By Chris Sloan

Oct. 24, 2023, (c) Leeham News: “I believe we have our arms around the operational and financial impacts of the powdered metal issue,” said Greg Hayes, RTX Chairman and Chief Executive Officer, during today’s third quarter earnings call primarily dominated by the Pratt & Whitney GTF powerplant’s ongoing quality control saga.

“With the analysis substantially complete, we do not expect any significant incremental financial impact as a result of those fleet management plans,” Hayes emphasized, with Pratt re-affirming its September projections with no changes to the previous recalls.

Analysts Bullish

Across the board, analysts remained bullish on parent company RTX ahead of consensus even though RTX reported third-quarter sales of $13.5bn, down 21 percent over the prior year, which included a $5.4bn charge related to the previously disclosed Pratt contamination recall.

“There is a lot of dissect but we think the headlines are better than the market’s low expectations and that this creates potential for near-term out-performance,” chimes JP Morgan’s sanguine analyst note. Still, RTX has endured more than a $35bn drop in market cap since the Q2 announcement of the severity of the problem.

Despite this, investors are bullish about the commercial aviation units Pratt and Collins, albeit with caveats and concerns. “The costs of the HPT disk problem will not come close to that value even under a worst-case scenario. The question for many in the industry is what the long-term outlook for the GTF will be,” said another report.

The Pratt unit reported third-quarter 2023 sales of $926m – down 83% versus the prior year. Q3 2023 sales included the impact of the GTF charge, with the remaining change driven by a 25% increase in commercial OE, a 21% increase in commercial aftermarket, and a 7% increase in military sales. Pratt & Whitney rung an operating loss of $2,482m, down $2,798m, compared to the prior year. Excluding the significant $5bn powdered metal charges, the engine-maker claimed an adjusted operating profit of $413m in the third quarter of 2023, up 30% versus the prior year.

GTF becoming WTF? A credibility gap

Despite reassurances from Pratt’s leadership, skepticism abounds about the company’s projections both on the call and recently at ISTAT Europe. Bernstein analysts noted that the feedback from customers was “not encouraging,” noting that Pratt lacks a sufficient number of disks and IBRs (Integrally Bladed Rotors) to make those replacements, with the company walking back its initial plans to replace all discs and high-pressure compressors during the GTF’s off-the-wing inspections. “We heard concerns from customers that it appeared to them the impurities in the powdered metal process were not yet fully understood,” Bernstein’s note continued.

There is concern about how these problems will not only affecting the allocation of discs for new powerplant production versus demand for replacing the flawed components but also sales and pricing. The GTF has indeed clouded Airbus’ A320neo family production numbers and the drive to rate 75. There is mounting concern at how this will affect sales to new neo customers like United, who just received their first A321neo, and existing afflicted operators exposed with sizeable, affected PW 1100G fleets and orders like Indigo, Spirit, EasyJet, JetBlue, and Volaris.

Will CFM benefit?

Will the rival CFM Leap benefit from airlines switching from Team Pratt to Team GE? Rumors are swirling that Airbus will add the LEAP as an engine option to the formerly GTF exclusive A220 program when the -500 variant is finally launched.

The percentage of the PW1100G-powered A321 family fleet of AOG stood at 19% at the end of September, or 267 aircraft out of 1,378 in the global fleet, an Aviation Week analysis showed. Pratt already disclosed that the number of grounded A320neos will be near 650 frames in the first half of 2024. Pratt forecasts that about 1,200 of the 3,000 engines with possibly problematic parts will need to be pulled off the wing for inspections by mid-2024.

This predominantly afflicts an earlier tranche of the 1100Gs built between Q4 2015 and Q3 2021 for the Neos. The fleets of PW1900-powered Embraer E2s and PW1500-powered Airbus A220s are affected, but to a much lesser degree. Pratt said it is instituting a fleet management plan that will primarily fit inside the shop visit plan already in place for these fleets. “As part of this plan, we’ll place a shorter life limit on certain early configuration parts and an inspection requirement at about 5,000 cycles for current configuration parts. There’ll be some incremental AOGs in the first half of 2024, but we believe these will be largely mitigated by the end of the year,” said Pratt President and Chief Operating Officer Chris Calio. He added that the service bulletin for these types will be released in November, followed by the Airworthiness Directives (AD).

Later legacy built V-2500s for the A320ceo family have yet to escape the contamination conundrum. Calio reminded analysts that a fleet management and inspection plan has been in place since 2021. However, “We’re going to augment this plan by accelerating certain inspections, but expect this tool will have minimal impact operationally or financially. It will result in roughly 100 or less incremental removals stretched out over the next four years.”

Execution is everything

While mostly accepting of GTF financial impact guidance, analysts peppered RTX leadership about execution. Mile Wilson of Wolf Research queried them about managing customers, their expectations, and supply chain challenges, leading to reports of some frames on the ground for up to a year with wing-to-wing POGS that Pratt has acknowledged.

“Obviously, it’s a challenging time for the customers with a fair amount of the aircraft on the ground, but we’ve got to accelerate MRO output,” Colio responded. “On the capacity side, you heard about the expansions that we’re doing both within the PR shops and across the network in terms of material flow both in the Pratt shops and across the networks. Our objective is to put in full life, H P T and H P T discs at these shop visits.” Pratt says a ramp-up in production, capacity, and inspection is already underway with the goal of “taking down the AOGs and therefore take down the penalties we’re going to have to pay to our customers.”

Lessons learned

There is a clear consensus that this reputational and market cap-decimating catastrophe, affecting Pratt and its customers and worldwide airline capacity on the world’s most popular narrowbody program, can never happen again. Ronald Epstein of Bank of America inquired about lessons learned to prevent another such meltdown. Colio pointed to investing further in automation, machine learning, and leveraging internal and external resources to “get ahead of issues before they turn into something.”

TGI Collins

The Collins Aviation segment, which has experienced its own supply chain and delivery issues, particularly with its Super Diamond premium seating even before the pandemic, has seen smoother fortunes than its Pratt stablemate as of late. Collins Aerospace was a drama-free bright spot in the quarter, reporting sales of $6,629m, up 16% versus the prior year. The increase in sales was propelled by a 30% increase in commercial aftermarket and a 27% increase in commercial OE. Overall, the unit recorded an operating profit of $903m, up 22% versus the prior year.