United Technologies 2008 Annual Report Download - page 52

impact on later sales of parts and service. Predicted traffic levels, load factors, worldwide airline
profits, general economic activity and global defense spending have been reliable indicators for
new aircraft and aftermarket orders within the aerospace industry. Spare part sales and
aftermarket service trends are affected by many factors, including usage, technological
improvements, pricing, regulatory changes and the retirement of older aircraft. Performance in
the general aviation sector is closely tied to the overall health of the economy and is positively
correlated to corporate profits.
The volatility of fuel prices throughout much of 2008 adversely impacted the commercial
aerospace industry leading many airline carriers to consolidate or reduce capacity by idling
some aircraft and retiring other older and less fuel efficient aircraft. Several smaller carriers
have either declared bankruptcy or shut down altogether. Although fuel prices had declined
substantially by the end of 2008, the deterioration in the worldwide economic environment has
led to a significant decline in passenger and cargo traffic. RPM growth was essentially flat in
2008 compared to the 5% growth reflected in 2007. We expect worldwide RPMs to be down
approximately 3% in 2009 as a result of expected further air traffic declines. While the service
and capacity reductions did not have a significant impact on our 2008 full year results, we did
begin to see a decline in Pratt & Whitney’s year-over-year large commercial spares orders and
we expect a further decline in 2009 based upon the current economic conditions. As a result of
lower business jet utilization, P&WC experienced a decline in spares volume in the second half
of 2008, and expect further declines in 2009. Total commercial aerospace aftermarket revenues
increased 2% in 2008 compared with 2007, reflecting increases at both Hamilton Sundstrand
and Sikorsky, while Pratt & Whitney was essentially flat year-over-year. Pratt & Whitney’s
commercial aerospace aftermarket revenue performance reflects the growth experienced in the
first half of 2008 offset by declines in the second half of the year. Hamilton Sundstrand’s
aftermarket revenues increased in the year due to provisioning by the airlines and as it supplies
product content on a broad spectrum of aircraft.
Despite the airline industry adversity, the strong production levels at the airframe
manufacturers generated commercial aerospace OEM growth in 2008, as compared with 2007,
as airframe manufacturers continued delivering on their strong backlogs. Given the current
tight credit markets facing both the airlines and the business jet market, there is a possibility
that some commercial aircraft delivery dates scheduled for 2009 are at risk of being deferred.
Projected global traffic declines, a weakening business jet market, and the possible deferral of
commercial aircraft deliveries by airlines to counter the weakening travel demand are all
expected to result in a moderation of growth rates in the commercial aerospace markets. The
machinist strike at Boeing during the year did not have a significant adverse impact to our
2008 full year results.
Continued government military spending is driving helicopter demand and, as a result,
Sikorsky’s military backlog remains very strong. While the U.S. Defense Department budgets
are largely in place for 2009, spending beyond 2009 will reflect policies of a new administration
and Congress. Across all segments, military OEM volume increased 13% in 2008 compared
with 2007, led by Sikorsky. As a result of the strong military helicopter demand and our
existing backlogs, we expect further growth in helicopter deliveries in 2009. Total sales to the
U.S. government of $7.7 billion, $7.3 billion, and $6.4 billion in 2008, 2007, and 2006,
respectively, were 13% of total UTC sales in 2008 and 14% in both 2007 and 2006. The defense
portion of our aerospace business is affected by changes in market demand and the global
political environment. Our participation in long-term production and development programs
for the U.S. government has contributed positively to our results in 2008 and is expected to
continue to benefit results in 2009.
Pratt & Whitney is among the world’s leading suppliers of aircraft engines for the commercial,
military, business jet and general aviation markets. Pratt & Whitney’s Global Services
organization provides maintenance, repair and overhaul services, including the sale of spare
parts, as well as fleet management services for large commercial engines. Pratt & Whitney
produces families of engines for wide and narrow body aircraft in the commercial and military
markets. Pratt & Whitney also sells engines for industrial applications and space propulsion
systems. P&WC is a world leader in the production of engines powering business, regional,
light jet, utility and military aircraft and helicopters. Pratt & Whitney Rocketdyne (PWR) is a
leader in the design, development and manufacture of sophisticated aerospace propulsion
systems for military and commercial applications, including the U.S. space shuttle. Pratt &
Whitney’s products are sold principally to aircraft manufacturers, airlines and other aircraft
operators, aircraft leasing companies, space launch vehicle providers and U.S. and foreign
governments. Pratt & Whitney’s products and services must adhere to strict regulatory and
market driven safety and performance standards. The frequently changing nature of these
standards, along with the long duration of aircraft engine programs, create uncertainty
regarding engine program profitability. The vast majority of sales are made directly to the end
customer and, to a limited extent, through independent distributors and foreign sales
representatives.
During 2007, both Mitsubishi Heavy Industries Ltd. (MHI) and Bombardier selected Pratt &
Whitney’s PurePower engine to power their planned new aircraft. Both aircraft are scheduled
to enter service in 2013. The PurePower engine, featuring GTF technology, is the exclusive
power plant for the new Mitsubishi Regional Jet and the proposed Bombardier C Series family
of passenger aircraft. This engine targets a significant reduction in fuel burn and noise levels
with lower environmental emissions and operating costs than current production engines. In
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