Raytheon Sees Commercial Recovery Taking At Least Three Years
Commercial aviation’s pandemic-driven downturn appears to have hit its low point during the 2020 second quarter (Q2), but signs point to a slow and unsteady recovery that will last until at least 2024, Raytheon Technologies Corp. (RTX) executives said.
The conglomerate, now one of commercial aviation’s largest suppliers primarily through its Collins Aerospace and Pratt & Whitney segments, reported year-over-year second-quarter revenue declines of 35% and 30%, respectively, in those units, as business from airlines and for aircraft manufacturers fell sharply.
Collins saw commercial original equipment (OE) revenue fall 53% and commercial aftermarket business drop 48%. A 10% increase in military business helped offset some of the civil side’s struggles. Engine-maker Pratt reported similar figures, including a 42% dip in commercial OE sales, a 51% decline in commercial aftermarket revenue, and an 11% uptick on the military side.
“We are tracking air travel trends across the globe on a daily basis. And while they are generally improving, recovery is slow,” said RTX CFO Anthony O’Brien. “We now see the recovery being protracted over several years, at least through 2023.”
The OE business is being reworked to accommodate lower monthly production rates across all Airbus and Boeing products. While the two leading commercial airframe makers have cut production, more adjustments are likely once air traffic demand trends and the financial ramifications for airlines are better understood. Collins is “disproportionately impacted” by the temporary 737 MAX production halt earlier this year and an overall drop in rates, RTX president and CEO Greg Hayes said.
Boeing recently restarted producing MAXs after a four-month slowdown, part of the manufacturer’s efforts to align supply with demand. Grounded since March 2019, the MAX’s headwinds now include significantly reduced demand for travel, which has led customers to drop nearly 600 orders and reschedule deliveries for later in the decade.
Boeing has not announced production-rate plans for the MAX, but initial projections put the monthly output at about 10 aircraft. Boeing was producing 52 MAXs per month when the 385-aircraft in-service fleet was grounded, and deliveries halted; 450 MAX aircraft are in storage awaiting delivery to customers.
“With the latest production schedule from Boeing on 737 [and] this kind of slow ramp in production, I doubt we’ll be shipping any 737-related inventory probably until the next half of next year,” Hayes said. “The production is slower, I think, than anybody had anticipated. On top of that, Boeing has gone through and looked at the inventory levels that they have for all of our equipment. That’s what really caused us to take a pause and say, ‘You know what, we probably aren’t going to be shipping much 737 hardware until the back half of 2021.’”
Outside of the 737 MAX, RTX sees second-half 2020 commercial OE sales aligning with airframe production rates and revised delivery schedules, though the company stopped short of providing formal financial guidance.
“Overall, I would say, we expect the commercial OEMs to be down roughly 40% or so,” Hayes said. “You’re going to see a bigger impact at Collins in the near term as they’re going to be more impacted by the 737 than anybody else.”
The MRO side will be more challenging to forecast, executives said. The general 50% decline in business tracks with the reduction in air transport aircraft operating and should not increase so long as passenger demand does not dip. Performance will vary wildly within asset types and specific families, however. For instance, PW1000G-series geared turbofan (GTF) aftermarket business was up in Q2—a product of Pratt’s efforts to upgrade certain parts that have had reliability issues since the engines entered service. Factoring out the GTF, large-engine shop visits fell 64% in the quarter, while Collins saw a 75% dip in spare-parts sales.
Pratt Canada’s aftermarket fell 40%, and a quicker recovery in markets it primarily serves should keep its declines less severe than the rest of the Pratt business.
“We still expect that Pratt Canada will be down in the back half of the year, but not as severely as the large commercial engine business, due to the differences in their end markets with business jet and general aviation markets showing better recovery,” O’Brien said.
RTX sees Collins third-quarter (Q3) commercial aftermarket sales being in line with Q2, with a “gradual recovery” evident in the fourth quarter (Q4), O’Brien said. Pratt’s aftermarket will likely be down 50% in both Q3 and Q4.
“The recovery is going to take several years. But right now, it’s hard to imagine probably getting anything worse than what we saw in Q2,” Hayes said. “Assuming we still see about 50% of the current aircraft flying out there.”
RTX is “on track” to cut $2 billion in costs and save another $4 billion via “cash conservation” in 2020 to help offset the commercial sector’s downturn, O’Brien said. “We now expect to realize approximately 30% of our announced cost actions in Q3 and approximately 40% in Q4,” he added. “This is after we already achieved around 30% of our cost actions in Q2.” Actions include idling production facilities, reducing material in its supply chain, and cutting jobs.
RTX posted a net loss from continuing operations of $3.8 billion in Q2, compared to a $1.2 billion profit for comparable year-earlier operations. The 2020 Q2 results include $4.4 billion of special charges and accounting adjustments related to the Raytheon-United Technologies merger.