GE Aerospace Stock

Hello. Good morning, everyone. I'm Kristine Liwag, Morgan Stanley's Head of Aerospace & Defense Equity Research. Very excited to host our next panel of GE Aerospace with Rahul Ghai, CFO of GE. So welcome, Rahul.

Thank you, Kristine.

Before we get started, you guys know the drill. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representatives.

So with that, maybe Rahul, I'll pass it on to you for some opening remarks.

Thank you, Kristine. Thank you for having us. Obviously, excited to be here. There's lots going on. As you guys know, GE Aerospace is a great franchise, one of the largest aerospace and defense fleets, 80,000 aircraft underwing right now, 50,000 on commercial, one of the fastest growing in the world, 30,000 on defense. We power 2/3 of the U.S. combat aircraft. So a fantastic franchise.

And it has been a very, very busy summer for us. Last time most of us were together was at Farnborough. And prior to that, we reported our second quarter earnings. But we had a really good air show. We got over 1,800 new engine orders at Farnborough, including the largest ever aerospace order from IndiGo Airlines for the LEAP-1A engine. That was a 1,000-plus engine order. And since then, we also got 100 engine order yesterday, engines and services from the Korean Airlines. So really strong commercial momentum in the business.

And making really strong strides on the technology side as well as we think about both the current gen and future generation of aircraft. First ever hybrid-electric flight at the commercial altitude that flew from U.S. to U.K. in partnership with BETA and with Boeing, but really excited about what our engineering teams have done on that front and what that can mean for our -- the future of aviation.

And then last week, we announced our largest acquisition as GE Aerospace, a stand-alone company, with CPP. Three main drivers as we think about the CPP acquisition. First and foremost, it's about capacity expansion for ourselves, but more importantly, for the industry. We do think that with the technical expertise and the capital that we can bring, we will improve the delivery performance of CPP, expand the capacity that is out there, and then that helps us get our products on time, helps the [ DOW ] meet their objectives, which is absolutely critical at this point.

Second, as we think about CPP, we announced a new airfoil that we have been working on for a while. It runs much cooler. And as we go back and think about the Maverick blade that we introduced on LEAP, it took us a long time to bring that blade to market. And having the manufacturing know-how in-house will shorten that time to market and bring that capability to our customers faster. So that was a really important linchpin as we thought about, okay, how do we -- what do we do on the casting space.

And as we work our way through the strategic and the operational side on the value that we can bring, luckily for us, it works for our shareholders as well. We can add a lot of synergies through the expertise that we can bring, about $200 million of synergies in year 3, doubling by year 6. And with that, it will be EPS and free cash flow accretive in year 1 with double-digit ROIC a few years out. So very strong strategic, operational and financial results from this transaction, which is exactly the framework we look at every time we look at M&A.

And then talk a little bit about the environment that we are in. Good to see the air traffic growth resume after air traffic being down in the second quarter. Air traffic has been up here in July and in August. Overall, and I'm sure Kristine will take us there in a minute or 2 as we think about the services outlook, but we are not seeing any change in fleet plans from the airlines. The parked aircraft remain really low from the airlines. The retirements are actually down year-over-year, down about 10%, '26 over '25. So we're really not seeing any long-term change in fleet plans from the airlines.

And our own engines that we have removed but not inducted, that is up 60% year-over-year as we sit here today, right, from these current numbers versus last year's numbers. So we feel good about our overall -- as we think about CES results for the year, CES should have a fantastic year. So sticking with services, we expect 20% plus growth on the services side, just given the backlog that we are seeing currently that's sitting outside plus the $170 billion backlog that exists in services over a multiyear period.

And on the OE side, we continue to make strides. We expect LEAP deliveries to be up high teens year-over-year. On the wide-body side, we're seeing really good momentum. Our GEnx deliveries were up 50% year-over-year in the second quarter with higher growth on installs. So -- Boeing, we were able to ship even more than 50% engines year-over-year basis, and the momentum is continuing here into the third quarter.

And on the defense side, we expect low double-digit growth with margin expansion in 2026. So overall, it should be a really good year for us, more than $1.5 billion of profit growth, 100% free cash flow. So strong performance in '26 and the momentum should continue through 2027 as well.

On the services side, we've spoken to that we expect double-digit growth just given the algorithm that we have of installed base, pricing, work scopes, all that kind of sets us up for a run rate double-digit growth business. And just given the delinquency that we have right now that we are sitting on, maybe there's some incremental volume as we think about 2027.

