A Weekend of Setbacks Dims Prospects for Airbus's Top Seller
(Bloomberg) -- As last weekend approached, Airbus SE was closing in on a firm order for at least 20 of its marquee A380 superjumbos, a contract that promised to keep production going for at least a decade. And lawyers were putting the final touches on a $99 million settlement that shut the door on a five-year bribery probe involving sales of Eurofighter jets to Austria.
Then late Friday, the positive momentum unraveled. Airbus was caught out by European regulators investigating a new problem on engines supplied by Pratt & Whitney for its best-selling A320neo, a single-aisle jet that may lack the prestige of the A380 but is far more important to the bottom line. Soon it emerged that Airbus was halting deliveries of Pratt-equipped models, including to the plane’s biggest customer, India’s IndiGo.
The geared turbofans, valued for their superior fuel efficiency, have been plagued by setbacks since the plane’s commercial debut two years ago. Yet in recent months top officials at both Pratt and Airbus had signaled to investors that they were getting past the problems that have held back deliveries of the single-aisle jet and disrupted airline schedules. Now delivery of the Pratt-powered version of planes is on hold, and no one has said when they’ll resume.
“Airbus has basically been stopped,” said Sandy Morris, an analyst with Jefferies International. “They can’t do test flights. It just brings everything to a grinding halt.”
About 30 percent of the 113 Pratt-powered A320neos in operation worldwide are equipped with either one or two of the flawed engines, Airbus said Monday in an emailed response to questions from Bloomberg News. The issues, involving a compressor seal, are different from faults that have previously afflicted the engine type and are from the most recent batches to come off the engine-maker’s production line.
Airbus shares fell Monday after Bloomberg News reported on the number of Airbus planes affected. They were down 1.4 percent to 82.41 euros as of 3:33 p.m. in Paris. That valued the company at 63.7 billion euros ($78 billion).
InterGlobe Aviation Ltd., which operates IndiGo, declined 0.6 percent in Mumbai. Pratt parent United Technologies Corp. fell 0.4 percent to $123.50 at 9:33 a.m. in New York.
Fourteen jets operated by Indigo and rival Go Airlines India Ltd. are impacted by the issue, Airbus said in the statement. Indigo on Sunday said it had suffered three in-flight shutdowns, while pilots have had to turn back before taking off in three other instances. The airline is also working with Pratt to swap out some of the faulty engines.
It’s impossible to overestimate the importance of the A320 for Airbus. It put the European planemaker on the map three decades ago, allowing the company to go from a speck in Boeing Co.’s rear-view mirror to powerful equal in what has become a de-facto duopoly in the global civil-aircraft market. Airbus churns out more than 50 of the aircraft each month, and the promise of the neo with its more fuel-efficient engines turned the model into the fastest seller in commercial aviation history, forcing Boeing to respond with a refreshed 737.
Airbus has traditionally offered two engine options on the A320, and the company maintained that approach on the neo. Customers can choose between the Pratt & Whitney model and a type built by the CFM joint venture between General Electric Co. and France’s Safran SA.
The 181 A320neos Airbus produced last year -- a rate slowed by production issues -- carried a list price totaling about $20 billion, triple the amount generated by the 15 A380s that flew out of Airbus’s factory in Hamburg, Germany.
“This year is ‘2017 Take II’ by the looks of it,” Morris said. “A320neo deliveries will be very skewed to the second half, and therefore the results through the first half are looking rather shabby in terms of Ebit and cash flow,” he said, referring to Airbus earnings before interest and taxes.
For Pratt, the neo’s introduction offered a chance to solidify its position in the market for single-aisle planes, which form the backbone of most global airline fleets. The company invested $10 billion to develop the engine, its most important product. The company has been trying to move past earlier snags, including a cooling problem that marred its commercial introduction in early 2016, and subsequent durability issues and delivery delays.
There are 43 affected engines in use and another 55 that have been delivered to Airbus awaiting installation, Pratt said Monday. The power plants, installed on 32 aircraft, entered service starting in December, and Pratt said it’ll present a plan to fix the issue to regulatory authorities this week. The issue emerged after the company introduced an engineering change in the middle of last year intended to improve the durability of the “knife edge seal,” the company said.
If the latest problem leads to penalty payments to IndiGo and other customers, it wouldn’t be the first time Pratt was on the hook financially. Greg Hayes, chief executive officer of United Technologies, said last April that Pratt incurred costs that weren’t material to retrofit the engines and for “helping the airlines through some of this.”
The early glitches at Pratt led many customers to wait on the sidelines: The competing CFM engine outsold the GTF on the A320neo by a 10-to-1 margin in early 2017. Pratt won several key orders late in the year as the earlier issues subsided, and executives at Airbus and United Technologies said the manufacturer seemed to be moving on from a difficult chapter.
While Pratt works on a fix, IndiGo said it will take delivery of older, less-efficient A320ceos to fuel its growth. Pratt is also working closely with IndiGo to provide replacement engines, having replaced 69 of them in the past 18 months.
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