Pratt's GTF Engine

Pratt's $10 Billion Bet Falters as Buyers Rush to GE Jet Engine

Aug. 22, 2017
The GE turbine has won 10 times as many orders this year to power a narrow-body Airbus SE plane on which the two suppliers compete head to head. Pratt has signed just one buyer in that span to supply its geared turbofan engine for the aircraft.

Pratt & Whitney’s $10 billion bet on a new jet engine is faltering after a troubled rollout, and buyers are rushing to a General Electric Co. model instead.

The GE turbine has won 10 times as many orders this year to power a narrow-body  Airbus SE plane on which the two suppliers compete head to head. Pratt has signed just one buyer in that span to supply its geared turbofan engine for the aircraft, according to data provided to Bloomberg by Flight Ascend Consultancy.

The figures paint a stark picture for Pratt and parent  United Technologies Corp., which billed the so-called GTF as a technological breakthrough that was supposed to help reverse GE’s recent market dominance. Instead, weak demand for the engine is fueling doubts about the long-term payoff of Pratt’s most important product.

“It reflects a concern about the engine and where it’s going to go from its rather checkered start,” said aviation consultant Robert Mann. The GTF has “had its share of teething problems and those have yet to be sorted out. And even if sorted out, it’s delaying a lot of aircraft deliveries. It gives people who made the initial choice of the GTF pause.”

Customers’ decisions about engines for the Airbus A320neo are crucial, because of the one-on-one matchup with GE and the plane’s importance for airlines. Along with the Boeing Co. 737, the single-aisle A320 family is a workhorse of the global jetliner fleet, far outnumbering the wide-bodies used on long-haul routes. The A320neo, Airbus’s latest version of the aircraft, will be flying for decades. That represents a long-term revenue stream for engine makers, which rely partly on service deals to recoup heavy initial investments.

While the geared turbofan has met performance specifications in areas such as fuel burn, it has also been beset by manufacturing hurdles, delivery delays and  technical glitches. Airlines such as IndiGo, India’s largest carrier, have been forced to ground planes because of Pratt’s problems, while Airbus is struggling to meet its delivery commitments for the A320neos. Pratt is rolling out fixes this year for durability issues affecting a carbon seal and combustor.

A slowdown in orders has been “deliberate to some extent” as the company focuses on addressing the issues, United Technologies CFO  Akhil Johri said in an interview last month. The Farmington, Connecticut-based company invested $10 billion to develop the engine.

Order Book

Pratt, which also supplies the GTF to planemakers other than Airbus, has more than 8,000 orders on the books, Chris Calio, president of commercial engines, said in a statement. He reaffirmed the goal of producing 350 to 400 of the new engines this year.

“We are confident in the long-term value of our GTF program,” he said. “We are aggressively addressing our entry-into-service issues and are focused on minimizing the operational impact on our customers as we ramp production.”

The durability issues plaguing the GTF have compounded the problems for Pratt, which fell short of its delivery goal last year as it struggled with availability of some components.

Some airlines have been forced to take planes out of service while waiting for fixes. About 46% of A320neo jets powered by the GTF were out of service for at least one week in the past month, compared with just 9 percent of those using GE’s engine, according to a report on August 21 from UBS Group AG analyst David Strauss.

GE Gains

The geared turbofan competes to power the A320neo family with the Leap, a new engine from CFM International Inc., a joint venture of GE and France’s Safran SA. Pratt’s engine is also the lone option on planes such as Bombardier Inc.’s C Series, while the Leap is the exclusive power plant for Boeing’s 737 Max.

Pratt signed a deal this year with British Airways owner IAG SA to supply engines for 47 of the Airbus planes. Including an eight-plane cancellation in the first quarter, Pratt has signed net orders to power 39 A320neos in 2017, according to Flight Ascend data through early August. By contrast, the Leap was selected for 396 planes.

GE’s dominant performance came after it won 66% of the decisions last year, Flight Ascend data show. That’s pushed GE’s share of all A320neo engine orders to 60%, after running for years close to 55%.

Boosting market share isn’t GE’s primary focus, said Rick Kennedy, a spokesman for the aviation division. The company’s attention is on controlling costs and “executing on the deliveries” while increasing production rates, he said.

Earnings Drag

While Pratt’s first-half sales rose from a year earlier, profitability fell as the business contended with the costs to ramp up production on the new engine. That weighed on United Technologies’ earnings. The shares advanced 5.2% this year through August 21, trailing the 8.5% gain in the S&P 500 Index.

Pratt still has opportunities to regain ground. Customers have yet to pick an engine for more than 1,500 A320neos already on order, or about 29 percent of the total, according to Flight Ascend. The engine maker also has orders to provide the geared turbofan to about 1,000 non-Airbus planes.

If the manufacturer can deliver all the promised engines without major interruptions and prove it can perform well in the long run, the geared turbofan still has a chance to be a success, said Cowen analyst Cai von Rumohr. Potential customers, meanwhile, can generally afford to sit on the sidelines for now because the large backlog means today’s orders won’t even be delivered for a few years.

“Why not wait to see how it’s doing before you step to the line?” he said.

By Richard Clough

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Licensed content from Bloomberg, copyright 2016.

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