in Iraq and Afg
h
anistan. P&W
,

in
particular
,

b
enefits from military contracts
,

such as the F19

and the F135 (Joint Strike Fighter engine)
,
to
name a few.


2.2.1
Trend
s

in US Federal Government Military Spending

In January 2011,
former
U.S. Secretary of Defense Robert Gates announced proposed cuts in U.S. defense
spending of $178 billion between fiscal 2012 and fiscal 2016, including a two year delay in the Marine
Corps version of the F
-
35 “Joint Strike Fighter” jet
(Tahch. A, Range. G.
P, 2011)
.

Also in April 2011,
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former
Secretary Gates announced a comprehensive review to identify $400 billion of cuts in defense
spending by fiscal 2023. It is no secret that the current US administration is under extreme pressure to
reduce spending and d
ecrease the Federal deficit. This present environment signals an uncertain future for
many federally funded aerospace projects with a telling effect on companies such as P&W. It is
conceivable that for the near term future at least, P&W will see a decline
in US military work.


3.0
Prime Manufacture
r
s


“The Competition”

P&W competes in the stratosphere of companies called “prime manufacturers” in the aerospace industry.
Prime manufacturers develop and produce complete aircraft and aircraft engines. The key
global players
in this environment can be separated into US companies and European companies. In the US there is UTC
(parent of P&W), General Electric (GE), Engine Alliance (GE and P&W joint venture) and Boeing. In
Europe there is Rolls R
oyce, Airbus (EADS

and
BAE Systems and Airbus)
, International Aero Engines
(multinational co
nsortium) and Snecma. Figure 1

below shows the prime manufacturer competitive
environment
(US Department of Commerce, 2005).



Figure 1


Prime Manufactures in US

and Europe


USA

EUROPE

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In aircraft e
ngine manu
fa
cture exclusively, the main head

to head rivals are GE,
Rolls Royce

and P&W,
1, 2 a
nd 3 respectively in terms of market share. Just looking at the US,
GE through the first nine months
of 2010 earned $2.48 billion on $12.82 billion in revenue at its aviation arm. Pratt & Whitney earned
$1.51 billion on $9.44 billion in revenue over the same time period
(Malone. S, 2010)

The business model of the prime
ma
n
ufacturers has traditionally be
en to design and manufacture
new
products by relying on a whole host of suppliers. The industry is now trending to few suppliers supplying
whole systems with the prime manufacture
r
s acting as systems integrators. Much of the
production is
being pushed down the supply chain. This trend has been evidenced by the recent production
work on

the
Boeing 787

Dreamliner.

Yet another industry trend is for prime manufacturers to seek foreign par
t
ners as a source of investment
capital for new projects
(US Department of Commerce, 2005).
This can be seen from GE’s recent
50
-
50
joint venture with Aviation Industry Corporation of China (AVIC).

Prime manufacturers and their suppliers are also taking adv
antage of the low cost manufacturing options
available in countries such as Polan
d, Mexico, Brazil and China
. The subsequent sections of this paper
discuss the specific presence of P&W in China.


4.0 P&W Presence in China

China currently represents the fas
test growing aviation market in the world. International aviation
companies have been manufacturing aerospace components in China for years, but now that China is
home to the

next

target market the manufacturing strategy has changed.
Until

recently
, P&
W’s presence
in China solely consisted of Chengdu Aerotech Manufacturing Co and South Pratt & Whitney Aero
Engine Company, which produced machined components for turbines (
Yiyu, Liu, 2011
).
Forced to
compete with local suppliers, P&W has sought out additio
nal partners within China to form competitive
joint ventures. These ventures give P&W access to markets that they could never manage on their own.

In order to fully capitalize on the new demand for aircrafts, P&W has expanded their
China business

beyond
component
manufactur
ing
.
In 2009 P&W made a significant capital and intellectual property
investment by constructing the

Shanghai Engine Center (SEC
)

as a joint venture with China Eastern
Airlines
. This service depot is
positioned

to

service aircraft fro
m all over the region
, and
further
establish
es

P&W in China’s aerospace supply chain a
s well as its growing economy.


4.
1

China’s Commercial Airline Market

China’s commercial airline market is ruled by China Eastern Airlines, China Southern Airlines and Air
China. The Civil Aviation Administration of China (CAAC) expects air travel to increase annually by
14% to the year 2020, which leaves a lot of room for
investment and growth. Air travel faces direct
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competition with the high speed rail system, though safety issues with these trains may force travelers
back to the skies. Regardless of competition, the growing population and rising middle class will creat
e
demand for air travel and planes will continue to grow old and be retired. Companies like GE and P&W
are positioning themselves to be selected as the aircraft engines that will take to tomorrow’s skies.
Already GE beat out P&W in the engine selection f
or China’s ARJ21 regional jet; however P&W’s
Rockwell Collins was awarded production of the Avionics. P&W is also working on landing the avionics
contract for the Comac C919, an aircraft produced by the Commercial Aircraft Corporation of China
(COMAC)
(Co
mac C919, 2011)
. Over 2,000 of C919s are expected to be built in competition with
Airbus and Boeing. Winning the C919 contract would not only an initial cash payment for the engine
purchases, but ensure future cash flow for engine maintenance. Maintenan
ce, repair and overhaul (MRO)
is a very lucrative business worthy of great investments by engine manufacturers, and P&W has
recognized their construction of the Shanghai Engine Center.


