The global commercial airplane industry is poised for growth over the coming years driven by replacement demand for aging airplane fleets in North America and Europe and increasing fleet sizes in emerging economies. The market for commercial airplanes is projected to grow to $4.5 trillion over the next 20 years, according to Boeing (NYSE:BA).  This large, growing global airline market will drive growth for aircraft engine manufacturers and service providers. GE (NYSE:GE) is one of the largest players in this space through GE Aviation and will continue to target this growing market.
Revenues for GE Aviation increased 7% y-o-y and profits increased 6% y-o-y in 2011.  Over the past two decades, GE also benefited from the increasing share of engine manufacturers in global maintenance, repair and overhaul (MRO) services market for aircraft engines. However, the relatively higher proportion of research and development expenses at GE Aviation in comparison to the other company segments will continue to impact the segment’s bottom-line.
We currently have a stock price estimate of $21.78 for the company, marginally above its current market price.
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GE Aviation is one of the largest aircraft engine manufacturers and MRO service providers
GE Aviation designs, manufactures and sells aircraft engines for commercial as well as military aircraft. It is one of the largest players in this space alongside United Technologies‘ (NYSE:UTC) Pratt & Whitney and Rolls Royce. The GEnx engines power the Boeing 787 Dreamliner and the Boeing 747-8, which is the largest commercial aircraft built in the U.S. In addition, GE’s commercial engines are used in all aircraft categories: short/medium, intermediate and long range as well as executive and regional aircraft. GE also has strategic joint ventures with Safran of France named CFM International and with Pratt & Whitney named Engine Alliance. All in all, GE Aviation is well-positioned to take a large share of growth anticipated in the global commercial airplane industry.
GE Aviation also provides MRO services to airlines usually under long-term contracts. Additionally, over the past few decades, as original equipment manufacturers (OEMs) like Boeing and Airbus increased their focus on their core competencies, the share of specialized MRO service providers increased in the global aircraft MRO service market. This further aided growth at GE Aviation.
GE Aviation to add significant growth to GE’s top-line over the coming years
Growth in military aircraft engine market is dependent on government spending. In the U.S. this is likely to come under pressure due to defense spending cuts, but growth in military spending in emerging economies is expected to continue to rise. And growth in the commercial aircraft engine market is closely linked with global economic growth. Despite the near-term concerns arising from the European sovereign debt crisis and slowing growth in emerging economies, the long-term growth prospects remain strong.
Recently, Turkish Airlines ordered 15 Boeing 777 and 15 Airbus A330 powered by GE engines. The airline also signed a corresponding long-term maintenance agreement with GE. The combined value of engine and maintenance agreements was over $2.4 billion.   By our estimates, GE Aviation constitutes nearly 19% of GE’s total value.
However, high R&D expenses in aviation will impact the segment’s bottom-line
Competition in the aircraft engine and MRO market is intense, and so product quality and efficiency are critical for success. As such R&D expenditures are high. Aviation accounts for the largest share of R&D expenses at GE even though the company’s energy business is larger than its aviation business. Thus, the higher proportion of R&D will continue to impact GE Aviation’s bottom-line.
All in all, growth in the commercial airline industry will drive GE’s aviation business, which in turn will drive GE’s top-line growth over the coming years.Notes:
- Long-term market airplane market developments, www.boeing.com [↩]
- 2011 10-K, www.ge.com [↩]
- Turkish Airlines Orders GE90-Powered Boeing 777-300ER Aircraft Turkish Airlines Signs OnPoint Agreement for New GE90 Engines, Nov 19 2012, www.ge.com [↩]
- Turkish Airlines Selects GE’s CF6 Engines for its Airbus A330 Fleet, Nov 19 2012, www.ge.com [↩]