GE Aerospace: Full Throttle

“GE sells jet engines at a loss or breakeven to Boeing and Airbus, then makes profits from aftermarket services over 20-30 years. List price might be $20-22 million, but actual revenue per engine is around $6 million due to 70-80% discounts. The aftermarket can be 3 to 5 times the OE sale over an engine's life. Spare parts carry 60% gross margins, with operating margins potentially exceeding 40%.”— Ramesh Narayanaswamy

Business & Entrepreneurship · Strategy & Decision Making · Economics & Markets

DUR_ENDURING

Equipment loss leader, services profit pool

“Making a jet engine at scale is one of humanity's toughest technical challenges, right up there with semiconductor fabrication, manufacturing biologics, or reusable rockets. Inside the high-pressure turbine, temperatures exceed the melting point of alloys. Atomic-scale defects can be catastrophic; a microscopic contaminant in Pratt Whitney's manufacturing led to a worldwide fleet recall.”— Ramesh Narayanaswamy

Technology & Engineering · Business & Entrepreneurship · Operations & Execution

DUR_ENDURING

Technical + commercial + financial barriers compound

“Engine maintenance is mandated by regulation and mission critical for airlines. Even during the pandemic when air traffic practically ground to a halt, Safran reported positive free cash flow in 2020. Airlines can defer some expenditures, but eventually mandated shop visits must happen. Relative to fuel costs, maintenance is a small portion of airline OpEx. Combined with sole-source positioning on spare parts, this creates multiple levels of protection from economic downturns.”— Ramesh Narayanaswamy

Business & Entrepreneurship · Economics & Markets · Strategy & Decision Making

DUR_ENDURING

Non-discretionary + regulated = recession-proof

“Rolls-Royce collapsed in the 1970s and had to be nationalized while trying to develop the RB211 engine, which ironically became a successful engine and the basis of their current Trent architecture. They almost went bankrupt doing it. China's COMAC, steeped in manufacturing muscle, chose a GE engine to power their aircraft. Even extremely scaled players and serious new entrants face barriers to entry in jet engines that are nearly insurmountable.”— Ramesh Narayanaswamy

History & Geopolitics · Business & Entrepreneurship · Strategy & Decision Making

DUR_ENDURING

Rolls-Royce bankruptcy, COMAC chose GE

“The bifurcation of buyer and user is a recurring pattern in enduring businesses. Whenever you have this bifurcation, you set up conditions for a more complicated path for a new entrant, a 3D puzzle. The other insight is the importance of management culture: some cultures emphasize growth, others emphasize durability. Books like Lights Out document missteps at GE in a culture that prioritized growth over durability, amplified by balance sheet leverage. Even the mighty fall.”— Ramesh Narayanaswamy

Strategy & Decision Making · Leadership & Management · Philosophy & Reasoning

DUR_ENDURING

Buyer-user split, culture choice, scarcity

“Pratt Whitney reportedly spent several billion dollars trying to manufacture 20 life-limited parts on a PMA basis for the CFM56 engine and failed spectacularly. Even a credible industrial-scale player within the aerospace ecosystem finds it extremely hard to manufacture credibly and steal share from OEMs.”— Ramesh Narayanaswamy

Strategy & Decision Making · Business & Entrepreneurship · Operations & Execution

DUR_ENDURING

Even credible entrants fail at PMA parts

“A typical aircraft program from inception to development to retirement is 4 decades, and the useful life of an aircraft is 25 years. The LEAP engine entered service in 2016, making it a very young program that will deliver earnings for decades to come. Typical engines are mandated to come in for overhauls every 6, 7, 8 years, creating predictable revenue streams. Current backlog is $175 billion, representing 4.”— Ramesh Narayanaswamy

Business & Entrepreneurship · Strategy & Decision Making

DUR_ENDURING

40-year programs, 25-year aircraft lives

“Pratt Whitney was maybe 60% of the commercial fleet in 1995 and now is less than 20%. Even the mighty fall. This is a long-cycle business, so when you get it right, it endures. But the reverse is also true. GE has gone all in on open rotor architecture for the next generation, which may be a decade away. Their argument: open rotor with no casing reduces heat, improves durability, and is the only way to get 20% fuel burn improvement.”— Ramesh Narayanaswamy

Strategy & Decision Making · Technology & Engineering

DUR_CONTEXTUAL

Pratt fell from 60% to 20% share

“Larry Culp brought Kaizen-like lean manufacturing principles from Danaher to GE. He walked the Gemba—go to the place where value is being added, the manufacturing floor—and focused on continuous improvement, problem solving, and addressed the don't shoot the messenger culture. He describes his philosophy as common sense vigorously applied. For GE, that meant simplification, deconglomeration, and focus: spinning off healthcare and power assets to focus exclusively on aerospace.”— Ramesh Narayanaswamy

Leadership & Management · Operations & Execution · Strategy & Decision Making

DUR_ENDURING

Gemba walks, kill messenger culture, focus

“Return on tangible operating capital employed for GE is around 20-25% on a cash basis, similar to Safran at 20-25% and MTU at 16-18%. Not spectacular returns, but what you lose in ultra-high returns you make up for in durability and visibility. All engine makers participate in programs with 25+ year useful lives. It's a highly visible, highly certain earning stream thanks to regulations around safety, servicing, and mandated shop visits.”— Ramesh Narayanaswamy

Business & Entrepreneurship · Strategy & Decision Making

DUR_ENDURING

Moderate returns, exceptional durability

“On the aftermarket side, there are two main revenue models. Time and materials, where airlines pay for spare parts at each shop visit every 5-7 years. And long-term service agreements, revenue per flight hour, which converts CapEx into OpEx for airlines. GE takes more risk with LTSAs, like selling insurance contracts. Recently, the LTSA mix has been reducing, and often spare parts are excluded from scope.”— Ramesh Narayanaswamy

Business & Entrepreneurship · Strategy & Decision Making

DUR_ENDURING

Time/materials vs LTSA risk transfer

“GE has a 50-50 joint venture with Safran called CFM International, one of the most successful aviation franchises in history, almost 50 years old. GE historically has done more on the hot side of the engine, Safran on the cold side, but everything is split 50-50. Given the challenges in developing engines, most companies enter into risk and revenue sharing agreements simply to mitigate risk.”— Ramesh Narayanaswamy

Strategy & Decision Making · Business & Entrepreneurship

DUR_ENDURING

50-year JV splits risk and reward 50-50