GE Aviation

GE Aviation (now officially known as GE Aerospace following its 2024 separation from its parent company) is a world-leading provider of jet and turboprop engines, components, and integrated systems for commercial, military, business, and general aviation aircraft. As a long-standing division of General Electric (GE), it grew into an industrial titan, powering a significant portion of the global airline fleet. The company's engines are the heart of aircraft manufactured by giants like Airbus and Boeing, making it an indispensable player in the aerospace ecosystem. Following a historic corporate restructuring, GE completed a spin-off in April 2024, launching GE Aerospace as a standalone, publicly traded company. This move was designed to unlock value by creating a “pure-play” aerospace firm, allowing investors to bet directly on one of the most durable and profitable business models in the industrial sector.

At its core, GE Aviation's success isn't just about building magnificent machines; it's about a brilliantly crafted business strategy that generates profits for decades after an initial sale.

The company operates a classic “razor and blades” business model, a concept that value investing practitioners love.

• The Razor: GE sells its highly advanced jet engines (the “razor”) to aircraft manufacturers at a relatively low, sometimes even negative, profit margin. This aggressive pricing helps secure long-term contracts and builds a massive installed base of engines worldwide.
• The Blades: The real money is made in the aftermarket. Once an engine is in service, it requires decades of maintenance, repairs, and replacement parts (the “blades”). These long-term service agreements (LTSAs) are extremely high-margin and generate a predictable stream of recurring revenue that is far less cyclical than new aircraft sales. Every engine sold is effectively an annuity that pays out for 20-30 years.

The market for large commercial aircraft engines is a fortress, an effective duopoly that is nearly impossible for new entrants to penetrate. GE Aerospace and its primary competitor, Pratt & Whitney (a division of RTX Corporation), dominate the field, with Britain's Rolls-Royce being another major player, particularly in wide-body aircraft. Furthermore, GE's most successful product line, the engines for single-aisle jets like the Boeing 737 and Airbus A320 families, is produced through CFM International, a 50/50 joint venture with Safran Aircraft Engines of France. This venture is so dominant that it effectively has a monopoly in its segment. This market structure grants the company immense pricing power and stability.

For investors, analyzing GE Aerospace is a case study in identifying a high-quality business with a durable economic moat.

The barriers to entry protecting GE Aerospace are colossal. Building a new jet engine is not a weekend project; it requires:

• Massive Capital: Billions of dollars in R&D are needed for a single new engine program.
• Decades of Expertise: It takes generations of institutional knowledge in materials science, thermodynamics, and advanced manufacturing.
• Regulatory Approval: Engines must undergo years of rigorous testing to be certified by bodies like the Federal Aviation Administration (FAA) in the U.S. and its European counterpart, EASA.
• Entrenched Relationships: The deep, trust-based relationships with airframers like Boeing and Airbus are built over decades and are critical for being designed into a new aircraft platform, a decision that locks in a supplier for the life of that plane.

The 2024 spin-off from General Electric was a landmark event. For years, GE operated as a sprawling conglomerate, and the performance of its excellent aviation business was often overshadowed by challenges in other divisions (like power and capital). This often resulted in a conglomerate discount, where the market valued the whole company at less than the sum of its parts. By becoming a standalone, pure-play aerospace company, GE Aerospace now offers investors a much clearer proposition. Management is 100% focused on aviation, and financial results directly reflect the performance of this single, high-quality business, making it easier to analyze and value.

No investment is without risk. Investors should keep an eye on several factors:

• Geopolitical and Economic Shocks: The airline industry is highly sensitive to global recessions, pandemics, and political conflicts that can depress air travel demand.
• Supply Chain Constraints: The complex, global supply chain required to build and service engines can be a point of vulnerability.
• Technological Disruption: While difficult, long-term shifts toward new propulsion technologies (like hydrogen or electric) could eventually challenge the current paradigm.
• Execution Risk: Delivering new, complex engine programs on time and on budget is always a challenge.

GE Aviation, now GE Aerospace, is a quintessential “wonderful company” that legendary investors like Warren Buffett admire. It boasts a formidable economic moat rooted in technology, intellectual property, and a lucrative aftermarket business model. The recent spin-off has simplified the investment thesis, presenting a focused, high-quality industrial powerhouse tied to the long-term global growth of air travel. While the business is world-class, the key for any value investor is to purchase its shares at a sensible price. Diligent analysis of its valuation relative to its future cash flow is the final, and most important, step in the pre-flight check.