Obviously, we'll give a little bit more color on that as we get into October and then Jan. But again, things look as good as they possibly can. I'm sure we'll get a little bit into the air traffic growth and other things that we're seeing in the market. But we feel good. I think given the operational momentum that we have, given the value that FLIGHT DECK is driving and given the $210 billion backlog, we feel good about the long-term delivery performance of this -- of the company.

Thank you, Rahul. And so I think in this conference, just for context of the past few days, I've heard from investors a lot more concern about commercial aerospace aftermarket. But as you discussed in your opening statement, you've got robust operating order activity. Also, you've got $170 billion in commercial services backlog as of last quarter without these incremental orders. And you've talked about how shop capacity is oversubscribed and customers are resilient.

But can you just peel back the onion a little bit? With the volatility in air traffic, how is that actually translating into your business? And then how much buffer is there in terms of the unmet demand that is inherent in the system versus what you're able to meet? And how long does that buffer last if this environment -- if we're in a flattish RPK environment?

Yes, absolutely, Kristine. So just in terms -- again, let me just build a little bit on what I had in my opening comments about what are we seeing externally. So if you look at the -- so what drives long-term services growth? The number of engines that are flying, clearly, that's one. Growth in work scopes and pricing. Those are the 3 main drivers.

So let's talk about what's happening on the installed fleet side. As I said, retirements are down 10% year-over-year so far through the last couple of weeks. Even for CFM56, which has been a lot of discussions that we've been having with investors, retirement rates are -- retirements are almost flat year-over-year through the first 9 months of the year, right, in 8.5, 9 months of the year.

And we expect, just given what we are seeing now and given that we are almost at the end of September, we think retirements will settle somewhere between 1.5 to 2. It looks closer to 1.5 points right now is where we think. Now as we -- Kristine, as we gave 2026 guidance, remember, we started by saying this could be -- when we gave '26 guidance last year, we said CFM56 retirements could be 3% to 4%, right?

Beginning of the year, we took that down and said, okay, given what we are seeing, it's probably 2% to 3%. Right now, what we're seeing is somewhere between 1.5% to 2%. So CFM56 retirements are really low. And as we think about the future, the long-term guidance that we've provided to investors, what's been the basis of our 2027 and '28 numbers, we expect -- internally, we had expected retirements to get to 3% to 4%. Now we're not seeing that based on the current trends.

And again, the precursor to retirements is the number of parked aircraft. The parked aircraft is actually down year-over-year, right? If you look at the number of airlines that were parked aircraft and they park the aircraft before they retire them, that is actually down on a year-over-year basis. So that is looking good as well.

Now coming back and taking a little bit of an internal look on what we are seeing, as you pointed out, we had -- we said in our -- when we reported results in July, we said we are 40% oversubscribed on shop visits for the year. And even now, as I said in my opening remarks, last week versus a year ago last week, the number of engines that we have removed but not inducted into our shops is up close to 60%. So that -- the engines continue to come off.

And now as we fast forward that into 2027, we expect that engine removals will be up double digits, more than 10% in the first half of next year, which is the visibility that we have, and then we'll get into the second half. So overall, we're seeing stable trends. Yes, the traffic growth has been slow in the last couple of months and obviously, second quarter was down. That will work out over time, right?

But as we look at the pent-up demand that is out there, that gets us through, obviously, 2026, but even as we look at 2027. So we've got -- our long-run trend for services growth is double digits. But given the delinquency that we have, given the pent-up demand that exists from the airlines, there could be incremental growth in services for next year.

That's very exciting despite all the uncertainties. So Rahul, maybe on CFM56, you touched on this. You've been ticking down your expected retirement for the year. So when you think about that 1.5% to 2%, why is it so low versus your initial expectation of 3% to 4%? And when you think about how 30% of the CFM56 fleet haven't had its first service visit and 2/3 haven't had their second, how long is this CFM56 demand? And what's in your planning horizon? Because it seems like the program has just been performing much stronger with more demand than your initial expectations.

Yes. No, thank you for that question, Kristine. Listen, this is a great aircraft, and we'll talk a little bit about what we are seeing now as airlines think about what can they do with the aircraft and other customers, the demand that we are potentially seeing outside the aviation industry for that platform. But just to step back, the retirement rates have been low.

Ultimately, if you go back to COVID and maybe even prior to that, I think what we are hearing from our customers is they were very, very quick to take capacity out, right? And once they took capacity out, the market share became a huge challenge for them. So I think airlines are just being very deliberate about their plans for fleet today than they were maybe a few years ago, just learning from prior experiences.

