The Importance Of GE's Credit Rating

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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Disclosure: The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog ...

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