GE’s Growth Over Coming Years Will Depend Primarily On The Success Of Its Aviation Business

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General Electric (NYSE: GE) has struggled to turn around its business over the last few years. With an eye on long-term profitability, the company’s focus over coming years will be on its Aviation, Power and Renewable Energy divisions. GE’s Aviation division in particular will remain key to its success over coming years – primarily because it is responsible for roughly 25% of the company’s revenues, and almost 45% of its operating profit. Trefis highlights this in the interactive dashboard Importance Of Aviation Division For GE. You can adjust various drivers to see the impact on the segment’s earnings and its contribution to the company, and see more Trefis Industrial company data here.

What Are General Electric’s Major Sources Of Revenues?

  • Aviation: $29.7 billion in FY 2018 (24% of Total Revenues). Aviation generates its revenues by designing and producing commercial and military aircraft engines, integrated digital components, electric power and mechanical aircraft systems.
  • Power: $26.5 billion in FY 2018 (22% of Total Revenues). This segment generates revenues by generating power for industrial, government and other customers worldwide with products and services related to energy production and water reuse.
  • Oil & Gas: $22.2 billion in FY 2018 (18% of Total Revenues). GE holds 50.4% consolidated interest in Bakers Hughes, a full stream oilfield technology provider that generates its revenues through four main business segments: Oilfield Services, Oilfield Equipment, Turbomachinery & Processing Solutions and Digital Solutions.
  • Healthcare: $19.2 billion in FY 2018 (16% of Total Revenues). Healthcare derives its revenues by providing essential healthcare technologies to developed and emerging markets and has expertise in medical imaging, patient monitoring and diagnostics, drug discovery, bio-pharmaceutical manufacturing technologies and performance improvement solutions.
  • Renewable Energy: $9.3 billion in FY 2018 (8% of Total Revenues). This segment generates revenues by providing affordable renewable energy to people across the world
  • GE Capital: $9.3 billion in FY 2018 (8% of Total Revenues). GE Capital generates revenues by providing financial products and services to GE’s all other business segments.
  • Transportation: $3.8 billion in FY 2018 (3% of Total Revenues). This segment generates revenues by supplying transport related equipment to the railroad, mining, marine, stationary power and drilling industries.
  • Lightning: $1.7 billion in FY 2018 (1% of Total Revenues). This segment includes GE Lightning business which generates its revenues by providing energy efficiency and productivity solutions for commercial, industrial and municipal customers

How Has The Aviation Division Fared Over Recent Years?

  • Segment revenues grew at a CAGR of 7% over the last 3 years.
  • Revenues of $29.7 billion in 2018 implied a 13.6% y-o-y growth, and accounted for nearly 25% of the total revenue mix.
  • While the company’s other segments have struggled, Aviation’s pre-tax profit surged 20% year-over-over to $6.4 billion in 2018, accounting for more than 60% of the company’s industrial segment pre-tax profit.
  • Moreover, the segment’s demand remained strong as evident from its 2018 order intake of $35.5 billion, which boosted its backlog 12% to $224 billion

What’s Driving This Growth?

  • Global passenger air travel has grown strongly over the years. In 2018, revenue passenger miles (RPM) growth outpaced the ten-year average – increasing 6.6% with strong growth both domestically and internationally. In addition, passenger load factors globally remained above 80%.
  • This has led to boosted the demand for new aircrafts globally.
  • Moreover, higher commercial spares shipment rate and increased price aided revenue growth for GE.
  • LEAP engines have been the largest growth driver for the company’s Aviation division. LEAP engine has continued to perform well, with GE having a better win rate over its competitors primarily due to its improved pricing.
  • GE has been able to reduce its cost of the LEAP engines by more than 40% over the last two years, thus providing an edge to the company over its competitors.

What To Expect In The Near Term?

  • We forecast GE’s Aviation revenues to grow around 4% in 2019 to $31 billion. This growth is likely to be driven by healthy growth in air travel globally, improved global defense spending as well as increased shipments of the more efficient and cost-effective LEAP engines.
  • Furthermore, GE sees huge growth opportunities in its military aviation business. Although, military spending tends to be cyclical, the company expects conditions to be upbeat over coming years and expects its military business revenue to roughly double by 2025.
  • With ample order backlog and continued efficiency of its LEAP engine, the segment margin is also expected to expand and boost profitability.

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