FLUG REVUE August 2004: Steffens outlines MTU plans

DR. KLAUS STEFFENS

An interview with the president and CEO of MTU Aero Engines GmbH

FLUG REVUE: What steps are you taking in anticipation of the planned stock market flotation of MTU Aero Engines?

Steffens: Quite apart from the medium to long-term goal of a stock market flotation, we plan to prepare ourselves to cope even better with future market fluctuations through our cost-saving programme, “Impact 100”. In recent years we have had to cope with the consequences of 9/11, the Iraq War, the SARS crisis and, in the last few months, unfavourable trends in the dollar exchange rate as well. We have to assume that, on top of the cycles in our markets, events like these will in future have a pronouncedly greater effect on the airlines and hence on developments in our own business. We are therefore trying to make ourselves more flexible than we were in the past. That way, we will be able to benefit disproportionately from the upswing in the aerospace industry that is currently under way. This will surely also be an attractive prospect to potential shareholders.

FLUG REVUE: Bearing in mind the development costs that participation in the Boeing 7E7 programme would have meant, are you happy that MTU will not be involved?

Steffens: Of course, not participating in one of the 7E7 engine programmes at first sight has advantages in terms of capital commitment. But that is not part of our strategy. One has to think and act beyond market cycles. Pratt & Whitney and MTU submitted a bid that was extremely attractive from a technical point of view. But we deliberately decided on a set of terms that would have guaranteed a return to us as engine manufacturers. In addition, we were not prepared to agree to subsequent improvements. That is why our proposal was turned down.

But even without the 7E7, MTU will virtually double its market share over the next ten years. Today we have much higher workshares than in the past on several promising new programmes, which will enable us to participate disproportionately in the market growth of the aerospace industry. We have clearly concentrated our resources on the Airbus A380, which will herald a new era in civil aviation. And when you look at the sales figures for the GP7000-powered version of the A380, that engine has established a 61 percent market share – and the trend is upwards.

FLUG REVUE: How do you rate the chances that P&W will develop the PW-EXX with MTU without time pressure for a new application?

Steffens: The expenses required to develop a new engine through to certification amounts to between 1.2 and 1.5 billion Euros. It is not that simple a matter to develop an engine without any particular goal in mind. You need to have an application. Until then the necessary technological development will be continued. That is definitely what we do.

FLUG REVUE: In the long-term, is there any chance that your contractual arrangements with Pratt & Whitney might be relaxed so that you could approach a new partner?

Steffens: No. Pratt & Whitney is a fantastic partner for MTU. There is no reason to change anything in a relationship that works well and has been tried and tested. Besides, MTU does work with other partners closely in an equal way. In fact, half our revenue comes from such business. On the GP7000, for example, we are working with GE. On the V2500, currently one of the most successful engines in the entire industry, we are partners with Rolls-Royce. We therefore have established collaborations with all three major manufacturers. This risk-minimising strategy on the part of MTU will continue to reap dividends in the future.

FLUG REVUE: Have any changes taken place in corporate thinking as a result of the recent change of ownership with KKR?

Steffens: We are continuing a well-proven strategy in relation to our new shareholder too. Besides, that strategy was one of the deciding factors in KKR's decision to invest in MTU. In the operating area, KKR has helped us to move towards independence. It is quite clear that, as part of a Daimler Chrysler conglomerate, MTU's position was quite different, because we were able to get many central services from the corporation, which we now have to provide ourselves, especially in the financial area, but also in matters such as the patent system.

FLUG REVUE: How much of MTU's revenue goes into research?

Steffens: About ten percent of our turnover goes into research and development, which puts us at the top of our industry. We will not change anything in that department. Research and development are investments in the future of a company. One cannot make savings over one's future. Our core business lies in turbine technology, compressor technology and in the area of electronic control systems.

FLUG REVUE: Will a German engine company be able to keep pace with foreign companies in the matter of state funding, or do you see problems coming Germany's way?

Steffens: In the long-term, Germany will have to make an effort, if it is not to miss the technological boat. The USA spends about six times as much on engine technology as Germany. Even our colleagues in France and the UK spend almost three times as much as we do. What we spend these days under the umbrella of the national technology programme is far too little. And even in military research, many projects fall by the wayside due to the financial constraints under which the Government operates. The fact that MTU has been so successful internationally up to now despite these problems is due to the fact that we have very cleverly transferred technologies from the Eurofighter programme to the civil sector. And we are strong supporters of European projects like the CLEAN programme, which aims to cut fuel consumption by another 20 percent, compared with today's engines. The real crunch – and this does not just apply to the aerospace industry – is this: Germany must quickly find a way of breaking free of its current position at the bottom of the international league in research funding and of working its way back up.

FLUG REVUE: In your opinion, which technologies hold out the best prospects for the future?

Steffens: Against the background of the impending scarcity of energy in the medium to long-term and the effects of CO2 emissions produced by air transport, it is MTU's goal to develop a very small core engine that has a very high bypass ratio and incorporates heat exchangers and intermediate cooling of the compression system. These elements create a circular process that could reduce fuel consumption by 15 to 20 percent compared with today. This automatically leads to the engine architecture of a geared fan, which makes possible a smaller core engine. If you decouple fan and turbine, you can build something that is a lot lighter and more efficient. But to do that, you have to develop a new generation of low-pressure turbines and make the heat exchanger technology flight-capable. There is still a long way to go to an application.

FLUG REVUE: What form could a consolidation of the European engine manufacturers take, and when might it come about?

Steffens: Potential mergers are of course always an extremely gripping subject – albeit not any more, since 11 September 2001, with its geopolitical and economic consequences. In the European engine industry, the merger fantasies have given way to economic realism. And the European governments understand just how important it is to have a national engine manufacturer – in Germany, that is MTU – to give them some negotiating clout over security policy. Only a player who is not dependent on others for spare parts supply and logistics is in a position to also make independent political decisions.

Another important point is that in the civil engine business, most of the work involves transatlantic collaboration. Because of all the intricate strands of cooperation, any merger would inevitably turn into a Gordian knot of competing programmes, which basically would be impossible to resolve. It is therefore my belief that the engine industry will do its optimising within the present structures. Collaboration between the engine manufactures, both at the European level and also across the Atlantic, will without a doubt become an even more pronounced feature of the industry, as no manufacturer can any longer handle the major technical challenges involved in engine construction on its own.

Patrick Hoeveler was asking the questions.

From page 21 of FLUG REVUE 8/2004

Last updated 8 July 2004

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