Historical category analysisHARRISON XUE

MGMT 731 – TECHNOLOGY STRATEGY, FALL 2015

PROFESSOR KARL ULRICH

Executive summary12 companies have manufactured commercial turbojet engines, since the first turbofan engine was produced in 1941 and jet engines were invented in in the late 1930s

◦ 5 manufactures are joint ventures between other leading players, combining best-in-class technology

◦ Few companies have exited the space, likely because the massive investment required limits entrants

Both the number of airline passengers and the number of aircraft in service has increased steadily from the 1960s to the present, driven by a growing middle class that can afford air travel

The high-bypass turbofan engine is the dominant design of commercial jet engines and follows a performance S-curve, measured in energy output per unit fuel (foot lb. hours per lb. fuel)

◦ The current design displaced turboprops due to superior performance at high speeds and altitudes

Turbofan manufacturers large, diversified companies with strong staying power

Manufacturer Parent companiesCountry of

orginEntry date

Exit

dateDisposition

Avic Commercial Aircraft Engines - China 2026 Current Current

Aviadvigatel - Russia 1963 Current Merged with Perm Engine Group

CFM International 50:50 JV between GE and Safran France, United States 1982 Current Current

Engine Alliance 50:60 JV between GE and Pratt & Whitney United States 2008 Current Current

General Electric - United States 1971 Current Current

Honeywell - United States 1992 2003 Exited category

International Aero Engines Pratt & Whitney, Rolls Royce, MTU, JAEC US, UK, Japan 1989 Current Current

Ivchenko Progress - Ukraine 1974 2004 Exited category

Lycoming - United States 1983 1995 Exited category

Power Jet 50:50 JV between Snecma and NPO Saturn France, Russia 2011 Current Current

Pratt & Whitney - United States 1960 Current Current

Rolls Royce - United Kingdom 1964 Current Current

Source: “Commercial Engines: Turbofan Focus,” Flight Global, 2015, “List of aircraft engine manufacturers,” Wikipedia, https://en.wikipedia.org/wiki/List_of_aircraft_engine_manufacturers

0

1

2

3

4

5

6

7

8

9

10

Number of companies

12 companies manufactured commercial turbofan engines, 3 have exited

Source: “Commercial Engines: Turbofan Focus,” Flight Global, 2015, “List of aircraft engine manufacturers,” Wikipedia, https://en.wikipedia.org/wiki/List_of_aircraft_engine_manufacturers

0

2

4

6

8

10

12

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

Number of companies

Cumulative entrants

Cumulative exits

Number of commercial turbofan engine manufacturers over time 1960-2030 (forecast)

Number of active manufacturers

Number of commercial airline passengers maintained a ~6% CAGR for 1970-2014

0

5

10

15

20

25

20051990 1995 2014

+6%

2010200019851980

Number of passengers

carried (Billions)

19751970

+5%

+7%

Commercial airline passengers carried, billions 1970-2014

Source: “Air transport, passengers carried,” World Bank, 2015

Aircraft manufacturers, airlines and passengers

may all represent turbojet “users,” number of

passengers shown here to illustrate penetration

of turbojet-powered transportation

Number of commercial jet aircraft in service has grown exponentially to ~23,500 in 2014

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2025

Number of commercial

jet aircraft in service

20101960 19951965 2005200019901985198019751970 2015 2020

Number of commercial jet aircraft in service, 1960-2026

Note: Analysis involves extrapolation of yearly data from 1995 to 2014

Source: “Statistical Summary of Commercial Jet Airplanes Worldwide Operations: 1959-2014,” Boeing, 2014, “Jet Airplanes in Service,” Jet Information Services, 2014

Source: http://www.thestreet.com/story/12851078/1/how-will-ge-ge-stock-respond-to-35-billion-aircraft-engine-investment.html, http://www.geaviation.com/company/aviation-history.html

For assessing product performance vs. cumulative investment, investment assumed to be proportional to the number of aircraft in service, a key revenue driver

