By Chris Sloan

Jan. 23, 2024, © Leeham News – GE Aerospace’s last earnings season before morphing into a pure play engine maker ended on a disappointing note for some analysts. “Aero results were a bit short of our expectations, said a J.P. Morgan First Take Analyst Report, citing “missed estimates by 2% and 6% respectively for sales and EBIT.”

Despite an ascendant 38% YOY growth, LEAP deliveries bore the brunt of the blame for missing the forecast below management’s previous 40-45% guidance increase: “GE delivered 396 LEAPs in Q4, up only a touch sequentially and still down vs 2Q23. There seems to be some loss of momentum here, potentially due to supply chain challenges,” the report continued.

DISAPPOINTING “D’s” CONTRAST WITH RISING “O’s”

In the final quarter of 2023, commercial order orders climbed by 10% to 1,4984 shipsets from 824 year on year. The $10.6 billion order book was catalyzed by an order for 202 GE9X engines and spares by Emirates for the upcoming 777X due for EIS in 2025. This thrusts the total orderbook for the world’s largest and most powerful airliner engine to 460. 

For the full year, LEAP engines from the Safran joint venture generated 2,508 orders, 1,053 of which accumulated from a flurry of big narrowbody orders in the last quarter. The first quarter of 2024 began with a boost as Indian carrier Akaska Air ordered 150 additional LEAP-powered Boeing 737 MAXs.

Full-year commercial engine orders, including GE9X, GEnx, LEAP, GE90 for legacy 777-F, and CF6s for legacy 767 freighters, totaled 3,827 – a 55% improvement over 2022’s tally of 2127 shipsets.

HITS AND MISSES

Revenues improved by 12% year-on-year with commercial services and commercial engines by the LEAP fueling the boost. Revenue growth disappointed on a quarter-by-quarter basis, falling from 25% in Q3 to 12% in Q3, suggesting slower momentum. Profits declined slightly to $1.7 billion from the previous quarter’s 1.6 billion. Operating margins fell slightly by 70bps to 18.8%

The full year 2023 picture looked more favorable, with revenues at a high rate of positive climb up 22% to $31.8 billion and profits soaring by 25% to $6.1 billion – cruising to a 19.2% margin, up by 90bps. The company is guiding the 2024 full-year revenue growth of OE commercial engines in the high-teens and services in the mid-teens.

The grounding of 171 Boeing 737 MAX-9s and inevitable extended knock-on delays of type certifications for the 737-7 and 737-10 have not yet led to any announced cancellations to the exclusive LEAP-powered MAX program. But, during the GE earnings call, United Airlines CEO Scott Kirby cast doubts on United’s 277 737-10s order on a CNBC broadcast. Boeing is not going to be able to meet their contractual deliveries on at least many of those airplanes, and let’s leave it at that,” said Kirby. Some read into Kirby’s comments that an order switch to Airbus A321neo powered by Pratt GTFs, which United just inaugurated, could be in the offing. “We are not canceling the order,” he stressed, meaning there could also be a change in variant. 

SERVICES, SPARES, AND SUPPLY CHAINS

GE Chief Executive Larry Culp explained GE Aerospace’s mid-teens services revenue growth: “We will see internal shop visits grow more rapidly than we are likely to see spare parts. We’re going to get pricing benefit and we’re going to see work scope improvements and that’s really how you ladder up.” 

GE conceded that in 2023, it could not get as many shop visits completed as it would have liked. Still, CFO Rahul Ghai says 2024 will see accretive improvement: “Given the demand outlook given the increase in traffic we are expecting, (we expect) our shop visits to be up kind of low double digits to mid-teens. Scope and pricing that pushes our revenue from shop visits towards the higher end of the teens and then spares growth moderates below that of the shop visit growth. When you combine all that, you’ll get to that mid-teens.”

SUCCESS SPOOLING UP FOR THE LONG HAUL

Despite the short-term quarterly hurdles, Boeing did win plaudits from Robert Springer, Managing Director and Analyst at Melius Research “Once the Vernova spin is complete, we would argue that GE will be the highest quality U.S. large-cap commercial aero company when compared to Boeing and RTX. GE is the only engine OEM with a dominant market share in the installed base and backlog across narrowbody and widebody platforms.” Springarn pointed to services and aftermarket for a 44,000-unit installed base of engines and LEAP ramp up to create a “cash harvest” for GE. “By 2025, we wouldn’t be surprised if GE Aero is a $40B top-line business with 20%+ margins as the LEAP program continues to mature and shop visits drive lucrative aftermarket sales,” the report glowed.

In playing to Wall Street, Culp said of the new independent GE Aerospace, “You should assume that we’re going to have a compelling dividend. Buybacks are going to be an important part of that overall effort, and we will certainly look to do meaningful value accretive M&A.” The chief executive buttoned the call with “We’re looking forward to moving beyond deleveraging and playing more offense.” Financial markets were taking the calm earnings call that coincided with seemingly unending MAX drama in stride, with the stock trading just slightly down throughout the day.