Just Imagine If Times Were GoodTim Smart
The aviation industry is still a long way from pulling out of its descent--but you wouldn't know it from looking at General Electric Co.'s jet engine business. Profits are growing at a pace reminiscent of the Reagan-era military buildup of the 1980s. Analyst Jennifer Pokrzywinski of Morgan Stanley estimates that the group's 1995 profits could climb 14%, to $1.1 billion, even though revenues may remain unchanged at $5.7 billion. That would push profit margins close to 19% (chart).
Just how GE Aircraft Engine Group, based in Evendale, Ohio, achieved those numbers, however, is more than an object lesson in reengineering an enterprise to fit a radically smaller market. It's yet another demonstration of how GE CEO John F. Welch Jr.'s relentless focus on the bottom line produces results--and pain. Since 1992, GE has extracted huge concessions from suppliers, while trimming its list of vendors by nearly two-thirds, to 500. The unit has also slashed its workforce almost in half, to 23,000. And with sales growth stalled, GE wants to cut costs an additional 30%. Workers fear more layoffs, though GE won't comment on such speculation.
Eugene F. Murphy, who heads the engine division, acknowledges the dislocations that downsizing has caused but argues that GE had no choice. "It's incumbent on us as GE leaders to shape the business to the realities of the marketplace," says Murphy, 59, a onetime CIA staff lawyer and veteran GE executive who took over the division in 1993.
The aircraft-engine unit clearly needed help in 1992, when demand for new engines plummeted as money-losing commercial airlines and the Pentagon slashed orders. From 1991 to 1993, profits tumbled 43%, to $798 million. Worse, margins slipped below the 15% Welch looks for at all his divisions, to just over 12% in 1993.
With business shrinking, GE decided to adopt "target costing." Rather than price an engine by calculating its costs and adding a profit, GE worked backward. It would first determine what a customer was willing to pay in the competitive environment and then lower costs accordingly to maintain its profits.
To make it work, GE first approached airline customers, including United Postal Service and American Airlines, to find out how it could redesign engines to reduce costs. In the case of the CF6-80C2 engine for the 747 and 767, for example, GE found it could lose the air manifold, a $10,000 valve that regulates air flow around an engine to adjust thrust. Though it helped save fuel, customers felt its cost outweighed its benefits. Now, GE is redesigning other engines, including the one it's planning for the Boeing 737X, a new short-haul commuter plane. GE has vowed to cut 30% off the initial estimated cost of the engine core, which generates thrust.
TOUGH MASTER. GE has also been working with its remaining suppliers to lower parts costs. Robert Donahue, vice-president for sales and marketing at Wyman-Gordon, which makes high-temperature materials, says a GE team constantly monitors his company's progress on improving manufacturing techniques. In turn, Wyman-Gordon is pressuring its suppliers to get more efficient. Of course, not everyone is happy with GE's oversight. Steve Moore, in charge of the GE account for Advanced Fabrications/Flameco in Ogden, Utah, which welds metal parts, says GE is demanding another 15% price reduction over the next three years, on top of 15% last year. To help meet those goals, the company has cut employment in half in recent years, to 150. "Over the last three to four years, we've noticed a significantly worsening relationship" with GE, says Moore. Still, Moore, who counts GE as one of his biggest customers, isn't about to ignore GE's targets.
Not surprisingly, GE's cost-cutting campaign has taken its toll on employees--and not just factory workers. The white-collar engineering staff, which peaked at 10,000 in 1991, was slashed to 4,000, leaving behind much bitterness. "Welch destroyed aircraft engines in my mind," says John Zurbrick, an engineer who was let go in 1993. Zurbrick is among 43 former white-collar employees who are suing GE, alleging that the aircraft-engine unit violated its policy of providing work at other GE sites for laid-off engine workers. GE, which settled a similar suit last year, says the latest suit has no merit.
GE has also been pressing for productivity improvements from its leaner workforce. GE first took a hard line to persuade the United Auto Workers union to accept work-rule changes, such as assigning employees multiple jobs. The company transferred some operations from Evendale to other plants where union and nonunion workers were more cooperative. Between job cuts and the transfer of operations, employment at Evendale has slumped from 20,000 to 8,000. Ed Willis, president of Local 647 of the UAW, admits the union should have been more flexible. Still, resentment lingers. Moving operations was a method of "punishing the union," says Tim Mason, vice-president of the UAW local--a charge GE denies.
GLITCH-FREE. Despite the pain, the results have been impressive. New-engine orders once took 24 months but now take close to six months. More significant, GE is now the lowest-cost producer in the business. Even though Pratt & Whitney is in the midst of its own downsizing, Pratt President Karl J. Krapek reckons that his company's operating costs are still 8% higher than GE's, though the gap is narrowing. And quality remains unchanged. GE customers say less than 0.01% of aircraft departure delays are due to engine problems. On the marketing front, GE captured two-thirds of worldwide orders for large commercial aircraft engines last year.
GE still isn't out of the woods. Murphy doesn't see a rebound until 1997, when airlines should step up orders to replace their aging fleets. Then, he's betting on the GE90, the biggest and most advanced commercial jet engine ever built, to power sales. GE, along with its partners, France's Snecma, Japan's IHI Heavy Industries, and Italy's Fiat, has spent $1.5 billion developing the engine for the new Boeing 777 widebody that will start flying commercially this summer.
Unfortunately for Murphy, both Pratt and Britain's Rolls-Royce PLC are eyeing the same market. And all three are being forced to bargain. Pratt acknowledges that it's offering discounts averaging 77% to win initial orders for its new PW4084 engine, its competitor to the GE90. Still, Murphy believes that double-digit revenue growth for the aircraft-engine division is just a couple of years away--not a moment too soon, when you have a boss like Jack Welch looking over your shoulder.