The Future of Innovation, Wings Club Luncheon — Remarks by UTC Chairman & CEO Louis R. Chênevert

Executive Speeches

The Future of Innovation, Wings Club Luncheon — Remarks by UTC Chairman & CEO Louis R. Chênevert

 

1/19/2012

“Urbanization will be a powerful force for the next decade or two, creating an amazing opportunity to build better cities and aircraft – cities and aircraft that are more efficient, consume less energy, and have a smaller impact on the environment.”

It’s certainly an honor to be here today as we start the New Year. It’s also great to see so many good friends, colleagues, and partners. I think it’s also appropriate for me to recognize and thank all the UTC customers here today. We’re grateful for the trust you’ve placed in us in the past – and we’re committed to supporting your success and delivering additional value in the years ahead.

Before I get started, I’d like to acknowledge and thank all the men and women who have fought – and continue to fight – for our freedom. We should never take our freedom for granted, nor should we take for granted the brave men and women who fight to secure it. So to the veterans here today, I thank you for your service and I assure you that UTC – and the entire aerospace industry – recognizes and appreciates your sacrifices. 

I know 2012 marks the 70-year anniversary for the Wings Club. So let me compliment the officers – and members of the Wings Club – for seven decades of supporting the aerospace industry: by providing a great forum for industry leaders to exchange ideas; and, by encouraging young people to pursue careers in aviation. 

As I look back on 2011, it was a good year for UTC, particularly for our aerospace businesses. We had tremendous success with our Geared Turbofan engine, which I’ll talk about in a few minutes. 

We also announced two transformational deals with IAE and Goodrich. Let me say a few words on Goodrich. It has been about four months since we announced the agreement and the more I learn about Goodrich the more I like it. They have great people and great technologies. It really complements our existing portfolio, and I look forward to welcoming the Goodrich employees, and executing our integration plan to deliver additional value to our customers and shareholders.

Turning now to the outlook for the aviation and aerospace industry, overall, I’m optimistic as we begin 2012. While the global economy continues to look challenging – especially in developed markets – emerging markets continue to provide really good growth opportunities. I think we’re at a good time in the aero-cycle, and I expect RPM rates will grow at a much faster rate than world-wide GDP growth. But rather than talking about the economic outlook, I’d like to highlight some of the challenges I see to future innovation in our industry. 

Often when I come to New York, I meet with our large institutional investors and Wall Street analysts. One of the most challenging parts of these discussions is getting investors to take the long-term view – to get them to look beyond the next few quarters – and to see how long-term value is created by investing in technology.

So, it’s a pleasure to speak with all of you – because I know there are few topics that interest this group more than innovation, which has been the key driver of our industry since its inception more than a century ago.

One thing that makes our industry unique is the type of innovation we do. In most cases, we innovate in an environment where failure is not an option. We’re also not a “million new products a year” type of industry. Rather, our products are developed over decades, and they are highly complex – far more complex than the products many people consider innovative, such as smart phones and tablet computers.

Working in an industry driven by large, complex engineering projects attracts people who have a great deal of discipline, courage, and passion for what they do. And the Wings Club is a great organization because it brings together many of these people, people who have helped shape – and will continue to shape – modern aviation in ways we can barely imagine today.

The opportunities for innovation in our industry are truly limitless. This becomes obvious when you look back at the advancement that has occurred since the Wings Club was founded in the early 1940s. Back then, biplanes were still widely operated and retractable landing gear was considered cutting edge technology. Needless to say, we’ve made some great progress in the past decades.

This afternoon, I’d like to talk about some of the great innovation and technology development happening at my company. But before I do, I want to talk briefly about some of the challenges I see facing our industry, especially the challenges standing in the way of innovation.

I think we all agree that innovation is a positive force in the world. It supports economic growth and prosperity, and has the potential to dramatically change the world for the better. In fact, when you look at the most significant turning points in world history, innovation has always played a critical role, whether it was: the steam engine during the Industrial Revolution; or, the way transistors revolutionized the field of electronics, paving the way for the computing and IT revolution in the second half of the 20th century.

