The cover story in Barrons this week is on GE’s dim prospects. I confess to being a very minor source for that story. I don’t own General Electric (GE) – but there is a price below the current price where I would buy it.
That said, I think there is one last shoe to drop, and it is a doozy. And it wasn’t covered in Andrew Bary’s excellent article. That is that GE’s credit rating – and hence its business – is under threat.
GE’s best business (by far) is jet engines where it competes with Rolls Royce (in wide-bodied engines) and a Pratt & Whitney consortium in narrow bodied engines.
There is a new generation of engines (and planes) now – and the aviation business is booming. Boeing’s stock price reflects that.
But GE is no longer the unequivocal engine leader. In wide-bodied (ie planes with two aisles) the current leader is the Airbus A350 powered by a Rolls Royce engine. It is the most fuel efficient long-haul plane on the market (measured in fuel cost per passenger-mile) and the engine is provided exclusively by GE’s competitor. GE is playing catch-up – but will probably succeed with the Boeing 777x which (on paper anyway) will take the mantle as the world’s most efficient plane.
In narrow-bodied the GE may still be the leader but Pratt & Whitney has caught up a great deal. Picking the competing engines apart is difficult (although at the moment the Pratt & Whitney competition has problems with a knife-edge seal). [I know serious aviation nerds who think the P&W engine is a better product with better prospects – although I think that is a minority view.]
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The jet-engine business is threatened by GE’s current worries. You see jet engines (especially wide-bodied jet engines) are sold with very long-term maintenance contracts. If I order a 777x now it will be a couple of years before the first delivery, maybe 10 years before my delivery and expect to be flying the plane for another 20-25 years after that. I may be ordering 10 planes in which case my last delivery may be 15 years away and I expect to fly that plane for a further 25 years.
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