The Global Aerospace Trends and the U.S. Perspective on the Role of Japan
Pratt & Whitney President David Hess spoke at Japan International Aerospace Exhibition in Nagoya, Japan, on October 9. In his keynote speech, "The Global Aerospace Trends and the U.S. Perspective on the Role of Japan," Hess focused on the outlook for the aerospace industry and stressed the long history of Pratt & Whitney in Japan and the importance of Japanese aerospace technology and innovation to the future of our industry.
Good afternoon and thank you for having me here today. I'd like to thank Hasegawa-san (Hoss-E-Gah-Wah – san) for his generous invitation to address this conference.
As many of you know, I currently serve as president of Pratt & Whitney, a division of United Technologies Corporation. We are a $13.4 billion-dollar company with more than 68,000 aircraft engines in service around the world.
In addition to my position at Pratt & Whitney, this year I am also honored to be the board chairman of the Aerospace Industries Association in the U.S., an organization of more than 330 member companies that represent $200 billion in annual aerospace sales and 90% of the U.S. aerospace market.
In that capacity, I have been regularly dispatched to draw attention to the opportunities for, and some of the challenges to our industry and its ability to sustain innovation, jobs and national security.
I will share some brief thoughts on U.S. aerospace policy in a moment, but for now, it's simply a pleasure to be in Japan, which is at the forefront of so many exciting programs and developments in the aviation industry.
This year marks a number of important milestones in U.S. aerospace history, including the 50-year anniversary of John Glenn's historic Mercury mission that put the first American in space.
Back then, Japanese industry was already working its way into the fabric of U.S. aviation. In the 1960s, Japanese gear boxes, galleys, lavatories and structural elements were flying on American airplanes.
Pratt & Whitney's partnership with Japan began even earlier, and has been going strong ever since.
In December 1952 – 60 years ago – we formed a partnership with Mitsubishi Trading, the company that became – through United Aircraft – the sales representative for Pratt & Whitney, Sikorsky and Hamilton in Japan.
Since then, our relationship with Mitsubishi has evolved in many ways to include sales, licensing, risk sharing and partnering, services and more.
In the 1960s, a Pratt & Whitney engine was selected as the exclusive power plant for the Kawasaki C-1 Transport, Japan Air Self-Defense Force's first indigenous military transport aircraft. Our JT8D-M9 engine for this program was licensed for local production at Mitsubishi Heavy Industries starting in 1969.
We're proud of our relationship with the Japanese Air Self-Defense Force and all of our Japanese industry partners.
We've been working with IHI on the F100 engine program since 1978, when we signed a licensing agreement to produce the F100 engine – in Japan – for Japanese Air Force F-15s. Today, the F100 and 220E engines produced by IHI power more than 200 Japanese aircraft.
I want to thank the JASDF for their recent vote of confidence in the Joint Strike Fighter program by choosing the F-35 with the Pratt & Whitney F135 engine.
On this program, Japan is not only a customer, but also a supplier. Japanese manufacturers, in fact, will make close to 40 percent of the F-35's components.
The F-35 program will replace Japan's aging F-4 fleet with highly advanced fifth-generation technology and capabilities. We look forward to powering Japan's fleet of next-generation fighter jets for years to come.
On the commercial side, Pratt & Whitney is part of the successful International Aero Engines partnership, which includes the Japanese Aero Engine Corporation. IAE produces the V2500 engine that is in service with close to 200 customers in 65 countries, with 70 million flight hours worldwide. IAE has delivered over 5,000 of these engines, and there are close to another 2,000 engines currently in backlog.
In addition, we are very pleased with our selection as the sole-source engine provider for the Mitsubishi Regional Jet, or MRJ. The MRJ brings all the latest technology and a new level comfort to the regional market. Combined with Pratt & Whitney's revolutionary PurePower PW1200G engine, this aircraft will deliver environmental and fuel savings up to $1.5 million dollars per aircraft per year, compared to today's best aircraft.
Tomorrow, Bob Saia will provide a detailed program update on the PurePower PW1200G engine for the MRJ.
This long and close relationship between Pratt & Whitney and our partners, suppliers and customers in Japan is indicative of the very close relationships that exist between the Japanese aerospace industry and the aerospace industries of America.
In many respects, the MRJ is an aircraft that reflects our industry's response to evolving forces in the global aerospace market, and the challenges confronting our customers.
Familiar to everyone in this room, the pressures faced by our customers are more complex and intense than ever before.
