RTX FY and Q4 2023 Earnings: Pratt GTF Propulsion Prognosis Improves, Collins Enjoys Widebody Renaissance Tailwinds

By Chris Sloan

Jan. 23, 2024, (c) Leeham News: RTX, the parent company of Pratt & Whitney and Collins Aerospace, reported during its fourth-quarter earnings call slivers of good news in the GTF program, which enters its ninth year of service – mostly in the headlines for the wrong reasons of poor reliability. Despite beating performance guarantees, the beleaguered powerplant family has been besieged by durability, operational, and production shortcomings since it entered service with the inauguration of Airbus A320neo service by Lufthansa back in January 2016 and EIS with the Bombardier C Series operated by Swiss (now Airbus A220) in July 2016.

The overall money metrics picture is upbeat despite weakness in military-based segments, higher production costs, and the continued Odyssey of the Pratt Geared TurboFan platform.

Pratt & Whitney reported an ascendant fourth quarter 2023 sales trajectory of $6.4 billion – up 14 percent versus the prior year. Commercial OE drove a 20% increase, while aftermarket rose 18%. Pratt reported $23.6 billion in sales for the entire year – an increase of 25%. Pratt’s full-year operating profit climbed by 25% versus 2023 to $382 million. The propulsion producer attributed its full-year profit growth to higher commercial aftermarket and OE mix.

Analysts were cautiously optimistic about the results. “While it’s no doubt a positive that the GTF is on track, there is still quite some way to go before RTX can declare ‘mission accomplished.’ But if RTX can hit its targets on GTF and also gradually improve the performance at Raytheon, then the stock looks inexpensive at 14.5x 2025 P/E,” said Vertical Research Analyst Robert Stallard.

Powdered Metal Progress

Incoming Chief Executive Christopher T. Calio – who is currently RTX President and COO took most investor questions – signaling the coming passing of the baton this May 2nd from current Chairman and CEO Greg Hayes, who becomes Executive Chairman after nearly a decade at the RTX helm. Calio is well versed on all things Pratt, having formerly been President of the division and heading its legal department during the development of the GTF for its first new customer.

Pratt seems to be getting its arms around the powdered metal problem – with incrementally improving prospects, though still averaging 350 aircraft on the ground (AOGs). “We do expect the peak to continue to be here in Q1 in terms of and then trend downwards thereafter,” Calio disclosed. “We think that peak is going to come down a bit since our initial assessment for two reasons: One, the timing of the AD has shifted a bit to the right. Then, customers took some proactive fleet planning and decided to, in some cases, accelerate some of their removals as they were doing their fleet planning for the year. They were pairing engines and doing all those things to make them more efficient,” he added.

“Our GTF fleet management plans remain consistent from October and continue to be a top priority,” said Calio, who responded to analyst Q&A with additional color. In 2023, there were 1,300 work packages on the GTF, with “a significant step-up in 2024” over the 30% MRO capability increase achieved in 2023. The propulsion provider provided no reduced durations for in-shop engine off-wing visits (ranging from 60 days to a year). Still, it’s endeavoring to accelerate this by adding its own MRO and tier-one partner capabilities.

The powdered metal disc production is the heart of overhaul and meeting delivery guarantees. “We feel like we’ve got pretty adequate forging capacity within our own four walls and with the supply chain. But again, we’ve got to continue to ramp up inspection and machining capacity – all critical parts of that value stream,” Calio caveated.

Calio disclosed all GTF engines being delivered to customer’s assembly lines contain full-life discs manufactured after Q3 2021. “On the GTF MRO front, we have begun installing full life desks during certain shop visits, and the number of engines receiving full life disk and MRO will increase throughout the year as we continue to ramp up production of these parts,” he adds.

Improving Supply Chain

Pratt’s Geared TurboFan imbroglio caught it in a squeeze play between its airline customers and its largest overall OE customer – Airbus – where the GTF has nearly half of the A320neo family market share. When asked whether P&W can meet a frustrated Airbus’ delivery plans as it ramps up Neo family production rates, Calio responded cautiously in the affirmative. “They understand where we’re ramping on powdered metal parts. And so we feel good about our ability to meet the commitments we made to them here in 2024.”

The engine maker’s guidance for 2025 indicates supply chains are recovering to pre-pandemic levels but at a cost. “We think the sales are going to be up in the mid-teens range. The good news there, as we look at engine production, which we think about as up about 20%, is that we’ll see about a headwind of maybe $125 million associated with that higher volume,” said RTX Neil Mitchill, Jr., Chief Financial Officer.

Menius Research Analyst Robert Springarn does not believe Pratt’s production stability is out of the woods: “We think it will be difficult for the commercial aero supply chain to ramp up production to meet requirements for both new engine production and spare parts as RTX works to retrofit 3,000 GTF engines through 2026. Supply chains remain fragile, and both GE and RTX missed their engine delivery targets this year. GE was ~20 units short of the low-end of its LEAP delivery target, and RTX (Pratt) large commercial engine deliveries were ~100 units or 10% below its initial target.”

