GE trumpets 40-year jet engine venture to bolster Alstom bid

PARIS Tue Apr 29, 2014 1:04pm EDT

The logo of U.S. conglomerate General Electric is pictured at the company's site in Belfort, April 27, 2014. REUTERS/Vincent Kessler

The logo of U.S. conglomerate General Electric is pictured at the company's site in Belfort, April 27, 2014.

Credit: Reuters/Vincent Kessler

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PARIS (Reuters) - As General Electric (GE.N) tries to convince French leaders to back its offer to rescue engineering firm Alstom (ALSO.PA), it hopes that three letters will convince them of its good will: CFM.

The initials mask a successful U.S.-French venture that will soon mark 40 years making jet engines.

Co-owned by GE and Snecma, a unit of French aerospace group Safran (SAF.PA), CFM has grown from a risky attempt to break into new civil markets into an aviation powerhouse with 26,000 units sold and a CFM-powered jet taking off every two seconds.

General Electric Chief Executive Jeff Immelt brought up the engine supplier during a meeting with French President Francois Hollande to press GE's $13 billion offer on Monday, a person with knowledge of the discussions said.

Immelt "stressed that CFM is an excellent example of co-operation", the person said, asking not to be identified.

By doing so, he not only boasted of GE's French credentials in the face of a rival offer from Germany's Siemens (SIEGn.DE).

He also implicitly addressed French concerns over "economic sovereignty" by comparing his bid to a previous episode in which the United States agreed to share its own sensitive technology.

Although now established in the aircraft industry, the creation of CFM in 1974 was so sensitive that it only went ahead after intervention by U.S. President Richard Nixon and French counterpart Georges Pompidou - one of the few points of agreement at an inconclusive Reykjavik summit a year earlier.

That's because the Pentagon had opposed plans to build a new engine with the French, in which GE's contribution was to be closely related to an engine conceived for the B-1 bomber.

Under a compromise deal, the first CFM engine tests were conducted in the United States away from the gaze of French engineers, who remained barred for some time from looking inside the sealed casing of the engine's "core" section supplied by GE.

CFM has managed to thrive, breaking sales records even as France and the U.S. fought over trade and high-profile tie-ups such as Vivendi Universal and Alcatel-Lucent went wrong.

It was the brainchild of two industrialists with colorful war records: a German-born fighter engineer who fought for the allies and was made a U.S. citizen by an act of Congress, Gerhard Neumann, and a French resistance hero called Rene Ravaud who lost an arm when the British bombed Brest in western France.

It sailed unnoticed through the industry's biggest battles: a record trade dispute between its customers Airbus and Boeing, and a patriotic contest in which Boeing won the right to supply American tankers to the U.S. Air Force, whose existing fleet had quietly run on partially French-designed CFM engines for years.

DRIVING FORCE

Although three out of four medium-haul jets sold today have CFM engines, the firm is so low-key that few passengers will be aware of its name.

But it has been a driving force behind some of the aerospace industry's most important changes, including huge increases in reliability for the workhorse short- and medium-haul jets that paved the way for low-cost airlines.

Now, its main U.S. rival, Pratt & Whitney (UTX.N), is stepping up competition with a new generation of engines, prompting CFM to focus on plans for its own new engine series known as LEAP.

After a push from leaders followed by a slow start that nearly saw CFM wound up, Immelt will hope that the firm's success shows what can be done in industrial politics.

But industry sources say it may also demonstrate the limits of co-operation whenever sensitive assets or pride are at stake.

CFM is one of two transatlantic partnerships that operated for decades with minimum publicity, the other involving Pratt & Whitney and Rolls-Royce (RR.L) until Rolls recently exited.

Alstom is seen unlikely to dodge the limelight in the same way, with thousands of jobs at stake and a history of getting bogged down in front-line politics. A previous crisis over its future topped French political headlines for weeks in 2004.

Secondly, while the jet engine industry has long adapted to the idea that it must forge alliances to share overwhelming development costs, the power-plant industry is still mainly run by national champions, albeit with international activities.

Most importantly, GE's offer for Alstom's power turbines appears a very different financial proposition from CFM, which skirted round questions of control by establishing a 50-50 venture and dual U.S. and French assembly lines.

Although the ban on looking inside the engine has long ago been lifted, the separation of roles is so strict that to this day, GE and Safran don't know each other's costs on the world's most-sold jet engine, according to executives in both firms.

The revenues of CFM International are pooled but each partner is responsible for its own costs and keeps its profits.

"It is a partnership in which both companies have stayed on their own territory," said Jean-Paul Bechat, the former CEO of Safran and a former aide to CFM's co-founder Ravaud.

Industry experts say such Chinese Walls and a growing market both eased CFM's relatively trouble-free development, but are not a model that would easily fit Alstom's entrenched problems.

Whoever buys most of Alstom's assets is expected to want real control, while Hollande has called jobs and energy security his priorities for a deal.

(Additional reporting by Geert de Clercq; Editing by Giles Elgood)

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Comments (1)
pbgd wrote:
GE takeover of Alstom will fail, Pfizer takeover of Astrazeneca will succeed. Simply because French are French, and Brits are Brits.

Apr 29, 2014 7:22am EDT  --  Report as abuse
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