Pratt & Whitney/RTX: engine recall puts cash flow into reverse thrust

Receive free Pratt & Whitney updates

We’ll send you a myFT Daily Digest email rounding up the latest Pratt & Whitney news every morning.

Pratt & Whitney makes the engines that power planes through turbulence. Such engineering prowess is little help to the US engine maker as it contends with tumult of its own.

Last month Pratt & Whitney, a unit of aerospace and defence giant RTX, was forced to issue a recall of its popular geared turbofan engine GTF. The problem stemmed from contamination in the powdered metal used to make an engine part. Over the next year, the company must remove and inspect some 1,200 engines made between 2015 and 2021. Airlines worldwide have already changed flight schedules and ground aircraft as a result.

Since the recall, RTX’s shares have dropped 12 per cent. That leaves the stock trading on just under 17 times forward earnings, compared with its three-year average of 20 times.

Calculating the profit impact is not clear-cut. It depends how fast RTX can conduct inspections and the time required to make any fixes. Airlines will demand compensation for lost flight time. Plus the manufacturing fault, described by P&W as a one-off, may cause long-term damage to order books.

RTX has offered few estimates on these scenarios. The GTF engine is a sizeable part of the business. It is used on the world’s best-selling jet, the Airbus A320neo. Analysts at Baird believe sales account for about 10 per cent of RTX group revenues.

Inspecting the 200 engines that have flown most should reduce free cash flow by $500mn this year, says RTX. This works out to $2.5mn per engine. But extrapolating this figure for the remaining engines does not account for typical maintenance scheduling, which reduces the extra cost. Jefferies pegs the hit to 2024 free cash flow at about $1.5bn.

This does not include compensation for airlines, which RTX chief executive Greg Hayes acknowledges will be “expensive”. Management’s aim of delivering $9bn in free cash flow in 2025 looks unrealistic. Ground any optimism of a quick stock price rebound.