Aircraft Engines and Engine Parts - Current Conditions

Current Conditions

By 2003, the aircraft industry was struggling in the wake of downturns in the air transportation market. The leading U.S. airlines lost more than $7 billion in 2001 and more than $3 billion through the first half of 2002. A number of factors—including a slack economy, a decline in travel following the attacks of September 11, and heightened competition from discount airlines—contributed to the air transportation sector's woes. United Airlines, which accounted for some 20 percent of U.S. flights, filed for bankruptcy in December of 2002, after losing $4 billion over two years and laying off roughly 20,000 employees.

In February 2003, Aerospace Industries Association (AIA) president and CEO John W. Douglass commented on what these conditions meant for the aircraft industry: "The effects of the downturn in airline activity since 9/11 have rippled through the aviation manufacturing base of the United States, resulting in lower deliveries of aircraft and related equipment. At the same time, the downturn has masked long-term system capacity problems that will re-emerge as the airlines return to long-term growth."

In addition to reduced orders for new engines, the bleak conditions within the aircraft industry also meant a decline in parts and repair revenues. However, this situation did not prevent manufacturers from investing in research and development initiatives that led to more powerful engines. One example was General Electric's GE90-115B. Capable of generating a massive 115,000 pounds of thrust, the engine was the latest in a series of engines the company first introduced during the mid-1990s. Following initial development costs of approximately $2 billion for the GE90, GE was investing an additional $600 million in the GE90-115B.

In the December 30, 2002 issue of Fortune, Philip Siekman said that GE's engineers considered the GE90-115B to be the "most ambitious product and technology development program in their history." In addition, he explained: "At a time when the airlines, GE's principal customers, are nosediving toward bankruptcy, trailing plumes of burning cash, the company has a dozen new or updated engines under development. Outsiders might well wonder whether GE has jettisoned common sense. But it doesn't have a lot of choice. Engines, often sold at breakeven or at a loss, are not where this business makes its money. They are a means to an end: parts and service revenues … will account for 40 percent of the business's $10.6 billion in sales this year and possibly as much as two-thirds of its $2.1 billion in operating profit."

According to Airline Business, the leading aircraft engine manufacturers were putting increased pressure on suppliers of parts and components during the early 2000s. This pressure applied to everything from individual fasteners to more complicated modules. In addition, these suppliers faced competition from other companies—including firms in the forging and casting industry—that were trying to encroach upon their market. However, given the strategic partnerships that existed between the leading three engine manufacturers and their suppliers, as well as high technological requirements, this was no easy task for new, would-be competitors.