Recent business highlights & your Aviation questions answered

As the year comes to an end, our teams are focused on accelerating our transformation. GE is in a strong position and we want to share some business highlights that demonstrate the momentum building across our businesses:

• Last week at Aviation, United Airlines operated the first commercial flight using 100% sustainable aviation fuel (SAF), operated on a Boeing 737 plane. The jet was powered by two LEAP-1B engines developed by CFM International, a 50-50 joint company between Aviation and Safran Aircraft Engines.
• At Healthcare, we’re collaborating with the University of Cambridge to develop an application aimed at improving cancer care. Cambridge will provide clinical expertise and data to support GE Healthcare’s development and evaluation of an AI-enhanced application that integrates cancer patient data from multiple sources into a single interface.
• As we lead the energy transition, we’re solving for the trilemma of affordable, reliable and sustainable energy. Renewable Energy recently announced Dogger Bank C wind farm reached financial close, marking the first commercial order for the 14 MW version of GE’s Haliade-X offshore wind turbine platform.
• At Power, Ontario Power Generation selected GE Hitachi Nuclear to partner in constructing a small modular reactor (SMR) at its Darlington site. This will be the first grid-scale SMR in Canada generating carbon-free power on demand using GE Hitachi's BWRX-300, which can be deployed faster than conventional reactors and at a lower cost. Additionally, PKN ORLEN and Synthos Green Energy announced their aim to deploy SMRs in Poland in 2030. GE and Harbin Electric Corporation announced that Guangdong Energy Group Co., Ltd. has ordered two 9HA.01 gas turbines for its Guangdong Huizhou combined cycle power plant. These turbines, expected to burn up to 10% hydrogen blended with natural gas when they start operating, are the first gas turbines to burn a hydrogen/natural gas blend in mainland China. These examples show how GE can support decarbonization and economic development goals with clean energy technology.

In addition, you may have seen that Safran, one of our Aviation partners mentioned above, held their Capital Markets Day last week. As we have done several times, we want to address some of the more frequent questions we have been hearing regarding our Aviation business we hope you’ll find relevant, addressing many similar themes shared by Safran. These include:

1. What is your latest recovery outlook for Aviation to 2019 levels across shop visits, revenue, margins, and free cash flow*?
2. Can you remind us how the CFM joint venture between GE and Safran works?
3. How does the transition of CFM56 to LEAP impact your commercial services financial outlook?
4. What is your latest view on aircraft retirements going forward?
5. What is the impact of price/cost in your Aviation segment?
6. What is your outlook for LEAP original equipment engine deliveries, including rate increases beyond 2023?
7. What are your longer-term prospects for Aviation segment growth?

We also want to remind you that as we have previously discussed, with the closure of the GECAS transaction, GE will move from reporting GE and GE Capital separately to a simpler single-column reporting in our upcoming 4Q’21 earnings materials and in our 10-K.  In addition, we will provide some select “industrial” metrics (e.g. Industrial free cash flow*) for 2021 given this is the basis on which our guidance currently stands, but otherwise are moving now to the simpler, single-column basis.

As we reflect on 2021, it has been a transformative year for GE, where we have made significant progress, operating from a position of strength culminating in our announcement to form three industry-leading, global, investment-grade public companies. As we look ahead to 2022, we’re embarking on this new and exciting journey to continue building a world that works.

1. What is your latest recovery outlook for Aviation to 2019 levels across shop visits, revenue, margins, and free cash flow*?

In line with recent discussion with airlines, we continue to believe GE/CFM narrow-body departures will recover to ’19 levels in early ’23, widebody departures in early ’24, and we are monitoring the latest COVID and border restriction trends. While we continue to anticipate significant growth in shop visits in ’22, ’23 and through the decade, we expect full recovery will take longer to realize, incorporating our latest view of departure levels, green time utilization, retirements, and new engine deliveries. On narrow-body, we are directionally aligned with Safran’s comments where our portfolios directly overlap, specifically that CFM56 -5B and -7B shop visits should return to ’19 levels in ’24. Widebody departures are recovering more slowly but the impact to our portfolio is buoyed by strong freighter demand and we expect international travel recovery to lead to shop visit growth.

We expect Aviation revenue to return to ’19 levels in ‘23 or very shortly thereafter. In addition to services, growth across our military, commercial engines, as well as our systems businesses all contribute to our revenue recovery outlook. Regarding commercial services revenue* growth, we are directionally aligned with Safran’s view of 15% CAGR from 2021 through 2025. Operating profit growth will follow revenue recovery, although margin rate will be pressured as a result of portfolio mix year to year. We are working back towards high-teens/20% margin rate levels. We expect free cash flow* above ’19 levels in ’23 driven by earnings growth, utilization and new order activity. Aviation free cash flow* conversion is expected to be 90%+ of net income over time.