2014-2019 turbofan jet engine investment projected to be $1.4 BB annually

1960-2026 investment estimated from $1.4 BB, proportional to aircraft in service

◦ Cumulative investment calculated from estimated annual investment

Commercial turbofan efficiency has improved approx. +80% from 1941-2010

Source: “Guide to Aviation Efficiency,” Air Transport Action Group, 2010, “Air Transport and Energy Efficiency,” Transport Papers, 2012, “Air Freight: A Market Study,” World Bank, 2009

Efficiency gain of commercial turbofan engines

over time

For passenger aircraft, efficiency gains separated into gains from engine improvement vs. gains from aircraft design

◦ 59% attributable to engines

◦ 41% attributable to aircraft

Engine efficiency difficult to measure◦ Efficiency varies by application, e.g. wide vs.

narrow-body

◦ Performance characteristics vary by environment e.g. temperature, pressure, humidity

Specific full consumption (SFC) in lbs. fuel per hour * foot lb. force is a general measure that can be converted to approximate efficiency in work per lb. fuel

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

1940 199019701950 19801960 20102000

Year

Fuel efficiency (hr*lbf/lb fuel)

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80

Cumulative

investment ($ BB)

Fuel efficiency (hr*lbf/lb fuel)

Turbofan efficiency S-curve demonstrates diminishing returns from current investment

Source: “Guide to Aviation Efficiency,” Air Transport Action Group, 2010, “Air Transport and Energy Efficiency,” Transport Papers, 2012, “Air Freight: A Market Study,” World Bank, 2009

Efficiency gain of commercial turbofan engines versus

cumulative investmentCurve combines efficiency over time with estimated cumulative investment

◦ Each year on the time graph converted to the corresponding cumulative investment

Investment before 1960 difficult to estimate

◦ Lack of commercial applications before the BAC Comet-4

◦ Military and government investment difficult to quantify and sensitive to inflation assumptions

◦ Total R&D before 1960 assumed to be 3x cost of US Air Force F-22 program

Turbofan engines are a mature

technology that has followed a

performance s-curve when accounting

for government investment

High-bypass turbofan design maintains domination of commercial jet engines

Dominant design centered around combination of a large fan upfront with a relatively small jet engine

◦ High-bypass design includes large fan portion with a much higher bypass ratio than other types of jet engines

◦ Fan and diffuser designed for high volume air flow to minimize exhaust velocity and reduce waste

◦ Exotic alloys are used for turbine blades with vane cooling technology to allow higher temperatures

◦ No afterburners in the exhaust nozzle

Modifications further improve the dominant design◦ Multi-spool compressors allow higher compression

◦ Geared turbofans increases maximum efficiency envelope

◦ Ceramic matrix composites used to allow even higher temperatures

Source: “Turbofan,” Wikipedia, https://en.wikipedia.org/wiki/Turbofan

With evolution of air travel, ramjets and propfans may displace turbofans

Turbofan engines are themselves a disruptive technology, replacing the turboprop

◦ Turboprops cannot match turbofan efficiency at high altitudes, speeds

◦ For turboprops, a gas turbine drives a propeller blade and exhaust gases provide negligible thrust

◦ Shift in airline industry towards longer routes made propellers less efficient due to low pressure at high altitudes and inefficient and turbulent flow at high fan blade speeds

Ramjets and un-ducted turbojets (propfans) may displace turbojets ◦ For supersonic speeds, ramjets do not require a compressor or fan

blades and can potentially be more efficient

◦ For speeds below 450 mph, un-ducted turbojets combine the performance of a turbofan with the fuel economy of a turboprop

Best jet engine technology is application-dependent

Source: “Turbofan,” Wikipedia, https://en.wikipedia.org/wiki/Turbofan, “Propfan,” Wikipedia, https://en.wikipedia.org/wiki/Propfan, “Ramjet,” Wikipedia, https://en.wikipedia.org/wiki/Ramjet