General Electric’s (NYSE:GE) stock had an impressive performance in the first half of 2023, gaining 68% and giving further support to the positive outlook for the company. The recent Paris Air Show, known for its announcements of new business in the aviation industry, provided an opportunity for engine suppliers to secure big deals. In this report, we will explore which engine manufacturer emerged as the major winner during the event.
Out of the total 2,426 engines ordered and committed to, a significant portion went to General Electric and its partner Safran (OTCPK:SAFRF), who produce the CFM LEAP turbofan through a joint venture. It is worth noting that during air shows, engine suppliers are often not yet selected for certain orders and are designated with an NS (Not Selected) label. However, in many cases, there is a preference for a particular engine platform, and that has been taken into account in this overview.
The dominance of General Electric and Safran in securing 81% of all engine orders can be attributed to the customer composition and the geographic location of the customers. On the Airbus A320 family program, customers have the option to choose between Pratt & Whitney’s geared turbofan and the CFM LEAP turbofans. Initially, many airlines opted for Pratt & Whitney’s geared turbofan due to the additional savings offered by its geared fan architecture, which improves engine efficiency. However, the geared turbofan has faced some technical issues, particularly in hot air environments where it has struggled with durability. This led to lower time-on-wing and forced airlines to ground their airplanes. At this year’s Paris Air Show, Indian Airlines, which operate in such challenging conditions, made significant orders for CFM engines. Additionally, IndiGo switched from Pratt & Whitney to CFM engines. This combination of factors made a compelling case for General Electric’s turbofan platforms.
Typically, the CFM platform holds a market share of around 55% on Airbus A320neo family airplanes. However, considering the order composition, it was expected that CFM would emerge as the clear winner while Pratt & Whitney works through the challenges faced by its engine and its maintenance, repair, and overhaul (MRO) capacity.
In terms of value, the CFM LEAP engines also came out on top, albeit with a slightly lower percentage of the total $27.3 billion pie. This is mainly due to the higher value of wide-body engines, which favor Rolls-Royce and contribute to their overall share. However, when considering unit basis, the GE programs account for 89% of the share compared to 85% on a value basis.
Assessing how these developments will impact margins is challenging. Jet makers tend to be secretive about pricing and margins, and engine manufacturers provide even less information on values and profits. Currently, the production and services related to the LEAP engines are not profitable, but this is expected to change by the middle of the decade. Most engine orders are scheduled for delivery after this time, which bodes well for General Electric as it transitions into a pure aerospace company. In Q1 2023, Safran’s aerospace propulsion segment achieved a 20% margin, while GE Aerospace recorded a 19% margin. As profitability improves, there should be significant opportunities for margin expansion, particularly as LEAP engine profits increase and CFM56 shop visits remain strong throughout the decade.
In the short term, General Electric will benefit from aftermarket activity on existing programs, while the production and aftermarket operations for the LEAP engine will become less loss-making, resulting in improved margins. In the long term, LEAP margins are expected to mature, aiming to reach at least the same level of profitability as the CFM56 program. Higher production levels for airplanes should also contribute to increased long-term profitability.
The Paris Air Show was undoubtedly a big win for General Electric, especially as Pratt & Whitney faced challenges in securing orders from operators in hot environments. It is important to view these wins in the context of long-term profitability, as the value will be realized over several years. As the transitional period unfolds, profit margins on production and services will increase. The strong demand for air travel and General Electric’s focus on becoming a pure aerospace player will further boost its sales with a profitable aftermarket tail.
