Air France AF66 engine explosion to drive checks on A380s powered by GP7200 engines

2 October 2017, Global – Air France AF66’s uncontained engine explosion on 30th September 2017 is likely to drive precautionary engine checks and potential replacements on all Airbus A380 aircraft that are powered by the GP7200 engines. This will negatively impact manufacturer Engine Alliance, a joint venture between General Electric GE:US and Pratt & Whitney (which is owned by United Technologies UTX:US).

It will also affect not only Air France-KLM AF:FP but more significantly, Emirates which is the world’s largest operator of the A380s (90 Emirates A380s are powered by the GP7200 engines), Etihad, Korean Air 003490:KS and Qatar Airways in terms of lost revenue opportunity if their planes have to be grounded for precautionary checks and potential replacements. The GP7200-powered Airbus A380 aircraft account for 35% of Emirates’ total aircraft fleet and 45% of Emirates’ total seat capacity. The Trent 900 engines also power the Airbus A380 operated by 8 out of 13 airlines globally. As such, Trent engine-maker Rolls-Royce RR/:LN and the airlines (mostly Asia Pacific carriers) operating Airbus A380 aircraft that are powered by the Trent 900 engines are unlikely to be affected by the Air France AF66 incident. However, if precautionary engine checks are extended to include all engine types that power the Airbus A380, then SAESL, which is 50%-owned by SIA Engineering SIE:SP, will be a beneficiary. 

GLOBALLY, FIVE AIRLINES OPERATE AIRBUS A380 AIRCRAFT THAT ARE POWERED BY THE GP7200 ENGINES – MAINLY THE GULF CARRIERS

The Airbus A380 is powered by two types of engines – the GP7200 engine which is built by Engine Alliance which is a joint venture between General Electric GE:US and Pratt & Whitney (which is owned by United Technologies UTX:US) and the Trent 900 engine which is built by Rolls-Royce RR/:LN).

GP7200 engines account for 60% of the global market share of engines that power the Airbus A380 aircraft currently in service. This is largely because Emirates, which is the largest operator of Airbus A380 aircraft with 98 of them currently in service, chose the GP7200 engines to power 92% of its A380s.

Etihad (10 A380s) and Qatar Airways (8 A380s) also operate Airbus A380 aircraft that are powered by the GP7200 engines. Other than the Gulf carriers, only Air France-KLM AF:FP (10 A380s) and Korean Air 003490:KS (10 A380s) have chosen to power their Airbus A380 aircraft with the GP7200 engines.

Chart: Global market share of engine types used to power the Airbus A380 aircraft

Chart: Global market share of engine types used to power the Airbus A380 aircraft

TRENT 900 ENGINES ARE MORE POPULAR AMONG THE REST OF THE AIRLINES, MOSTLY ASIA PACIFIC CARRIERS – TRENT WAS CHOSEN BY 8 OUT OF THE 13 AIRLINES THAT OPERATE THE A380 AIRCRAFT GLOBALLY

The remaining 8 out of the 13 airlines that operate the 215 Airbus A380 aircraft that are currently in service globally have chosen to power them with Rolls-Royce’s Trent 900 engines. These include Singapore Airlines SIA:SP (which operates 18 Airbus A380s), Lufthansa LHA:GR (14 A380s), British Airways IAG:LN (12 A380s), Qantas QAN:AU (12 A380s), Asiana 020560:KS (6 A380s), Malaysia Airlines (6 A380s), Thai Airways THAI:TB (6 A380s) and China Southern Airlines 1055:HK (5 A380s).

Chart: List of airlines operating the Airbus A380 aircraft globally and their choice of engine types

Chart: List of airlines operating the Airbus A380 aircraft globally and their choice of engine types

GP7200 MID-AIR UNCONTAINED ENGINE EXPLOSION WILL NEGATIVELY IMPACT GENERAL ELECTRIC (GE:US) AND UNITED TECHNOLOGIES (UTX:US)

The GP7200 mid-air uncontained engine explosion will negatively impact General Electric (GE:US) and United Technologies (UTX:US) due to costs incurred in supporting the affected customers and could potentially face legal claims.

