Avio Purchase Strengthens GE Engines

December 24, 2012

Michael Mecham San Francisco, Guy Norris Los Angeles and Amy Svitak Paris
General Electric is pulling more aero engine technology under its roof with the $4 billion purchase of Avio SpA, the Italian transmission, gearbox and turbine specialist that is simultaneously helping GE and rival Pratt & Whitney develop some of the era's biggest commercial engine programs.
Formal announcement of the deal was expected Dec. 21 in Naples, although it must pass European and U.S. antitrust approval. BCV Investments owns the controlling interest in the Avio Group, which is managed by Cinven and Finmeccanica.
Besides strengthening GE's control over its manufacturing capacity, the Avio purchase also helps ensure the integrity of the Evendale, Ohio-engine maker's intellectual property. When prime contractors bring in risk-sharing partners on new product development, they spread their financial risk. At the same time, they increase the possibility that their intellectual property will drift away. Strict controls of IP are every manufacturer's goal. There is no suggestion in the Avio purchase that IP has been a problem.
But the manufacturing process has become so complex that primes often must share IP with key suppliers—and vice versa—in order to derive all the advantages of including a specialist manufacturer into the fold of design and development.
With demand for its engines higher than ever, GE Aviation is stepping past potential IP problems while increasing the vertical integration of its manufacturing base by capturing the skills sets of suppliers through acquisitions or joint ventures. Its joint venture with Safran Group's Snecma unit that created CFM is its template for industrial cooperation.
The Avio announcement is another in a string of acquisitions and joint ventures GE has made in just the past two months. They include a JV with Parker Aerospace to develop an advanced fuel-nozzle technology center in Clyde, N.Y., and the acquisition of Morris Technologies and Rapid Quality Management of Cincinnati, to expand GE's use of additive technology and advanced machining for combustion chambers.
More expansion is anticipated. In a matter of weeks, GE is expected to complete the permitting process for two additional engine test cells, one at its main Peebles, Ohio, test and development center and another at an unnamed facility outside the state. The company has ramped up its capacity in composite fan blade production by adding two factories in Mississippi. And in the next few weeks, it is expected to announce a deal that will take it in quite a different direction—a joint venture to produce specialty forgings.

GE's external expansion is a standout, but on a smaller scale others have been busy. GKN's purchase of Volvo Aero Engines moves it beyond parts and components into full engine production. Pratt & Whitney and Rolls-Royce are counting on internal development to grow their aero engine programs. However, Pratt will benefit with a closer relationship with Goodrich Aerospace, a long-time industrial partner on nacelles, including for the geared turbofan (GTF) engine series. Having been purchased by Pratt's parent, United Technologies, Goodrich is now part of UTC Propulsion & Aerospace Systems.
With the strength of CFM's control of about 75% of the market for single-aisle transports, due largely to being a sole-source engine on the 737 NG and 737 MAX—plus its own dominance on Boeing's widebody products—GE is claiming its share of the general upsurge in engine sales that is being felt across the industry as airframe production rates rise. Together with CFM, GE will see engine production increase from 2,270 this year to 2,785 in 2014.
Avio's rise as a supplier started in 1976 with a contact from Pratt for the PW2037. But since the 1980s, starting with T700s for U.S. Army helicopter programs, GE has become Avio's biggest customer, accounting for about 65% of current revenues. The shift became most evident in the 1990s when Avio emerged as a risk-sharing partner on the GE90 for the Boeing 777. It was further strengthened when Avio won the drive train and low-pressure turbine contracts for the GEnx that powers the 787 and 747-8. Already a CFM56 supplier, Avio signed a March 2012 agreement to help develop its successor, the Leap for the Boeing 737 MAX, Airbus A320NEO and Comac C919 programs.
Still, Avio has maintained close relations with Pratt, largely through the International Aero Engine consortium that Pratt helped found to build the V2500 as a competitor to the CFM56 on the A320 and other Airbus products. Specifically for Pratt, Avio supplies components for the Pratt PW4000 and PW2000 engines, the latter now being produced only for the Boeing C-17 military transport. The Italian supplier also works with Pratt & Whitney Canada on the PW150 turboprop that powers the Bombardier Q400, and on a turboshaft version of the PT6.
In 2011, Avio signed a long-term agreement to supply the fan drive gear for the PW1500G GTF engine that will power the Bombardier CSeries regional jet. This strong link with the GTF is expected to be worth more than €4 billion ($5.3 billion) for Avio over the next 20-plus years. In 2012 Avio expanded its GTF role when it was selected to provide the gear system, transmission and oil tank for the PW1100G engine now starting tests for the NEO.
Besides the fan drive gear system, Avio is producing the accessory drive gearbox and the mid-turbine frame for the PW1500G. One of the main parts of its deal with Pratt includes rights to participate in the engine's maintenance and overhaul network. Avio called its first GTF production contract “the crowning achievement of years of study and investment with Pratt & Whitney,” a sentiment amplified by the subsequent deal on the PW1100G. Avio developed prototypes of the gear systems at its plants in Turin and Naples, Italy.
With the Avio purchase, GE becomes a supplier of engine programs across Europe. A GE Aviation spokesman noted that such cross ties are not unusual; when GE bought the former Smiths Aerospace, it inherited components contracts with both Pratt and Rolls-Royce.
Avio is heavily involved with Rolls-Royce, notably providing components for the Trent 900 that powers the A380 and producing the afterburner for the Eurofighter Typhoon's EJ200, on which Rolls led the development. Avio also is a partner on the Snecma-led SaM146 engine for the Sukhoi Superjet.
Avio's 2011 revenues topped €2 billion with pre-tax earnings of €348 million, a 13% rise from 2010. The company's orderbook was valued at more than €6 billion. Engines accounted for 83% of its revenues; space propulsion was 15%.
GE is not interested in Avio's space propulsion unit. Safran is regarded as most likely to acquire it through its Snecma motors division. Snecma and Avio are 50:50 shareholders of Paris-based Europropulsion, which develops and commercializes solid rocket motors for European launch vehicles, including the Ariane 5 heavy-lift launcher and Italy's new Vega light launcher, which made its successful inaugural flight in February. Avio also is a 70% shareholder in ELV, the prime contractor for Vega. Italy's ASI space agency owns the rest.


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