By Chris Sloan

Oct. 24, 2023, © Leeham News – GE spooled up high-thrust third-quarter earnings with consensus-topping results in sales, margins, and EPS in all three of its segments, led by Aerospace. The engine-marker delivered double-digit growth in orders, revenue, and operating profit year-over-year, driven by Original Equipment (OE) and services. 

 Despite supply chain headwinds, the company highlighted its CFM Leap joint venture with Safran Engines as output surged 85% year-on-year. Overall, operating profits rose from $5.6bn to $5.9bn between commercial and military, up from $5.3bn to $5.7bn year-on-year in the quarter and 1H, respectively.

Aerospace boosted its balance sheet guidance by $500m for the whole year, on top of Q3’s 25% revenue growth and 120 basis points of margin growth.

GE made the long-awaited announcement that its pure-play GE Aerospace will become a reality with the Q2 2024 spin-off of Vernova as a separate company. GE Aerospace’s stock will take on the GE ticker symbol. GE’s soon-to-be-separated Vernova Renewable Energy and Power units registered a -9.3 % operating loss and 9.1 % operating profit, respectively.

Aerospace Profits Generate Lift While Production Generates Drag 

“GE delivered a very strong performance and we’re raising full year guidance again,” said GE Chief Executive Larry Culp, primarily attributing the “rapid growth driven by robust demand and solid execution largely in commercial engines and services.” Melius Research analysts’ post-earnings note echoed Culp’s confidence: “GE Aerospace continues to exceed high expectations and is arguably the highest quality U.S. based large cap commercial aero business compared to Boeing and RTX. The company delivered sizeable beats on sales, margins, and EPS,” the note said.

Melius posited that GE Aero’s commercial aftermarket sales were up 31% compared to 21% for Pratt, as GE benefits from higher widebody aircraft utilization on international routes. GE’s commercial OE sales also grew 23% compared to Pratt’s 25% commercial OE. J.P. Morgan analysts trumpeted, “GE’s Q3 results were strong even in the context of high expectations, with beats for Aerospace’s top line and margin, driven by aftermarket.” 

Commercial OE manufacturing grew at 23%. However, J.P. Morgan analysts expressed concern at the 389 LEAP deliveries in the quarter, lagging the previous quarter by 30 units. The LEAP 1-A powers the Airbus A320neo family in a duopoly on the program with Pratt & Whitney’s competing GTF Geared TurboFan PW1100G. CFM holds the edge. The LEAP 1-B is the exclusive engine on the Boeing 737 MAX.

Analyst Chris Snyder at UBS applauded margins yet noted headwinds “outside the (services) mix”, querying how the company would meet its 20% margin target in 2025 regarding price, cost, and efficiency. “We’ve made progress on productivity. Not to the extent that we would’ve liked, but there’s positive momentum on productivity,” said GE’s newly minted Chief Financial Officer Rahul Ghai.

Rising commercial orders

 Commercial orders spooled up to 900 from 181 year-over-year, with LEAP’s narrowbody numbers adding most to the order book. Further buoying the backlog is Air Canada’s September order of 18 Boeing 787-10s with an option for 12, translating to 36 GEnx-1B engines plus four spare engines. 

Momentum is also gathering for the GE-9X program, which powers the long-delayed 777-X, finally making solid progress on its certification program’s march to entry-into-service in 2025 – albeit some six years after original EIS targets.

While its rival, Pratt GTF, is plagued by far greater time off-wing pains, the LEAP is not without its own problems. A Bernstein Research report echoes the well-documented experience some airlines in harsh, hot, and sandy environments like the Middle East, China, and India are experiencing with an abbreviated 3,000 cycles on the wing. 

This is largely attributed to the degradation of HPT blades. GE disclosed it is seeing success in its testing, which will lead to implementing a modification package in a year. Unlike Pratt, spare availability seems plentiful with Services “LEAPing” to the rescue. Other past LEAP issues appear resolved. 

Pratt’s pain is GE’s pleasure. Bernstein points to a far smaller percentage of LEAP-powered Airbus A320neos AOGs than GTF-powered A320neos (5% versus 15%). This advantage could bode well for carriers to switch allegiances from Pratt to CFM. The LEAP is mooted to break the GTF’s current monopoly on powering the Airbus A220 program, with dual-engine options on the forthcoming A220-500.

Service’s Strength Stands Out

Services hold the edge in Aerospace’s momentum with a stout 31 % increase in sales year-over-year, which J.P. Morgan attributed to CFM’s August price increase. CFO Ghai built on this on the call: “Spare parts revenue was up more than 35% this quarter because of three main things: volume, pricing, and increased work scope.”

As for work scope, Ghai reveals that widebodies engines like the GEnx and GE90s are coming back into the shop for second visits. Narrowbody CFM engine volume increases were “primarily a phenomena of customers kind of trying to constrain spending in challenging times, especially in China last year. So now as they’re a little bit more cash, the departure’s growing,” he said. Ghai forecasts MRO shop visit growth in the low-to-mid teens, given “tight supply chain constraints.”

Finally, in its quest toward simplifying to a pure-play stand-alone engine maker, GE redeemed the remainder of its preferred equity and sold a portion of our AerCap shares for $2.7 bn of proceeds.