Business Breakdowns
· Matt Reustle, Ramesh Narayanaswamy
[00:00:00] S0: What do you think led him to sticking with the aerospace assets versus going with healthcare or Vernova? It's just an interesting choice. It might have just been market size, but do you think there's anything there in terms of what led him to continue on with this specific business line? [00:00:00] S1: If you go back in time to 2020, the board awarded Larry a one-time performance grant to incentivize him to stay. It was at the very high end of what you would normally see—something like $200 million in shares based on certain stock price targets. It was a little bit controversial at the time, simply because the share price was depressed given the fact that we were reeling from the pandemic. But it also aligned outcomes between management and shareholders. And similarly, a very similar grant was made in 2024, again tied to operating metrics but in smaller scale compared to the 2020 grant. As to why Larry decided to become CEO of GE Aerospace rather than Vernova or Healthcare, a couple of things I would point to. One might have been the fact that he was historically well versed in industrials businesses, so Danaher. And second, perhaps it was an implicit indicator of how strong aerospace was compared to their other segments. And he wanted to be the CEO of the crown jewel asset, so to speak.
· Ramesh Narayanaswamy, Matt Reustle
[00:00:00] S1: If you go back in time to 2020, the board awarded Larry a one-time performance grant to incentivize him to stay. It was at the very high end of what you would normally see—something like $200 million in shares based on certain stock price targets. It was a little bit controversial at the time, simply because the share price was depressed given the fact that we were reeling from the pandemic. But it also aligned outcomes between management and shareholders. And similarly, a very similar grant was made in 2024, again tied to operating metrics but in smaller scale compared to the 2020 grant. As to why Larry decided to become CEO of GE Aerospace rather than Vernova or Healthcare, a couple of things I would point to. One might have been the fact that he was historically well versed in industrials businesses, so Danaher. And second, perhaps it was an implicit indicator of how strong aerospace was compared to their other segments. And he wanted to be the CEO of the crown jewel asset, so to speak. [00:00:00] S0: You referenced some of the market shares that they have in this jet engine business. Can you just bring us back in time in terms of the origins of that industry, and that'll lead us on to how GE has captured the share and foothold that they have. But maybe go back in time. I have some sense of when jet engines came around. It was probably correlated to when airplanes came around, but maybe you can lay that out for us.
· Matt Reustle, Ramesh Narayanaswamy
[00:00:00] S0: You referenced some of the market shares that they have in this jet engine business. Can you just bring us back in time in terms of the origins of that industry, and that'll lead us on to how GE has captured the share and foothold that they have. But maybe go back in time. I have some sense of when jet engines came around. It was probably correlated to when airplanes came around, but maybe you can lay that out for us. [00:00:00] S1: The jet engine business is nearly 100 years old, so it's a fairly long time. It was first invented in the 1930s here in the UK. Actually, the first jet engine built in the US, however, was a GE engine, which incidentally was a copy of the British engine developed by Frank Whittle. Historically, you would find that as technologies develop, they become cheaper to manufacture and to scale. But what we have observed in jet engines is that that has not necessarily been the case. Even inflation-adjusted, jet engines still cost at least several billion dollars to make. And if you look at the most recent Pratt & Whitney geared turbofan engine, it reportedly costs perhaps something like $10 billion. Now, it's a good question to ask why that is the case. I would suggest that because jet engines are constantly pushing at the leading edge of materials, technology, and engineering, and you're tackling new problems at the frontier, that keeps costs high and entry barriers high as well.
· Ramesh Narayanaswamy, Matt Reustle
[00:00:00] S1: The jet engine business is nearly 100 years old, so it's a fairly long time. It was first invented in the 1930s here in the UK. Actually, the first jet engine built in the US, however, was a GE engine, which incidentally was a copy of the British engine developed by Frank Whittle. Historically, you would find that as technologies develop, they become cheaper to manufacture and to scale. But what we have observed in jet engines is that that has not necessarily been the case. Even inflation-adjusted, jet engines still cost at least several billion dollars to make. And if you look at the most recent Pratt & Whitney geared turbofan engine, it reportedly costs perhaps something like $10 billion. Now, it's a good question to ask why that is the case. I would suggest that because jet engines are constantly pushing at the leading edge of materials, technology, and engineering, and you're tackling new problems at the frontier, that keeps costs high and entry barriers high as well. [00:00:00] S0: It's the type of product that I don't mind if it's a little bit more expensive as well, given what it actually does and how I might be a user of it. Let's discuss GE's evolution in that space in terms of leading to this place where you always hear about the duopoly atop, in terms of the OEMs with Boeing and Airbus, not so much about the rest of the value chain. Who else is in the jet engine market? I think you've referenced Pratt & Whitney a few times, but how has that evolved over time?
· Ramesh Narayanaswamy
[00:00:00] S1: So first, to maybe set the scene, it's worthwhile putting the industry in context and why it's so hard to make a jet engine. In simplest terms, the barrier to entry into the industry is the requirement to have both extraordinary technical performance at extraordinarily low cost. So making a jet engine at scale is one of humanity's toughest technical challenges, right up there with some semiconductor fabrication, manufacturing biologics, or even things like reusable rockets. So this is a very, very hard technical challenge to overcome. Just to give you a flavor of what engines have to deal with in commercial aerospace, which we take for granted every time you take a flight, within the hot section of the engine, inside the high-pressure turbine, the temperatures can exceed the melting point of alloys, which, when you stop to think about it, is quite mind-boggling. Similarly, engines have to withstand and be tested extensively in a variety of harsh conditions, including extreme cold, extreme heat, dusty conditions, including things like bird strikes, which they have to be resilient against, which happens more commonly than you think. Even at the manufacturing level, atomic-scale defects can be catastrophic. For example, the most recent issue that Pratt & Whitney had with the geared turbofan: they found a microscopic contaminant in the manufacturing process, which led to a worldwide recall of the entire fleet. So even extremely small issues can cause significant after-effects and significant catastrophic losses for the engine makers. Now, once you have solved these technical problems, you now need to convince Airbus and Boeing that you can manufacture and supply this at scale, and then convince the airlines that this will be reliable to operate for decades on end, all at a cost of ownership that is competitive, based on sort of worldwide global aftermarket support. And, oh, by the way, you also need to sell at a loss to Airbus and Boeing before you can see the first profit from spare parts in five or ten years’ time from the airlines. This is an extraordinarily difficult industry with very significant technical barriers, in addition to regulatory barriers, where, rightly, regulators require extensive certification and safety testing of aircraft and every single part that goes into an aircraft, including the engines.
· Matt Reustle
[00:00:00] S0: It's a marvel in terms of what they've been able to do. Who's on the other side of the spectrum beyond Boeing and Airbus? What goes into those partnerships and those relationships that creates the ecosystem that now exists, where you do have certain parts of the value chain entirely relying on each other?