We’ve all seen great technology advances in our lifetimes, but we need to recognize that future innovation should not be taken for granted. Innovation does not just happen. Rather, it depends on the right balance of three critical factors. 

The first factor is visionary leadership that creates a culture of innovation – an environment where conventional thinking can be challenged and calculated risks can be taken. But bold vision on its own is not enough. Innovation also requires private industry and government to support and fund ongoing R&D – this is absolutely critical to driving future innovation. The third factor is the ability to inspire and educate young people to sustain the pipeline of talent for the future.

Today, the need for innovation has never been greater as there are powerful forces that are fundamentally reshaping the world, including globalization and urbanization. And, while we don't have enough time this afternoon to get into a full discussion on this topic, I’ll just say that it’s really hard to overstate the impact these forces will have on our industry.

I’ll give one example to illustrate this point. Today, the world is urbanizing at rates never seen before. As we start 2012, more than 50 percent of the world’s inhabitants live in cities. And, some of these cities are growing into mega-cities with populations in excess of 10 million; today, there are 21 of these mega cities. This is a remarkable number when you consider that in 1975, there were only three cities with populations over 10 million. Just a few more numbers. Today there are around 380 cities with populations between one million and five million, and this number will increase to over 500 by 2025.

A lot of this growth will happen in emerging markets. By 2020, 200 Chinese cities will have more than one million people. 

Simply put, urbanization will be a powerful force for the next decade or two, creating an amazing opportunity to build better cities and aircraft – cities and aircraft that are more efficient, consume less energy, and have a smaller impact on the environment. 

However, this can only be achieved with the right focus by industry and government on energy efficiency – and a commitment to fund the research necessary to develop game changing technologies. 

In the past, our industry has shown that with the right leadership, the best and brightest young minds – and sufficient R&D funding – there are few limits to what is possible. Just one example from my company is Pratt & Whitney’s Geared Turbo Fan engine. When this engine enters service next year, it will deliver a remarkable 16 percent improvement in fuel consumption. It will also provide: double digit improvement in nitrogen-oxide and carbon emissions; and, reduce airport noise levels by 50 percent compared to today best-in-class engines.

And, we believe this is just the beginning for the GTF. The GTF story really begins in the mid-1980s. Back then, a small group of engineers and executives at Pratt & Whitney became convinced that major reductions in fuel burn, operating cost, noise, and emissions could be achieved in a jet engine by leveraging the benefits of geared technology used on smaller, turboprop planes.

We had looked at several new engine architectures, but it soon became clear that the geared approach had the most potential. We already knew that the turboprop was an incredibly efficient way of producing power. The reason we knew this was because turboprops have always been at the core of our Pratt & Whitney Canada business.

In the most basic terms, we knew that if we could make our next-generation jet engine like a turboprop – where the fan moved more slowly because of the gear – we wouldn’t penalize the turbine on the back of the engine, and we could take better advantage of airflow in order to make a quieter, more fuel efficient engine. We also wouldn’t have to trade engine efficiency against noise, which would have been the case with other architectures such as an open rotor configuration.

Now I won’t go into the detail about the many gear configurations we examined – and what we learned after investing in three demonstrator engines. But what I will say is that as I was leaving Pratt & Whitney, my confidence in the Geared Turbofan was real. And in 2006, after becoming UTC COO, with the support of George David, I decided we were going to make a big investment in this technology for the single aisle market segment. We targeted this segment because it’s the biggest piece of the market. 

Single aisle aircraft will account for 75 percent of future aircraft deliveries between 2013 and 2032.

When we publicly announced we were building a geared turbofan demonstrator, it’s fair to say we had some critics. Many said it would never work. Our competitors said the gear system wasn’t durable, and some industry analysts called the gear “old” technology. 

