Podcast Summary: Business Breakdowns – GE Aerospace: Full Throttle

Podcast: Business Breakdowns
Episode: 234
Host: Matt Russell (Colossus)
Guest: Ramesh Narayanaswamy, Co-Founder and Portfolio Manager, Tubian Partners
Release Date: November 14, 2025

Episode Overview

This episode provides a deep dive into GE Aerospace, now operating as a pure-play aerospace business after the well-documented breakup of the GE conglomerate. Host Matt Russell and guest Ramesh Narayanaswamy explore GE Aerospace’s business model, industry structure, supply chain dynamics, competitive advantages, financial profile, capital allocation, and enduring risks. Through their discussion, they reveal the intricacies of the jet engine market, long-term earnings visibility, and the lessons learned from GE’s transformation.

Key Discussion Points & Insights

1. Introduction to GE Aerospace

• Main Business: GE Aerospace designs, manufactures, and services jet engines for commercial and military applications, commanding a massive global installed base.

• Fleet Composition: Out of 70,000 engines, about 45,000 are in commercial aviation and 25,000 are in military applications.

  "GE power something like three out of four, all commercial takeoffs pretty much every day." – Ramesh (04:49)

• Market Share Breakdown:

  • Narrow-body (short haul): ~70% market share (e.g., Boeing 737, Airbus A320 families)
  • Wide-body (long haul): ~50% share (majority positions on Boeing 787, 777, and dominant sole-source provider on 777X)
  • Regional & Business Jets: Balanced exposure (Bombardier, Embraer, etc.)

2. Commercial vs. Defense Businesses

• Commercial Dominance: 85% of revenues come from commercial engine services, with strong operating margins (25%+).
• Defense Segment: Smaller, driven by participation in specific military programs (e.g., F/A-18 Hornet), but less market share than competitors like Pratt & Whitney.
• Propulsion Technologies: 12–15% of revenues, spanning both commercial and military applications.

3. Revenue Model & Aftermarket Dynamics

• Backlog & Predictable Revenue:

  • $175B headline backlog, equating to 4.5 years’ worth of revenues. Commercial backlog closer to 6 years; services backlog up to 7 years.
  • 70% of revenue comes from regulated, services-based aftermarket (spare parts, maintenance, shop visits), which is highly predictable and lucrative.

    "This gives rise to an extremely predictable earning stream... which also tends to be the more profitable earnings stream." – Ramesh (11:45)

• Original Equipment Sales (OE): Engines often sold at deep discounts or losses to aircraft manufacturers (Airbus, Boeing), compensated by the profitable aftermarket.

  "There’s not that much profit on the OE sale for an engine maker because of this. So you typically sell the OE engine at a loss or breakeven at best, and make up for it in the aftermarket." – Ramesh (29:21)

4. The Supply Chain & Barriers to Entry

• Technical Complexity:

  • Jet engine design and production sit among the most challenging feats in modern engineering, with survivable temperatures often exceeding the melting point of the metals used.
  • Reliability, safety, extreme environmental testing, and atomic-scale manufacturing defects make entry extremely difficult.

  "Making a jet engine at scale is one of humanity’s toughest technical challenges." – Ramesh (22:46)

• Industry Structure: Effectively a triopoly among GE (w/Safran), Pratt & Whitney, and Rolls Royce, with entrants facing monumental capital and technological hurdles.

• Partnerships: Notably, GE’s 50:50 CFM International joint venture with Safran is foundational in the narrow-body sector.

5. The Business Model: Two-Sided Customer Base

• OEM Customers: Engines sold to airframers (Airbus, Boeing, Comac) – highly consolidated, with the airframer exerting pricing power.

• Airline Customers: Aftermarket services provided for decades to airlines – fragmented airline industry gives GE bargaining advantage.

• Aftermarket Model:

  • Time & Materials: Airlines pay for parts and service as needed.
  • Long-term Service Agreements ("Power by the Hour"): Subscription-like payments for ongoing engine support (increasing prevalence in narrow- and wide-body fleets).

6. Growth Levers & Industry Dynamics

• Commercial Aviation: Air travel expected to continue growing at 1.5x GDP, with significant tailwinds in emerging markets.
• New Platform Penetration: The LEAP engine (entered 2016) will be the largest installed fleet in history, with enormous future service revenue potential.
• Aftermarket Latency: Many in-service engines haven’t yet needed major shop visits, promising continued aftermarket growth.

