Business Breakdowns
· Matt Reustle
[00:00:00] S0: This is Matt Reustle, and today we are breaking down GE Aerospace. Now, if you go by tickers, we did break down GE several years ago, but that episode focused on how Larry Culp, at the time, was turning around that Titanic. That was GE the conglomerate. Today, Ramesh Narayanaswamy, Co-Founder and Portfolio Manager of Tourbillon Partners, joins me to go deeper on what is now a pure-play aerospace business. So we get into some of the unique dynamics of the supply chain in aerospace, the long-cycle nature that differentiates it from many other industries that you look at, and I marvel a bit at the complexity that is aircraft engine manufacturing. But not for long, because this is another beautiful example of selling services attached to equipment. And I first met Ramesh back in the summer of 2024 at a Business Breakdowns event. It did not take long for me to appreciate his approach around finding these businesses with unique scarcity or scale benefits, and I finally got him on Business Breakdowns. So, please enjoy our conversation on GE Aerospace. All right, Ramesh, I am pumped to have you here. We're covering GE Aerospace today, and some listeners may remember we covered GE just a couple of years ago. This was prior to the spin-offs and having these pure-play entities. We thought it was a good opportunity to come back to this name, particularly with how the story has played out over the past few years. And even prior to that episode we did, initially I thought the best place to start was just a reintroduction to GE — but specifically GE Aerospace — and just a small, simple explanation of what it is that they do, maybe what they sell, give some context about where they operate in the aerospace spectrum.
· Ramesh Narayanaswamy
[00:00:00] S1: Well, thank you for having me, Matt. First of all, it's really exciting to discuss aerospace in terms of what GE Aerospace does. At its core, they sell jet engines for both commercial as well as defense and military applications. The total fleet of GE Aerospace engines is about 70,000, which is broken down roughly between commercial and military: 45,000 engines in the commercial application space and 25,000 engines in the military space. So taking it one by one, on the commercial side, if you look at the 45,000 engines that are in service, and if you look at the aircraft that they touch, GE powers something like three out of four commercial takeoffs pretty much every day. And it includes a mix of engines where they are the sole-source provider of an engine for an aircraft, as well as programs where they have a dualistic kind of market position. Within commercial aircraft, there are three subsegments. One is the narrow-body segment — think short-haul, like New York–Chicago kind of flights. Here, their older-generation engines are called the CFM56, which is an industry benchmark. It has a very long-standing reputation for quality, reliability, and performance. It powers all Boeing 737s, the entire family, and just over half of the Airbus A320 family. And this is the engine that has been in production for a while and now is sunsetting. Their newer engine, which is currently in production, is called LEAP — short for Leading Edge Aviation Propulsion. These are engines that power the Boeing 737 MAX, again a sole-source position, and the Chinese COMAC C919, also a sole-source position. So pretty much 100% market share there, and just over half — or 60% — of the Airbus A320neo family overall. In the narrow-body segment, GE has something like a 70% share of that space. On the wide-body side — which is long-haul flights, think London to Tokyo — they have something like a 50% share of the wide-body fleet and backlog. Here you're talking about aircraft like the Boeing 787, where GE's engine is called the GEnx, which has something like an 80% share of the backlog. And also the Boeing 777, where the GE90 is the engine, also something like 80% share. And the Boeing 777X, when it does enter into service, the GE9X is going to be the sole-source engine for that program. Fairly dominant positions in a duopolistic landscape within the wide-body space.
· Ramesh Narayanaswamy, Matt Reustle
And finally, to round out, they also sell engines for regional jets and business jets. This includes things like Bombardier aircraft — the Passport engine — and Embraer, which uses the CF34 series. So within the commercial side, they're fairly well balanced: half of their exposure is through narrow-bodies, about 35% is through wide-bodies, and about 15% is through regional and business jets. [00:00:00] S0: Of those three categories, the wide-body engines may be slightly less share, but it's making up a big chunk of that revenue. Wide-body engines — are they any more or less profitable than narrow-body? Is there a distinction that you would make between those two categories in terms of what is maybe a higher-quality business line?
· Matt Reustle, Ramesh Narayanaswamy
[00:00:00] S0: Of those three categories, the wide-body engines may be slightly less share, but it's making up a big chunk of that revenue. Wide-body engines — are they any more or less profitable than narrow-body? Is there a distinction that you would make between those two categories in terms of what is maybe a higher-quality business line? [00:00:00] S1: Historically, the narrow-body side has been more scaled because of the sole-source position that they have with Boeing — which is roughly half the market — and they have significant share, nearly half to 60% share on the Airbus family. So the narrow-body has been the key driver for GE over the long term. They go to market on the narrow-body side through a joint venture with Safran called CFM International, which has been one of the most successful aviation franchises in history. In terms of profitability, there is no meaningful difference. Both wide-bodies and narrow-bodies are profitable — something like a 20% margin. Though I would guess that, just given the way the cash flows work in terms of the old fleet retiring and the new fleet coming on at different points in time, the narrow-body fleet might be more profitable for them by a few percentage points, perhaps. But despite the difference in market position, GE has done a phenomenal job in delivering roughly 20% overall margins across those programs. [00:00:00] S0: And then the military exposure as well — how would you frame that in terms of exposure and share, to the extent that they disclose that?
· Matt Reustle, Ramesh Narayanaswamy
[00:00:00] S0: And then the military exposure as well — how would you frame that in terms of exposure and share, to the extent that they disclose that? [00:00:00] S1: On the military side, it's more useful to think about how many programs and platforms they are on. They have something like 25,000 engines in their fleet. This includes engines for programs like the F/A-18 Hornet/Super Hornet fighter aircraft. It also includes nearly two-thirds of all U.S. military aircraft, including helicopters. So it's a fairly diversified portfolio. One thing I would note is that GE has not been as scaled as somebody like Pratt & Whitney on the defense side. Historically, for example, they lost out on the F-35 fighter program in terms of being able to provide the engines — Pratt provides the engine there. Program by program, there can be changes. The overall market share is probably not as good a metric, and it's much more useful to look at program participation in key programs that they're on. [00:00:00] S0: Is there anything else besides those two lines that GE still has?
· Matt Reustle, Ramesh Narayanaswamy
[00:00:00] S0: Is there anything else besides those two lines that GE still has? [00:00:00] S1: They do have a defense and propulsion technologies business. So outside of their defense programs, something like 12–15% of the business is in propulsion technologies, which includes things like aircraft equipment businesses that go into both commercial and military applications. But overall, in terms of the revenue mix, commercial is overwhelmingly nearly 85% of revenues, and in terms of profitability even more pronounced. I would also add that they do report insurance revenues, which is a legacy part of GE given their intense transformation over the last few years. Less than 10% — now about mid-single-digit percent — of their overall revenues comes from insurance, though that is now in run-off. So it is not really a portion of the business where they're committing new capital. [00:00:00] S0: Just to give some scale around the revenue base today, how big are they from a top-line perspective? [00:00:00] S1: This year they'll report something like $40 billion in revenues, of which 75% is commercial engines and services and 25% is defense and propulsion technologies. Due to the difference in profitability, the commercial engine-services business is roughly 25% operating margins. The other businesses — defense and propulsion technologies — tend to be more like 11–12% margins. So in terms of earnings contribution, you're really looking at a commercial-engine franchise here in GE.