Pratt & Whitney's GTF Engine - Another Perspective

| About: United Technologies (UTX)

Summary

P&W has stumbled with late deliveries and a tech fix.

This was no surprise to industry veterans.

The criticisms are exaggerated.

Pratt & Whitney's (NYSE: UTX) new aeroengine, commonly referred to as the GTF (geared turbofan), is attracting a lot of attention. This is because the engine has met with a technical issue and then met with a supply chain issue. So, yes there were two items that have annoyed customers.

But let's take a look at the issue with less excitement. After all, this is not the first aeroengine P&W has delivered.

P&W has been around since the dawn of aviation. The company has faced trouble before in its long history. Which company hasn't?

P&W's first engine for the 747 also had technical problems. But these were overcome and the 747 went on to have a remarkable career. P&W was also the first engine on the 777. P&W came from the Boeing (NYSE: BA) stable (as did United Airlines (NYSE: UAL)).

One of the storied mistakes P&W made in its long history was not offering Boeing an engine for the 737 Classic. This slip cost P&W big - it allowed CFM International (joint venture by GE (NYSE: GE) and SAFRAN (SAFRF:US OTC US)) into Boeing. Boeing's 737 and CFM subsequently developed the closest of relationships, with the CFM LEAP exclusive on the latest version of the 737 MAX as it was on the previous generation 737NG.

The P&W GTF's primary competitor today is the CFM LEAP. The LEAP is looking like being a very good engine and worthy successor to the CFM56.

Let's look at the GTF and why it was the right technical solution for P&W. Most importantly, why the engine, despite the stumbles, remains a credible solution for both aircraft OEMs and airlines.

The origin of the GTF dates back to the Superfan. P&W's managers are painfully aware of the mistake on the 737, and the development of the GTF was a two decade long program to win back its place in the market. Rather than develop an engine that continued on the path turbines were following, P&W engineers took an idea and grew it into what is the GTF.

Geared fan engines was an idea that had been tried before, but never at the size and power levels seen on the GTF. The new GTF engine has been a big bet for P&W, and despite the media chatter, it was the right bet.

The fact that the engine has been selected by five aircraft OEMs suggests that the GTF offers what they need in a next generation engine. The competing LEAP is on three OEM programs.

The GTF offers a path of ongoing technology upgrades that will keep pressure on CFM's LEAP. CFM has created a tough benchmark in the CFM56. Both the LEAP and GTF have to beat this engine. P&W's V2500 has competed with the CFM56 for many years and started out as a joint effort with Rolls-Royce (RYCEY:US OTC US). But to do deals with maximum flexibility, P&W bought out the Rolls-Royce share.

The initial technical issue the GTF faced was a "bowing" in the engine from heat. The newest engines (GTF & LEAP) operate at higher temperatures and pressures than the previous generation. This is necessary to achieve 16% improved fuel burn. These new engines literally squeeze more power out of the same amount to fuel.

All turbines suffer from "bowing". The rush to get the GTF to the market, and beat CFM, may have caused some issues to only show up later. The issue with the bowing of the GTF may have caused airlines a three minute delay. Details are explained well here. Only one airline has complained about this publicly - Qatar. IndiGo in India grumbled but has taken all its Airbus A320neos, whereas Qatar cancelled four deliveries so far. P&W has said it fixed the problem using a software patch. This fix will be applied to all existing engines as they come in for maintenance. New engines have the patch when they leave the factory.

The latest issue with the supply chain is also being turned into something bigger than it might be. Are engine delivery delays annoying? Absolutely. Could or should P&W have better managed the process? Yes, of course. P&W is in the midst of a production ramp the company has not seen since the second world war. It has been a long time since P&W has seen a backlog of over 8,000 engines. Supply chain failures have occurred at Boeing on the 787 and at Airbus on the A350. To be fair, the aerospace supply chain is under more stress than ever before. Airbus and Boeing are sitting on huge (~7 years) backlogs for the aircraft that will be using the LEAP and GTF. Should P&W have managed the ramp up better? Yes, but in stumbling it is in good company. Supply chain delays are normal. And as with the other OEMs, P&W will fix this.

Now let's take another look at the news about Qatar's order. The comment about "mitigate our risk" is disingenuous. If the airline really wanted to mitigate risk, why not convert the GTF orders at Airbus to LEAP? That would be by far the most logical thing to do. The idea of going to Boeing says more about Qatar's dissatisfaction with Airbus. Qatar has played this game before. We did a story about this earlier this year. Qatar has beaten up Boeing before, too. Qatar's mercurial complaints are old news for Airbus and Boeing.

In conclusion, P&W could have done this better. The problems they faced might have been predicted, but in fairness, the company is eager to prove it is "back in the game" with its new engine. The engine is doing well and is delivering what P&W promised. The challenges being faced are not show stoppers.

Incidentally, as good as the LEAP is expected to be, it too is in the early stages of its development and might also face challenges. This happens with new technology. Both engine makers are pushing the edges of turbine technology. Refinements are going to come, everyone in the industry knows and understands this.

Finally, when we compare the A320 family, where CFM and P&W compete directly, we see that on the current engine option models, CFM56 has a 59% market share. Looking at the new engine option, where they also compete, the LEAP has a 54% share. The GTF has already improved P&W's market share. The GTF is an all new engine. P&W will work through the challenges. Qatar represents about 1% of the GTF orders, so perspective shows the news is really not such a big deal. The P&W engine is already delivering over 99 dispatch reliability. Which is remarkable if you consider the technology inside this engine.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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