General Electric's aviation business has some baggage.
The strongest of the groups within the industrial conglomerate run by Larry Culp is inking solid orders at the Paris Air Show. But under the hood are troubles with some of its main growth drivers. That this cyclical business hasn yet to hit real economic challenges is also one of the more worrying signs that GE still has outstanding risks.
The division's Chief Executive David Joyce had some good news at the biennial industry powwow this week. The company booked the largest single engine deal ever when IndiGo, a low-cost carrier from India, placed a $20 billion order for engines through GE's joint venture with Safran, named CFM International. The company's backlog for its commercial-engines-and-services business is nearing a record at $209 billion, it said during its presentation on Tuesday. Both those factors give GE a foundation to work off.
It desperately needs one. GE, through its joint venture, makes the engines that go into Boeing's 737 MAX, which has been grounded since earlier this year following a pair of lethal crashes. Though production has kept up with targets, that could change , CFM President Gaël Méheust recently said. Now GE is in the process of redesigning an engine for the 777x long-haul jetliner, another Boeing plane, because of some hiccups during testing. Its delivery of this engine could ultimately be delayed.
Other areas of growth aren't a sure thing. Mr. Joyce touted GE's strength within the U.S. military, noting that President Trump's defense budget is up. But GE engines already power more than half of U.S. Department of Defense airplanes, which could limit future growth. A proposed megamerger between Raytheon and United Technologies could step up competition for new orders, too.
Then there is China, the region where air passenger kilometers are growing at the fastest clip. Analyst John Inch at research firm Gordon Haskett cautions that growth in air travel in the country could come down if its economy continues to sputter. A prolonged U.S.-China trade war could shift share away from GE over time, too.
Further concerns show up in GE's numbers. JPMorgan estimates that the aviation segment's 2018 free cash flow could be much less if anomalies such as low cash taxes and big payables benefits were taken into consideration. Gordon Haskett surmises that the read-through on the valuation from the Raytheon-United Technologies merger could mean GE's standalone aviation business could be worth some $50 billion on paper, roughly half as much as some of the more bullish analysts currently estimate.
That is all before taking any large global economic slowdown into account. Industrywide revenue passenger kilometers declined during the latest global recession, according to data from the International Air Transport Association. GE's aviation business remains in the air, but only just.