What happened
RTX (RTX 0.63%), the company that until recently was known as Raytheon Technologies, has discovered a flaw in one of its commercial aviation engines that will lead to complex inspections and cost a lot of money.
Investors fled for the emergency exits when the issue was disclosed, sending shares of RTX down 10% in July, according to data provided by S&P Global Market Intelligence.
So what
RTX was formed in 2020 via the merger of defense specialist Raytheon and the commercial-focused aerospace arm of United Technologies with a promise of diversification: The combination would be so big, and in so many markets, that it wouldn't be reliant on any one program.
But as investors found out in July, an issue at one of the company's most important platforms can still have an oversized impact on the business. RTX disclosed that its Pratt & Whitney engine unit had discovered a "rare condition in powder metal" used to manufacture engine parts would require inspection.
RTX warned that a "significant portion" of its PW1100G-JM engine fleet, which powers the Airbus A320neo, would require removal and inspection within the next nine to 12 months. That will be time-consuming and expensive, including reimbursing airline customers for the delays.
As a result of these issues, RTX lowered its free-cash-flow outlook for the year by 76% to $193 million.
NYSE: RTX
Key Data Points
Now what
The good news is that RTX discovered this issue before it has caused any harm. Pratt & Whitney has a strong reputation in the industry; taking the prudent step here, no matter how painful in the short term, is key to making sure the company retains that position well into the future. All of the engine makers have a substantial backlog, meaning it will be difficult for airlines to swap out PW1100G-JMs for other options even if they want to.
The engine issues will linger into 2024, but for those willing to look past the drama, RTX does have a solid portfolio of defense and commercial assets that are positioned to benefit from trends, including the Western stockpiling of weapons in response to the Russia-Ukraine war and the strong global demand for travel.
It will just take time to get to the destination.