Recall that Rolls-Royce (RR/:LN) and Qantas (QAN:AU) reached a settlement in June 2011 where Rolls-Royce paid A$95m to Qantas Airways as compensation following the uncontained explosion of a Rolls-Royce Trent 900 engine in mid-air on one of Qantas QF32’s Airbus A380 aircraft in November 2010. The incident led to the grounding of Qantas’ entire fleet of six Airbus A380 aircraft for engine checks and replacements. Singapore Airlines (SIA:SP) and Lufthansa (LHA:GR)’s Airbus A380 aircraft engines also underwent checks following the incident.

Rolls-Royce incurred a total cost of GBP56m for this engine failure (including incremental service and support costs, uncontracted settlements to all affected customers and the impact on Rolls-Royce Group’s operational activity) in 2010 plus some small additional costs in 2011. This cost impact cut Rolls-Royce Civil Aerospace division’s underlying profit before financing by 14% in 2010.

Investors also reacted negatively to the incident. Rolls-Royce’s share price fell 11% during the week following the Qantas QF32 incident.

Chart: Share price performance after Qantas QF32 uncontained engine failure on 4th November 2010

APART FROM AIR FRANCE-KLM, EMIRATES, ETIHAD, KOREAN AIR & QATAR AIRWAYS’ OPERATIONS COULD POTENTIALLY BE AFFECTED IF BROADER CHECKS NEED TO BE CONDUCTED FOR THE GP7200 ENGINES THAT POWER THEIR AIRBUS A380 AIRCRAFT

Air France-KLM (AF:FP) will be negatively impacted as we expect its fleet of Airbus A380 aircraft to be grounded near term for engine checks and potential replacements, resulting in lost revenue opportunity for the airline even though it can file claims against the Engine Alliance to mitigate the financial impact. Air France-KLM has 10 Airbus A380-800 aircraft, all powered by GP7200 engines.

More importantly, precautionary checks could potentially have to be carried out on all the GP7200-powered Airbus A380 aircraft given safety concerns. This will affect Emirates Airlines the most as 90 of its A380s are powered by the GP7200 engines. The GP7200-powered Airbus A380 aircraft account for 35% of Emirates’ total aircraft fleet and 45% of Emirates’ total seat capacity. Etihad (10 A380s), Korean Air 003490:KS (10 A380s) and Qatar Airways (8 A380s) will also be affected.

Some airline customers may avoid choosing flights that are operated by Air France-KLM and the above carriers using the Airbus A380 aircraft near term due to safety concerns until the investigations and thorough inspections are done. Although these airlines can file claims against GP7200 manufacturer Engine Alliance, the precautionary checks could be significantly disruptive to their operations near term.

ROLLS-ROYCE AND OTHER AIRLINES OPERATING THE A380 AIRCRAFT THAT ARE POWERED BY ROLLS-ROYCE TRENT 900 ENGINES ARE UNLIKELY TO BE AFFECTED

The GP7200 and the Trent 900 engines are unrelated. As such, Rolls-Royce and the airlines operating Airbus A380 aircraft that are powered by the Trent 900 engines are unlikely to be affected by the recent Air France AF66 incident.

SIA ENGINEERING COULD BE A BENEFICIARY IN THE EVENT THAT THE INSPECTIONS ARE EXTENDED TO INCLUDE TRENT ENGINES

However, if they are, then SIA Engineering (SIE:SP)’s 50%-owned Singapore Aero Engine Services (SAESL) will be a beneficiary. The Trent 900 engine failure on Qantas’ Airbus A380 in November 2010 drove precautionary checks on all of Rolls-Royce’s Trent 900 engines. This boosted Singapore Aero Engine Services (SAESL)’s workload and earnings in 2010.

SAESL is a Singapore-based engine MRO and is 50% owned by SIA Engineering (SIE:SP) and 50% owned by Rolls-Royce. It is Rolls-Royce’s Centre of Excellence in the Asia-Pacific region for the repair & overhaul of Rolls-Royce Trent engines. SAESL has a design capacity to turn around 320 engines annually and the new engine test facility can carry out full engine test on all Trent engines. SAESL was also the first Trent 900 Centre of Excellence appointed by Rolls-Royce and has the capability to repair & overhaul the Trent 1000 engine. SAESL has also been selected to be the lead MRO facility for the Trent XWB engine.

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