Biker is right on the mark re his description of UTC's terrific Income Fund...now paying 3.35%, well above comparable fixed income funds. This fund's principal and interest are guaranteed by insurance companies. Comparing the interest rate to the dividend yield on stocks isn't really meaningful. You know that kid.
You're making it sound as if the aircraft engine has just been invented and no one knows whether or not it will be profitable and/or how to price it. Engines cost a lot to develop and are sold below production cost.....and enjoy a very, very profitable aftermarket business for many years. The GTF will be no exception. Nothing new here. Hayes' remarks about the urgency of production cost reduction are nothing new. That is a problem and and a goal of every new engine no matter who makes it. Pratt struggled to develop the JT8D and then lived off it for decades. Hopefully the GTF will be as successful. But it will take time.
This year and next won't be easy as Pratt struggles to climb a steep production ramp up, while facing a very, very tough competitor, GE's LEAP. Maybe Pratt will catch a break and the LEAP engine will have its share of teething and/or performance issues. Can't bet on that, of course.
Two billion profit "year-after-year"? C'mon kid, production of the GTF just began a few months ago....the negative margin impact has just begun; there was none in prior "$2 billion" profit years. Voodoo accounting has nothing to do with it. For the foreseeable future Pratt's revenues will rise and margins will decline....essentially beginning this year. This is the price Pratt and UTC will have to pay, and gladly, for Pratt's reentry into the large commercial engine business....and along with that Pratt's climb past Rolls into the #2 spot among engine producers. Over its history Pratt has pulled a few big rabbits out of its hat; the air-cooled Wasp; the high-pressure compressor jet engine...rising to the top of the heap. The slide began a few decades ago (think 737/CFM56). But, with its very large base of legacy engines requiring service, Pratt's margins actually rose consistently throughout the period when revenue growth was very slow-to-non-existent. Now we're witnessing a complete reversal of that trend. That's good, of course. Unfortunate that many of us will not be around to see the full impact on the company
I agree that it's odd that Hayes gave competitive information. But, overall his numbers are not consistent. By 2018 Pratt is projecting ~ 800 GTFs produced. Round that off to 1000 for simplicity. He said the 2018 negative margin will be about $1 billion. At 1000 engines that's about $1 million per engine. No way is that consistent with a cost reduction to $2 million. What I think Hayes means and meant to say was that the cost per engine has to be reduced by BY $2 million...not TO $2 million. That makes sense to me.
I think Hayes misspoke if he really said that GTF production cost needs to be reduced by a factor of five to around $2 million. Pratt doesn't make any commercial engine for $2 million. The GTF replaces the V2500 on the A320, essentially. The V2500 costs a lot more than $2 million per copy. A 50% cost reduction is a reasonable target...a factor of five is not.
Good analysis, pj.....but perhaps a bit too gloomy. UTX has been beaten down relative to peers,,,,,Morningstar;s "fair value" for the stock is $120. Also, I don't know much about the GTF fleet management deals Pratt has signed...but it's my understanding they pull aftermarket profits forward in contrast to having to wait a decade for overhauls, etc. Any info you have on that matter will be appreciated. Also, in my mind one of the most interesting charts PW/UTC uses at its analyst meetings is installed engine base over time. Pratt's installed base has been in decline for decades.....bottoming out in 2015 and increasing sharply for the foreseeable future. Like Otis, Pratt's installed base is a critical factor re profit. No doubt P&W is in for a rough couple of years...but it's a good kinda "rough" that bodes well for decades. Essentially, after a slipping for a few decades Pratt is being reborn. And, of course, UTC's other three business areas are solid global infrastructure plays. Cash flow is important so that dividend increases, while less than in the recent pass, can exceed inflation comfortably. The recent 3% increase, while triggering #$%$ and moaning, still exceeded the inflation rate by quite a bit. Again...nice analysis, pj.
Good! The very last thing we need for the rest of the year, at least, is "news",,..,because news is most likely to be about the GTF "teething" problems. In my opinion, for a while the best UTC news is no news. Assuming GTF corrective actions are on track, when the good news eventually comes it will be strong (for UTC) revenue growth. GTF shipments were targeted at 200 this year, 400 next and so on. That's serious money and revenue growth that's atypical for UTC. Never mind that we lose money on every engine. It's healthy revenue growth that drives share price, not earnings.
