NEW YORK (TheStreet) -- General Electric's (GE) record $150 billion jet-engine backlog is propelling its aviation business toward becoming the company's biggest profit generator, heightening the significance of airline customers.
Growth in aviation and other manufacturing divisions is more important than ever for Fairfield, Conn.-based GE as CEO Jeff Immelt executes a plan to shed most of the GE Capital finance unit, its biggest single revenue generator, and hit a 2018 target of drawing 90% of total operating profits from the company's industrial units.
Last year, the finance unit accounted for 28% of $18.6 billion in operating income, while the power-and-water business -- the biggest industrial profit generator at the time -- made up 22% and aviation provided 20%. Still, the jet-engine business posted annual growth of 14%, roughly twice as much as the power-and-water segment, and may overtake it within two years if that pattern holds.
"GE, as well as many other diversified industrials exposed to the commercial aviation industry, have all been enjoying a cyclical upswing," Barbara Noverini, an equities analyst with Morningstar, wrote in an email to TheStreet. "As such, the aviation segment has experienced healthy revenue growth and profitability expansion."
The business is benefiting from improved performance by airlines, which have been reducing capacity for six years to bolster profitability and can also take advantage of interest rates near record lows
"When you get a period of excess liquidity and low rates, the tendency is to modernize their fleet," said Nicholas Heymann, an equities analyst with William Blair. Indeed, both Airbus and Boeing (BA), the world's largest planemakers, introduced upgraded jetliners in the past several years that offered more fuel-efficient engines from GE and smaller competitors like United Technologies' (UTX) Pratt & Whitney unit.
GE and its joint ventures are the largest engine provider for commercial airliners, and at the recent Paris Air Show, the company touted its new LEAP-x engine, which is seen as a successor to the widely popular CFM56.
The LEAP engine is produced by CFM, a joint venture between GE and Snecma, a French aircraft manufacturer and subsidiary of Safran (SAFRY). The CFM56 "is the best selling engine in the world, has the largest installed base in the world, and a tremendously large backlog," Heymann said. "You are now seeing LEAP come in as a successor to the CFM platform and are starting to see still greater and higher efficiency in engines."