UTC Warns Jet Makers That Poaching Service Business Will Mean Higher Prices
July 25 2017 - 2:48PM
Dow Jones News
By Thomas Gryta
United Technologies Corp.'s boss warned Tuesday that the company
may need to raise prices for its jet engines and aerospace parts,
if airplane makers try to steal some of its lucrative maintenance
business.
Jet engine makers, like United Technologies' Pratt & Whitney
division, General Electric Co. and Rolls-Royce Holdings PLC,
typically sell the huge machines with little or no profit but then
make up the money by selling decades of servicing and parts.
But Boeing Co. and Airbus SE have been nudging their way into
that aftermarket business to capture some of that profit -- a
strategy that puts them on a collision course with suppliers.
United Technologies is particularly exposed because aside from
Pratt & Whitney it runs a large aerospace division, which makes
parts such as wheels and landing gear. Those units accounted for
more than half of its $15.28 billion in second-quarter revenue.
"If we're going to change that model, where the [plane makers]
are going to take more of the aftermarket or demand more of the
aftermarket, we're going to have to think about how we price our
products," United Technologies CEO Greg Hayes said on a conference
call.
The Farmington, Conn., company spent $10 billion developing its
latest engine, called the geared turbofan, and the launch will
continue to hurt profits at the Pratt & Whitney division before
it starts making money on the installed engines. "If all of a
sudden I lose that aftermarket, I don't have a business going
forward," he said.
United Technologies shares dropped 2% midday Tuesday.
Other jet engine makers have taken notice of the shift by Boeing
and Airbus. "They can try to squeeze the engine companies out of
the aftermarket, but if they do so at some point the engine
companies won't invest the same level in all of the new technology
we are doing," Eric Schulz, president of civil aerospace for
Rolls-Royce, said last month.
GE Aviation spokesman Rick Kennedy said the company isn't
concerned about Boeing's move into aircraft services. There is
already a "significant number of viable competitors in the engines
aftermarket," he said, and GE doesn't expect a big impact from
plane makers entering the fray.
Boeing launched a new services unit this month as part of a push
to cut costs and boost margins, part of its effort to more than
double its service revenue to $50 billion in five years. Boeing,
which reports second-quarter results Wednesday, isn't just stirring
up its suppliers but has also said it may want to service planes
made by rivals like Airbus.
Mr. Hayes, who called the tension around the aftermarket "one of
the fundamental strategic issues" in the future of the aerospace
industry, said his company, which also makes Otis elevators and
Carrier air-conditioning systems, may have to decide to allocate
investment to areas where it has an advantage. "There's a lot of
pressure out there," he said.
In reporting second-quarter results Tuesday, United
Technologies' aerospace division was only business with a drop in
sales. It cited slowness in business from companies like Boeing as
well as sluggishness in the business jet and civil helicopter
market.
Over all, second-quarter net income rose 4% to $1.44 billion, or
$1.80 a share, while revenue increased 3% from a year ago. The
conglomerate raised the lower end of its full-year earnings
estimate and now projects annual sales of at least $58.5 billion,
up from a prior forecast of at least $57.5 billion.
Chief Financial Officer Akhil Johri said the change came from
the first-half performance rather than any shift in second-half
views. "Unlike in prior years, EPS in the second half will be lower
than the strong first half," he said.
Doug Cameron and Robert Wall contributed to this article.
Write to Thomas Gryta at thomas.gryta@wsj.com
(END) Dow Jones Newswires
July 25, 2017 14:33 ET (18:33 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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