7. Financial Profile

• Scale: Projected 2025 revenue ~$40B, 75% from commercial engines and services.
• Margins: Group margin >25% for commercial services vs ~11–12% for other segments.
• Capital Intensity: Headline capex <3% of revenue; strong free cash flow conversion due to "harvest phase" of existing engine platforms.
• Returns: Adjusted returns on tangible capital employed of ~20–25% (in line with Safran, higher than Rolls Royce/MTU).

  "The better marker of capital intensity is probably return on capital..." – Ramesh (45:18)

8. Capital Allocation

• Dividends & Buybacks:
  • Management targets returning all excess cash to shareholders (approx. 70%), with 30% through dividends, the rest via buybacks.
  • Disciplined capital return reminiscent of Larry Culp’s Danaher era.

9. Risks & Challenges

• Technical / Reliability Risks: New engine programs (like LEAP) can suffer reliability "teething" issues, potentially disrupting cash flows.
  • "Time on wing" is a key metric: how long engines operate before unplanned maintenance.
• Competitive Dynamics: Pratt & Whitney’s reliability issues have benefited GE recently, but leadership can shift over decades.
• Technological Bets: GE is pushing forward with "open rotor" designs for next-gen efficiency—a high-risk, high-reward technological leap, while others pursue lower-risk paths.

  "If you study history, you know... Pratt and Whitney was maybe 60% of the commercial fleet in 1995 and now is less than 20%. So even the mighty fall." – Ramesh (48:03)

• OEM Power & Program Shifts: Boeing could dual-source upcoming platforms, threatening GE’s current sole-source position.
• Threats from PMA Parts: Regulatory, technical, and commercial hurdles protect GE’s aftermarket, making disruption less likely, especially early in an engine’s life.
• Valuation Cyclicality: During crises, valuation can drop below "liquidation value," giving opportunities for patient investors; at mid-cycle, high multiples reflect scarcity and reliability of earnings.

10. Lessons and Final Takeaways

• Technical complexity sets a near-impossible bar for new entrants ("do not try this at home" business model).
• The bifurcation of buyer (airframer) and long-term user (airline) creates unique economic moats and value chains.
• Management culture, especially the shift from growth/leveraged expansion to durable, focus-driven execution under Larry Culp, is transformative.

  "Durability, rather than sort of a focus on growth, is another lesson, and the last one that comes to mind is how scarcity can drive value." – Ramesh (58:34)

Notable Quotes & Memorable Moments

• Market Share Reality
  "GE power something like three out of four, all commercial takeoffs pretty much every day." – Ramesh (04:49)

• Aerospace Barriers to Entry
  "Making a jet engine at scale is one of humanity’s toughest technical challenges." – Ramesh (22:46)

• Aftermarket Economics
  "Typically on the OE side you sell at a very deep discount... generally end up making losses on the OE side. So you have negative margins until you get to maturity... On the aftermarket side... extremely profitable." – Ramesh (30:43)

• Predictable Earnings
  "This gives rise to an extremely predictable earning stream in the aftermarket, which also tends to be the more profitable earnings stream." – Ramesh (11:45)

• On Valuation
  "...in a way, the install base can be valued like a bond, an inflation protected bond. And there have been times when the market has priced in distress and these companies have been available for proof of purchase below liquidation value." – Ramesh (56:04)

• Management Culture
  "I’ve heard Larry describe his philosophy as common sense, vigorously applied, which is probably a good phrasing of what he did at GE..." – Ramesh (18:28)

Timestamps for Important Segments

• GE Aerospace Basics & Market Shares – 04:42 to 07:36
• Backlog & Aftermarket Revenue Model – 10:57 to 12:31
• Industry Barriers & Technical Complexity – 21:14 to 25:06
• Joint Ventures (Safran, CFM International) – 27:03
• Revenue Model Details (OE vs. Aftermarket) – 29:21 to 36:53
• Growth Levers & LEAP Engine – 37:08 to 39:23
• Cyclicality and Resilience – 40:20 to 42:48
• Margins & Capital Intensity – 43:02 to 47:20
• Capital Allocation Policy – 47:20 to 47:50
• Risks (Technical, Competition, PMA Parts) – 48:03 to 55:50
• Valuation Approaches – 56:04 to 58:21
• Key Lessons & Takeaways – 58:34 to 60:09

Conclusion

This episode provides a masterclass in the structure and economics of the jet engine industry, spotlighting GE Aerospace’s dominance, enduring moats, profitability, and remarkable foresight into future risks and opportunities. Ramesh Narayanaswamy frames GE’s transformation as a case study in unlocking value via focus, management discipline, and exploiting the unmatched durability and visibility of aerospace aftermarket earnings.

Useful For: Investors seeking deep insight into high-barrier, long-cycle industries; anyone interested in business model durability, capital allocation, or the modern industrial supply chain.