2017 is a make or break year for Pratt & Whitney’s beleaguered engine programme
The Geared Turbofan (GTF) engine is proof that innovating in aerospace is never an easy task. When Airbus and Boeing first introduced the concept of their new re-engined narrowbodies (A320neo and 737MAX) they were quick to reassure airlines and investors that this was a simple development proposition - a design modification rather than a clean sheet aircraft. I remember noting at the time that Airbus and Boeing were cleverly transferring the majority of engineering risk to the engine original equipment manufacturers (OEMs), and it has proved to be ever thus.
Unfortunately, Pratt & Whitney’s bid to get back into the narrowbody market, which has been dominated for a decade by CFM International (a JV between GE and Safran), has proved more complicated than the company envisaged. The aircraft OEMs have made it abundantly clear on their recent conference calls that it is GTF engines causing aircraft deliveries to be delayed. In 2016 Airbus had to substitute 20 A320neos for A320 classics and Bombardier only delivered half of its planned C-series aircraft. Airbus made clear on its FY16 results call yesterday that the main factor limiting the narrowbody ramp up is the speed at which Pratt & Whitney can deliver functioning GTF engines.
Last year the GTF struggled with its engine cooling cycling, requiring pilots to wait three minutes after powering the aircraft off before starting the engine again. Three minutes may not sound like much, but time really is money to low cost carriers whose business model depends on short turnaround times at the gate. Recently it has emerged that the engine’s aluminum-titanium fan blades are taking 60 days to manufacture, rather than the planned 30. All engines have a learning curve, but it seems Pratt & Whitney is taking rather a long time to make progress along the curve with the GTF.
In contrast, GE’s new engine, the Leap, has entered service almost without hiccup. Ascend Flightglobal estimates that GE has 54% market share on the A320neo where customers have chosen their engine. However, one third of customers are yet to choose an engine so there are lots of sales up for grabs. Modern airlines are much better businesses than their ancestors, and therefore are not afraid of changing from their established supplier on grounds of performance or price. Last October Qatar Airways, one of the launch customers for the GTF powered A320Neo, followed through on its threat of ordering 100 Boeing 737Max aircraft in order to mitigate risk on its A320neos which have been delayed.
Pratt & Whitney must now prove it can get the engine working reliably and efficiently, whilst ramping up production. It delivered 150 engines in 2016 but is targeting 350-400 in 2017. There is then of course the risk that the GTF will require higher than expected levels of maintenance during its lifecycle. The new gearbox technology means that Pratt & Whitney is not able to depend on its wealth of existing engine data.
If airlines do not see progress in 2017 then there is a real risk that the LEAP engine will become the engine of choice on the A320neo and Pratt & Whitney’s bid to end the narrowbody monopoly will effectively have failed.
Disclaimer - Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. This document may contain materials from third parties, which are supplied by companies that are not affiliated with Edison Investment Research. Edison Investment Research has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of publication and is subject to change without notice. While based on sources believed reliable, we do not represent this material as accurate or complete. Any views or opinions expressed may not reflect those of the firm as a whole. Edison Investment Research does not engage in investment banking, market making or asset management activities of any securities. The material has not been prepared in accordance with the legal requirements designed to promote the independence or objectivity of investment research.