GE Aerospace's Q1 Earnings Call Confirmed the Services Cash-Cycle Has Begun

Aerospace services revenue follows a predictable shape that sits at the heart of the GE Aerospace investment case. New engines deliver to airline customers and run for 4-7 years before the first major shop visit. The shop visit is where the aftermarket revenue arrives. Spare-parts catalogue purchases at the visit run at 4-6x the original equipment price across the engine's life. Each engine in the installed base is therefore an annuity-like revenue stream that compounds for 20-25 years.

The LEAP-1 engine, jointly produced through the CFM joint venture with Safran, has an installed base of approximately 4,200 engines as of end of FY2025. Most of those engines were delivered between 2017 and 2024, meaning the wave of first major shop visits is now landing on the services line. The shop-visit cohort grows from approximately 350 visits in FY2025 to a modelled 700+ visits annually by FY2028. At an average services revenue of $4.3 million per visit (current run-rate), the LEAP services revenue line scales from roughly $1.5 billion in FY2025 to north of $3 billion by FY2028. That is purely from the shop-visit curve, before any pricing escalation or scope expansion.

The LEAP curve is layered on top of the existing CFM56 services stream, which remains the franchise cash cow. The CFM56 fleet (over 14,000 engines flying) continues to generate $4-5 billion of annual services revenue with the natural fleet retirement trajectory pushing those engines toward end-of-life heavy maintenance. The combined LEAP and CFM56 services revenue, net of fleet retirements, is on track to grow at 14-16% annually through FY2030.

The pattern, looking back across two prior generations of CFM engines, has been consistent. Services revenue accelerates 5-8 years after the production-volume peak. The original CFM56-3 followed this curve from 1994-2002. The CFM56-7B repeated it from 2010-2018. The LEAP curve is now beginning. Engine services compounding cycles last 8-10 years from inflection to peak.

Post-spin, GE Aerospace inherited a capital allocation framework that emphasised three priorities: maintain investment-grade balance sheet, sustain a moderate dividend, and reinvest in services capacity to capture the LEAP shop-visit curve. With the FCF inflection now visible in the FY2025 numbers, the allocation framework has tilted noticeably toward shareholder returns.

The FY2026 buyback authorisation runs at $7 billion, up from $4 billion in FY2025. At today's $309 print, that is roughly 2.3% of the share count repurchased over twelve months. The dividend grew 30% year on year, although from a low absolute base post-spin. The dividend coverage ratio at end of FY2025 sat at 23% of FCF, well below the historical aerospace-prime average of 35-40%. The room for above-historical dividend growth is meaningful.

Capex remains disciplined. FY2025 capex of $1.27 billion ran at 2.8% of revenue, well below the 4-5% historical conglomerate-era levels. Most of the capex flows to LEAP and CFM56 services capacity expansion, which the Capital Desk views as high-ROIC investment given the services-revenue trajectory described above. We model FY2026 capex at $1.4-1.6 billion, still below 4% of revenue.

The debt trajectory has improved. Net debt at end of FY2025 stood at $8.1 billion against EBITDA of approximately $11.5 billion, a 0.7x leverage multiple. That is well within investment-grade parameters and below management's 1.0-1.5x stated comfort zone. The balance sheet flexibility means the buyback can scale further if FCF growth continues to outpace the current authorisation pace.

Return on invested capital sits at approximately 18% on the FY2025 reconstruction, well above the cost of capital. Capital allocation that earns above cost of capital is value-accretive by definition. The Capital Desk view is that GE Aerospace is now in the canonical position for a high-quality industrial: rising FCF, expanding margins, disciplined capex, increasing buyback. Each year of compounding from here adds to the per-share earnings power.

FY2025 revenue grew from $38.7 billion to $45.9 billion, an 18.5% pace. Operating income climbed from $6.76 billion to $8.77 billion, expanding at 30%. Net income climbed 33%. Each successive line on the income statement showed accelerating operating leverage as the services mix shift continued.

Gross profit reached $16.9 billion at a 36.8% gross margin, up 240 basis points from FY2024. The services-revenue mix shift drives the gross margin trajectory. Services gross margins run in the high 30s, original-equipment in the low-to-mid teens. As services revenue grows from approximately 58% of total revenue today toward the modelled 65% by FY2028, the consolidated gross margin should drift toward 40%.