So I think that's what we are seeing the retirements, and it's a really well-performing aircraft. And given the durability performance that we've had, I think that is partially driving a lot of the stability that we're seeing on the performance. And even if you think about the retirements, 80% of our work on CFM56 comes from aircraft that are less than 20 years old.

And if you look at the retirements that happen, that typically happen to aircraft that are more than 20 years old. So even if you think about the impact on retirements, that's obviously limited. And there have been lots of discussion on the work scope for CFM56. Now the work scopes in CFM56 have been very stable. And that's driven by 2 things.

One, most of the aircraft that are coming in now need life-limited parts replacement, because they've been kind of flown the number of cycles they've flown. So that gives a little bit of stability. Now we've been able to drive that work scope expansion because the material availability has improved over time. So that has helped us fulfill that life-limited part demand that we could not do a few quarters ago.

And what we see now into the remaining 4 months of 2026 and into '27, we do expect the work scopes to be absolutely stable for CFM56 just given the need for replacement of life-limited parts. So that is what we're seeing. And then we've spoken about the 2,300 to 2,400 shop visits, which is higher than probably where we were. Maybe a year ago, we were expecting 2,300 shop visits for this year and for next year. We raised that expectation beginning of the year to 2,300 to 2,400.

And as we're sitting here today, we think that number for this year and next year, probably closer to 2,400 than 2,300. And then on the used material side that you mentioned, even if retirements happen, that typically takes -- once you retire an aircraft, that takes 6 to 12 months for that material to show up. So even if retirements do pick up, there's a lag before the used material comes in.

And that is not factoring in the demand that comes from the non-aviation sector that, as you know, I mean, you cover some of those players in the industry. I mean you're closer to it than I am in some cases. But I mean we are seeing a lot of pull from the power gen sector to convert the CFM56s into now providing power for the data center needs.

And if you just look at what just one company, FTAI has announced, they are talking about 100 engines next year. And that 100 engines is roughly 1 point of retirement. So if you think about retirements going up from 1.5% to 2% this year to maybe 3% or so next year, you pull that demand out, you're back at 2%, right? So that will provide a little bit of cushion to the retirement.

What that basically means for us is lack of used material in the market and the incremental spare part sales. And FTAI is just one of the companies that we are talking to. We're talking to several other players in the market that are exploring the similar plans. So we feel really good about the franchise. We think the revenue here is -- the work is stable through '28 and then a little bit of revenue growth beyond '28 just given the pricing and the work scope changes that we'll see.

I think FTAI will take any incremental CFM56s that come out of service. They said they'll pay $100 more than anybody. So with that, Rahul, look, switching to the LEAP engine, right? You've indicated that durability kits can approximately double LEAP time on wing and LEAP shop visits are still expected to grow roughly 25% annually through 2030.

So as durability improves, especially with the Maverick additions and things like that, how should we think about the trade-off between fewer engine removals over its life versus higher work scope, material content when these engines need to go into the shop ultimately, could better durability improve both customer economics and can that also improve GE's margin economics in the program?

Yes. No, I think it's a really good question, Kristine. I think just to step back, we launched the durability kit, which included the new blade on Airbus last year. We're doing that with Boeing in the first quarter of next year. We certified. We're ramping up production. We'll introduce that into the fleet in first quarter of 2027.

What that does is basically brings the LEAP durability at par with CFM56. What does that mean? It means 17,000 to 18,000 cycles in a neutral environment, 8,000 to 10,000 cycles in hot and harsh. Now I convert that to what that means for us. It's like in a neutral environment, an aircraft does not need or an engine doesn't need to go in for an overhaul for 8 years -- 8 to 9 years. That's a really long time.

If you think about an airline, you're buying an engine and you don't need to bring it for a shop visit for 8 to 9 years. That's a really long time. So this obviously helps a lot with their fleet planning and their ability to generate revenue. So that's what we're seeing. And a good sign, I mentioned the IndiGo order, Kristine, at the outset. And what IndiGo also did besides placing a 1,000-plus engine order with us is also that they are -- they will set up their own overhaul shop and they will service the engines.

So the reason that statement is important is because that tells you that the airlines are getting more and more confident that they can underwrite the performance of the engine, and they don't need us to underwrite the performance of the engine. So it just speaks to the confidence that the customers are now getting in this product. So it's a sea change from where we were just a couple of years ago, right? So that's a really good sign.

And I think that takes us into -- what does that mean for us and our financial performance. A couple of things. One, with the durability kit, the time on wing for the LEAP is now absolutely in line with our financial models. So that is what we had underwritten. So that lines up with our financial model. So that's a really good step. So now where does the LEAP profit go from here? I think we've said that before that we expect LEAP profit to be at par with CFM56 by the time we get to 2030.

