Engine makers Pratt & Whitney and General Electric continue to suffer from supply chain and labor issues. Although there seem to be some stabilization and engine deliveries were higher in Q3 than in previous quarters, both OEMs are confronted with the same issues as in previous quarters, they said on October 25 in their earnings releases. Supply chain, labor, and inflation cause headaches engine makers.
“The industry-wide challenges remain the same. You have heard me talk about them before: supply chain, labor, and inflation,” said Greg Hayes, CEO of Raytheon which is the parent company of Pratt & Whitney. “We continue to focus on what we can control by proactively managing the businesses through these dynamic times. While supply chain issues are frustrating, we are seeing some stabilization.”
General Electric CEO Larry Culp also mentioned the problems in his earnings call. “Global industrial supply chain disruptions in material and labor continued to affect performance, however, Aerospace saw signs of improved flow through our factories.”
In its 10-Q filing, GE says: “Global supply chain constraints and labor shortages, in part driven by the pandemic, are causing disruptions for us and our suppliers, which have impacted our production and delivery. We continue to partner with our airline and leasing customers and collaborate with our airframe partners on future production rates. However, supply chain output improved this quarter, and we increased our Commercial and Military engine sales units by 32 percent compared to the second quarter of 2022 and 21 percent compared to the same quarter last year.”
More engine deliveries in Q3
In their Q2 earnings calls in July, Hayes and Culp identified labor issues, shortages of raw material, and a shortage of castings of engine parts as factors that were holding production back. Despite the issues, both manufacturers delivered more engines in the third quarter. Pratt & Whitney delivered 192 large commercial engines in Q3 compared to 177 in Q2 and 119 in Q1. The highest number until now was 211 engines in Q1 2020 but this dropped to an all-time low of just 77 engines in Q2 after the first Covid-wave hit. GE Aerospace together with Safran delivered 347 CFM LEAP engines in Q3 this year compared to 226 in the same period last year, or 211 in Q2 and 239 in Q1.
Although the situation is improving, Greg Hayes remains concerned about the situation at some of its suppliers: “We have 13.000 suppliers and of those 13.000, about 400 are a problem for us. But we have deployed teams to almost all of those suppliers to work with them on a daily basis, giving them raw material, contract labor, technical support. Labor availability is a challenge, especially in the supply chain. We have hired 27.000 people in 2022, our total headcount is over 180.000. The challenge is that we need about 10.000 more people. We will continue to hire at this rate.”
Inflation
Another headwind that the OEMs have to confront is inflation. “We expected $1.5 billion cost growth through compensation on the supply chain and energy prices. That billion and a half has turned out to be closer to two billion, so $500 million of additional headwind that we didn’t expect when we came into the year. Couple that with the $200 million from cessation in Russia, and we came with a $700 million headwind that we had to overcome,” says Hayes. Raytheon and GE are able to pass on most headwinds to government customers on military programs, but educing costs wherever possible remains key. “We have to compensate and have some 500 cost reduction programs”, the Raytheon CEO says.
While the headwinds will continue to have an impact on business into next year, both GE and P&W expect the market to further recover. As Greg Hayes said: “We expect strong growth of commercial aviation to continue, and revenue per seat mile (RPM) will continue to recover back to 2019 levels. We are going to see strong OE growth as Boeing and Airbus take up production rates and we expect to see strong aftermarket growth as airlines continue to add capacity.”
GE’s Larry Culp said: “I think like others, we are concerned about the hot of issues that are out there, but that said, at Aerospace we have tremendous demand. Customers I speak to are quite bullish about their outlooks. They need us to continue to support them and we intend to do that.”
