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Pratt & Whitney, GE Vie for Jet Engine Supply

Zacks Equity Research

The aerospace industry is set to undergo robust expansion as leading players like The Boeing Company (BA) and Airbus Group (EADSY) opt to replace their aging fleets with new fuel-efficient composite material-laden aircrafts. Both these players have achieved a significant headway in aerodynamics over the years. However, steep rise in aviation fuel expenses remain the most prominent component of variable costs and have forced these aircraft manufacturers to restructure their fuel-guzzling fleet.

CFM International, the joint venture partner of General Electric Co. (GE) and Pratt & Whitney, a unit of United Technologies Corp. (UTX), are contesting with each other for replacing these jet engines. Both Pratt & Whitney and CFM International have pledged a reduction of at least 15% in fuel consumption in the new-generation engines, compared with their older counterparts.

These premier manufacturers of jet engines are vying for contracts which are reportedly worth a whopping $20 billion. Over the next decade, the market for jet engines is expected to skyrocket to around $500 billion. Manufacturers contest hard for initial sales of units, since a large installed base of engines ensure continued cash streams down the road via parts replacement and routine maintenance.

Single-aisle planes are expected to constitute 70% of the 35,000 new commercial jets in the next couple of decades, with a market valuation of nearly $2.3 trillion. While CFM International has been a prominent provider of engines on narrow-body, single-aisle planes, Pratt & Whitney has a relatively humble presence in commercial aircraft. Pratt & Whitney’s forte lies in the military contracting field.

CFM International has won contracts for engines of Boeing’s 737 MAX but the two companies are still battling over supply rights for Airbus’ A320neo. Pratt & Whitney, having procured exclusive deals with smaller jet makers, like Bombardier and Embraer, intends to sever CFM International’s grip through its geared turbofan engines. Of the 2,610 Airbus A320neo orders as of Jan 2014, CFM International and Pratt & Whitney have secured about 32% each.

Consequently, the contest seems pretty open with either of the player possessing the capability to outwit the other. Each engine costs around $11 million, which translates into a value of about $20 billion for the outstanding order of 1,880 engines.

Per the Zacks Industry Rank, the aerospace industry currently ranks among the top one-third, implying that the outlook remains positive on this sector for the next year, backed by a steady surge in air travel demand. For the aerospace sector, both earnings and revenue "beat ratio" stood at an impressive 88.9% in the fourth quarter. Total earnings for the companies in this sector grew a healthy 20% year over year.

Both General Electric’s CFM International and United Technologies’ Pratt & Whitney, being major players in the sector, are well-positioned to reap benefits from this strong industry performance. However, it is too early to predict an outright winner.

General Electric currently holds a Zacks Rank #4 (Sell), while United Technologies holds a Zacks Rank #3 (Hold).

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