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The Jet-Engine Business Is a Risky Gamble on a Faster Travel Recovery; Despite an encouraging rebound in flight bookings, jet-engine makers are rightly cautious about upgrading their guidanceThe Jet-Engine Business Is a Risky Gamble on a Faster Travel Recovery; Despite an encouraging rebound in flight bookings, jet-engine makers are rightly cautious about upgrading their guidanceSindreu, Jon.Wall Street Journal (Online); New York, N.Y.As the summer approaches, prospects of a travel recovery are lifting spirits across the aviation industry. But jet-engine makers are still cautious, and for good reason. On Tuesday, two top U.S. industrial conglomerates, General Electric and Raytheon Technologies, reported first-quarter earnings showing the continuing impact of the pandemic . GE lost $2.8 billion due to a 28% year-over-year drop in aviation revenue. Raytheon notched a $753 million profit, 44% below 2019 levels. Both its aviation-parts division Collins Aerospace and the Pratt & Whitney engine business are still suffering. Based on the median of analyst estimates collected by Visible Alpha, GE's aviation sales won't recover to pre-pandemic levels until 2023 and profits will take even longer. The reason is that these companies make most of their aviation earnings in the so-called aftermarket —maintenance and repair. This is especially the case for jet engines, which are usually sold at a loss and claw profits back over a period of years. This revenue is volatile because during crises, carriers defer shop visits and retire older planes. Losing a chunk of their installed base reduces the companies' future earnings potential, even if a rise in engine sales allows revenues to recover: Visible Alpha doesn't expect Pratt's aftermarket sales to match pre-pandemic figures for the foreseeable future. But there are now hopeful signs that the travel recovery being reported by airlines is filtering through to the rest of the aviation industry. "January and February were a little scary because…air traffic was not picking up as fast as what we had expected it to. That all turned around in March," Raytheon Chief Executive Greg Hayes told analysts during a conference call Tuesday. "Airlines are actually being proactive in getting the aircraft ready for service in the summer selling season." For investors, it is welcome news that airlines headed back to the shop in March and April, as soon as their forward bookings for the summer rebounded, rather than waiting for traffic itself to return. This prompted Raytheon to revise the lower range of its earnings-per-share guidance for 2021 to $3.50, from $3.40. Yet it is still a very modest upgrade, reflecting the wide margin of uncertainty surrounding these recent green shoots. GE didn't change its guidance. While the U.S. and Chinese domestic markets seem to be doing much better than seemed possible two months ago, the rest of the world is doing worse. In Western Europe, scheduled seat capacity is still down 72% relative to the January 2020 level, data by OAG shows. For aftermarket revenue to stage a significant comeback, it is essential that wide-body planes start flying long-haul international routes again. "Forty percent of Collins's aftermarket is wide-body, and that market is down significantly and is not recovering as fast as we thought it was going to," Mr. Hayes said. It also remains unknown how many old jets that have been parked will be returned to service, or how "power-by-the-hour" engine agreements —which spread maintenance payments depending on engine use—will affect the timing of the aftermarket recovery. For investors who are particularly bullish about vaccines, the jet-engine business may provide a way to bet on a faster reopening of the global economy. But it is still a risky gamble. |
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