For commercial carriers, margins are slim, fuel costs are up and global economic conditions are tenuous.
In 2011, the cost of jet fuel consumed 35 percent of total airline operating expenses, up from 30 percent the year before. Operating revenue was up 13 percent, but offset by expense growth of 16 percent. The current forecast for 2012 says that air transportation will clear a $3 billion global profit this year on revenues of $631 billion – just a .5 (point-five) percent margin.
Just last month the CEO of the International Air Transport Association gave a speech in Tokyo where he said that airlines take a collective loss when global GDP growth falls below 2 percent, which is about where GDP projections for 2012 stand today.
On the military side, the world's largest defense customer – the United States – is facing a massive budget cut starting in January 2013. Unless an alternative is found in the U.S. Congress, we're just a few months away from $500 billion-dollar budget cut that will indiscriminately slash funding for American defense and aerospace programs across the board.
The impact on the international market is unclear, but the world is watching. National policymakers – from the White House on down – understand the negative impact this policy will have on U.S. employment, GDP and our industry's ability to innovate.
As an industry, we will continue to speak with a unified voice against this policy until an alternative is found.
Again, our industry is accustomed to challenges. Budget cuts notwithstanding, when faced with change, our default position is typically not one of protest.
Instead, our response to long-term shifts in the global economy, customer priorities and regulatory challenges has resulted in innovation, new solutions and new technologies that are changing our industry and the way people travel.
A perfect example is our investment in green engine technologies. Civil aviation contributes about 2 percent of the world's CO2 emissions. Even though commercial and general aviation aircraft are 75 percent more fuel-efficient than the jet aircraft of 40 years ago, we can do better.
Globally, the industry has committed to achieving fuel efficiency gains of 1.5 percent annually, carbon neutral growth from 2020 onward, and a 50 percent reduction of net CO2 emissions by 2050.
Pratt & Whitney is leading the way in the development of next-generation propulsion systems that deliver environmental performance in every aspect – including manufacturing, engine performance and service.
Our engines today use less fuel, produce less noise and emit dramatically fewer emissions than ever before – and we are making them better all the time.
Traditional jet engine architecture has reached a performance plateau, and future improvement will provide only incremental increases at the engine level, although these are still important.
A new jet engine architecture – such as the Geared Turbofan engine – is needed for the industry to achieve significant efficiency improvements and lower fuel consumption.
Over the past 20 years, Pratt & Whitney has invested more than a billion dollars to develop technology for our Pure Power family of next-generation Geared Turbofan engines. That is why we are so proud that this engine – the PW1200G – has been sole-sourced for the MRJ. This revolutionary technology offers groundbreaking improvements in performance, fuel efficiency and overall operating costs – and will do so for many decades to come.
Our Japanese partner, Mitsubishi Heavy Industries, will do final assembly and testing of the PW1200G engine in nearby Komaki City. This partnership will deliver real value to the customer, and when the first PW1200G production engines are delivered, there will be no greater affirmation of the trust we place in Japanese capabilities and innovation.
And there's more to come. We are working on ultra-high-bypass geared-turbofan solutions compatible with current aircraft configurations. These engines would provide 25 to 30 percent improvement in fuel burn compared to today's engines. Progress will rely on new technologies being introduced across the engine, as they have been for the past 50 years.
New engine designs will be enabled by new materials, such as lightweight composites, ceramics and new metal alloys – many of which have been developed with Japanese industry. These technologies will enable engines to achieve even higher bypass ratios to reduce fuel burn, noise and emissions.
To get there, ongoing partnership between U.S. and Japanese companies is critical, and the maturation of the global supplier network means more opportunity for collaboration.
The opportunity for Japanese aviation products to reach new markets has never been greater. Today, there is growing U.S. acceptance – politically and culturally – of the global nature of the aerospace industry supply chain.
That acceptance has been earned by proving time and again the value of that supply network, and the positive impact it can have on alleviating the pressures faced by our customers.
Fuel costs, low margins and environmental concerns are going to be a reality for the foreseeable future.
For our Japanese partners, it reinforces the imperative to demonstrate world-class quality and delivery performance.
At no time was our confidence in Japan higher than during the response to the 2011 earthquake and tsunami.
On March 11, damage forced the shutdown of IHI in Soma, which is part of the IAE partnership that manufactures parts for the V2500 engine. As I mentioned before, the V2500 is one of our flagship products, and currently maintains 50 percent of the market share for engines for the Airbus A320 family of aircraft.
