UTC Is Expanding Its Aviation Service Business As Demand From The Global Commercial Aviation Sector Grows

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United Technologies

Rising demand for new airplanes from airlines around the world has increased shipments of engines and airplane parts from United Technologies‘ (NYSE:UTX) aerospace division, consisting of Pratt & Whitney (P&W) and UTC Aerospace System (UTAS) segments. P&W which makes airplane engines and UTAS which is a leading global supplier of airplane components such as landing brakes and nacelles will likely constitute around 45% of United Technologies’ (UTC) top line in the current year. So, rising shipment volumes from both these segments is adding significant growth to UTC’s results. However, UTC is seeking to benefit from the ongoing upcycle in global commercial aviation not only through higher engine and component shipments but also through growing its aviation service business. UTC provides maintenance, repair and overhaul services to airlines covering their engines and other components.

We currently have a stock price estimate of $119 for UTC, around 8% ahead of its current market price.

See our complete analysis of UTC here

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A Growing Commercial Aviation Market

Global airline passenger traffic is rising driven by a steadily growing global economy, rising trade and globalization. Forecasts from Boeing (NYSE:BA) anticipate the global airline passenger traffic to grow by around 5% per year through the next two decades. At the same time, driven by higher global demand for air travel, airline profits are also rising. As a result, airlines are placing orders for new airplanes which has forced airplane makers such as Boeing and Airbus to hike their production rates. According to figures cited by UTC, driven by these higher production rates, about 35,000 new commercial airplanes are expected to be delivered to airlines over the next 20 years, up from about 19,000 commercial airplanes that were delivered to airlines over the past 20 years. [1] This tremendous growth in commercial airplane deliveries is in turn expanding the global airplane fleet, growing the aviation service market.

UTC’s Growing Service Business

To benefit from this growing service market, UTC is expanding its aviation service network. The company has currently grown its service network to about 100 maintenance, repair and overhaul (MRO) sites spread across multiple geographies catering to airlines. Such a wide service network is attracting more and more airlines to sign up for long term service agreements with UTC. With a growing customer base, the company’s engine manufacturing segment, P&W, anticipates capture rate of about 80% for its latest Geared Turbo Fan (GTF) engine. This is a significant improvement from existing capture rates of about 45% and 60% for UTC’s PW4000 and V2500 engines, respectively. The company also expects a similar trend at its UTAS segment with steady revenue growth from long term service agreements covering airplane components. [1]

For airlines, good aftermarket engine and part service is essential to maintain high airplane utilization rates. These high utilization rates in turn directly aid an airline’s profitability. All in all, UTC by expanding its service network is growing its aviation service business in order to fully exploit the rising demand from the global commercial aviation sector.

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Notes:
  1. UTC’s propulsion and aerospace systems presentation, March 13 2014, www.utc.com [] []