Pratt & Whitney: Facing Turmoil as Engines Propel Planes
About Pratt & Whitney
Pratt & Whitney, a unit of defense and aerospace giant RTX, is renowned for its engineering prowess in making engines that propel planes through turbulence. However, the US engine maker is currently facing its own turmoil due to a significant issue with its popular GTF geared turbofan engine. This article delves into the details of the problem, its impact on the company and the aviation industry, and the challenges ahead for Pratt & Whitney.
The GTF Engine Recall
Last month, Pratt & Whitney was forced to issue a recall of its GTF engines, which was caused by contamination of the powdered metal used to make a crucial engine part. The recall and inspection process will affect approximately 1,200 engines manufactured between 2015 and 2021. As a result, airlines worldwide have already experienced changes in flight schedules and grounded aircraft. The repercussions of this issue are severe, not only for Pratt & Whitney but also for the entire aviation industry.
Financial Impact and Stock Performance
The recall has had a significant impact on the stock performance of RTX, with shares falling by 12 percent since the withdrawal. Currently, the stock is trading at just under 17 times future earnings, compared to its three-year average of 20 times. However, calculating the exact impact on earnings is challenging as it depends on the speed of inspections, the time required for fixes, and potential compensation demands from affected airlines. The manufacturing flaw, described as unique by Pratt & Whitney, can also have long-term repercussions on order books and customer trust.
Airlines will undoubtedly seek compensation for lost flight time, adding to the financial strain faced by Pratt & Whitney. The GTF engine itself is a crucial part of the business, as it is utilized in the Airbus A320neo, the world’s best-selling aircraft. Analysts estimate that GTF engine sales account for approximately 10 percent of RTX group’s total revenue. In addition to the immediate financial burden, there are concerns about the long-term implications for the company’s ambitious goals.
Impact on Cash Flow
The recall and inspection process will have a significant impact on RTX’s cash flow. Inspecting the top 200 engines that have flown the most is estimated to reduce free cash flow by $500 million this year, equating to $2.5 million per engine. However, extrapolating this figure to cover the remaining engines without considering the typical maintenance schedule could lead to an inaccurate assessment of additional costs. Analysts at Jefferies project a hit of around $1.5 billion on 2024 free cash flow due to this ongoing issue.
Compensation Challenges and Unrealistic Targets
Compensating affected airlines is expected to be a costly endeavor for Pratt & Whitney. The CEO of RTX, Greg Hayes, has acknowledged that the compensation process will be “expensive.” The company’s goal of delivering $9 billion in free cash flow by 2025 appears increasingly unrealistic due to the financial setbacks caused by the GTF engine recall. These challenges dampen any optimism for a swift rebound in stock prices.
Exploring Deeper Implications
Looking beyond the immediate financial impact, it is crucial to understand the potential long-term consequences of this issue. The GTF engine’s reputation has taken a significant hit, raising concerns among current and potential customers. The aviation industry operates on reliability and trust, and any dent in these aspects can have far-reaching effects.
From a broader perspective, this incident highlights the importance of rigorous quality control measures in critical manufacturing processes. Pratt & Whitney’s unique manufacturing flaw has not only caused financial distress but also poses a threat to its credibility and future orders. Other companies operating in similar industries should be attentive to the lessons learned from this recall and ensure robust quality assurance measures to prevent comparable setbacks.
Conclusion
Pratt & Whitney’s struggle with the GTF engine recall showcases the challenges faced by even the most renowned players in the aerospace industry. The financial and reputational consequences of such incidents are substantial, affecting not only the company involved but also its stakeholders and the industry as a whole. Moving forward, it is essential for Pratt & Whitney to rectify the problem swiftly and implement measures to regain customer trust and address concerns about future engine performance.
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Pratt & Whitney makes the engines that propel planes through turbulence. Such engineering prowess is of little help to the US engine maker as it faces its own turmoil.
Last month Pratt & Whitney, a unit of defense and aerospace giant RTX, was forced to issue a remember of its popular GTF geared turbofan engine. The problem stemmed from contamination of the powdered metal used to make an engine part. Over the next year, the company must recall and inspect some 1,200 engines made between 2015 and 2021. As a result, airlines around the world have already changed flight schedules and grounded aircraft.
Since the withdrawal, RTX shares have fallen 12 percent. That leaves the stock trading at just under 17 times future earnings, compared with its three-year average of 20 times.
Calculating the impact on earnings is not clear. It depends on how fast RTX can perform the inspections and the time required to make the fixes. Airlines will demand compensation for lost flight time. In addition, the manufacturing flaw, described by P&W as unique, can cause long-term damage to order books.
RTX has offered few estimates on these scenarios. The GTF engine is an important part of the business. It is used in the world’s best-selling aircraft, the Airbus A320neo. Baird analysts believe that sales account for around 10 percent of the RTX group’s revenue.
Inspecting the top 200 engines that have flown the most should reduce free cash flow by $500 million this year, says RTX. This equates to $2.5 million per engine. But extrapolating this figure for the remaining engines does not take into account the typical maintenance schedule, which reduces the additional cost. Jefferies pegs the hit to 2024 free cash flow at around $1.5 billion.
This doesn’t include compensation for airlines, which RTX CEO Greg Hayes acknowledges will be “expensive.” Management’s goal of delivering $9 billion in free cash flow by 2025 seems unrealistic. Destroy any optimism of a quick stock price rebound.
If you’re a subscriber and would like to receive alerts when Lex’s articles are posted, simply click the “Add to myFT” button at the top of this page, above the title.
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