U.S. market leader General Electric (GE, Financial) is currently under close watch from all parlances – be it the spin-off of its Appliance section or the improved investment in the Aviation section. The company sources confirmed early this year that the management had decided to pump in nearly $3.5 billion in terms of investment into the aviation section of the company. A query soon arises as to why suddenly such a huge sum is being invested on GE Aviation. How much is GE Aviation actually contributing to the overall revenue of the company? What could be the management plans for the aviation wing? Let’s investigate further to get to the real answers.
A quick glance at the results
The aviation wing has been contributing to the lion’s share of the company’s revenue and profits. A quick peek into the recent second quarter results speak to the contribution. The aviation business is one of the core segments in the industrial division and ranked second in terms of revenue contribution of $6.1 billion, with the Power business being the first accounting to $6.3 billion in the quarter.
However, while computing the industrial segment’s profits, the aviation line of business stood first contributing 28.7%, well ahead of the Power segment’s 27.2%. Therefore, one thing is sure, that the aviation wing’s top and bottom line plays a vital role in keeping the industrial segment growing for GE. And as the company wishes to generate around 75% of its profits through the industrial segment by 2017, the importance in investing on the aviation wing cannot be undermined.
A well-known brand name for the best engines
Recently, Air Asia X (AIABF, Financial) has inked a MOU with GE to equip 25 of its new Airbus A330-300 aircrafts with GE’s CF6-80E1 engines. This deal is valued in excess of around $1.5 billion and with this contract; GE has become Air Asia X’s second core engine supplier. On similar lines, GE engines have been long appreciated by several airline companies in the past. The company also has an added advantage of its engines being famous among all the aircraft ranges –regional, narrow body and wide body aircraft segments.
The aircraft engine maker has been swift in understanding the requirements of the airline companies and has manufactured the Gen-x engine offering better fuel efficiency than the CF6 engines and currently powering the Boeing (BA, Financial) 787 Dreamliner. Presently the company is investing in 3D printing for making the nozzles of its evolutionary LEAP engine that will save up to $1 million annually, per airplane and lower fuel costs by 15%. The LEAP engines, yet to enter production, will power the Boeing 737 Max, Airbus (EADSY, Financial) A320neo and COMAC C919.
Future forecast of Airbus
Taking into account factors like urbanization, population growth, emerging markets, innovation and environmental impact, Airbus has brought out a global forecast for 2013-2032 which expects air traffic to grow at 4.7% annually. This would require over 29,220 new passenger aircraft by 2032 valued nearly $4.4 trillion.
So, to match the projected rise in air traffic, airplane manufacturers have to work towards reducing fuel consumption to keep their production costs under control. And they have to go for effective engines as well. Here’s where GE strives to win by offering the best and efficient engines which match the requirements of airline companies who have lofty expectations from engine manufacturers.
Anticipated demand moves investment
GE and its partners have close to 34,000 commercial jet engines currently in service. GE expects this number to grow by a whopping 20% to 41,000 in the next few years. To meet this upcoming demand for better engines, GE Aviation has planned to invest more than $3.5 billion in plant and equipment spending between now and 2017. And most of the spending is likely to happen in the U.S.
Indeed, GE has invested nearly an annual $1 billion in jet propulsion R&D which has benefited the make of the LEAP engine which is not expected to enter service until 2016. But nevertheless, it has already bagged more than 6,000 confirmed orders from 20 countries, valued at more than $78 billion.
Final call
As the commercial aircraft market boom is around the corner, GE is well prepared to make the most of the valuable opportunity. The company is aware of the role its fuel-efficient engines play in the aircraft’s longevity, which is a critical point for most airline companies. GE has used its innovative eye to excel in making the best engines of the era, and any investment that goes to the aviation wing will propel its engine growth further and take the company to newer highs.
