Airbus' A320neo Engine Problems Just Won't Go Away

Stock SectorFebruary 12, 201810min8
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<div><p><a href="https://finance.yahoo.com/news/airbus-apos-a320neo-engine-problems-132000893.html"><img src="http://l1.yimg.com/uu/api/res/1.2/M1hnJUUlYqjVI2Sx8CuZWA--/YXBwaWQ9eXRhY2h5b247aD04Njt3PTEzMDs-/http://media.zenfs.com/en-US/homerun/motleyfool.com/29cd710569dbf9abeb05881d1c141bc4" width="130" height="86" alt="Airbus' A320neo Engine Problems Just Won't Go Away" align="left" title="Airbus' A320neo Engine Problems Just Won't Go Away" border="0"></a>Pratt & Whitney thought it had fixed all of the "teething" problems of its new geared turbofan engines for the A320neo family, but now a new manufacturing flaw has appeared.</p><p><br></p></div>

Pratt & Whitney’s state-of-the-art geared turbofan (GTF) engines have won rave reviews for delivering big improvements in fuel efficiency, emissions, and noise. However, the United Technologies(NYSE: UTX) subsidiary has had trouble producing reliable versions of its revolutionary engine.

Such “teething” problems are fairly common with new engine designs. That said, the stakes are especially high here, because Pratt & Whitney’s GTF engine is one of two engine options for the extraordinarily popular Airbus(NASDAQOTH: EADSY) A320neo jet family. Unless United Technologies fixes the latest problems quickly, it could drive potential customers into the hands of rival engine maker CFM: a joint venture of General Electric(NYSE: GE) and Safran.

Running behind

The Airbus A320neo family is the fastest-selling jet family in history. Airbus ended January with a backlog of 5,750 orders, enough to keep its production lines going for nearly a decade.

An Airbus A320neo jet parked on the tarmacAn Airbus A320neo jet parked on the tarmac
An Airbus A320neo jet parked on the tarmac

There are nearly 6,000 outstanding firm orders for A320neo-family jets. Image source: Airbus.

Unfortunately, Airbus has had trouble getting the jets into customers’ hands — and ensuring that they can operate reliably thereafter. In the first two years after their introduction, the Pratt & Whitney engines were affected by flaws related to the fan blade, an oil seal, and the combustion chamber lining.

While Pratt & Whitney was able to resolve all of these issues, implementing the fixes slowed production. Furthermore, numerous engines had to be used to replace defective ones, rather than being available for new jets. Meanwhile, both Airbus and its customers grew frustrated with the delays and reliability problems.

To be fair, the competing CFM LEAP engine has also had some teething issues, and production is about a month behind schedule. Nevertheless, in terms of both on-time deliveries and reliability, Pratt & Whitney is way behind its rival.

Another issue crops up

For most of 2016 and 2017, Pratt & Whitney’s production problems caused the balance of engine orders among A320neo buyers to tilt heavily toward the CFM option. Yet by late 2017, it seemed that the United Technologies subsidiary finally had things under control, leading to a rebound in orders.

Those hopes were dashed late last week, as Airbus and Pratt & Whitney disclosed a new problem related to a “knife-edge seal” on certain engines, which appears to have caused several in-flight engine shutdowns. The two companies are working to get a solution approved by regulators. In the meantime, they have halted all deliveries of Pratt & Whitney GTF-powered A320neos.

This defect affects 43 in-service engines, as well as numerous engines that have not been delivered to airlines yet, according to Bloomberg. The European Aviation Safety Agency has ordered airlines to ground any planes using two of the defective engines. Aircraft with one affected engine are banned from operating certain long-range routes.

It’s too early to know if Pratt & Whitney and Airbus will be able to recover from this setback to meet their 2018 delivery goals. However, the outlook is now a lot cloudier than it was at the beginning of the year.

An opening for GE?

With Pratt & Whitney facing another stumbling block in its efforts to ramp up GTF production, General Electric has a great opportunity to build up the order backlog at its CFM joint venture. After all, airlines want to be sure that they will receive their airplanes on time and that they will operate reliably.

A substantial portion of the outstanding A320neo orders don’t have an engine choice selected yet. Thus, there are already a huge number of engine orders up for grabs. Additionally, Airbus is selling hundreds of A320neos every year. Finally, if airlines turn to Boeing because of Airbus’ production constraints, CFM will win because it is the sole engine supplier for the 737.

General Electric stock has been mired near a multiyear low, amid dire warnings from analysts about weak profitability and a possible cash crunch. However, these analysts appear to be completely ignoring the sparkling financial performance and strong growth trajectory of GE’s aviation business. Pratt & Whitney’s continuing production woes will only add to GE Aviation’s growth opportunities.

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Adam Levine-Weinberg owns shares of General Electric. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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