Why GE Aerospace's Engine Business Faces a Hit-and-Miss Margin Cycle—But Long-Term Prospects Remain Strong

The market’s aggressive selling of GE Aerospace stock following its Q4 2025 earnings results tells only half the story. Yes, management’s guidance for flat operating margins in 2026 disappointed investors expecting profit growth alongside low double-digit revenue expansion. But dig deeper into the company’s engine business model, and you’ll discover that this near-term margin pressure is actually a sign of long-term health rather than weakness.

Understanding the Engine Spare Ratio: From Crisis to Normalization

To understand what’s really happening at GE Aerospace, you need to grasp the dynamics of its core business: designing and manufacturing commercial aircraft engines. The company produces the CFM56 (powering Boeing’s legacy 737 and Airbus A320 family) and the newer LEAP (used on the 737 MAX and A320neo).

The engine business operates on a counterintuitive economics model. When GE first delivers newly installed engines to airlines, those sales often generate minimal or negative margins. The real profit comes later—through decades of highly lucrative aftermarket service revenue from long-term service agreements (LTSA). Since aircraft engines can operate for 40+ years, this creates an enormous revenue stream for supporting those installed powerplants over their lifetime.

But there’s another crucial profit driver: spare engine sales. Airlines purchase backup engines to ensure they can maintain flight schedules without interruption. During and immediately after the pandemic lockdowns and supply chain crisis, carriers became extra cautious, building up larger inventories of standby engines. This pushed the spare engine ratio—the proportion of backup engines to those installed in active aircraft—to elevated levels, generating significant near-term profitability for GE.

The Spare Engine Normalization: Why Margins Will Feel the Pressure

Now that supply chain conditions have stabilized, airlines are reducing their spare engine holdings back to historical norms. GE’s Chief Financial Officer Rahul Ghai acknowledged this dynamic on the latest earnings call, stating that “margins are expected to be flattish in 2026” due to a lower spare engine ratio.

This is a temporary hit. As carriers reduce backup inventories, the mix of GE’s sales shifts. Historically profitable spare engine sales drop, while sales become increasingly weighted toward newly installed engines—which, as noted, carry thinner near-term margins. That’s why the company faces this margin cycle pressure in 2026 and likely 2027.

Why This “Headwind” Is Actually Tailwind for Smart Investors

Here’s where the market gets it wrong. Management revealed two critical insights that suggest GE’s long-term earnings power is actually strengthening, not weakening:

First: Older aircraft are staying in service longer than expected. The retirement rate for GE engines in 2025 remained similar to 2024, with management expecting just 2% retirement rates in 2026—at the low end of their 2%-to-3% guidance range. Longer aircraft lifecycles mean more installed engines in the field generating service revenue for additional years. That’s pure gold for GE’s high-margin aftermarket business.

Second: While shifting toward more installed engine sales pressures near-term margins, this transition actually improves long-term profitability. The key insight investors miss: installed engines generate far more aftermarket revenue per unit than spare engines sitting in hangars. As GE accelerates LEAP engine deliveries (the industry’s latest high-efficiency model), each new installation becomes a 40-year revenue stream rather than a one-time sale.

The Hit-and-Miss Market Reaction Masks a Structural Strength

The market’s sharp sell-off reflects emotional reaction to guidance that sounds uninspiring on the surface. But this is precisely the kind of margin cycle that creates opportunity for patient capital. The company isn’t weakening; it’s transitioning from short-term crisis profiteering to sustainable long-term cash generation.

GE is trading at less than 40 times expected 2026 earnings—not particularly cheap by historical standards, but hardly expensive for a company with decade-long visibility into engine service contracts. The recent selloff presents a chance for investors willing to look beyond quarterly margin guidance and understand the multi-decade engine service economics at play.

The market’s hit-and-miss approach to GE Aerospace stock—punishing the company for predictable business cycle dynamics—suggests that those with a longer investment horizon should take a closer look at what the engine manufacturer’s future really holds.