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Engine Inspections Trigger Sharp Decline in RTX Corp Shares

RTX Corp is facing a significant setback as defects in their Pratt & Whitney GTF engines force extensive inspections, sending shares tumbling.

RTX Corp building
RTX Corp building

Engine Defects Trigger RTX Corp Stock Plunge

Shares of RTX Corp, formerly known as Raytheon (NYSE: RTN), plummeted 14% following the company's announcement that more than a thousand Pratt & Whitney GTF engines, used in Airbus A320neo jets, will undergo "accelerated removals and inspections". This news has sent investors scrambling for clarity about the potential costs and impact on airline services.

Manufacturing Issue Triggers Fleet Inspection

The company stated that a unique issue related to the powder metal used in manufacturing certain engine parts necessitates expedited fleet inspections. Out of over 3,000 engines produced from 2015 to 2021, 1,200 engines will undergo these inspections over the next 9-12 months. The current production remains unaffected by this issue.

Faulty Metal Sparks Concern Among Analysts

Microscopic contaminants were detected in a Pratt & Whitney proprietary metal utilized in the engine's high-pressure turbine discs, according to RTX management. This disclosure has increased concerns, given Pratt & Whitney's significant contribution of 30% to RTX's total sales in 2022. The process of replacing the faulty discs involves a meticulous procedure of engine disassembly, inspection, potential replacement, and reassembly, stated Raytheon COO Chris Calio.

Analyst Predicts Financial Impact for RTX

The financial ramifications of the Pratt & Whitney GTF engine issue remain unclear, causing concern among investors, noted Vertical Research Partners analyst Robert Stallard. Despite assurances from Airbus and RTX that the problem doesn't pose an immediate safety concern, the lack of financial clarity could restrain RTX's stock performance.

Forecast Adjustments Indicate Financial Impact

The engine defect has forced RTX to decrease its 2023 cash flow forecast by $500 million, dropping to $4.3 billion. However, the company also revised its 2023 sales forecast upward, from $73 billion to $74 billion. Neil Mitchell, RTX's CFO, stated that more information about the inspections' impact on the 2024 and 2025 cash flow would be available in the coming months.

Airline Companies Anticipate Potential Disruptions

Major airline customers that have purchased Airbus A320neo jets fitted with the affected engines include Spirit Airlines, JetBlue Airways, and Wizz Air. While Airbus confirmed that this issue would not impact A320neo deliveries and pledged to work with airlines to minimize disruption, the precise impact on individual airlines remains uncertain.

Engine Removal and Inspection Timeline

RTX Corp anticipates the need for about 200 "accelerated removals" from jet fleets fitted with PW1100G-JM engines by mid-September this year. Over the following nine to twelve months, an additional 1,000 engines will be inspected. As it works towards minimizing operational impacts and supporting customers, RTX expects the FAA to publish an airworthiness directive in response to these developments.

Pratt & Whitney's Continued Struggles

This issue compounds Pratt & Whitney's ongoing challenges with the GTF engines in hot and dusty climates. Go First, an Indian low-cost carrier that plunged into financial crisis this year attributed the grounding of about half its 54 Airbus A320neos to "faulty" Pratt & Whitney engines.