Driven by an upcycle in the global commercial aviation sector, General Electric‘s (NYSE:GE) aviation business is poised for solid growth in the coming years. The industrial conglomerate’s aviation business, called GE Aviation, primarily manufactures and services commercial as well as military airplane engines. During 2011-2013, driven by the rising demand for new airplanes from airlines around the world, GE Aviation’s revenues grew at a compounded annual growth rate (CAGR) of 8% to nearly $22 billion in 2013.  Looking ahead, we anticipate GE Aviation’s revenues to continue to grow at strong rates driven by its presence in key airplanes such as the Boeing 737MAX and Airbus A320neo, which will constitute the bulk of global commercial airplane deliveries in the coming years.
Last year, GE Aviation constituted roughly 15% of GE’s $146 billion revenues, but along side the company’s oil & gas business, was the key driver for growth in its results. Going forward we anticipate GE Aviation to constitute a larger share of GE’s revenues as the company’s financial business, GE Capital, is getting smaller due to sale of assets. We currently have a stock price estimate of $26.20 for GE, marginally below its current market price.
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Higher Demand From Commercial Aviation Is Growing GE Aviation’s Engine Shipments
Global airline passenger traffic is steadily rising driven by a growing global economy, rising trade and globalization. The long term market outlook from Boeing (NYSE:BA) forecast global airline passenger traffic to continue to grow by around 5% per year, through the next two decades.  At the same time, global airline profits are also rising driven by this growing demand for air travel. According to International Air Transport Association (IATA), global airline profits grew to $12.9 billion last year, from $7.4 billion in 2012 and these are expected to rise further to around $18.7 billion in 2014.  Together these two trends of rising global airline passenger traffic and increasing airline profits have enabled airlines to place large orders for new airplanes. As a result, airplane makers such as Boeing and Airbus have been forced to hike their production rates. Driven by these higher production rates, around 35,000 new commercial airplanes are forecasted to be delivered to airlines over the next 20 years, compared with around 19,000 commercial airplanes that were delivered to airlines over the past 20 years, according to figures cited by United Technologies (NYSE:UTX). 
These rising airplane deliveries are in turn increasing the demand for airplane engines. The global market for airplane engines is dominated by three players – GE Aviation, Pratt & Whitney (which is a segment of United Technologies) and Rolls Royce. We figure that out of the three, GE Aviation will likely extract maximum gains from this growing global demand for airplane engines, as its commercial engine portfolio is much wider than the other two. It has a strong presence in all the three airplane segments namely regional, narrow-body and wide-body. In comparison, Pratt & Whitney has a strong presence in two segments – regional and narrow-body, while Rolls Royce has a sizable presence in only the wide-body airplane segment.
Additionally, GE’s 50-50 joint venture with Snecma of France, called CFM International, is the leading commercial engine supplier in the narrow-body airplane segment, which drives the bulk of global commercial airplane deliveries. Narrow-body airplanes such as the Boeing 737 and Airbus A320 constituted around three-fourth of their respective company’s total commercial airplane deliveries last year. Engines from CFM International power both Boeing 737 and Airbus A320, so through CFM International, GE Aviation commands a handsome share of all engines sourced by Boeing and Airbus for their commercial airplanes.
GE Aviation’s Growth Will Be Enabled By Its Presence In Key Boeing & Airbus Airplanes
We figure in the coming years, GE Aviation will be able to maintain its leading position as its engines have been chosen by both Boeing and Airbus to power many of their next generation airplanes. For instance, CFM International’s LEAP engine has been chosen by Boeing as the sole engine for its upcoming 737MAX. Through May 2014, the 737MAX received 2,023 orders which means that CFM International has two times as many orders for its LEAP engine (as this airplane is powered by two engines) from this airplane.  CFM’s LEAP engine has also been chosen by Airbus to power its next generation A320neo. However, Airbus has also chosen Pratt & Whitney’s PurePower engine to power the A320neo. Apart from these two narrow-body airplanes, GE Aviation’s GEnx engine also powers the Boeing 787 Dreamliner and 747-8 Intercontinental in the wide-body airplane segment. Recently, Boeing also selected GE Aviation’s GE9x engine for its 777X which is expected to enter service around the end of this decade. Overall, GE Aviation’s commercial engines power airplanes across segments, and most importantly are present in the Boeing 737MAX and Airbus A320neo, which will likely drive the bulk of global commercial airplane deliveries through this decade.
Driven by its presence in these leading commercial airplanes, GE Aviation anticipates its engine production volume (including those from its joint venture CFM International) to grow at a CAGR of 4% through this decade.  We figure this growth in GE Aviation’s engine production volume will drive its growth in the coming years. At the same time, these rising commercial engine deliveries will grow the installed base of GE engines in the worldwide commercial airplane fleet. This will directly boost GE Aviation’s revenues from servicing commercial airplane engines. Last year, commercial engine manufacture and servicing constituted nearly $15 billion of GE Aviation’s $22 billion revenues.  The remaining portion of GE Aviation’s revenues came primarily from the manufacture and servicing of military airplane engines. In this business, we figure that GE Aviation’s revenues will likely face some pressure from the flat-to-declining U.S. military spending. Nonetheless, the growth from commercial engines will likely more than offset this pressure from flattish U.S. military spending. All in all, in our view, driven by the growing global demand for air travel and presence of GE engines in leading commercial airplanes, GE Aviation’s results will grow strongly in the coming years.Notes:
- GE Aviation at Deutsche Bank Industrial Conference, June 6 2014, www.ge.com [↩] [↩] [↩] [↩]
- Boeing’s long term commercial airplane market outlook, June 16 2014, www.boeing.com [↩]
- UTC’s propulsion and aerospace systems presentation, March 13 2014, www.utc.com [↩]
- Boeing’s unfilled airplane orders, June 16 2014, www.boeing.com [↩]