What drives that? Obviously, the fact that we have -- the LEAP installed base will be 2x between '25 to '30. So we'll double the installed base by the time we get to 2030 than just we were there maybe a year or 2 ago. The repairs on LEAP, we're growing repairs on LEAP at more than 20% a year. So when we can repair a part, that is less than half the cost of a new part and obviously also helps with the turnaround time because we don't need to stress the supply chain that is trying to support both new make and aftermarket.

So volume growth and repairs will be a huge part. Then the third-party channel is growing as well. Last year, we did about 15% of the shop visits were done by third parties. On a -- if you look at the number of shop visits that we have sold, about 25% of the shop visits that are on a sold basis are to external third parties. So we expect that by the time we get to 2030, we -- about 1/3 or 30% of the shop visits will be performed by third parties. So that channel doubles as well.

And obviously, as we're driving more shop visits, we get to use our fixed capacity more. So it's really good progress on LEAP in terms of just the run rate that we are on in terms of durability. Now what does -- that does not factor in, Kristine, as you go beyond 2030, 2 things. One, now we said that LEAP profit will equal CFM56 by the time we get to 2030. And the installed base of LEAP will be equal CFM56.

That doesn't factor in any growth that the platform will see for the next -- whatever time between 2030 and the next-generation narrowbody. That's just several years out. So if you look longer term, LEAP is going to be at least 2x the profit of CFM56 just based on the installed base growth even if we do nothing else.

And then the new airfoil that we announced last week with the CPP transaction, that is just what we do inside the company. That's just part of the DNA of GE Aerospace. If you look at CFM56, they're on the third-generation blade. And with this new airfoil, that will be the third-generation blade on LEAP. And if you just look at the picture, we spend more time explaining to everyone what the technology does.

But just if you look at the pictures on the current blade versus the new blade, if you look at the new blade has a lot more blue on it, which means it just runs much cooler. Now that improves the durability of the engine even further from where we are today. So that's positive.

And then as you think about our margins, as I said, the current margins are in line with the durability that exists on the engines that we are selling today. Any improvement from this point on will be incremental to our long-term service margins on LEAP. So I think there's a lot more runway on LEAP than what we're currently seeing.

Rahul, I just want to confirm. So basically, the announcement with the CPP airfoil blade, that is not factored into your previous margin outlook. So when you talked about you were doubling CPP capacity through 2030, I mean, 2030, there's a possibility that LEAP not only is in the same margin as the CFM56, but significantly more. Is that -- I just want to understand this.

Yes, absolutely. So I think the first part of your statement is correct, Kristine. We have not factored in any improvement in airfoil technology in the margins that we are recognizing today. We've not announced yet. Now to the second part of your question, we've not announced the timing of when we introduce the airfoil. We'll do that...

I was assuming...

So we'll get that here in the next few months. We'll talk a little bit more about that. But as and when we introduce that. So no timing on that just yet, but as and when we introduce that, and again, it's not a conceptual product, Kristine. It's something that we've been testing internally. There's more than 3,000 test cycles that we've run in our own labs. So it's a real product that's going through testing. We'll have to obviously get through FAA certification and everything else and industrialize it. So we will talk more about the timing, but it's in progress.

Great. Maybe switching gears to the gears to the GE9X aftermarket inflection. You've talked about the GEnx also going to double from 2024 to 2030. And I think can you talk about where the fleet is today versus light shop visits versus full performance restorations? And when do you expect to see a more mature like aftermarket stream from this engine where it's significantly contributing to dollars per shop visits?

Yes. Now listen, we are really proud of the GEnx platform. It is a fantastic platform. One of the things I didn't mention at the outset was at Farnborough, we announced that the GEnx engines have flown 50 million cycles. That's the fastest that any wide-body engine has done that for us. And if you think about where we are today, although we've flown 50 million cycles, as you mentioned, our installed base will double between '24 and '30. We've got more than 2,000 engines in backlog today on GEnx.

Our win rate on the platform has been more than 95% if you go back all the way from 2022. So just given the win rates, we're seeing huge backlog, huge increase in deliveries over the next few years. So it's just -- it's a platform that is -- it's doing really well, but has a lot of growth ahead of it. Now as you mentioned, if we get into -- on the services side, you're absolutely right. I mean 90% of that fleet has -- 50% of fleet hasn't seen the first shop visit, 90% hasn't seen the second shop visit.

