General Electric's (GE) crucial relationship with Boeing (BA) is a complicated issue for GE, but it might not be the big problem many expected.
The initial implication of the Boeing crash was worrisome for GE as the plane manufacturer is GE's second largest relationship after Swiss tech giant OC Oerlikon Corporation and has an impact on both GE Aviation, which manufactures the LEAP-1B engines alongside Safran Aircraft Engines (SAFRF) , and GE Capital Aviation Services (GECAS), which purchases MAX 8's for its jet leasing service.
Barclays' estimates pin LEAP engines for Boeing's MAX models at 3% of 2019 revenue for GE, while GECAS currently has 22 737 MAX's on its books, with more than 150 on order. The GECAS program is the second largest customer for MAX aircraft, behind only Southwest Airlines (LUV) .
"A slower delivery ramp of the MAX may mean slightly smaller LEAP losses in 2019, but would negatively affect the medium-term slope of how quickly the program breaks even," Barclays analyst Julian Mitchell said.
The slowdown as planes remain grounded would delay the 2021 break-even that management has slated for the LEAP program.
"Aviation is roughly flat year-on-year, while we expect negative free cash flow in 2019, I'd like to underscore that we expect to cross well into positive territory in 2020 with further acceleration in 2021," CFO Jamie Miller explained.
To be sure, GE Aviation is protected somewhat as the demand remains strong for the LEAP engines not only from Boeing, but also its chief competitor in Airbus (EADSF) .
"[We have] over 1,200 engines in service at 100 operators across the 320Neo family and the 737 Max, a terrific product positioning," GE Aviation CEO David Joyce told investors on Thursday morning. "We're holding 58% win rate on the [Airbus] 320Neo's, 320s, family and a sole source on the [Boeing] 737 Max and the COMAC C919, which is still in development."
Additionally, the company's GEnx engines are the preferred engines for Boeing's less controversial models like the 787 Dreamliner.
That is not to mention the military performance for the segment.
"Military outlook will benefit from the growth in the President's DOD base budget," Joyce pointed out. "We see an increase in science and technology spending, as well as operations and maintenance. Additionally, internationally, defense spending is growing anticipated to be up 6% both in 2019 and again in 2020."
Overall, analysts were optimistic that timelines will be able to remain on track.
"The last time there was a major such grounding was on the Boeing 787 program. During this time, Boeing continued to produce the aircraft, and suppliers continued to be paid," Barclays' Mitchell noted.
He even expected only minor impacts to Honeywell (HON) , a name that would possibly be more connected if the cause is in any way similar to the Lion Air crash in October. That disaster was precipitated by a failure in reference installations provided by Honeywell. From eye witness accounts, an issue with a similar system is far more likely than any trouble to do with the structure of the aircraft or engines provided by GE.
Overall, the outlook for aerospace and aviation coming from GE executives was far from rosy, as free cash flow is slated to turn from $4.2 billion to flat in 2019 before hitting a turnaround. But Boeing shouldn't be adding too much bearishness on Thursday.
