General Electric's (NYSE:GE) aviation unit -- GE Aviation -- has been 'powering a century of flight' across the globe. During the First World War, the company designed America's first airplane engine "booster" or turbosupercharger, and in the 90-odd years that have passed, it's crossed several important milestones. GE built America's first jet engine and has emerged as one of the world's leading producers of commercial aircraft engines. The company plans to invest $3.5 billion in the aviation unit by 2017. Let's find out what's making the company do so, and whether it will take GE to new highs.
Focus on GE Aviation
It's not difficult to understand why GE is investing so heavily in aviation as the segment generates the lion's share of the company's industrial sales and profits. In the recently concluded second quarter, the segment was the second-highest revenue earner among all industrial businesses. It made up for 22.6% ($6.1 billion) of GE's industrial revenues, losing only to the Power business, which accounted for 23.4% ($6.3 billion). In terms of industrial segment profits, GE Aviation took the ace position, contributing 28.7%, ahead of the Power segment's 27.2%. But this may not be the only reason why GE is pumping $3.5 billion into aviation -- it has also to do with the segment's huge upside potential.
Fuel-efficient engines are in high demand
The U.S. aircraft major Boeing has forecast that between 2013 and 2032, global passenger traffic will increase 5% annually, spurring demand for 35,280 new aircraft. One crucial element that helps traffic grow is attractive fares. But, keeping fares in check isn't easy for airlines as the soaring fuel costs make up one-third of their total operating expense bill. This has turned the tide toward fuel-efficient planes.
Oil-guzzling Boeing 747 or Airbus A380 are fast falling out of favor, prompting aero-majors to come up with new planes and reengineered versions of old planes that score high on fuel efficiency and cost savings.
There's a fuel-save promise attached to the entire new breed, whether it is Boeing's built-from-scratch 787 Dreamliner that boasts "10% lesser cash seat mile costs than peer planes," or reengineered 777X that touts "12% lower fuel consumption and 10% lower operating costs than the competition." The 737 Max aims to "reduce fuel use and CO2 emissions by an additional 14% over today's most fuel-efficient single-aisle airplanes." Airbus' all-new A350 XWB claims to be 25% more fuel-efficient than existing planes, and the reengineered A320neo and A330neo assert 14%-15% savings.
Aircraft makers can live up to their lofty claims with the help of advanced engineering and better engines. And this is where GE Aviation's opportunities lie. The company has an added advantage as its engines are used by all three major commercial aircraft segments -- regional, narrow body, and wide body. Rival Pratt & Whitney serves only regional and narrow-body airplanes, while Rolls Royce caters primarily to the wide-body segment.
A big LEAP
GE has been quick to spot the prospects and is busy building next generation engines for next generation aircraft. Its GEnx engines have already won plenty of accolades and have become the company's fastest-selling engine family, with an order backlog crossing the 1,300 mark. It offers 15% better fuel efficiency compared to the older CF6 engine, and at the same time reduces carbon-dioxide emissions. The GEnx engines power Boeing's 787 Dreamliners.
But GE's latest engineering marvel is the LEAP engine that goes a mile further in delivering performance. The engines will be manufactured in collaboration with Snecma (Safran) of France. GE is using 3D printing (also known as additive manufacturing) to make 19 fuel nozzles for the engine, which could lower fuel costs by 15% and help save up to $1 million annually, per airplane. The LEAP engines will power Boeing 737 Max, Airbus A320neo, and COMAC C919.
The $3.5 billion investment will go into upgrading facilities and equipment around the globe, with a major thrust on the U.S. The plan includes building a LEAP engine manufacturing plant in West Lafayette, Indiana for $100 million. GE will also make LEAP engines at its existing factory in Durham, North Carolina. David Joyce, GE Aviation president and CEO, has said, "Beginning in 2015, the LEAP engine will experience a dramatic production ramp-up for the remainder of the decade." The company wants to ramp up total engine production by 30% to 3,300 engines by 2020 from 2,600 engines in 2013.
GE is grabbing the opportunity thrown by the booming commercial aircraft market with both hands. The company knows it has a critical role to play in aircraft makers' and airlines' pursuit of fuel-efficient next-generation planes. By establishing new standards of efficiency and fuel savings in engine technology, GE has set its sight on the future of aviation, and newer highs for itself.
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ICRA Online and Eshna Basu have no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.