The global commercial airplane industry is poised for growth
over the coming years driven by replacement demand for aging
airplane fleets in North America and Europe and increasing fleet
sizes in emerging economies. The market for commercial airplanes
is projected to grow to $4.5 trillion over the next 20 years,
according to Boeing (
BA
). This large, growing global airline market will drive growth
for aircraft engine manufacturers and service providers.
GE
(
GE
) is one of the largest players in this space through GE Aviation
and will continue to target this growing market.
Revenues for GE Aviation increased 7% y-o-y and profits
increased 6% y-o-y in 2011. Over the past two decades, GE also
benefited from the increasing share of engine manufacturers in
global maintenance, repair and overhaul (
MRO
) services market for aircraft engines. However, the relatively
higher proportion of research and development expenses at GE
Aviation in comparison to the other company segments will continue
to impact the segment's bottom-line.
We currently have
a stock price estimate of $21.78 for the
company
, marginally above its current market price.
See our complete analysis of GE here
.
GE Aviation is one of the largest aircraft engine
manufacturers and MRO service providers
GE Aviation designs, manufactures and sells aircraft engines for
commercial as well as military aircraft. It is one of the largest
players in this space alongside United Technologies' (NYSE:UTC)
Pratt & Whitney and Rolls Royce. The GEnx engines power the
Boeing 787 Dreamliner and the Boeing 747-8, which is the largest
commercial aircraft built in the U.S. In addition, GE's commercial
engines are used in all aircraft categories: short/medium,
intermediate and long range as well as executive and regional
aircraft. GE also has strategic joint ventures with Safran of
France named CFM International and with Pratt & Whitney named
Engine Alliance. All in all, GE Aviation is well-positioned to take
a large share of growth anticipated in the global commercial
airplane industry.
GE Aviation also provides MRO services to airlines usually under
long-term contracts. Additionally, over the past few decades, as
original equipment manufacturers (OEMs) like Boeing and Airbus
increased their focus on their core competencies, the share of
specialized MRO service providers increased in the global aircraft
MRO service market. This further aided growth at GE Aviation.
GE Aviation to add significant growth to GE's top-line
over the coming years
Growth in military aircraft engine market is dependent on
government spending. In the U.S. this is likely to come under
pressure due to defense spending cuts, but growth in military
spending in emerging economies is expected to continue to
rise. And growth in the commercial aircraft engine market is
closely linked with global economic growth. Despite the near-term
concerns arising from the European sovereign debt crisis and
slowing growth in emerging economies, the long-term growth
prospects remain strong.
Recently, Turkish Airlines ordered 15 Boeing 777 and 15 Airbus
A330 powered by GE engines. The airline also signed a corresponding
long-term maintenance agreement with GE. The combined value of
engine and maintenance agreements was over $2.4 billion. By our
estimates, GE Aviation constitutes nearly 19% of GE's total
value.
However, high R&D expenses in aviation will impact
the segment's
bottom-line
Competition in the aircraft engine and MRO market is intense,
and so product quality and efficiency are critical for success. As
such R&D expenditures are high. Aviation accounts for the
largest share of R&D expenses at GE even though the company's
energy business is larger than its aviation business. Thus, the
higher proportion of R&D will continue to impact GE Aviation's
bottom-line.
All in all, growth in the commercial airline industry will drive
GE's aviation business, which in turn will drive GE's top-line
growth over the coming years.
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