4.
2

The Shanghai Engine Center

The SEC is a product of a joint venture

between P&W and China Eastern Airlines. These types of joint
ventures are becoming quite common in China as a means to defeat their disadvantaged import market.
Without participation from a Chinese partner, businesses forgo better interest rates, spend
more on labor
and are subject to different (
costlier
) tax laws. This joint venture also gives P&W a stable source of
revenue through a long term maintenance service agreement with China Eastern Airlines, reducing the
total risk of this joint venture
(P&W
web page, 2011)
.

The technology installed in this 275,000 sq. foot building is cutting edge, and the facility is the only one
of its kind in China to earn a LEED Platinum certification
(P&W web page, 2011)
. Its construction
showcases many of the products
developed by other UTC companies such as Carrier chillers and pumps,
and a Hamilton Sundstrand Sullair compressed air system. As viewed by the president of the U.S. Green
Building Council, the SEC “will serve as a leading example for other facilities with
in China”
(P&W web
page, 2011)
. With all of the international attention on pollution and unregulated production in China, the
SEC sets the bar high for new joint ventures. In addition, its Platinum status could become financially
beneficial if China gets

onboard with global trends and awards tax b
reaks to green manufacturers.

The SEC provides complete gas turbine
MRO

and will be used to service a wide variety of commercial
aircraft as part of the Global Service Partners (GSP) network. The GSP network c
urrently services

P&W, International Aero Engines,
General Electric, Rolls Royce and CFMI”
(P&W web page, 2011)
.

The facility was primarily construc
ted to support the CFM56® engine as its partner, China Eastern
Airlines, uses these engines more than any other airline in the Asia
-
Pacific region
(P&W web page,
2011)
.

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Several

ASEAN countries
fly CFM56® engines so having a local service depot

is great for

business for
P&W an
d the airlines. Service depots

bring

in money for services as well as decreas
e

engine downtime, a
measurement used to rate an engine’s reliability. Having more reliable engines will
increase

favor
towards P&W when airlines consider fu
ture purchases
.
In September of 2011 the SEC delivered its first
overhauled CFM56® engine to Vietnam based Jetstar Pacific Airlines
(P&W web page, 2011)
. This
delivery was well executed and
is a shining example of P&W’s commitment to excellence.
Eventuall
y the
SEC is expected to perform 300 of these overhauls per year
(P&W web page, 2011)
.
P&W
will continue
to use

the SEC as a launch point for capturing business in the region of the South China Sea.


5.0 Conclusion

In order to remain competitive, P&
W must keep pace with its rivals’ ingenuity and market strategy. This
applies domestically and internationally, and no company can afford to ignore the explosion of growth in
China. P&W’s
Chinese ventures

in gas turbine manufacturing
, MRO of operating en
gines
and avionics
manufacturing come at a crucial time for commercial airline expansion. Their position in China should
give them an advantage when it comes to winning the next big airline contract which could
mean billions
in revenue
. At the same time,

P&W’s Shanghai Engine Center is world renowned for its green
construction and allows UTC to demonstrate its total solution package.
Joint ventures such as the SEC
will be the key to gain access to future Chinese markets, and in the middle of a global rec
ession

and with
a parent company as strong as UTC, P&W is perfectly poised to deliver to what soon may be the world’s
greatest superpower.





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References

[1] PW web page.
http://www.pw.utc.com/

[Retrieved October 17,
2011]

[2] US Department of Commerce, International Trade Administration (March, 2005).
“The US Jet
Transport Industry


Competition, Regulation, and Global Market Factors Affecting US Producers”

[3] PR Newswire, United Business Media website.
“Embraer Anno
unces Long
-
term Aviation Market
Outlook”.

http://www.prnewswire.com/news
-
releases/embraer
-
announces
-
long
-
term
-
commercial
-
aviation
-
market
-
outlook
-
98750744.html
. [Retrieved October 18, 2011]

[4] US Government Spending Web page.
http://www.usgovern
mentspending.com/

[Retrieved October 18, 2011]

[5] Tahch. A, Range G. P. (June, 2011)
“Aerospace Industry Overview and Update”

http://www.srr.com/article/aerospace
-
industry
-
o
verview
-
and
-
update


[Retrieved October 18, 2011]

[6] Malone. S (November, 2010) “
Analysis: Rolls Royce woes could boost GE, Pratt & Whitney


http://www.reuters.
com/article/2010/11/05/us
-
a380
-
engines
-
idUSTRE6A44AC20101105

[Retrieved October 18, 2011]

[7] Yiyu, Liu. "Pratt & Whitney, AVIC in Talks on Making Engine Parts."
Chinadaily US Edition
. 12
June 2010. Web. 15 Oct. 2011. <
http://www.chinadaily.com.cn/bizchina/2010
-
06/12/content_9969696.htm>. [Retrieved October 19, 2011]

[8] "Comac C919." Wikipedia, the Free Encyclopedia. Web. 17 Oct. 2011.
<http://en.wikipedia.org/wiki/Comac_C919>. [Retrieved October 19, 2011]