It’s also important to remember that, when we launched the GTF program, there were no airplanes being built for this engine, and there were no customers committed to the program. So, at this stage, we were all alone, which really made this decision unique. 

Of course, decisions like this really come down to what you believe in – and what type of company you want to be. At Pratt & Whitney, the passion over the geared turbofan was impossible to ignore. We had a growing group of true believers, but naturally we had to make sure the engineering worked, and the cost benefits added up – which they did. 

A big driver in making the numbers work was the fact that the GTF engine has a scalable common core, eliminating the need to start with a clean sheet design for every GTF engine. 

In fact, the cores being used on the MRJ, C-Series and the A320neo aircraft are essentially scaled versions of each other. And the common core can also be leveraged on other applications, such as large business jets, and in the future wide-body platforms. 

It’s important to note that even though we didn’t have a committed customer for the GTF – our customers were very much a part of the process. As we began to define and mature the GTF technologies, we visited with over 150 customers to validate our approach. Throughout the development process, we held annual symposiums with our airline customers, and established a steering Committee that included customers.

These mechanisms allowed us to obtain and incorporate customer feedback throughout the process. At UTC, we certainly understand that our success is dependent upon our customers’ success – so it was critical to have this early customer feedback. I know several members of the GTF steering committee are represented here today, so let me thank you for your valuable input during the GTF design process.

In the end, we felt confident in challenging conventional thinking about engine architecture, in part, because we knew we could leverage more than half a billion hours of experience UTC had with gears for Pratt & Whitney Canada turboprops. 

We also understood that in today’s global economy, our greatest chance for success would come from launching a disruptive technology that was fundamentally better than the competition, an engine that set new benchmarks for environmental performance, including fuel efficiency, reduced emissions, and noise – while also reducing maintenance costs. We truly believed that the size of the potential benefits for both our company and for our customers justified this calculated risk, rather than following the safer path of incremental change. 

With more than 2,000 engines on order to date, we’re confident we made the right decision. And we expect that the Geared Turbofan engine will be every bit as important – and maybe more important – to the future of Pratt & Whitney than was: the legendary J57 engine that won the Collier Trophy in 1952; and, the JT3 engine that powered the Boeing 707, and the Douglas DC-8 at the very dawn of the Jet Age.

The same holds true for the development we did at Sikorsky on the X2 technology demonstrator helicopter program, which flew at 250 knots and won the Collier Trophy last year. Today, we continue to develop the technology, launching the S-97-Raider program, which is a prototype light tactical helicopter. 

In addition to much greater speed and improved noise, the S-97 will provide: increased maneuverability; greater endurance; and, the ability to operate at high altitudes.

While I have great confidence in the X2 and gear technologies, I’m a bit troubled by the outlook for the future pool of U.S. workers having the right science, technology and engineering skills, which could impact future innovation throughout our industry. This circles back to my earlier point about future innovation being dependent on the ability to inspire and educate young people 

According to the Bureau of Labor Statistics, the number of technology-oriented jobs is expected to increase over the next decade, while the number of trained and qualified engineers continues to decline. 

Today, only about six percent of U.S. college degrees are awarded in engineering, compared to Germany, where the number is approximately 16 percent; Japan, where it’s about 20 percent; and China, where it’s about 30 percent.

In the U.S., more students are earning degrees in psychology than engineering, and there are more degrees being earned in performing arts than in physical science. These numbers are troubling, especially when you consider that innovation has been a cornerstone of economic growth throughout our nation’s history.

As industry leaders, it’s our job to develop the generations that will follow us, especially since we all have an enormous stake in finding highly skilled workers to drive innovation in our industry. 

Now, I know that many of the companies represented in this room today have been leading voices in encouraging STEM education initiatives in schools across the country. I applaud you for your efforts, and encourage you to keep finding ways to inspire the younger generation about careers in aerospace. Of course, this starts with providing additional opportunities for students to interact with aerospace professionals as they consider career choices.