So the work will grow because most of the work that we're doing today on GEnx, 80% of the work is on the first shop visit, right? And there's about 50% to 60% increase as we go from first shop visit to a second shop visit on a wide-body platform. So as we migrate from the first shop visit, which is majority of the work that we're doing today to second shop visit, that the work will grow. So that will drive incremental profitability, but it's really profitable for us today.

The margins that we are recognizing on NX (sic) [ GEnx] are over and above what we overall see as service margins. So it's a profitable product today. I think over time, as the installed base grows, as we drive incremental work scope. And also what's also happening is that we are working -- the pricing on that platform is a lot better. As we look at what the engines that we sold between '19 to '21 to between '22 to '25, '26, the pricing is about 30% higher on a shop visit basis. So the higher-priced shop visits will start flowing through as well.

So I think, again, you're going to see a lot of momentum on NX on the services side. But we're also seeing momentum on the OE side, Kristine. I think that's been the other change here as we think about GEnx. Our deliveries -- as our deliveries were up 50% year-over-year in the second quarter, more here in the third quarter. Both on a year-over-year basis, we expect stronger growth on the OE deliveries to Boeing and to our airline partners in the third quarter along with sequential growth.

Great. Now on the 777X, Boeing said yesterday that the program is still going through some delays. Can you talk about what's GE's role? What's happening with the GE9X? And I think there were some concerns about the mid-seal and durability. Like where are you on this program? And are you the holdup for their progress?

Yes. So we're first proud to be under wing on the 777X, really excited about the entry into service next year. So the engine has been certified since 2020, as you know, Kristine. So what we found, I think what Kristine is talking about here, as you're going through the testing of the engine, we found that our mid-seal, which is one of the parts that connects the front and the back of the engine, was not as durable as we had expected, which is the reason you test the aircraft.

So there are 2 separate things that we are working on right now. Let's talk about certification first, and we'll talk about -- then we'll talk about production. So on certification, we do not need a new mid-seal for certification. The plan was, as always has been that we can have the certification completed with the existing mid-seal. We have -- we've been working with FAA to get that done. We're going to -- Boeing needs to submit that approval to FAA, along with all the other approvals that they need for TIA completion here so that they can start the ETOPS testing.

So that work is underway. I think Boeing needs to file the paperwork, and we have a support role in that, which we will work with Boeing to make sure they file all the paperwork that is needed for FAA to approve ETOPS certification and then ETOPS flights can start and testing can start. So that's on the certification side. We do not need the new mid-seal for that. The existing mid-seal works. We just need FAA to approve that along with all the other approvals that Boeing needs on TIA. So that's the first part.

The second part is on the production side, we do have a new mid-seal. We understand the challenges, what happened with the first mid-seal. We have a solution. We've tested that thoroughly internally. We've been talking to FAA about what that means. Huge degree of confidence that our design will work. The confidence is so high, Kristine, that we've incorporated that design in everything that we are producing today.

We started shipping those engines with the new and improved mid-seal to Boeing in the third quarter. We're going through the FAA certification process right now. FAA is doing the testing. That should get completed here in the next few months, and we will -- and then we'll rev rec those engines. So 2 separate parts. The ETOPS certification does not need a new mid-seal. The existing mid-seal works. That was always the plan. So we're just executing that plan and supporting Boeing and what they need to do to get that certification for ETOPS.

And then for the production aircraft, we have a design, confident that it's working. We put that into production. We don't have the FAA certification on that part yet, but we expect that here in the next few months. So confident that, that is not going to be the holdup as we think about entry into service next year.

Thank you, Rahul. Now on production rates, you touched on the increasing OE deliveries for GEnx, but let's look at production rates a little bit more broadly. Boeing and Airbus want to ramp up production at a variety of programs like the 737 MAX, 787, the A320neo. What are you seeing regarding demand signals?

And by the way, in case you didn't hear it, Boeing yesterday was very favorable saying that they're getting all the engines on the LEAP on the 737 MAX. So that seems to be pretty good. But what demand signals are you seeing? And when you look at the capacity that you have today and what you can see from the supply chain, how are you able -- how is your confidence in your ability to meet the production rates the OEMs have put out there?

Yes. The demand is very -- I know we're going through the short-term hiccup here with the traffic growth and everything we spoke at the beginning of the conversation, Kristine. But longer term, if you look at the growth rates that are out there and what the airframers want and the way the installed base has grown over the last few years, the demand outlook over the medium term is very strong.

