Weekly Aviation Note: United Technologies, General Electric And Boeing

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The past week saw important developments at three aviation companies under our coverage. During the week, United Technologies‘ (NYSE:UAL) Aerospace Systems segment – which manufacturers aviation components – received the contract to supply landing gear for Boeing 737MAX. This contract will help United Technologies (UTC) take advantage of the huge order book for 737MAX. Meanwhile, General Electric (NYSE:GE) Aviation started testing on its fan blades for the GE9X engine, which will power Boeing 777X. New materials and design improvements in this fan blade are expected to improve the 9X engine’s fuel efficiency, which will play a critical role in enabling Boeing to build a more fuel more efficient 777X, compared to today’s 777. Both of these events marked progress in Boeing’s 737MAX and 777X programs. During the week, Boeing (NYSE:BA) also delivered the third C-17 to the Indian Air Force (IAF), proceeding on track to deliver by the end of next year the 10 C-17s ordered by the IAF .

United Technologies

UTC Aerospace Systems was selected by Boeing to manufacture the nose, main landing gear and the main gear side struts for the 737MAX airplane. [1] Through July 2013, the 737MAX had 1,495 confirmed orders from airlines worldwide. [2] This upgraded version of the 737 is expected to enter service with airlines in 2017, and by the end of the decade, is expected to become the mainstay of Boeing’s airplane delivery volumes. Thus, a position as 737MAX’s supplier supports long term revenue stability at UTC.

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UTC Aerospace Systems bulked up in size in July last year with the $18 billion acquisition of Goodrich Corp. Today, it is one of the largest aerospace component manufacturers in the world with all major aircraft manufacturers including Boeing, Airbus, Bombardier and Embraer as its customers. In 2013 – the first year that includes an entire year’s results from Goodrich – UTC guides its Aerospace Systems revenues at $13.5 billion and operating profit at $2.1 billion. [3]

See our complete analysis of UTC here

General Electric

GE Aviation started testing on its new composite fan blades for the GE9X engine. This is the first of the many tests that GE has planned for these new fan blades over the course of this year. The GE9X fan blades are made from a new high-strength carbon fiber material with a steel alloy leading edge. The high-strength material allows the fan blades to be thinner with the same strength and durability as the blades used in current engine fans. This shaves off several pounds of weight from the engine fan and its supporting structures to improve the engine’s fuel efficiency. Many other design changes to the fan module like the reduction in the number of fan blades to 16 and an increase in the size of the front fan also aids the 9X engine’s performance. Overall, GE is aiming to improve the 9X engine’s fuel burn by 10%, compared to GE90-115 engines, which power today’s Boeing 777 aircraft. [4] Thus, the 10% engine fuel efficiency gains from GE9X engines play the single largest role in Boeing’s aim of reducing 777X’s fuel consumption by 20%, compared to today’s 777. [5]

The timely completion of these tests is also necessary for the company to maintain its project timelines. Currently, GE anticipates to hold the first engine test for the 9X in 2016, its first test-bed flight tests in 2017 and its certification in 2018. This way the engine will be ready well before the 777X’s planned entry in service with airlines at the end of this decade.

See our complete analysis of GE here

Boeing

Boeing delivered the third C-17 Globemaster to the Indian Air Force (IAF) during the past week. The company delivered the first two C-17s to IAF earlier this year. It plans to deliver two more of these military transport aircraft to IAF in 2013 and another five in 2014. [6] Boeing is making these military aircraft deliveries under the $4.1 billion contract that was finalized in 2011 for the purchase of 10 C-17s by IAF through the Foreign Military Sales program of the U.S. government. [7]

Such international defense sales are becoming increasingly important for Boeing as it faces pressure from lower defense spending in the U.S.. Last year, the company generated roughly 40% of its total sales from its defense business, and around 80% of its defense sales came from the U.S. government. [8] Due to this high degree of dependence on the government, the company is vulnerable to sequestration, which is expected to reduce the government’s defense spending by around $500 billion over the next ten years, including by around $42.7 billion in fiscal 2013. [9]

To counter the impact from declining defense spending in the U.S., Boeing has focused on expanding its international defense business. It has also been successful in doing so which is reflected from the high mix of international orders in the company’s total defense backlog. At the end of the second quarter, 37% of the company’s total defense backlog comprised of international orders – significantly higher than the historical mix between international and U.S. defense volumes. [10]

See our complete analysis of Boeing here

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Notes:
  1. UTC Aerospace Systems to supply landing gear for Boeing 737MAX, August 22 2013, www.utcaerospacesystems.com []
  2. Boeing’s unfilled orders by model, August 23 2013, www.boeing.com []
  3. UTC’s Q2 earnings conference call, July 23 2013, www.utc.com []
  4. GE fans out testing of the new GE9X fan blades, August 21 2013, www.geaviation.com []
  5. Boeing’s 777X fact sheet, June 2013, www.boeing.com []
  6. Boeing delivered Indian Air Force’s third C-17, August 22 2013, www.boeing.com []
  7. Boeing C-17, August 23 2013, www.wikipedia.com []
  8. Boeing’s 2012 10-K, February 11 2013, www.boeing.com []
  9. Boeing’s 2013 first quarter 10-Q, April 24 2013, www.boeing.com []
  10. Boeing’s Q2 2013 earnings form 8-K, July 24 2013, www.boeing.com []