UTX's Pratt & Whitney Inks 200 Long-Term Supplier Contracts - Analyst Blog
United Technologies Corporation's UTX division Pratt & Whitney has inked around 200 long-term agreements with key product suppliers across the world, entailing a projected spend of over $18 billion, as it primes itself for a significant ramp up in its engine production.
Production Ramp Up
The aircraft engine maker is preparing for an anticipated doubling in engine production by the end of the decade by strengthening its supply chain logistics to support the increased production levels. In addition to providing the manufacturing technology and tools for the engine ramp up, these long-term agreements will ensure that Pratt & Whitney's rigorous standards concerning quality, cost and delivery requirements are adhered to.
The suppliers will deliver key parts and components for its large engine business, including the PurePower PW1000G family of engines, the F135 military engine, and Pratt & Whitney Canada's engines, such as the PurePower PW800, and will do so over the life of the engine programs.
In addition to fortifying its supply chain, the jet engine maker is also taking steps to optimize engine operation, engine performance and engine maintenance. Jet engines turn profitable only after they start generating service revenue, and Pratt & Whitney has been attempting to shift its model toward long-term service agreements and away from "transactional" repairs and maintenance.
Thus, it is looking to expand into Big Data, which will help it gather and analyze data in order to predict and prevent problems. To accelerate its efforts, Pratt & Whitney is collaborating with IBM Corporation IBM , which announced a broader $3 billion investment into data analytics for businesses just last week.
Aerospace Industry Prospects
Per research by Deloitte, the commercial aerospace sector is expected to set new records for aircraft production this year. Growth in the commercial aerospace sector is expected to be driven by increasing passenger travel demand, especially in the emerging markets, and production of next generation fuel-efficient aircrafts.
Additionally, interest rates are low and carrier-operating costs have reduced (in part due to lower crude oil prices ), further boosting industry prospects. Accelerated replacement of obsolete aircraft with next generation fuel-efficient aircraft, especially in the Middle East and the Asia-Pacific region, will contribute to the favorable trend in the industry.
However, the challenge for aerospace companies lies in successfully navigating the upsurge in orders, related production complications and supplier management. Thus, we believe that Pratt & Whitney's efforts to reinforce its supply chain faculties will position it well to capitalize on the bright prospects of the aerospace industry going ahead.
United Technologies presently carries a Zacks Rank #3 (Hold). Some better-ranked conglomerates include Compass Diversified Holdings CODI and Icahn Enterprises, L.P. IEP , both carrying a Zacks Rank #2 (Buy).