It does sound simple. Yet, for some reason the Chinese, Russians and Japanese haven't been able to master it....relying on Western-built engines in order to compete in the commercial sector. In another direction, it will be very interesting to see how the LEAP engine performs. Some months ago there was talk that LEAP missed fuel-burn targets by quite a bit. You can't just make that up by paying penalties....because range and payload are affected. Pratt is boasting about a 16+% improvement, while promising ~ 20% in just a few years.
kid, you may have misunderstood my comment, "kid, I'm waiting". I was 'waiting' for you to slam my oft-repeated assertion that aircraft engines are the world's most complex products.
True, strike,....but, aircraft engines are the most complex products in the world (OK, kid, I'm waiting)......there's a reason why China, Russia and Japan use Western commercial engines. It's because they can't design and build engines like that. Pratt is right, the problems encountered so far are trivial, no matter how annoyed the airlines may be. If not corrected this year...that's another story. But, if all is well by year-end Pratt will be golden. Re the JT9D/747....that was a disaster in comparison. Boeing and Pratt were at war.
Strike, I think the difference is that the V2500 ramp-up was very gradual...and the way the GTF is being built is completely different. It's not just plugging one engine production in for another, Also, there are four different GTF engines...a much larger supplier base, etc. Everything is different. One thing I do not understand is, after all the testing for thousands of hours, why was the start-up problem and its importance not recognized until entry into service? Pratt will get through this in a few months...but the PR is bad and the customers are not happy.
True, but the ~ $10 billion cited as Pratt's development cost for the GTF is lunch money when the very long development time frame is considered. My point was that the JT8D was, in Pratt's words, the industry work horse for decades....and 15,000 were produced. Pratt already has orders for 7000 GTFs...half the multi-decade production run of the JT8D. If the GTF is as successful as we all hope, Pratt will have a grip on regional jet applications.....will likely earn more than a 50% share of the A320 family. The A321 promises to fill at least a portion of the role played by the B 757. And Boeing/GE may be squeezed by the inability to "hang" a large fan engine under the wing of the 737. That would be sweet.
I don't think what Pratt is going through is appreciated. According to Pratt's website, there were ~ 15,000 JT8Ds produced over decades.....Pratt's life blood and one of its most successful engines ever. There are 7000+ orders for the new GTF....~ 50% of the total JT8D production run. To me, that is amazing...and what Pratt is doing to meet such a massive ramp up very few companies in the world could accomplish.
Pratt is having a very rough year...but will get though it. By next year at this time, assuming the GTF continues to perform as it has to date, Pratt will be well along the road a big-time resurgence in the engine business...possibly even leadership. There is more than a minor possibility that Boeing and GE will face major problems matching Airbus/Pratt.
The close-to-the-ground engine design of the 737 results in a major limitation as more powerful, efficient engines require a fan diameter larger than the current 737 design will permit.
kid, I think development costs are expensed as they occur. It makes perfect sense to sell a product at below the cost of manufacture if you're going get aftermarket business at 50% margin for decades. Even Otis does that wit elevators. At the investors meeting a week or so ago Hayes said that by about 2018 Pratt's negative margin on the ~ 800 engines it plans to produce that year will be about $1 billion. Do the math...that's over $1 million per engine. Since I know you're probably still not buying this argument, I suggest that as the quarters fly by you take note of Pratt's margins. They have been decreasing and will continue to do so as production ramps up. Pratt will add very significant revenue growth for UTC in the years ahead....but UTC's margins and cash flow will be squeezed. There was a reason why the recent dividend increase was so small compared to recent years.
I'm not sure that creating shareholder value was much if a consideration re the SA sale....so long as value was not reduced. UTC made it quite clear that the reason for selling SA was that it did not fit well with UTC's core operations. Since the govt was SA's largest customer by far, SA's profit margin was severely limited relative to UTC's other operations. Further, SA has been a headache for UTC in recent years. Indeed, LM has already learned that SA's financials were not nearly as good as they anticipated.
UTC got a good price for SA. True, the cap gains tax was a big hit. But even after that the net proceeds were more than satisfactory. UTC's big, big issue right now and for the foreseeable future is Pratt....good news-bad news story. Pratt's resurgence in the big engine market after years of decline is a very good thing for Pratt and UTC. But, as you are well aware, while Pratt's sales are growing rapidly, "negative engine margin", typical of the business, hits profit margins hard. That will continue for quite a few years. But, Hayes has correctly pointed out that engines are a 30 year business.