2. Can you remind us how the CFM joint venture between GE and Safran works?

Our 50/50 CFM joint venture with Safran is an important partnership for Aviation. In June, we announced the extension of the JV partnership to 2050, where the scope of the agreement covers engines from 18k to 50k pounds of thrust currently covering the CFM56 and LEAP engine families as well as the RISE technology development program. Both GE and Safran are responsible for the development and production of different modules of the engine for both new engine production, spare parts fulfillment, and the associated costs.

Financially, per US GAAP, GE does not consolidate the CFM JV revenues into its financials. For original equipment, GE recognizes revenue for our share of CFM engines delivered.  GE’s commercial services revenues are reflective of the actual spare parts, part repairs, and engine overhauls sold and work performed.  Worth noting, GE is the manufacturer for the compressor and high-pressure turbine on both CFM56 and LEAP engines, and those engine parts are more frequently replaced at the time of service.

3. How does the transition of CFM56 to LEAP impact your commercial services financial outlook?

As airlines prioritize younger, more efficient engines to support their fleet recovery needs, LEAP engines are flying longer hours than their predecessor CFM56 engines.  As LEAP utilization continues to grow, we expect some margin rate pressure driven by engines that are early in the product lifecycle as well as a higher concentration of long-term service agreements. However, services revenue, operating profit and free cash flow* will continue to grow rapidly, as reflected in our latest financial outlook. Through the LEAP transition, CFM56 services are still growing and will be stable through the decade. The CFM56 engines are still young with a lot of shop visit life left, notably ~50% of -5B/-7B engines have not seen their first shop visit. CFM56 shop visits are expected to peak beyond ’23 and sustain at robust levels through the end of the decade, also contributing to profit growth.

4. What is your latest view on aircraft retirements going forward?

Our view of retirements is aligned with Safran and factored into our financial projections. Retirements have been very low to-date and are customer specific decisions driven by fleet needs, fuel pricing, recovery pacing and other factors. Retirements are expected to be concentrated in older aircraft over the next 2-3 years, including some older CFM56 aircraft. Looking ahead, CFM56 has proven an ability to fly with Sustainable Aviation Fuel (SAF), and we believe this is one of the ways to prolong the length of time engines fly as customers focus on reducing CO2 emissions. Based on our latest forecasts, we expect about 3-4% of CFM56 shop visits to fall out over the next decade. We do not expect a significant impact on part-outs or USM in the near-term. Some parts will be impacted more than others, but we expect this will be limited due to technology insertions, hot and harsh utilization, and requirements on life limited part replacements.

5. What is the impact of price/cost in your Aviation segment?

The pricing environment remains healthy although still highly competitive. Looking forward, our view is consistent with Safran, where we expect catalog price evolution consistent with recent history in the mid-single digit range. On services, the vast majority of our contracts include escalation clauses. Regarding cost, we are actively working countermeasures to offset the impact of inflation, including forging different, improved relationships with our suppliers for win/win solutions.

6. What is your outlook for LEAP original equipment engine deliveries, including rate increases beyond 2023?

Our engine production rates are fully aligned with Airbus for the A320neo family and the Boeing MAX aircraft demand through ’23.  This results in up to ~900 expected LEAP engine deliveries in ’21 increasing to ~2,000 units in ’23. We are working with our airframer customers on rates as we always do as part of normal course – it is too early to discuss rates beyond ’23. As we continue to work down the LEAP cost learning curve, we expect LEAP engine gross margins to breakeven by 2025 at the latest.

7. What are your longer-term prospects for Aviation segment growth?

Long-term through the cycle, we expect market growth of low to mid-single digits with operating margin in the high-teens to 20% range, while converting more than 90% of free cash flow*. Near-term, we’re focused on delivering faster top line growth, profitability and cash generation to return to 2019 levels.

Aviation is a global leader in aircraft propulsion and systems with value propositions across efficiency, reliability, and lifecycle economics that are the most competitive and innovative in the industry.  Our commercial franchise is diversified across narrow-body, wide-body, and regional engines, with a flexible service model to support our customers across the largest and youngest installed base. Military demand is robust and our systems and other businesses continue to grow with the market, including new technologies like hybrid electric. We’re investing in lower carbon technologies, such as the CFM RISE program, where we’re aiming to improve fuel efficiency by more than 20%. In summary, we are excited about helping define the future of flight and the long-term growth prospects for the industry and for GE Aviation.

For important information concerning our forward-looking statements, please click here.

*Non-GAAP financial measure