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The growth in flight departures has pushed out the sales peak period for services of the company’s legacy engines.
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The easing of the supply chain crisis is creating long-term growth opportunities for the company.
In its first full year as a stand-alone company, GE Aerospace (NYSE: GE) continued its fantastic run by appreciating almost 85% last year. It’s a performance that underlines the company’s critical importance to the aerospace industry and its long-term potential to generate streams of recurring income from servicing its commercial aerospace engines. Here’s why GE Aerospace has been a standout performer in recent years.
The company has come a long way since the dark days of 2018, when it was part of an industrial conglomerate, General Electric. While the former GE faced significant challenges in the decade leading up to 2018, one thing it always had was great technology. Indeed, the spinoffs, GE Healthcare and GE Vernova, are market leaders in imaging equipment and gas turbines, and GE Aerospace is the dominant player in commercial aerospace with 3 out of 4 commercial flights powered by GE or GE joint venture (CFM International) engines.
CFM International’s LEAP engine is the sole engine on the Boeing 737 MAX and one of two options on the Airbus A320neo family of aircraft, which are the workhorses of the skies.
This dominant position, combined with the legacy CFM56 (which powers the legacy 737s and A320s), ensures a secure long-term stream of income from highly lucrative long-term services agreements signed at the sale of engines. It’s essentially a razor-and-blade model, whereby engines are sold at a negative or small profit margin only to generate service revenue, which can span over four decades, as engines tend to be used over a long-term period.
In a nutshell, the recovery in flight departures has led to strong growth in service demand, resulting in better-than-expected service revenue on the legacy CFM56, particularly as LEAP engine delivery growth has been slower than expected due to supply chain issues. It’s a somewhat unfortunate situation for airlines that want new, more efficient planes and engines, but the reality is that they will often run older planes and engines (which often require more servicing) if the routes are commercially profitable.
The good news is that the supply chain issues, notably material part availability, are easing significantly, which is making it easier for GE to ramp up LEAP deliveries and deliver on soaring commercial engine and services (CES) order growth.
