Airbus Engine Snafu Raises Fresh Concerns for United Technologies
(Bloomberg Gadfly) -- United Technologies Corp.'s new jet engine is back in the news for all the wrong reasons, and that's the last thing it needs right now.
A "limited subpopulation" of United Technologies' geared turbofan (GTF) engines on Airbus SE's A320neo planes have a flawed part that's been tied to in-flight shutdowns and thwarted takeoffs. The issue is "limited" in that it's confined to the most recent round of engine production and involves engines delivered to customers since December 2017. But that batch still represents about a third of the 113 A320neos with GTF engines in operation worldwide. United Technologies said Monday that approximately 55 engines delivered to the Airbus final assembly line awaiting installation on customer aircraft were also affected. The impact is outsize because previous durability issues with the GTF engine forced a back-loading of deliveries.
Airbus has halted deliveries of A320neo planes with United Technologies' engines, according to the biggest customer, IndiGo.
It's hard to assess how this latest setback will affect United Technologies' short-term profitability or its goal this year of almost doubling the 374 engine deliveries it made in 2017, but it doesn't seem good. United Technologies on Monday connected the glitch, which affects the knife-edge seal on the high-pressure compressor, to an engineering change it implemented in mid-2017 to improve the durability of that part. It's troubling that this is tied to a design update made at the behest of United Technologies, although it's not clear yet if the issue is the direct result of that change or some sort of manufacturing foul-up with Airbus planes specifically as it was implemented. The latter situation would be less painful and more easily fixable.
At the very least, concerns about the GTF will re-emerge as a theme for United Technologies. That's all the more painful coming a month after executives were celebrating a drop in questions about glitches with the engine on the company's earnings calls. "I feel pretty good about the GTF today," CEO Greg Hayes said on Jan. 24, during United Technologies' fourth-quarter update.
United Technologies could be forced to compensate airlines (again) for any disruption. And while the company is sitting on a large pool of spare engines, it's not clear if any of those were also affected by this latest setback. The company said it will present a proposed mitigation plan to regulators this week, and that it likely won't be able to make any updates as far as its 2018 delivery plan until it hears back from them.
Hayes will now have to re-convince investors that GTF headaches are truly behind the company. United Technologies can ill afford even the appearance of ongoing challenges as it prepares to take on the mammoth task of integrating its $30 billion takeover of avionics maker Rockwell Collins Inc. and contends with efforts by Boeing Co. and Airbus to encroach on suppliers' turf.
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Brooke Sutherland is a Bloomberg Gadfly columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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