I mean you look at where Boeing wants to go, not just with the narrowbodies with the MAX, but even with the wide-bodies, they want to take the 787, which is at whatever, 7, 8 right now, they want to take it up to 14 over time. MAX obviously wants to go from low 40s in the first part of this year to somewhere in the 60s. So that's close to a 50% increase. And same thing is happening on the Airbus, both the narrowbody and the widebody.

So there's a lot of new demand coming and everybody is expecting every single platform to be at least at a 20%, 25% CAGR from now until '28, '29. So there's a lot of growth. And that's just one side of it. If you look at LEAP, we spoke about the LEAP shop visits need to be up 25% a year, along with the work scope on LEAP that will grow as well because right now, LEAP work scope is half that of a CFM56, just given because we have 90% of the shop visits that we're doing on LEAP are light shop visits.

So on LEAP aftermarket, what you will see is not only that the number of shop visits will grow at 25% per year, but the work scope will expand as well. We spoke about same things happening on the GEnx where we'll go from first shop visits to second shop visits. So all that to say that there's a huge demand growth that is coming at us. And so what's happening right now is that we are trying to meet that demand as best as we can. And you can see that in our material receipts that we have, our material receipts have been up for -- sequentially for the 9 consecutive quarters.

But we need to do more. Everybody in the industry recognizes that. There's a lot of hard capacity that is going in. And it's just not -- I wish there was just one commodity, one part that is happening. There are multiple places where the industry needs to add hard capacity to support the growth. And that was part of the thesis why we had the CPP transaction -- and we're going to have combine our capabilities with that of CPP so we can meet that demand.

But that needs to happen. Castings is just one of those many areas that we need to work on. So it's a constant challenge. Anybody who thinks that this is a conversation that we won't have 6 months from now, 12 months from now, it's just not staring at the problem hard enough, right? This is going to be a challenge that we are committed to working our way through, but it is work we need to do.

And Rahul, with that on the supply chain and vertical integration after CPP, how do you think about that supply chain management broadly? Do you anticipate you'd have to do more vertical integration? Are there areas that you're worried about? We're hearing from the other parts of the supply chain, OEMs like yourself are buying dedicated capacity. How do you think that hard capacity gets to be put in place?

Yes. Listen, broad vertical integration is not the solution, Kristine. I think CPP was a unique situation where we had -- where we thought we could add value to the way CPP was running. We obviously have the new airfoil that we are trying to introduce. So -- and CPP, having CPP in-house would accelerate that time to market as we spoke and the financial accretion that we discussed earlier.

Beyond that, we are doing everything we can. We are partnering with suppliers to improve the day-to-day operations. We are working with them to run joint Kaizen actions. We have more than 500-plus engineers that we've been talking about for the last several years deployed into our supply base to help improve yields, improve quality, solve industrial bottlenecks if there's a second shift we need to add, and we are jointly investing with our suppliers.

We're sharing the CapEx investments that they have. Our production system is a lot more stable. So we're giving them firm indication on our demand that exists out there because we have the visibility. So we are -- our interaction with suppliers has been much better. So it is a broad-based effort to get the delivery up to where it is needed.

And CPP is just one action. That's not to say that we're going to go vertically integrate every single part of our value stream. That's not practically possible. But there will be joint work on improving -- removing bottlenecks in the existing shops, adding CapEx will contribute to that and then solving other issues that may arise over time.

Great. In the interest of time, I'll ask one last question. Look, on free cash flow, your conversion has been exceptionally high. You had 140% free cash flow conversion in 2Q. And you said it wasn't really driven by any onetime items, but it should be a little bit structurally lower over time. So I guess what is the right free cash flow conversion for the company considering everything you've said so far in our entire presentation was very positive. Everything seems to be going up. So where are the deltas? And what's the floor in that conversion?

Yes. So put CPP aside for a second, Kristine. But overall, it's like there's nothing structural that should say that GE Aerospace should drive free cash flow above 100%. The reason we've been able to do it is our contract assets, contract liabilities have been very favorable. Growth in installed base is a good thing, right, because a lot of these contracts that have long-term service contracts, which basically means that we earn cash when airlines are flying the aircraft, and earn -- we get cash prior to some of the work being done.

So that has been favorable. We've done a really good job. Our teams have done a really good job bringing the receivable days down. And you saw that here in the second quarter, even with our growth that we had, our receivables were actually down year-over-year. So our receivable days are down to low 40s right now. So that's really good.

Now as we go into the next couple of years, we feel that contract assets, liabilities will be less of a tailwind because the shop visits will pick up and eat into some of the buffer that we have. But we've also added -- one thing that we have not done very well is inventory. We've added $5 billion of inventory over the last few years. And even if the rate of growth slows down, even the rate of inventory growth slows down, that will be a tailwind to cash flow generation.

