We think GE will beat UTX/HNY In massive Army Engine Competition to be announced Friday

01/31/19 07:00AM EST

We expect that Friday, (1 Feb) the Army will announce whether GE or Advanced Turbine Engine Company (ATEC) (a UTX/ HNY joint venture) will be the winner of its ambitious Improved Turbine Engine Program (ITEP). 

The announced winner will begin Engineering and Manufacturing Development to re-engine the Army's existing 3000+ twin-engine UH-60 and Apache helicopters and to equip the Future Attack Reconnaissance Aircraft (FARA), the first of its Future Vertical Lift capabilities. Production is to begin in 2024.  This is a franchise program whose total value will easily exceed $5B. 

In 2016, GE Aviation and ATEC each received design contracts for a 3,000 HP engine that will be 50 percent more powerful, 20 to 25 percent more fuel efficient, and provide a 20 percent longer design life than the 20,000 1975-design GE T700 engines now installed around the world.  T-700 engines currently go for ~$650K and the ITEP is to remain below that cost.

ASSESSMENT:

PROGRAM RISK:  Reengining 3000+ "legacy" helicopters is not without controversy given inevitable integration issues of putting new dynamics in old airframes but the Army's massive existing fleet has steadily lost power margins as weight requirements have grown.   ITEP has been Army Aviation's number one priority for some time.  In the bigger picture, the Army is known for having far more program appetite than it can afford and it seems to now be on a path to fund two brand new  Future Vertical Lift development programs (Capability Set 1 = FARA and Cap Set 3 = medium lift) as well as ITEP all at the same time A major signal was recently sent when the Army began including ITEP as one of the Army's three "signature" programs in support of its Future Vertical Lift vision.  When it all shakes out, we think Cap Set 3 (TXT, LMT/BA) will be slowed relative to FARA and ITEP.  Bottom line: ITEP funding should be assured in the near and mid term even in a budget downturn.

TECHNICAL APPROACH.  The two companies have taken two distinctly different technical approaches to the challenge. GE has gone with a greatly improved "single spool" turbine that is similar to current small engine designs which in theory means lower risk, easier/cheaper to maintain - both essential selection criteria.  ATEC has submitted a "dual spool" design similar to large aircraft engine designs that is probably heavier but said to have more growth potential, be more efficient and better at sand ingestion.  Field maintainability of the dual spool design has been questioned but ATEC claims some degree of modularity and less overall need for maintenance.  Advantage: ATEC. 

TECHNICAL RISK.  It should be noted that when the preliminary design contracts were issued in August 2016, each of the companies received wildly different levels of funding for essentially the same scope of work.  GE received $102M while ATEC received $154M.  Given that the intent of those design contracts was to ensure that the Army would have two viable competitors for its Milestone B decision this month, one inference may be that ATEC needed more money to catch up to GE and be competitive at downselect.   It should also be noted that GE invested significant company dollars (>$100M) to produce a production-similar prototype of its ITEP submission - normally an excellent confidence builder for source selection board members.  Advantage: GE

PRICE HUNGER. We believe that GE has more to lose than ATEC given that it is the incumbent T700 manufacturer and an award to ATEC would be a direct transfer of GE market share.  We also believe that the more conventional GE design probably lends itself to having a sharper pencil when costing the development portion of the bid.  Advantage: GE.

© 2019 Hedgeye Risk Management, LLC. The information contained herein is the property of Hedgeye, which reserves all rights thereto. Redistribution of any part of this information is prohibited without the express written consent of Hedgeye. Hedgeye is not responsible for any errors in or omissions to this information, or for any consequences that may result from the use of this information.