I know the Wings Club has a great history of encouraging students to pursue careers in aviation. I also applaud the Wings Club for its “student table” program – and welcome the students from Aviation High School who are here at today’s luncheon. I want you and your classmates to know that aerospace engineers and scientists – like those working on the GTF – not only make good salaries, but get to work on very exciting projects, projects that can and will change the future. 

I’d like to close my remarks today by going back to one of the critical factors necessary to support future innovation – the willingness of our government to fund and support R&D. 

As we all know, much of the discussion in Washington today is focused on reducing spending. And in times like these, it’s important to take a long-term view, and to remember what a powerful contributor the aerospace and defense industry is to the American economy. Our industry supports millions of high-skilled, well-paying jobs, and is among America’s largest exporters. 

Past investments in aerospace and defense have played a vital role in safeguarding national security, supporting humanitarian efforts around the globe, and spurring innovations that have enabled economic growth. 

While America’s future requires finding the right budget solutions, it would be unwise to try to solve these challenges on the back of the defense and aerospace industry. The consequences would be severe.

In the long-term, cutting too deeply into our defense budget would jeopardize our national and economic security, and impact our future competitiveness in the global aerospace industry. 

Let me end today, by saying that I see a lot of amazing opportunities for our industry. While I spent much of my time talking about innovation in jet engines and helicopters, I see innovation happening throughout the industry. For example, I know airlines are listening to their customers, and innovating in ways that make air travel more convenient and more enjoyable whether it’s: offering wireless in-flight entertainment; or, allowing passengers to check-in with boarding passes downloaded to their mobile phones. 

I hope this spirit of innovation that has defined our industry continues, and that all of us have the foresight to see investment in innovation as the engine that will power our future.

Thank you.

 

These comments contain statements which, to the extent they are not statements of historical or present fact, constitute “forward-looking statements” under the securities laws. From time to time, oral or written forward-looking statements may also be included in other materials released to the public. These forward-looking statements are intended to provide management’s current expectations or plans for our future operating and financial performance, based on assumptions currently believed to be valid. Forward-looking statements can be identified by the use of words such as “believe,” “expect,” “plans,” “strategy,” “prospects,” “estimate,” “project,” “target,” “anticipate,” “will,” “should,” “see,” “guidance” and other words of similar meaning in connection with a discussion of future operating or financial performance. These include, among others, statements relating to: future sales, earnings, cash flow, results of operations, uses of cash and other measures of financial performance; the effect of economic conditions in the markets in which we operate and in the United States and globally and any changes therein, including financial market conditions, fluctuation in commodity prices, interest rates and foreign currency exchange rates; levels of end market demand in construction and in both the commercial and defense segments of the aerospace industry; levels of air travel, financial difficulties (including bankruptcy) of commercial airlines; the impact of weather conditions and the financial condition of our customers and suppliers; delays and disruption in delivery of materials and services from suppliers; new business opportunities; cost reduction efforts and restructuring costs and savings and other consequences thereof; the scope, nature or impact of acquisition and divestiture activity, including integration of acquired businesses into our existing businesses; the development, production and support of advanced technologies and new products and services; the anticipated benefits of diversification and balance of operations across product lines, regions and industries; the impact of the negotiation of collective bargaining agreements, and labor disputes; the outcome of legal proceedings and other contingencies; future repurchases of common stock; future levels of indebtedness and capital and research and development spending; future availability of credit; pension plan assumptions and future contributions; and the effect of changes in tax, environmental and other laws and regulations in the United States and other countries in which we operate. All forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those expressed or implied in the forward-looking statements. For additional information identifying factors that may cause actual results to vary materially from those stated in the forward-looking statements, see our reports on Forms 10-K, 10-Q and 8-K filed with the SEC from time to time, including, but not limited to, the information included in UTC's Forms 10-K and 10-Q under the headings “Business,” “Risk Factors,” “Management's Discussion and Analysis of Financial Condition and Results of Operations” and “Legal Proceedings” and in the notes to the financial statements included in UTC's Forms 10-K and 10-Q.

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