So I think over time, Kristine, this should normalize to 100% of net income. But given what we see right now, we should be above 100%, at least for the next 2 to 3 years, and we'll take it from there.

Well, great. Well, thank you very much. This concludes our session at GE Aerospace. Thank you for joining us.

Thank you.

Good day, ladies and gentlemen, and welcome to the GE Aerospace Second Quarter 2026 Earnings Conference Call.

[Operator Instructions]

As a reminder, this conference is being recorded. I'd now like to turn the program over to your host for today's conference, Blair Shoor from the GE Aerospace Investor Relations team. Please proceed.

Thanks, Liz. Welcome to GE Aerospace Second Quarter 2026 Earnings Call. I'm joined by Chairman and CEO, Larry Culp; and CFO, Rahul Ghai. Many of the statements we're making are forward-looking and based on our best view of the world and our businesses as we see them today. As described in our SEC filings and website, those elements may change as the world changes. Additionally, Larry and Rahul will speak to total company and corporate financial results and guidance today on a non-GAAP basis. With that, over to Larry.

Blair, thank you, and good morning, everyone. The GE Aerospace team continues to execute with discipline and focus with our customers at the center of everything we do. Our 57,000 employees remain committed to our purpose, inventing the future of flight, lifting people up and bringing them home safely. I'd like to open by saying CFM International is supporting our customer, Ryanair, and assisting with the investigation into Flight 1879. Safety is our top priority at all times, and our thoughts are with the passengers, pilots and crew who were on board.

The second quarter marked another quarter of significant growth, driven by robust commercial services. Overall, orders were up 17%, with both segments up at least low double digits. Revenue increased 24% with CES up 27% and DPT up 16%. The Operating profit grew 18%, with both segments up at least high teens. And EPS increased 22% and free cash flow grew 43% with conversion over 140%. These results closed out an exceptional first half with orders up 49% revenue up 27%, EPS growing 24% and free cash flow increasing 31% with 115% conversion. FLIGHT DECK is helping us drive the operational improvements, which undergird the significant output increases with the first half commercial services revenue up 32% and total engine deliveries up 31%. We remain focused on advancing what matters most to our customers, delivering on robust demand and our backlog of over $210 billion while investing in both current and next-gen technologies to improve time on wing and cost of ownership. Given the strength of our first half results and momentum for the remainder of the year, this morning, we're raising our 2026 guidance across the board. I'd like to thank the entire GE Aerospace team and our supplier partners for working so well together to deliver for our customers. Turning to Slide 4. FLIGHT DECK continues to strengthen our operational capabilities in safety, quality, delivery and cost, always in that order. With demand increasing for the F110 engine, at our site in Lynn, Massachusetts, we used flight deck to reduce overall production lead time for a critical component by roughly 60% through the consolidation of key process steps and reducing operator distance traveled. This supported F110 deliveries growing over 50% year-over-year in the second quarter.

In May, I was in Brazil with the team at Selma, our largest MRO site, where I saw firsthand how we used flight deck to reduce 56 final assembly lead time by nearly 50%. Actions like this have improved total shop visit turnaround times by about a week since the end of 2025. And just last week, we held 3 Kaizens with GKN, a top supplier of fan cases and other key components to break constraints tied to rate performance. We worked collaboratively together to create detailed visual work instructions, increase capacity and implemented a 3D inspection technology, which led to a 90% improvement in inspection time. Work is now on our way to sustain these results and build further momentum. At the same time, AI is a force multiplier for FLIGHT DECK. Across our turbine air foils team, for example, we recently ran several Kaizens to improve the demand signal process. Standardizing and reducing demand signals strengthens supplier confidence deck to simplify and then using AI to automate the process, we cut the number of demand signals in half and reduced processing time by nearly 90% across 190 parts.

Reducing the number of demand signals we sent our suppliers helps focus their efforts leading to priority supplier material input, increasing double digits sequentially and year-over-year again in the second quarter. This supported commercial services revenue up 32% in the first half including record internal shop visit output in the second quarter and first half total engine deliveries, up 31%, including LEAP engines up 41%. We're also expanding capacity to meet growing aftermarket demand for LEAP as the installed base is expected to more than double between now and 2030. Last week, we celebrated with MTU, the grand opening of their new maintenance facility in Fort Worth, which recently inducted their first LEAP-1B engine. All in, we're making meaningful progress with FLIGHT DECK. And while there's always more to do, we delivered substantial improvement in the first half, and our teams remain focused on meeting customer expectations.

