Bloomberg News

Rolls Exits Engine Venture to Prepare for Next-Generation Jets

October 13, 2011

Oct. 13 (Bloomberg) -- Rolls-Royce Group Plc’s decision to exit a venture making engines for the Airbus A320 aircraft lets it cash in on a program that’s set to wind down in coming years while positioning itself for the next-generation airliners.

Rolls-Royce, based in London, agreed to sell its 32.5 percent stake in International Aero Engines to Pratt & Whitney for $1.5 billion, as well as payments for 15 years for each hour flown by planes using the V2500 engine, the companies said late yesterday. Rolls and Pratt also agreed to form a joint venture for the next generation of single-aisle jets.

Airbus and Boeing have begun selling upgraded versions of their single-aisle jets that use new engines, and Airbus has picked up record orders for the so-called A320neo. Rolls-Royce isn’t part of the new-engine push, opening a potential flank to competitors including General Electric Co. on single-aisle jets, the biggest segment of the civil aviation market.

“The absence of Rolls-Royce on the program created a serious hole in Rolls-Royce’s civil aerospace aspirations and opened up the prospect of three-way competition going forward, so this seems a clever way of re-entering the narrow-body market while also bolstering short-term cash and earnings per share,” JPMorgan Cazenove analyst John Middleton said in a note today.

Rolls-Royce jumped as much as 58.5 pence, or 9.4 percent, to 684.5 pence, the most in more than two years. The stock has gained 7.6 percent so far this year, valuing the world’s second- largest engine maker behind GE at about 12.54 billion pounds ($19.68 billion).

Growing Market

Formed in 1983, IAE makes the V2500 line of engines for the Airbus A320 narrow-body jet family. Airbus said at the end of last year that it was offering Pratt & Whitney’s new PurePower geared turbofan as an option on its upgraded A320neo after Rolls-Royce and Pratt & Whitney reached an impasse on marketing the engine via IAE.

Rolls-Royce is forming the partnership with Pratt & Whitney, owned by United Technologies Corp., to target the rapidly growing market for mid-sized plane engines, which seat 120 to 230 people. All-new single-aisle jets by the two manufacturers are unlikely to emerge for at least another decade, as they focus on the upgraded variants of their best- selling models.

‘Some Clarity’

“This new joint venture provides some clarity on how Rolls-Royce will address the new single aisle aircraft - when it finally emerges,” said Sandy Morris, an analyst at Royal Bank of Scotland in London. He has a “buy” rating on the stock.

The market for single-aisle engines has so far been shared by the IAE partners -- which also include MTU Aero Engines Holding AG of Germany -- and CFM International Inc., a venture between GE and Safran SA of France. CFM makes the only engine that powers the Boeing 737, the world’s most widely flown jet. CFM is offering a new engine for both upgraded variants, while Pratt is an alternative on the A320neo, but not on the 737 MAX.

The new joint venture between Rolls-Royce and Pratt will focus on high bypass geared turbofan technology, while also collaborating on future studies for next generation propulsion systems, including advanced geared engines, open rotor technology and other advanced configuration, Rolls-Royce said.

“This announcement should help ease market concern over Rolls’ non-participation on the A320neo and clarify its long- term intentions in this end of the market,” Rupinder Vig, an analyst at Morgan Stanley in London, said in a note.

--Editors: Benedikt Kammel, Andrew Noel

To contact the editor responsible for this story: Andrew Noel at anoel@bloomberg.net


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