Rolls-Royce and Pratt & Whitney announce new partnership to develop next generation engines for mid-size aircraft and restructuring of IAE collaboration

Wednesday, 12 October 2011

New joint venture with Rolls-Royce and Pratt & Whitney to develop new engines for future generation mid-size aircraft
Pratt & Whitney to purchase Rolls-Royce share of International Aero Engines (IAE)
1. New Joint Venture
Rolls-Royce, the global power systems company, and Pratt & Whitney, a United Technologies Corp. (NYSE:UTX) company, are pleased to announce an agreement to form a new partnership to power future mid-size aircraft (120 – 230 passenger aircraft).  The two companies will establish a joint venture company, in which each will hold an equal share, to develop new engines for the next generation of aircraft that will replace the existing mid-size fleet.  The new venture will draw on the most advanced technology from two world-class companies to drive enhanced performance for this fast growing segment in which worldwide demand for around 20,000 new aircraft (or nearly 45,000 engines) is predicted over the next 20 years.

This new joint venture will focus on high bypass ratio geared turbofan™ technology.  In addition, the venture will collaborate on future studies for next generation propulsion systems, including advanced geared engines, open rotor technology and other advanced configurations.

The new collaboration brings together complementary technological resources and is designed to offer the best, most competitive response to customer demand for the next generation powerplant in the mid-size segment. The collaboration could bring about significant value for customers as both parties are able to benefit from each other’s strengths.

The new joint venture between Pratt & Whitney and Rolls-Royce also benefits from the success of the V2500 and the PurePower® engine in establishing a broad customer base.  It builds on the long-standing and successful partnership between Pratt & Whitney and Rolls-Royce in the mid-size segment.   Japanese Aero Engine Corporation (JAEC) and MTU Aero Engines (MTU), partners of IAE and the PurePower® PW1100G-JM (Geared Turbofan™) programme for the Airbus A320 New Engine Option (neo), also intend to join the new collaboration.

2. Rolls-Royce and Pratt & Whitney restructure IAE participation
As well as establishing the new partnership, Rolls-Royce and Pratt & Whitney will restructure their participation in IAE, which produces the V2500 engine for the A320 family of aircraft. Under the terms of the agreement Rolls-Royce will sell its equity and programme shares in IAE to Pratt & Whitney for $1.5 billion and in addition receive an agreed payment for each hour flown by the current installed fleet of V2500-powered aircraft for fifteen years from completion of the transaction.

Under the continuing leadership of Pratt & Whitney, JAEC, and MTU, IAE will continue to deliver the same high-quality product and customer support without interruption.   Rolls-Royce remains committed to IAE and its customers and will continue to be responsible for the manufacture of high-pressure compressors, fan blades and discs as well as the provision of engineering support and final assembly of 50 per cent of V2500 engines.

Since its creation almost thirty years ago IAE has become a major force in international aviation with approximately 4,500 V2500 engines in service and approximately 2,000 on order.

“Today’s announcement charts a clear course for the future of Rolls-Royce in the important mid-size aircraft segment” said Mark King, President - Civil Aerospace, Rolls-Royce. “We are building on many years of successful collaboration with Pratt & Whitney in this segment to develop advanced aero engines, which we are confident will set new standards in aviation technology, performance and fuel efficiency.”

“These agreements position Pratt & Whitney, JAEC, MTU and IAE to best serve the needs of their customers for all of the A320 aircraft family”, said Todd Kallman, President, Commercial Engines and Global Services, Pratt and Whitney. “We are delighted to collaborate with Rolls-Royce, with its complementary capabilities, as we look forward to the next generation of aircraft engines that will offer even greater operational and environmental benefits.”

In addition, Rolls-Royce will make a modest financial investment in the PurePower® PW1100G-JM (Geared Turbofan™) engine for the Airbus A320 New Engine Option (neo) programme.

These transactions are subject to various closing conditions including regulatory approvals.

3. Financial implications for Rolls-Royce
These transactions are not expected to have a significant impact on the 2011 trading performance nor the financial guidance provided for 2011, as last updated with the Group’s half yearly results on 29 July 2011.

Looking forward, the restructuring of our involvement in IAE will produce a number of important effects on trading performance. These include net cash proceeds of circa $1.5bn subject to some working capital adjustments when the transactions complete, and improvements in the trading performance over coming years.  The cash proceeds will be retained for general corporate purposes. The effect of these transactions on Civil Aerospace will be to improve trading profitability over the next few years, with the full year improvement in operating profits expected to be more than £140m in the first year, with a slowly diminishing contribution in successive years depending on the utilisation of the current V2500 fleet. Overall the majority of value to Rolls-Royce will be derived from flight hour payments due over the next fifteen years.