Boeing's (NYSE:BA) new 777X series of commercial jets will soon become the largest twin-engine jets on the market. To power them, Boeing needed the world's most powerful jet engines. General Electric (NYSE:GE) has spent years developing the brand-new GE9X engine to serve just that purpose.
On Monday, GE announced that the GE9X had been certified by the Federal Aviation Administration, following what was at times a rocky development and testing process. This marks a big step toward getting the 777X itself certified for commercial service and beginning deliveries.
The GE9X is finally certified
General Electric's GE9X is a slightly larger and more powerful successor to its GE90 engine, which powers the current-generation Boeing 777. The GE9X's fuel efficiency is 10% better than the newest variant of the GE90 and 5% better than any other engine in its class, according to GE. That's a big driver of the 777X's fuel-burn advantage over older models.
There were plenty of bumps along the way to getting the GE9X certified. Most notably, a mechanical issue with the engine's high-pressure compressor forced Boeing to postpone the 777X's first flight last year. That ultimately caused the entry-into-service date to slip from late 2020 into 2021. (Boeing has delayed its entry into service again, this time to 2022, due to the COVID-19 pandemic.)
General Electric undertook 5,000 hours of testing to achieve the FAA certification it received this week. It has delivered eight test engines and two spares to Boeing to support flight testing on the 777X. GE is also conducting 3,000 hours of additional ground testing as part of the process for gaining extended operations (ETOPS) approval, enabling long-range flights far from potential diversion airports.
Different challenges ahead
Certification represents a big milestone for the GE9X engine, but it doesn't mean the road ahead will be easy. For one thing, GE will need to reduce production costs, as new types of jet engines are typically produced at a loss initially. Moreover, the pandemic has crushed air travel demand, causing nearly all airlines to pull back dramatically on aircraft purchases. Large wide-body jets like the 777X are particularly out of favor due to weak demand on long-haul routes.
These issues are surmountable, though. Boeing has 309 777X orders in its backlog. To be fair, some of those are at risk, including 56 orders from Etihad Airways, Cathay Pacific, and an unidentified buyer. Top customer Emirates (which has 115 on order) also wants to swap some 777X orders for the smaller 787 Dreamliner, according to Bloomberg.
But most 777X customers are still committed to taking the jet, albeit perhaps with a more elongated delivery schedule than originally planned. These include ANA, Lufthansa, Qatar Airways, and Singapore Airlines. With Boeing cutting output of the 777 family of jets to just 2 per month next year, near-term demand and planned production are relatively well aligned.
Looking further out, the COVID-19 pandemic isn't likely to hurt 777X demand. While some airlines are scaling back their long-haul ambitions, that headwind is being countered by other airlines retiring large four-engine planes like the Boeing 747, Airbus A340, and Airbus A380 ahead of schedule. Emirates alone has over 100 A380s, most of which it is likely to retire over the next decade. So even if it switches some 777X orders to the smaller 787 in the near term, it is likely to replenish its 777X order book within a few years to replace the A380s.
Patience is required
The key determinant of GE Aviation's recovery over the next couple of years will be how quickly utilization of key aircraft models like the 737, A320, 777, and 787 returns to near 2019 levels. The segment generates the bulk of its profit from servicing GE jet engines. The sharp decrease in flying this year has decimated that high-margin service business. As utilization recovers to normal levels, revenue and profit will bounce back.
For the next five years at least, GE is likely to lose money on GE9X output, while service revenue for the type will be minimal. But as Boeing ramps up 777X output toward the middle of the decade, GE should be able to bring down unit costs, eventually reaching breakeven. Meanwhile, the growing installed base of GE9X engines will support a substantial stream of high-margin service revenue in the 2030s and 2040s.
Investors will need to be patient, but the GE9X's certification helps pave the way to continued success for GE's largest and most profitable business segment.