Tuesday, July 25, 2017

United Technologies Corporation Warns Jet Makers That Poaching Service Business Will Mean Higher Prices: Engine makers typically sell at little or no profit then make up the money through years of service and parts

The Wall Street Journal
By Thomas Gryta
July 25, 2017 2:18 p.m. ET

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.