Hundreds of aircraft will be grounded worldwide over the next several years due to issues with Pratt & Whitney engine. This is a $3bn blow to RTX, and another setback to airlines who are already struggling to keep up with post-pandemic demand.
P&W, the US aerospace and defense group formerly known under the name Raytheon in the US, has announced that it will recall between 600-700 engines, from 2023-2026. This will result in an average of 350 aircraft being grounded each year.
RTX announced that it would incur a charge up to $3.5bn, mainly due to the compensation of its customers. It also said it will have $1.5bn less free cash flow by 2025. This is a bigger hit than what it had originally predicted in July.
Arlington, Virginia-based firm now expects sales to reach $67.5bn-$68.5bn for the full year compared with $67.1bn by 2022. In July, it had increased its guidance for sales between $73bn to $74bn.
In New York, shares of RTX fell almost 7 percent in the morning trade. The company has been losing money since July when it revealed its metal problems.
In July, the group announced that contaminants found in the powdered steel used in its PW1100G turbofan engines that are installed in Airbus aircraft would require some of its engine to be inspected sooner than expected.
Chris Calio told analysts that the cracks were “larger than expected” by the company.
Greg Hayes described the disruption as frustrating, adding that it would “have a major impact on our clients, our partners, and RTX”.
After each engine has been removed from an A320neo narrow body jet, the plane will be returned to the airline in an average time of 250 to 300 days.
Calio warned the engine replacements and inspections would “create more congestion” within the maintenance, repair, and overhaul network of the company, which has already been experiencing delays due to problems obtaining materials.
RTX stated that it “plans currently to continue to fulfill our commitments to Airbus”, with new engines and spare parts. Airbus may still be hampered by the fallout of the A320 issue as it plans to increase production over the next two-year period.
The European group stated on Monday that they were in “constant dialog” with P&W, its customers and did not expect any impact on their “2023 deliveries or on our 2024 ramp up plan”.
The groundings of so many commercial planes has caused carriers to rush to find spare engines and parts to prevent cancellations.
Vertical Research analyst Rob Stallard said that the $3bn charge “was larger than expected”. The company had estimated that the 200 first engines that needed inspections in this year would result in a $500mn reduction of free cash flow.
RTX estimates that the total cost of the PW1100 engine program will be between $6bn and $7bn when P&W shares the risk. According to Chief Financial Officer Neil Mitchill, 80 percent of the money will go to customer compensation. The remaining 20 percent is for labour and materials.
MTU Aero engines, one of the engine program partners with an 18% share, warned on Monday that its “otherwise stable” forecast for 2023 was not sustainable.
The German group estimated that the impact would be €1bn of revenue and earnings before tax and interest in the current fiscal period, and the liquidity impact will continue from 2024-2026.