The aerospace industry is set to undergo robust expansion as
leading players like
The Boeing Company
) opt to replace their aging fleets with new fuel-efficient
composite material-laden aircrafts. Both these players have
achieved a significant headway in aerodynamics over the years.
However, steep rise in aviation fuel expenses remain the most
prominent component of variable costs and have forced these
aircraft manufacturers to restructure their fuel-guzzling fleet.
CFM International, the joint venture partner of
General Electric Co.
) and Pratt & Whitney, a unit of
United Technologies Corp.
), are contesting with each other for replacing these jet
engines. Both Pratt & Whitney and CFM International have
pledged a reduction of at least 15% in fuel consumption in the
new-generation engines, compared with their older counterparts.
These premier manufacturers of jet engines are vying for
contracts which are reportedly worth a whopping $20 billion. Over
the next decade, the market for jet engines is expected to
skyrocket to around $500 billion. Manufacturers contest hard for
initial sales of units, since a large installed base of engines
ensure continued cash streams down the road via parts replacement
and routine maintenance.
Single-aisle planes are expected to constitute 70% of the 35,000
new commercial jets in the next couple of decades, with a market
valuation of nearly $2.3 trillion. While CFM International has
been a prominent provider of engines on narrow-body, single-aisle
planes, Pratt & Whitney has a relatively humble presence in
commercial aircraft. Pratt & Whitney's forte lies in the
military contracting field.
CFM International has won contracts for engines of Boeing's 737
MAX but the two companies are still battling over supply rights
for Airbus' A320neo. Pratt & Whitney, having procured
exclusive deals with smaller jet makers, like Bombardier and
Embraer, intends to sever CFM International's grip through its
geared turbofan engines. Of the 2,610 Airbus A320neo orders as of
Jan 2014, CFM International and Pratt & Whitney have secured
about 32% each.
Consequently, the contest seems pretty open with either of the
player possessing the capability to outwit the other. Each engine
costs around $11 million, which translates into a value of about
$20 billion for the outstanding order of 1,880 engines.
Per the Zacks Industry Rank, the aerospace industry currently
ranks among the top one-third, implying that the outlook remains
positive on this sector for the next year, backed by a steady
surge in air travel demand. For the aerospace sector, both
earnings and revenue "beat ratio" stood at an impressive 88.9% in
the fourth quarter. Total earnings for the companies in this
sector grew a healthy 20% year over year.
Both General Electric's CFM International and United
Technologies' Pratt & Whitney, being major players in the
sector, are well-positioned to reap benefits from this strong
industry performance. However, it is too early to predict an
BOEING CO (BA): Free Stock Analysis Report
AIRBUS GROUP NV (EADSY): Get Free Report
GENL ELECTRIC (GE): Free Stock Analysis
UTD TECHS CORP (UTX): Free Stock Analysis
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General Electric currently holds a Zacks Rank #4 (Sell), while
United Technologies holds a Zacks Rank #3 (Hold).