General Electric (NYSE:GE) has a strong position in the aviation market and this segment is essential for the company. As GE has been trying to shift focus towards the industrial arm of the company; the importance of the aviation as well as power businesses of the company has increased further. Recently, there have been some developments in the segment which might prove to be a game-changer and catalyst for growth for the company. In our previous articles we briefly discussed GE's position in the segment compared to its competitors. In this article, we will look into the recent financial developments in the aviation segment. We will further look into how the company's new engines will drive the future growth in this segment and the advantages which the company has over its competitors.
The Value of the Aviation Segment for GE
The aviation segment of the company showed the second highest growth rate of 15% behind the oil and gas segment, which recorded revenue growth of 20%. The industry has shown huge potential and GE has been making the right moves to derive profit out of this opportunity. The overall growth of this segment was 13% in 2013 while in the first quarter of 2014, it was 14% -- current growth rate has surpassed the previous figures.
Moreover, GE has recently announced orders which it won in Farnborough Airshow. The total value of these orders is around $36 billion, including $2.6 billion with American Airlines, $3.3 billion with EasyJet, and $13 billion with Emirates, all at list prices. This will add to $2.9 billion worth of orders that it recorded in the second quarter. With this addition, the negative growth of the order backlog of aviation segment in the second quarter will be turned into a handsome positive number. Besides that, its aviation services order backlog has already shown 13% growth in the second quarter which is the third highest of the overall business.
GE recently announced building a new plant in Lafayette which will manufacture its new line of engines called LEAP Engines. Leading Edge Aviation Propulsion (LEAP) Engine was developed by CFM international, which is a joint venture of GE Aviation and Snecma, a France based company. LEAP Engine's design is a newer version of low pressure turbine of SAFRAN which was used in GEnX Engine. What makes this engine unique is that its turbine blades are flexible enough to untwist as the turbine speeds up its rotation. Along with some other unique combinations of technicalities, this engine has proved itself to consume 16% less fuel than the previous engines.
Although LEAP engines are scheduled to hit the market by 2018, its advantage has given birth to preproduction demand in the airline industry. In the start of this month, the preproduction orders had crossed 6,000. However, the recent international Air Show worked like a catalyst for LEAP Engines and the orders have now crossed 7,500. The company expects to deliver only 1,700, which shows that the demand for the Engines will remain solid, which should also keep the prices at a good level. LEAP engines are schedule to get in production by 2016 and this project will start to have an effect on the income statement of the company in 3 to 4 years.
Continued Innovation is the way to Move Forward in the Segment
GE is also working on another engine to power Boeing's upcoming 777X. GE's engine, GE9X has been exclusively chosen by the company for this new twin-aisle jetliner, which is expected to be in service by 2020. In order to develop this engine, the company has picked Safran (SAF.PA) of France, IHI Corp of Japan, and MTU Aero Engines AG of Germany as partners. All these companies will collectively share 25% of this project. GE will invest $300 million in this program during the current year.
Similar to LEAP Engines, preproduction orders for this engine have already crossed 600. There is strong demand for 777X aircrafts, which is pushing the demand for these engines. Emirates Airlines recently finalized its plan to buy 150 777X aircrafts. Since GE9X is the sole engine to be used in this aircraft, its demand is also rising.
Over the last few months, the rise in the stock price has been very slow as the company is shifting its focus. However, the deal with Alstom and the rising demand for GE's aviation services will allow the company to grow its industrial segment substantially. As a result of this growth, we will see a considerable increase in earnings of the company. We have discussed in our previous articles how fast the airline industry is likely to grow by 2020. GE has an advantage over its competition in this segment it has already secured orders for the engines which are still in the development phase.
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