3 Reasons to Feel Positive About United Technologies

United Technologies' aviation engine company Pratt & Whitney has been subject to disappointment over its geared turbofan engine. Here are three reasons those fears may be overplayed.

Lee Samaha
Lee Samaha
Jul 17, 2014 at 11:41AM

Another day, another announcement that a major airline, American Airlines, is placing 100 orders for CFM International's LEAP-1A engines to power its fleet of Airbus 320neo. This is good news for General Electric (NYSE:GE) (CFM is a joint venture between General Electric and Snecma) as it competes with United Technologies' (NYSE:UTX) Pratt & Whitney for engine orders on the revamped A320. It's obviously not such good news for United Technologies. Moreover, given that a Pratt & Whitney engine recently caught fire on a Bombardier (TSX:BBD.B) CSeries jet on a ground test, investors are entitled to start feeling apprehensive about United Technologies' prospects going forward. Is it really that bad for United Technologies?

Bombardier's CSeries problems
The CSeries matters to Pratt & Whitney, because the PW1000G geared turbofan engine is the exclusive engine option on the planes. In fact, aside from the A320neo -- where it competes with CFM -- the engine is currently only offered elsewhere as an option on some smaller circulation regional jets. Therefore, earlier in the year, when Bombardier's CSeries jet was delayed for a fourth time, investors must have started to downplay expectations for the PW1000G. Indeed, the CSeries -- originally expected to enter service in 2013 -- is now expected to be commercially available for service as late as the second half of 2015. Throw in the engine fire mentioned above, and the problems appear to be mounting for Pratt & Whitney.

Photo: The Motley Fool

Why it isn't so bad for United Technologies
With that said, there are a few reasons investors shouldn't panic just yet over Pratt & Whitney, or, for that matter Bombardier's, fortunes.

First, time and cost overruns are pretty much part and parcel of developing a new aircraft these days. Fools already know that Boeing has had production issues on the 787 Dreamliner, even as the company sticks to its planned ramp up in production rates on the program in 2014. Moreover, the Airbus A350 is also running significantly behind schedule. In other words, the delay in the CSeries deployment, although regrettable, should not be unexpected. Boeing and Airbus have had their issues, too.

The second consideration is that the fire issue in the Pratt & Whitney engine on the CSeries appears to be a minor issue. According to an article in FlightGlobal, Pratt & Whitney's chief engineer described the problem as a "minor blip" that was "unrelated to the fan-drive gear system, which is a unique feature of the PW1000G engine family." While the issue is embarrassing -- Bombardier couldn't actually fly the CSeries at the Farnborough air show -- it doesn't look likely to significantly hold back CSeries sales.

Third, Bombardier has actually been recording significant orders and letters of intent for its CSeries range. In fact, Bombardier is on record as claiming orders and commitments for 495 jets (203 firm orders) when the company expects 300 firm orders by the time it enters service in the second half of 2015 -- good news for Bombardier and for United Technologies. Furthermore, according to recent presentation by Pratt & Whitney's president, Paul Adams, the company has lifted orders to 6,000 units from a backlog of 5,500 in late May, as it strives to achieve comparable orders to CFM on the A320neo.

The bottom line
All told, the setbacks with Bombardier's CSeries are obviously disappointing, but they shouldn't come as a surprise given the increasing complexity of modern airplane production. Moreover, United Technologies continues to compete with General Electric on the A320neo, so it isn't just about Bombardier for United Technologies. The issue of the engine fire appears to be under control, and as the media headlines subside on the issue, Bombardier is quietly building its order book.