RTX/MTU/Melrose: engine recall means risk now defines partnership

Receive free Aerospace & Defence updates

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

Aerospace investors have adopted the brace position since RTX updated the market on Monday. The US-listed owner of Pratt & Whitney said it expected a dollar hit in single-digit billions from its recall of PW1000G turbofan engines.

The damage will be spread more widely via a risk and revenue sharing partnership (RRSP) RTX struck with other manufacturers. Going by the precedent of Rolls-Royce’s Trent 1000 recall, this is the beginning of a long and costly process.

The biggest of RTX’s partners, Germany’s MTU Aero Engines, saw its shares fall steeply on Monday and Tuesday. It plans to provide an update on Wednesday. Melrose, whose GKN is a 4 per cent partner in the project, estimated the cash cost of the recall at £200mn.

Pratt & Whitney thinks that an average of 350 aircraft will be grounded between 2024 and 2026 while a manufacturing fault is fixed. Problems relating to contaminated metal will hit RTX profits by up to $3.5bn. It forecasts a total financial cost of up to $7bn for its 51 per cent share of the project.

UK-based jet engine maker Rolls-Royce had a similar problem when wear and tear issues led to the eventual grounding of about 30 aircraft. The faults emerged in 2017 and remediation continued into 2019. A charge of £2.4bn was followed by cash costs of £550mn to cover lease payments for customers.

The bulk of the charges covered by RTX will be compensation for customer airlines forced to withdraw from service Airbus A320neo aircraft fitted with the faulty version of the engine. Low-cost European carrier Wizz Air has already said it might lose 10 per cent of its capacity as a result of the recall.

Costs are expected to trickle down proportionately via respective RRSP contracts. MTU, which has an 18 per cent stake in the partnership, may be looking at a $1.2bn (€1bn) hit to operating profits and revenues. The Frankfurt-listed company expects to generate €800mn of ebit this year.

Greater diversification at Melrose, whose RRSP revenues are less concentrated, supports the group’s rerating as a pure play aerospace business this year.