RTX shares tumble on Pratt & Whitney jet engine problem - Reuters

July 25 (Reuters) - RTX Corp (RTX.N), formerly Raytheon, said more than a thousand of its Pratt & Whitney GTF engines that power Airbus A320neo jets will need "accelerated removals and inspections," sending shares down 14%.

The news left investors looking for answers about how serious and costly the issue would be for RTX, as airlines worked to access how their service would be impacted by removing and repairing hundreds of engines.

"Pratt & Whitney has determined that a rare condition in powder metal used to manufacture certain engine parts will require accelerated fleet inspection," forcing an inspection of 1,200 out of more than 3,000 engines produced between 2015 to 2021, RTX said on Tuesday. The inspections will occur over the next nine to 12 months, but there was no impact on engines that are in production, the company said.

Microscopic contaminants in a Pratt & Whitney proprietary metal used in the engine's high-pressure turbine discs were present, RTX management told Wall Street analysts on a post-earnings conference call. Pratt & Whitney made up 30% of RTX's total 2022 sales.

Replacing the disks involves removing the engine and disassembling it, inspecting and potentially replacing the disk, and then reassembling the engine, Raytheon Chief Operating Officer Chris Calio said.

'LIMITED CLARITY'

In a research note titled "GTF. OMG.", Vertical Research Partners analyst Robert Stallard wrote: "What makes this situation challenging for investors is that they still have limited clarity on the scale of the cash hit from the GTF HPT issue, and that could hold back the RTX stock until we have a better handle on the situation." HPT is short for 'high pressure turbine.'

Airbus said in a statement that the issue is not an immediate safety problem. RTX said it began dealing with the issue about 10 days ago.

In June, defense contractor Raytheon Technologies Corporation officially changed its name to RTX Corporation.

The engine issue caused RTX to reduce its 2023 cash flow forecast by $500 million to $4.3 billion as inspections occur, while the company increased its 2023 sales expectation from $73 billion to $74 billion, compared with its prior forecast of $72 billion to $73 billion.

Neil Mitchill, RTX's Chief Financial Officer, said in the "next couple of months" the company would know more about the impact of the inspections on cash flow in 2024 and 2025 promising to provide an update.

Major customers that bought Airbus (AIR.PA) A320neo jets with PW1100G-JM engines during the timeframe - also known as the geared turbofan or GTF engine - include Spirit Airlines Inc (SAVE.N), JetBlue Airways (JBLU.O), and Wizz Air (WIZZ.L), according to Cirium data.

Airbus stock was down about 0.5% in Paris.

Airbus said there was no impact expected to A320neo deliveries and it would continue to work with airlines to minimize the disruption to their fleets.

JetBlue said the company was working with Pratt to access the impact on its fleet. Spirit and Wizz Air did not immediately respond to a request for comment. JetBlue and Spirit are due to report their earnings next week.

"The powder issue highlights the extreme engineering developed into next-generation engines which has come with unexpected maintenance," Benchmark analysts said in a note on Tuesday.

About 200 "accelerated removals" from the jet fleet containing PW1100G-JM engines will be needed by mid-September this year, RTX said. An additional 1,000 engines will be inspected over the following nine to 12 months.

"The business is working to minimize operational impacts and support its customers," RTX added. Following a service bulletin, RTX said it expects the FAA to publish an airworthiness directive. It can take months for the FAA to issue an airworthiness directive in non-emergency circumstances.

The FAA said it was aware of the issue and "will ensure appropriate steps are taken."

RTX executives said it was too early to say how the issue would impact cash flow in 2024. CEO Greg Hayes said its 2025 financial goals, which include reaching $9 billion in free cash flow, should not be impacted by the problem, but there could be "potential margin impact."

Pratt & Whitney has also been facing issues related to the GTF engines in hot and dusty climates. Low-cost Indian carrier Go First, which plunged into financial crisis this year, blamed "faulty" Pratt & Whitney engines for the grounding of about half its 54 Airbus A320neos.

Reporting by Pratyush Thakur in Bengaluru, Valerie Insinna and Mike Stone in Washington; additional reporting by Susan Mathew in Bengaluru, Rajesh Singh in Chicago; Editing by Shounak Dasgupta, Sharon Singleton and Nick Zieminski

Our Standards: The Thomson Reuters Trust Principles.

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