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Safran’s Bechat lays out strategy for small engine battle with GE

 - November 30, 2006, 10:08 AM

Since Snecma dropped the idea of taking a share in General Electric’s GEnx turbofan program the two long-time partners now find themselves competing in the regional jet engine arena.

The company had been negotiating for a share in the GEnx–the CF6 replacement chosen to power the Boeing 787, the A350 and the 747-8–but in 2004 it decided not to join that program. The decision not to go ahead was surprising to many observers. And, as things stand, Snecma will be absent from all these new aircraft. Snecma still has a 10- to 20-percent share in the different versions of the GE CF6-80 engine used on the Airbus A330, Boeing 747 and 767.

Snecma must also wrestle with the fact that the only widebody application for the CFM56 family– the Airbus A340-300–is being marginalized by the other variants, the -500 and -600. At last report, Airbus had just backlogged seven orders for the A340-300. Snecma is still a 17.5-percent risk-sharing partner on the Engine Alliance GP7200 (for the Airbus A380) and has a 23-percent share in the General Electric GE90 (for the Boeing 777).

While the 787 and the A350 widebodies are experiencing quick success in their commercial starts, the SaM 146-powered Russian Regional Jet has, at last, received its first firm orders–10 aircraft, from a Russian leasing company, confirmed in August 2005, plus a further 30 units ordered by flagcarrier Aeroflot in December. The SaM 146 engine is a $650 million program, evenly shared between Russia’s NPO Saturn and Snecma. Last October saw the launch of VolgAero, a jointly owned company that is to produce aircraft engine parts.

At the same time, GE’s CF34-10 could be seen as a threat to the lower-thrust-range engines in the CFM56 family. It powers the Embraer 190, and another variant–a clone of the CFM56–is to power the China’s ARJ21 regional jet. On GE’s Web site, the CF34-10 is officially presented as an 18,000- to 20,000-pound thrust engine. As such, it would bite into the CFM56’s domain. The GE-Snecma agreements state that any engine in the 18,500- to 50,000-pound range must be developed under the joint venture.

Considering these circumstances, Aviation International News asked Jean-Paul Bechat, CEO of the Safran group, the parent company of French engine maker Snecma and electronics specialist Sagem, about Snecma’s current civil aircraft engine strategy.

Isn’t Snecma’s position in widebody aircraft engines weaker than it used to be, say, five years ago?
It is not our goal to have a position in widebody aircraft engines. CFM, our joint venture with GE, is the world’s number-one alliance. We offer no big engine on our own but participate in other manufacturers’ engines, such as Pratt & Whitney (via our subsidiary Techspace Aero) and Rolls-Royce (via Hispano-Suiza). These decisions are made on the return on investment we foresee. Big engines are an interesting complementary business but represent only a small percentage of our revenues. This is all the more true since the merger with Sagem.

Why did we see an insufficient return on investment on the GEnx? As a tier-one partner on the 787, GE had to fight to be selected and this impacted the conditions it offered to us. This time, we did not think they were attractive. The return on investment was too far distant. However, today, our Techspace Aero subsidiary has a 3-percent share in some components.

Was taking a share on the GEnx out of Snecma’s financial reach? In 2003, R&D spending reached €1.1 billion ($1.3 billion). A 20-percent share would have cost only €250 million to €350 million [up to $420 million] spread over several years.
Definitely, it was affordable for us. In 2003, we had little debt and a very good cash-flow. But the real issue was return on investment. The decision might have been different if 50 percent of our future revenues had been affected, but in this case it was 1 to 2 percent.

Was it a good idea to commit funds to the SaM 146 and drop the GEnx?

The first [Russian] RRJ order is only the visible part of the iceberg; we expect many more sales. The SaM 146 decision is a very good one because it enables us to apply our know-how in a tier-one position. The business model is much better than in a tier-two position. We belong to the small group of companies that can build an entire engine. We do not want to offer a fourth product in the big engine sector–three may already be too many. But we thought there was room for a new product in small engines. The Rolls-Royce Allison family is relatively old. And there have been several iterations of the GE CF34, but it still relies on the original architecture. With a clean sheet design, we can make a modern engine with several decades of life ahead of it.

The SaM 146 will find other applications. And we had good news recently. The Russian government has granted further support to the program–$300 million spread over three years. And Finmeccanica is about to become a risk-sharing partner. This is a winning team and we can certainly take a fair market share.

Is there a risk of competition between the CFM56 and the C34-10? How can you diplomatically handle the situation?
This is not a problem. We are not in a situation where we would sue each other at the boundaries of our joint business. CFM is successful. Clearly, CFM engines find applications in Airbus and Boeing 100-plus-passenger aircraft; we see no other application. The CF34 is growing, which is normal and does not affect CFM sales to Airbus and Boeing. We are indifferent about this. This is not an attack, so why would we be angry?

Are the ties with GE tenuous, with the competition on small engines and the no-go on the GEnx?
We have an excellent relationship in what we do together. In the rest of our activities, each of us acts for the best of the shareholders’ interests. We share a great success with GE and we also share difficulties when they happen at CFM. For example, when a problem occurs in operation, its cost is always split evenly. We do not try to determine whether the faulty component comes from one partner or the other. We bear costs in equal amounts.

Now that Snecma is merged with Sagem into Safran does the new group have the capacity to increase investment in civil aircraft engines?
The capacity was not insufficient before the merger. Of course, being stronger can allow us to take heavier commitments. But our activities were already healthy. We were not suffering from constraints. So the decision with the GEnx would have been the same.