The Rebirth of a Titan - GE Aerospace
Few names in American business history carry as much weight as General Electric. Founded by Thomas Edison in 1892, GE has long been synonymous with industrial innovation and engineering excellence. From light bulbs and home appliances to jet engines and healthcare technology, GE has touched nearly every aspect of modern life. However, the company’s journey has not been without challenges. Over the past few decades, GE faced significant hurdles, including financial crises, shifting market dynamics, and the need to streamline its sprawling operations.
Today, GE stands at the dawn of a new era, reborn as GE Aerospace. This transformation is the culmination of years of strategic restructuring, divestitures, and a renewed focus on its core strengths. GE Aerospace represents not just a rebranding but a fundamental shift in the company’s vision—an intense focus on innovation in the aerospace and defense sectors, industries poised for sustained growth in the 21st century.
As a standalone entity, GE Aerospace is now free to harness its engineering prowess and operational expertise to capitalize on the booming demand for next-generation aviation technology.
Quality Factors
High Barriers to Entry
Duopoly
The commercial jet engine business has two different end markets, wide-body jets (twin aisle) and narrow-body jets (single aisle).
Two companies dominate each end market. GE Aerospace and Rolls-Royce dominate wide-body engines. GE Aerospace and Pratt & Whitney dominate narrow-body engines.
Measured by its total engine install base of 40,000 plus commercial engines, GE Aerospace participates in about 75% of the commercial jet engine market.
It took years and massive capital investments in R&D and in manufacturing facilities by GE Aerospace to reach this position. It would be extremely cost-prohibitive for a new entrant to the jet engine market to compete for GE Aerospace’s business. Even if a potential competitor were able to raise the capital to build out their manufacturing capabilities, could they reach the same economies of scale that GE Aerospace has reached to make the effort economically worth it?
R&D
GE’s R&D spend has consistently produced stronger more fuel-efficient engines with impeccable safety ratings. It’s why GE Aerospace earned a leading position in jet engine manufacturing and it creates a self-reinforcing positive cycle.
GE’s leading manufacturing position gives it better economies of scale than its competitors leading to higher operating margins. This creates a virtuous cycle. Higher margins allow GE to reinvest more capital as a percentage of revenue back into R&D. The increased R&D allows GE to maintain its current market position and invest for future growth.
High Switching Costs
The jet engine business also comes with incredibly high switching costs
Once an aircraft is configured to a specific engine, it is extremely difficult to switch to another engine brand. It requires major changes across the whole plane like the mounting pylon, the wiring and ducting, instrumentation, and avionics systems. The aircraft would be out of commission for a long time and every minute that plane is not flying it is losing money. It’s not financially worth it to change engines.
Airlines have built out their maintenance, repair, and overhaul (MRO) services to be as efficient as possible and focused on servicing as few jet engine types as possible.
Not only would it be costly and time-consuming to switch engines on a plane, but it would also be costly to retool and reconfigure your MRO services.
If you’re a smaller jet engine maker trying to gain market share against GE Aerospace you have to wait for the next cycle of new aircraft to try and get your engines onto planes and into fleets. But then you face two more problems.
Long Operating life
Commercial jets and their engines are built to operate for 20+ years. If you're a competitor that wants to gain market share when the next airplane build cycle comes around, you’ll have to wait 20 years and continue to invest in R&D to ensure that your engine is a viable option.
Without an existing commercial engine business, it is tough to justify a 20-year cycle of investment with the hopes that your engine gains market share.
The last hurdle is GE Aerospace’s long track record of safety and your lack of one.
Safety
David Rubenstein: What is the most important issue when people buy jet engines?
Larry Culp: Safety. Safety. Safety.
A plane crash is one of the most visceral tragedies in the modern world. It’s not just the sudden massive loss of life but the fear it instills in all of us as would-be travelers.
Even if a crash were 100% out of an airline's control, they could still face a consumer backlash. Airlines already operate with thin profit margins and any consumer backlash could push the airline into the red. Airlines want the safest planes and the safest engines.
GE became the first company that designed its engines to be recognized by the FAA for its safety management systems.
And GE Aerospace has a long history of safe engine operations.
Does an airline put its entire operation at risk and switch to new jet engine maker or stay with a company with a long-proven track record of safe operations? GE’s multidecade track record of safety creates an incredibly high switching cost.