GE Aviation Posts Profit, Points To Services Recovery
Steady increases in key metrics including departures and spare parts sales have GE executives confident that its aviation services unit is headed in the right direction and original equipment (OE) sales are poised to follow as aircraft production rates increase, company executives said.
“We’re starting to see improving fundamentals associated with the commercial market recovery across services and [original equipment] production,” GE CFO Carolina Dybeck Happe said during the company’s second quarter (Q2) earnings call July 27. “While departure trends continue to vary by region, we still expect the global recovery to accelerate in the second half.”
Departures of aircraft powered by GE Aviation or CFM International engines were down 27% for the week ended July 21 compared to the same week in 2019. While a significant drop, the figure has been steadily climbing since mid-Q2, when it was down 40% from 2019 levels. GE Aviation and Safran are 50-50 joint venture partners in CFM.
The recovery is varying by region. In China and North America, departures are within 6% and 11% of 2019 departure levels, respectively, led by strong domestic markets that are less affected by COVID-19-related transborder travel restrictions limiting international flights. In Europe, departures are down 40%, while the Asia-Pacific region not including China was down 63%, GE’s figures showed.
While inconsistent across the board, the general increases are driving more maintenance spending.
“Shop visit volume trended better than our expectations, up over 30%” year-over-year, Dybeck Happe said, while work scopes improved “slightly” compared to the 2021 first quarter (Q1).
The company’s spare parts rate—commercial spares shipped out or used in GE-provided time-and-materials shop visits expressed in millions of dollars in sales per day—increased as well. Q2’s $15.0 million/day figure was up compared to Q1’s $13.2 million/day as well as 2020 Q2’s $13.1 million/day. Pre-pandemic, the figure was around $30 million/day.
As long-haul traffic recovers, the figure should rise steadily as more lucrative widebody work picks up.
“Broadly, we’re seeing higher concentration of narrowbody visits, which typically have lower revenue,” Dybeck Happe said.
GE is projecting a sequential improvement in shop visits in the third quarter (Q3), and a 25% increase compared to Q3 2020.
“I think our view is that we will continue to see strong year-over-year shop visit numbers,” CEO Larry Culp said. “I think we’ll see a gradual continuation of the improvement sequentially as well. That suggests a number of these impediments, like green time”—use of available spare engines in lieu of spending money on maintenance—“fade with time, but they don’t disappear.”
“We’re obviously watching some other variables here like the [COVID-19] delta variant,” Culp said. “But at this point, I think we’re optimistic about the second half performance in aviation services.”
GE Aviation’s Q2 revenues of $4.8 billion were up 10% year-over-year, led by a 24% increase in commercial engines and services, to $3.1 billion. The segment’s profit was $176 million, compared to a $687 million loss in Q2 2020.
GE sold 383 commercial engines in Q2 compared to 362 in Q2 2020. Sales of CFM LEAPs totaled 211, up from 178.
GE Aviation’s results included an approximately $300 million negative adjustment linked to a long-term narrowbody services agreement “that turned into a loss-making contract,” Dybeck Happe said.
The change came following an annual review that each of the company’s long-term deals goes through that compares projected versus actual shop visits, overhaul costs, and margins.
“What technically happens then is that you don’t only update history to that new margin, you also pull forward all the expected or possible losses that you would have going forward on that contract,” Dybeck Happe said. “That’s why it had such a big impact in the quarter, with almost $300 million.”
GE says it has about 200 long-term agreements covering 12,800 of the 37,700 GE and CFM engines in service.
Separately, the company continues to expect its sale of leasing arm GECAS to AerCap to close by year end. The European Commission cleared the deal July 26, adding its approval to that of AerCap shareholders and the U.S. Justice Department.
Note: the original version of this article contained an incorrect figure related to the long-term contract adjustment. It has been corrected.