Operating expense discipline has been a feature of the post-spin financial profile. SG&A at 13.6% of revenue in FY2025 was below the 15.4% level in FY2023. R&D ran at 4.1% of revenue, a normal absolute level for a major-engine programme. Each line of operating expense has scaled below the revenue growth pace, which is the ingredient that turns top-line growth into operating-margin expansion.

Return on assets reached 6.7% on the FY2025 base, up from 5.2% in FY2024. The pre-spin GE conglomerate ran at 1-2% ROA across most of the prior decade. The standalone Aerospace business, with its concentrated services exposure, has structural ROA capacity in the 8-10% zone. We model the company reaching that level by FY2027.

The net pension liability, often a hidden line item in industrial spin-offs, came in at $5.8 billion at end of FY2025, down from $7.4 billion at the spin date. The de-risking trajectory is favourable, and the cash funding requirement through FY2027 is manageable inside the FCF profile.

The aerospace aftermarket cluster has produced some of the best returns in industrials over the past decade. TransDigm trades at roughly 28x EBITDA on a niche-component aftermarket franchise. Heico trades at 35x EBITDA on a similar profile with more diversification. Howmet, more cyclical with stronger original-equipment exposure, trades at 17x EBITDA. GE Aerospace at roughly 19x EBITDA sits in the middle of the cluster despite having the largest installed-base aftermarket exposure of any operator in the segment.

The multiple gap to TransDigm and Heico reflects two factors. First, GE Aerospace's exposure includes the original-equipment line, which is lower-margin and inherently more cyclical than the pure-aftermarket peers. Second, the Vernova spin-off transition has been a recent enough corporate event that the market is still digesting the standalone profile. As that digestion completes and the FCF compounding becomes visible across multiple quarterly prints, the Capital Desk view is that the multiple gap to TransDigm and Heico compresses by 200-300 basis points of EBITDA.

A closer comparable is Rolls-Royce, the other large-engine aftermarket franchise. Rolls-Royce trades at roughly 14x EBITDA on a smaller installed base and slower services growth profile. The relative-value case for GE Aerospace versus Rolls is straightforward: larger installed base, faster services cycle, stronger US dollar exposure, cleaner capital structure post-spin. The multiple should command a premium of 25-35% to Rolls. It currently does, at the lower end of that range.

The Howmet comparison surfaces in headlines because both companies serve the same airframe customers. The competitive overlap is real but small. Howmet specialises in high-performance components (engineered fasteners, fastening systems, structural castings). GE Aerospace makes the engines that those components attach to. They are complements more than competitors.

The bear thesis on GE Aerospace concentrates on three risks. First, a LEAP-engine reliability event that triggers a fleet-wide inspection programme similar to Pratt's GTF recall. The disclosure cadence at CFM has been clean through the engine's commercial life. The original-design specification was conservative on hot-section materials, and the in-service data on time-on-wing has been consistent with the engineering targets. The base rate on a major reliability programme arising in any given year for a mature in-production engine is approximately 4%. The probability is not zero, but it is low.

Second, a sustained Boeing or Airbus production disruption. The Boeing 737 MAX production issues of 2024 are now mostly resolved, with monthly production rates climbing back toward the 38-aircraft level by mid-FY2026. Airbus A320neo production is running at the highest absolute monthly rate in the platform's history. Both are structural tailwinds for LEAP original-equipment revenue. A geopolitical-shock-driven setback is the obvious tail risk but is not currently in the data.

Third, an airline-traffic compression that reduces shop-visit volume. The historical correlation between RPK growth and shop-visit cadence is high, with a 12-18 month lag. RPK growth has run at 6-7% globally over FY2025, ahead of trend. The leading indicators (forward bookings, capacity additions) point to continued traffic growth through FY2026. A traffic compression of magnitude similar to 2009 or 2020 is the tail risk; outside of that, shop visit volumes track production deliveries.

The combined probability-weighted view leaves the central case essentially unchanged. The capital allocation programme works in essentially every scenario short of a major LEAP reliability event or a global-traffic compression. The setup is structurally favourable.