GE Aerospace's Hit and Miss Engine Strategy: Why the Stock Selloff Misses the Point

Following GE Aerospace’s fourth-quarter 2025 earnings report, investors sent the stock tumbling on concerns about margin pressure. However, the market’s hit and miss assessment of the company overlooks a more nuanced reality. While near-term challenges with spare engine sales do represent a “miss,” the underlying shift toward installed engines for long-term service contracts signals a significant “hit” for future profitability that shouldn’t be ignored.

The core tension stems from how airlines are changing their spare engine purchasing behavior. During the post-lockdown supply chain crisis, carriers accumulated spare engines at elevated ratios to ensure operational continuity. Now, as supply chains normalize, those ratios are declining—a development CFO Rahul Ghai directly addressed on the earnings call, noting that “margins are expected to be flattish here in 2026.” This spare engine hit impacts near-term financial performance, but the bigger story involves how this reshuffles GE’s profit drivers.

The Two Engines Powering GE’s Business Model

GE’s commercial aircraft engine business operates on a distinctive economics model built around two distinct revenue streams. The company designs and manufactures engines including the CFM56 (powering legacy Boeing 737 and Airbus A320 families) and the newer LEAP technology (used on Boeing 737 MAX and Airbus A320neo). Newly installed engines typically generate razor-thin margins during initial years, essentially serving as long-term investments that unlock decades of high-margin aftermarket revenue through service agreements.

Here’s where the hit and miss dynamic becomes critical. Spare engines sold to airlines represent immediate profit opportunities—they’re standalone sales at premium prices. Installation engines, by contrast, are frontloaded losses that pay dividends over 40+ year service lifecycles through lucrative long-term service agreements (LTSA). During the supply chain crisis, airlines needed spares urgently, creating an unusual hit for near-term profitability. That window is closing.

Why Fewer Spares Actually Signal a Bigger Hit for Long-Term Value

The apparent miss—declining spare engine sales—actually masks a strategic hit for investors willing to think beyond 2026. Consider the operational reality: GE’s engines continued running at consistently high utilization rates through 2025, with retirement rates mirroring 2024 levels. Management expects 2026 retirement rates to reach 2%, sitting at the low end of their 2% to 3% projection range. This means older aircraft stay operational longer, directly boosting aftermarket demand.

Simultaneously, as LEAP engine deliveries ramp up through 2026 and beyond, the composition of GE’s sales increasingly tilts toward installations rather than spares. This directional shift appears negative for margins in the near term—CFO Ghai’s “flattish” margin guidance reflects exactly this pressure. Yet the miss on margins becomes a substantial hit when measured against installed engine utilization patterns. Engines actively running in commercial service generate far more aftermarket revenue than those sitting idle in airline hangars.

The data substantiates this trajectory: GE expects LEAP deliveries to continue accelerating as supply chain bottlenecks ease. Higher installed engine volumes today translate directly into expanded service revenue streams tomorrow, even if quarterly profit margins take a step backward.

The Valuation and Opportunity Question

Admittedly, GE Aerospace doesn’t appear cheap at current valuations, trading near 40 times expected 2026 earnings. Yet nothing in the Q4 2025 results justifies the aggressive selloff from a long-term investor perspective. The market’s hit and miss judgment appears inverted—treating temporary margin pressure as a fundamental deterioration when the opposite is occurring.

The stock experienced a sharp correction that may have overshot fundamentals. While the hit to near-term margins is real, it’s driven by a fundamentally positive dynamic: the business is shifting toward higher-lifetime-value engine placements even as spare engine sales normalize. For investors focused on multi-year holding periods, the current sell-off presents a potential entry point rather than a capitulation signal.

GE Aerospace remains positioned within a durable, decades-long aftermarket revenue cycle that rewards patience. The hit and miss narrative around spare engines shouldn’t distract from the company’s structural positioning within global commercial aviation’s long-term growth trajectory.