GE Aerospace's Service-Driven Profitability and Long-Term Durability

Key Quotes

"GE powers something like three out of four all 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 duopolistic kind of market position within commercial aircraft."

Ramesh Narayanaswamy explains GE Aerospace's significant market presence, highlighting their role in powering a vast majority of commercial flights. This quote underscores the company's dominant position, often as the sole provider or one of two major players in the commercial aircraft engine market.

"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 shares or 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."

Narayanaswamy details the strategic importance of the narrow-body segment for GE Aerospace, emphasizing its historical scale and profitability. He points to the joint venture with Safran, CFM International, as a key driver of this success and a highly profitable franchise within the industry.

"The aftermarket side which is the revenue that they get from airlines and that lasts 20 25 30 years this is extremely profitable as spare parts and service revenues are effectively exclusive to the engine makers and regulations mandate that you need to bring in these engines for servicing after a certain number of flight cycles so typically every six seven eight years and airlines typically don't want to use sort of alternatives to the original spare parts as it voids the warranty protection on it so this revenue stream is extremely profitable you're looking at something like a 60 by gross margin on the aftermarket."

This quote from Narayanaswamy illustrates the highly profitable nature of GE Aerospace's aftermarket business. He explains that due to exclusivity and regulatory requirements, spare parts and service revenues from airlines generate substantial gross margins, significantly contributing to the company's overall profitability.

"In simple terms I would say Larry brought the Kaizen like lean manufacturing principles that he was so successful implementing at Danaher to GE uses a Japanese phrase he walked the Gemba as they call it i e go to the place where the value is being added the manufacturing floor the shop floor and really focused on very basic ideas of continuous improvement problem solving and more importantly addressed the don't shoot the messenger culture which was badly needed at GE and also crucially focused on the customer."

Narayanaswamy describes Larry Culp's operational approach at GE, drawing parallels to his success at Danaher. He highlights Culp's implementation of lean manufacturing principles, a focus on continuous improvement, problem-solving on the shop floor, and fostering a customer-centric culture, which were crucial for GE's transformation.

"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 semiconductor fabrication manufacturing biologics or even things like reusable rockets so this is a very very hard technical challenge to overcome."

Narayanaswamy emphasizes the extreme difficulty of entering the jet engine manufacturing industry. He explains that the combination of requiring exceptional technical performance and achieving extraordinarily low costs makes it one of the most challenging manufacturing endeavors, comparable to fields like semiconductor fabrication or rocket development.

"The bifurcation of the buyer and the user is a recurring pattern in many enduring businesses for engines you have Airbus and Boeing as the buyer and the OE customer but the long term user being airlines and whenever you have this kind of bifurcation you set up conditions for a more complicated path for a new entrant as you now have to solve sort of a 3D puzzle so to speak."

Narayanaswamy identifies a key lesson from GE Aerospace's business model: the bifurcation of buyers and users. He explains that having distinct entities (Airbus/Boeing as buyers and airlines as users) creates a complex, multi-dimensional challenge for new entrants, making it difficult to gain a foothold in the market.