United Technologies 2011 Annual Report Download - page 41

MANAGEMENT’S DISCUSSION AND ANALYSIS
Aerospace Businesses
The financial performance of Pratt & Whitney, Hamilton
Sundstrand and Sikorsky is directly tied to the economic
conditions of the commercial aerospace and defense
aerospace industries. In particular, Pratt & Whitney
experiences intense competition for new commercial
airframe/engine combinations. Engine suppliers may offer
substantial discounts and other financial incentives,
performance and operating cost guarantees, participation in
financing arrangements and maintenance agreements. At
times, the aerospace businesses also enter into development
programs and firm fixed-price development contracts, which
may require the company to bear cost overruns related to
unforeseen technical and design challenges that arise during
the development stage of the program. Customer selections
of engines and components can also have a significant 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 commercial airline industry rebounded in 2010 and
remained strong through 2011. Airline traffic, as measured by
revenue passenger miles (RPMs), grew in 2011, as compared
with 2010, and we expect RPMs will continue to grow between
4% and 6% in 2012. Although airlines have generally returned
to profitability, high fuel prices continue to challenge the
airlines to consider the need for more fuel efficient aircraft. We
incurred significant investment in engineering and
development in 2011 and expect continued significant
investment in 2012, primarily at Pratt & Whitney as we
continue to develop four separate geared turbofan platforms
to meet demand for new engines which are fuel efficient and
have reduced noise levels and exhaust emissions. We also saw
a favorable trend in commercial aftermarket growth
during 2011 as airlines were adding capacity to their fleets,
leading to additional overhaul and repair maintenance
requirements. Orders of short cycle commercial aerospace
spares grew year-over-year, with 8% growth in Pratt &
Whitney’s large commercial spares orders and a 22% increase
in Hamilton Sundstrand’s commercial spares orders. These
increases in order rates have led to a corresponding increase
in commercial aerospace aftermarket volume at both Pratt &
Whitney and Hamilton Sundstrand. Accordingly, consolidated
commercial aerospace aftermarket sales increased 13% in 2011,
as compared to 2010. We do not expect the aftermarket sales
growth rates seen in 2011 to continue in 2012. The overall
business jet market has begun to recover during 2011,
particularly within the long-range large business aircraft
market. The small to mid-size business jet market recovery has
been slow but is expected to continue to improve during 2012.
Sales growth at Sikorsky during 2011, compared with 2010
was driven by higher international military aircraft shipments
and aftermarket support activity. Sikorsky continued to
benefit from U.S. government spending, with approximately
85% of Sikorsky’s 2011 helicopter deliveries based on military
platforms. Commercial helicopter aftermarket sales volumes
increased 18%, which were partially offset by lower
commercial deliveries in 2011, compared with 2010. We have
seen a renewed interest in helicopter demand in support of
oil operations and have taken orders for more than 20 S-92
helicopters during the fourth quarter of 2011.
Deficit reduction measures considered by the U.S.
government are expected to pressure the U.S. Department of
Defense budget in the coming years, resulting in a decline in
U.S. Department of Defense spending. Total sales to the U.S.
government of $9.8 billion in 2011, $9.9 billion in 2010, and
$9.3 billion in 2009 were 17% of total UTC sales in 2011 and
18% both 2010 and 2009. 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 2011
and is expected to continue to benefit results in 2012.
Pratt & Whitney is among the world’s leading suppliers of aircraft engines for the commercial, military, business jet and general
aviation markets. Pratt & Whitney Global Services 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 market and fighter and transport aircraft in the military market. P&WC is a
world leader in the production of engines powering business, regional, light jet, utility and military airplanes and helicopters and
provides related maintenance, repair and overhaul services, including sale of spare parts, as well as fleet management services.
Pratt & Whitney Rocketdyne (PWR) is a leader in the design, development and manufacture of sophisticated space propulsion
systems for military and commercial applications. Pratt & Whitney Power Systems sells aero-derivative engines for industrial
applications. Pratt & Whitney’s products are sold principally to aircraft manufacturers, airlines and other aircraft operators,
aircraft leasing companies, space launch vehicle providers and the 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 development, production and support programs,
creates 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.
Pratt & Whitney is currently developing technology intended to enable it to power proposed and future aircraft, including the
PurePower PW1000G Geared TurboFan engine. The PurePower PW1000G engine targets a significant reduction in fuel burn
and noise levels with lower environmental emissions and operating costs than current production engines. In December 2010,
2011 ANNUAL REPORT 39