The Soma facility was inundated by the tsunami. All power, water and transportation infrastructure went offline, and employees and their families were relocated.
Immediately, a plan was developed to avoid work stops for our customer, Airbus.
Through daily coordination and a lot of hard work, the Soma facility gradually came back online. At the same time, manufacturing and assembly processes were modified at MHI; at Pratt & Whitney in Middletown, Connecticut; at Rolls Royce in Berlin; and at Goodrich in Toulouse to accommodate the recovery plan.
By April, 65 percent of the IHI Soma manufacturing workforce was able to return to the plant, and by June, Soma was fully restored to 100 percent operability. In the end, there was no impact to Airbus, IAE remained 100 percent on time with deliveries.
It was a dramatic display of Japanese commitment to the customer, it reaffirmed the strength of our partnership, and was a compelling testament to flexibility of a truly effective global supply chain.
And, Japan will remain a key player in the supply chain, as long as it continues to meet the market's capacity, cost and capabilities requirements.
So…is Japan ready for the production ramp ahead? Are you sized appropriately? A lot has been written about the pressure on suppliers. We are all working to mitigate the potential of raw material and parts shortages that could cause delays. A recent study found that 21% of aviation suppliers are worried about capacity and the ability to finance retooling and other investments they need to keep up with demand.
Regarding cost: The need to be aggressive on cost is not going away. Will Japanese industry be able to meet the price points demanded of our customers? We all know how expensive and time-consuming the development process can be.
Non-recurring development costs for a new, large civil aircraft can easily be in excess of $5 billion. The Airbus A380 is estimated to have cost over $10 billion before the first flight test. From a business perspective, R&D in aviation can be challenging. Break-even points are far away, the learning curve for new entrants is steep, and success comes only with experience.
Warren Buffet likes to say that in business, the rearview mirror is always clearer than the windshield. But we must continue to look ahead, anticipate the needs of our customers, and be prepared to take the risks associated with long-term R&D.
And, capabilities: Is Japan able to develop the technologies we need for new engine lines and new aircraft? The record so far is very good.
Japanese companies are playing an important role in the global development of the Pratt & Whitney 1100G-JM engine for Airbus' A320neo. This engine will meet Airbus' requirement for fuel-efficiency, emissions and noise-reduction. As a 23 percent program partner, Japanese companies will provide fans, low-pressure compressor modules, combustors and low-pressure shafts for the engine. These are some of the most advanced parts of the engine.
The bar is high for engine performance on the A320neo, which is promising a 15 percent reduction in fuel consumption, carrying two tons of additional payload, 500 additional nautical miles of range, and lower operating costs.
Along with our Japanese partners, I know we're up to the challenge.
Our partnership on the A320neo is just one example of how Japanese companies continue to help us meet the cost and environmental challenges of an evolving global industry.
Overall, Japanese involvement in U.S. aircraft manufacturing is on the rise. Japanese subcontractors now make more of a U.S. aircraft than ever before. On Boeing's 777 program, for example, Japan's workshare was 20 percent. For the 787, Japan's workshare is around 35 percent.
And Japan's role continues to transcend that of a supplier. MHI used to produce components of the 747-400, but in 2004 it took over complete fabrication of the center wing section.
The MRJ, of course, is the next logical step in Japan's evolution.
The MRJ signals a strategic shift from production work to design. As the first civil aircraft to be built entirely in Japan, the MRJ partnership says to me that Japan will continue to grow as a partner and as a customer for Pratt & Whitney engines.
Despite some of the gloomy figures I offered earlier about aviation industry challenges, there are reasons to be optimistic about the future of the Japanese aerospace industry and our ongoing partnership.
The steady liberalization of aviation trade policies will make it easier for U.S. companies to conduct business with Japan. As one analyst wrote, the military relationship between our countries offers a form of "security glue" that discourages commercial conflict. This enduring bond has yielded a series of beneficial agreements, starting with the lifting of the 1952 aviation ban, to the 1998 Open Skies agreement, all the way through this year's deal on the F-35.
Pratt & Whitney founder Frederick Rentschler once said "the best airplanes are built around the best engines." I certainly think this is true, and thanks to our partnerships in Japan, we know that some of the best engines will be built using Japanese technology and know-how.
To that end, we will continue to value Japan's aviation industry as a collaborative and committed partner as we develop the next generation of products to meet the growing demands of our global customers.