Compensation and Customer Damage Control

Compensating customers for hundreds of AOGs continues to be a hot topic with an overall hit, including recall costs, to RTX’s P&L expected to be up to $6 billion. The company is projecting a $1.3 billion headwind to cash flow in 2024 and $1.5 billion held for 2025. 

The company is getting righting the production and overhaul ship while crucially coming to compensation agreements, particularly with its most critically impacted customers. US ULCC Spirit Airlines, with over 20 Neos on the ground, has been particularly vocal in the strain their GTF-powered AOGs are causing to the operation – and heavily contributing to its hemorrhaging losses, which have some questioning its liquidity that could lead to a Chapter 11 bankruptcy filing. Volaris, JetBlue, and Hawaiian are among the other customers significantly affected.

Pratt is trying to mitigate its liability and responsibility for its customer’s plight. “There are some customers out there – 10 to 12 that are going to be more impacted than others. We’re working very hard with them to come up with a compensation structure relative to the powdered metal AOG situation that’s fair, and that can give them a little bit of lift. Obviously, it won’t make up for all of the disruption that they’re having in their fleet and all of the things that they’ve got to do to accommodate for these removals,” Calio admits.

When asked about potential lawsuits, like in the case of all A320neo carrier Indian ULCC GoAir who blamed the engine’s foibles for its cessation of operations, Calio tried to strike a conciliatory chord. “We’ve got a track record of coming to an agreement with our customers on some of the more difficult problems we faced, and I’m confident we’re going to be able to do it again.”  

The Menius Analyst plays spoiler again: “Despite a solid end to 2023, there is still a lot of risk in the story. With 4Q results, RTX reiterated its financial and operational outlook for the GTF fleet management plan, which is a clear positive. However, RTX is still in early-stage negotiations with GTF customers regarding compensation, and GTF risk-sharing partners (MTU Aero Engines, GKN Aerospace/Melrose, and Japanese Aero Engines) are likely to push back on RTX’s assumption that the risk-sharing partners will cover 49% of the $6B – $7B powder metal issue costs.

 

Collins Keeps On Keeping On

Collins continues to be a relatively drama free, bright spot in the RTX portfolio, contributing strong top-line and bottom-line performance without its corporate sibling’s struggles.

Collins Aerospace displayed positive sales and profitability in Q4 2023, climbing by 14% year-on-year to $7.1 billion. Aftermarket commercial sales improved by 23%, and 17% for commercial OE did the heavy lifting in the quarter over the military. Quarterly operating profit ballooned by 34% over year-on-year.

Full-year adjusted sales notched increases of 14% to $26.1 billion – above its Pratt – its RTX stablemate. The full-year 2023 operating profit of $3.8 billion blossomed 14.6% over 2022.

The long-awaited post-pandemic growth in international travel and widebody orders is paying dividends. “Widebody is going to be a big driver. But it’s nowhere near the levels of 2019. And so we don’t see that coming back until about 2026,” Mitchell said. “We are in the process of working with a number of airlines as they are going through their retrofit. And keep in mind, that is a three-to-five-year process to upgrade these things. So, we are still finishing out things that we had signed up for back in 2018 and 2019. But again, as Neil said, the business is coming back,” Hayes added.

3 Comments on “RTX FY and Q4 2023 Earnings: Pratt GTF Propulsion Prognosis Improves, Collins Enjoys Widebody Renaissance Tailwinds

  1. Its good that Pratt is part of RTX that is helping then deal with GTF financial hit.

    I wonder if RR can be absorbed by SAFRAN group to create similar aeropsace company like RTX.

  2. P&W was part of United Technologies so they had a large corporate umbrella (before Raytheon bought them out) .

    Some of UT was divested out, have not tracked before or after.

    Note Collins was and is still part of Raytheon.

    Not covered is Raytheon and its defense side that should be going gangbusters in this climate (and PW has the F-35 engine with no competition).

    The F-35 engine has done generally well, some problems but overall good. Its issue is they have pushed it so hard to make up for other problems on the F-35 (as well as increased capability that take more power and cooling) that it needed a Pip which it now has.

    Safran would have a conflict with GE on widebody engines if they got into the RR jet engine business.

    And RR is a lot more than jet engines with multiple other divisions in ship systems as well as diesel engines.

    • UTC bought Raytheon, not the other way around. same “bought them with their own money” model as McBoeing. they just kept the Raytheon name for marketing reasons.

      UTC got the majority of stock, board and all Csuite positions, Raytheon CEO got $200M and a “nonexecutive chairman” position on the board with a fixed and non-extensible 2 year duration.

      with Wes Kremer retiring as head of the Raytheon Business Unit of RTX, the last legacy Raytheon senior executive is gone. his replacement is a Collins guy.

Leave a Reply

Your email address will not be published. Required fields are marked *