RTX Corp, the parent company of Pratt & Whitney, experienced a drop in shares to a two-year low on Monday due to a $3 billion charge and the announcement that hundreds of Airbus jets would need to be grounded for inspections in the coming years. This is due to a rare manufacturing flaw that has been discovered, in addition to previous problems with the durability of Pratt & Whitney's Geared Turbofan series. The acquisition of this series by RTX, formerly known as Raytheon, occurred in 2020.
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In July, RTX issued a warning that a powder metal defect could lead to engine component cracking and called for accelerated inspections of 200 engines by mid-September. Now, the company estimates that 600 to 700 engines will need to be inspected for quality over a period of three years, from 2023 to 2026. CEO Greg Hayes initially expected the repair work to take 60 days, but it is now projected to last up to 300 days per engine. As a result, an average of 350 jets could be grounded annually through 2026, with up to 650 jets sitting idle in the first half of 2024.
RTX's shares fell 7.9% in late trading to $76.89, hitting a low of $76.71. Airbus shares also fell 1.3% in Paris. Pratt & Whitney competes with GE-Safran joint-venture CFM to power the A320neo series, which competes with the Boeing 737 MAX powered exclusively by CFM. RTX disclosed higher-than-expected gross costs of $6-7 billion to deal with the problem and expects an up to $3.5 billion pre-tax hit to profits over the next few years. The company lowered its free cash flow goal for 2025 from $9 billion to approximately $7.5 billion and decreased its projected reported sales figure for 2023 by $5.5 billion.
MTU Aero Engines, RTX's German partner that controls 18% of the GTF program, said it may have to bear 1 billion euros in extra costs, but it is too early to say how this year's financial goals will be affected. Hayes acknowledged that the problem "will have a significant impact on our customers," and some airlines have already been forced to park their A320neo-family jets to wait for spare engines following durability problems. The powder issue may reduce Hungary's Wizz Air's capacity by 10% in the second half of 2024, according to the airline. Lufthansa, which was the first to introduce the GTF engine series, is evaluating the situation. Of US carriers, Spirit Airlines, JetBlue Airways, and Hawaiian Airlines are the most exposed to the GTF problem, according to Jefferies. None of the airlines responded immediately to a request for comment. Robert Stallard, an analyst with Vertical Research Partners, said the RTX charges were larger than expected. Airbus stated that the problem is not expected to impact 2023 deliveries or the planned production ramp-up in 2024. However, the new checks could exacerbate a tug of war for engines between airplane factories and repair shops, as airlines clamor for engines to be diverted from assembly lines and made available as spares to keep existing jets flying. The quality issue relates to a rare condition in powder metal used to manufacture engine parts, such as high-pressure turbine disks and high-pressure compressor disks, that could result in micro-cracks and fatigue. During a production ramp-up in 2015, a microscopic contaminant entered the powdered metal made by RTX subsidiary HMI in Clayville, New York, which could not be detected by previous inspection methods, Hayes said. He added that there have been nine changes to the process to ensure the purity of the powder and that he is "confident" the problem is resolved.