Driven by an upcycle in the global commercial aerospace sector, United Technologies‘s (NYSE:UTX) aerospace business, consisting of Pratt & Whitney and UTC Aerospace System segments, is poised for solid organic growth through the end of this decade. Pratt & Whitney (P&W) which makes airplane engines and UTC Aerospace Systems (UTAS), which is a leading global supplier of airplane components are benefiting from rising global demand for new airplanes from airlines.
Additionally, we figure in the coming years this strong growth in P&W and UTAS will likely be a key driver of growth in United Technologies’s (UTC) overall results. In the current year, sales from P&W and UTAS will likely constitute around 45% of UTC’s top line with the remaining coming from the company’s building market related businesses including Otis, Carrier and Kidde/Chubb, and its helicopter business – Sikorsky. Here we highlight in detail how P&W and UTAS in the coming years will realize growth from the global commercial aerospace sector.
We currently have a stock price estimate of $121 for UTC, around 5% ahead of its current market price.
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A Growing Commercial Aerospace 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, 35,000 new commercial airplanes are expected to be delivered to airlines over the next 20 years, up from around 19,000 commercial airplanes that were delivered to airlines over the past 20 years.  This tremendous growth in commercial airplane deliveries is in turn raising demand for airplane engines and components. Both P&W and UTAS, have taken many steps to position themselves suitably to benefit from this upcycle in commercial aerospace sector.
P&W & UTAS’s Growth Will Be Enabled By Their Presence In Key Boeing & Airbus Planes
Over the last year, P&W reshaped its portfolio by exiting from its space (Pratt & Whitney Rocketdyne) and power systems business and investing in IAE, which makes the V2500 airplane engines. As a result, P&W of today is more focused on the commercial aerospace sector. Additionally, P&W’s investment in research and development enabled it to develop the geared turbo fan (GTF) engine which is claimed by the company to be 10-15% more fuel efficient than current engines used on regional and single-aisle airplanes.  In an environment of persistently high jet fuel prices, GTF engine’s higher fuel efficiency is a big draw for airlines. As a result, this engine has won more than 5,300 orders and has been selected to power five commercial airplanes – Airbus A320neo, Bombardier CSeries, Embraer’s second generation of E-jets, Mitsubishi Regional Jets and Russian Irkut MC-21. Its development is also on track with the certification of the GTF engine for CSeries complete. The progress on the GTF engine selected by Airbus for its A320neo is also on track. We figure this timely development will enable both Bombardier CSeries and Airbus A320neo airplanes to enter in service with airlines in 2015, as was initially planned.
Like P&W, UTAS has also through acquisitions and divestitures focused its portfolio on the commercial aerospace sector. It is today a leading supplier of actuation and propeller systems, air management systems, aero-structures, landing systems, electric systems, sensors and interiors for airplanes. It is a key component supplier to leading airplane models from both Boeing and Airbus, including the Boeing 737MAX, Boeing 787 Dreamliner and Airbus A350. Thus, P&W and UTAS have a presence on key airplanes that will likely drive the bulk of growth in future global commercial airplane deliveries. UTC expects that driven by its position on these next generation airplanes, combined sales of P&W and UTAS will grow by around 7% per year through this decade. 
This estimate exceeds the 5% annual growth which is forecast in the global airline passenger traffic. In our opinion, it is likely that combined sales of P&W and UTAS will outpace the growth in global airline passenger traffic as P&W and UTAS are present on airplanes such as the Airbus A320neo, Airbus A350, Boeing 737MAX and Boeing 787 Dreamliner, which will constitute a large part of future commercial airplane deliveries to airlines.
P&W and UTAS Will Also Gain From Their Position On Priority Government Defense Programs
Separately, P&W and UTAS are also engine and component suppliers to the global defense aerospace sector, especially the U.S. defense aerospace market. P&W and UTAS generate roughly 25% of their sales from the defense aerospace sector with the remaining coming from commercial aerospace.  As U.S. defense spending is expected to remain flat through this decade, it could temper P&W and UTAS’s growth from commercial aerospace. But we figure that due to P&W and UTAS’s position on key U.S. defense programs such as the F-35 fighter jet, KC-46A tanker and CH-53K helicopters, it will likely not be impacted as much from the overall flattish U.S. defense budget. These key defense programs of the government are likely to receive increasing funding in the coming years driven by the planned ramp up in their production. Thus, P&W and UTAS’s defense aerospace business is also suitably positioned for growth through this decade.Notes:
- Boeing’s long term commercial airplane market outlook, May 8 2014, www.boeing.com [↩]
- UTC’s propulsion and aerospace systems presentation, March 13 2014, www.utc.com [↩] [↩] [↩]
- Pratt & Whitney’s PW1000G engines, May 8 2014, www.wikipedia.com [↩]