Shifting to Slide 5, while the environment remains dynamic, aftermarket demand has been resilient. First half departures were roughly flat, but we have not observed any changes in customer behavior. We expect a gradual return to modest departures growth in the second half. And combined with our commercial services backlog of roughly $170 million, we remain well positioned for services growth in 2026 and beyond. Demand continues to be robust for LEAP, our fastest-growing platform as demonstrated by Copa Airlines recently selecting up to 120 LEAP-1B engines to power their growing fleet of 737 MAX aircraft. In addition, maturing time on wing and lowering cost of ownership remain critical priorities for our customers. We recently achieved a major milestone completing the certification for the LEAP-1B durability kit including the upgraded HPT blade. This is expected to deliver approximately a twofold improvement in time on wing with full MRO and new make cutover expected early next year. At the same time, we're improving LEAP turnaround times, which are now around 100 days, down over 2 weeks year-over-year. Keeping customer fleets flying is critical, and we've reached nearly 0 grounded LEAP powered aircraft due to engines, supporting our customers' need for reliable lift.

We're also continuing to advance the future of FLIGHT. Through the NASA electrified powertrain flight demonstration or EPFD project, we recently completed a ground test for the megawatt class hybrid electric demonstrator. This represents a major milestone in understanding hybrid electric flight by bringing together advanced engines, electrical power systems and controls. We've also expanded our relationship with Beta Technologies, who joined the EPFD project last year to advance the modification of the EPFD aircraft. We're looking forward to this plan being part of the flying display at the Farnborough Air Show next week. Within defense, we continue to support robust demand for our services and products both domestically and with Allied partners, while advancing next-gen technologies. We announced an agreement with Turkish Aerospace Industries to provide F404 engines for its HURJET Advanced Jet Trainer program and our CP7 engines were selected to power the U.K. Ministry of Defense new medium helicopter program.

We completed an assembly readiness review for the XA-102 adaptive cycle engine, a critical milestone that moves the program from design into assembly and test. This builds on the progress of the XA100, and validates that the XA102 engine design, manufacturing process and supply chain are progressing and on schedule. And we continue to strengthen our position in the fast-growing collaborative combat aircraft or CCA market with our suite of products, both the GEK 1500 and the GE426 achieved significant milestones to move to preliminary design review, bringing them closer to eventual flight on small and medium thrust CCAs, respectively. We look forward to sharing more exciting wins and updates at the Farnborough Air Show next week. Stepping back, we're focused on translating our unmatched experience and investments into value for our customers while driving long-term growth. Rahul, over to you.

Thank you, and good morning, everyone. GE Aerospace delivered another strong quarter, marked by double-digit growth across all key metrics. Orders were up 17% and with CES up 18% and DPT up 12%. Revenue increased 24%, marking our fifth consecutive quarter of at least 20% growth. CES was up 27% and PPT grew 16%. Operating profit was $2.7 billion, up 18%, driven by services volume and price. As expected, margins decreased 130 basis points to 21.7% from installed engine growth, investments and inflation. EPS was $2.02, up 22%, and from increased operating profit, a lower tax rate and a reduced share count. Free cash flow was $3 billion, up 43% from higher earnings a nearly $200 million reduction in working capital and AD&A, including year-over-year favorability from tariffs.

Net income conversion was over 140%. Our results built on the strong first quarter, with year-to-date revenue up 27%, operating profit up nearly $800 million, largely driven by strong growth in commercial services, and free cash flow up over $1 billion. Going deeper on our 22% EPS growth this quarter. Increase in operating profit drove $0.31 or over 85% of the improvement in EPS. Growth in segment profit was partially offset by corporate cost from lower interest income and an increase in intercompany eliminations. The remainder of the EPS growth was driven by a lower tax rate and reduction in share count. Tax rate decreased 2 points to 16.7% primarily from tax planning and benefit from recent tax legislation. Share count was down $24 million from 2% or 2% from our previously announced capital allocation actions.

Turning to CES. In the second quarter, orders grew 18%. Services were up 22% and up 34% in the first half. Equipment was up 7% as some orders shifted to second half while nearly doubling year-to-date. Revenue increased 27%. Services grew 26%. Internal shop visit revenue grew 25% from higher volume, including LEAP internal shop visits up over 50% and widebody mix. Spare part sales increased over 25% and from improved material availability that helped us fulfill strong customer demand, growth in LEAP external channel and price. Even with strong revenue growth, given robust orders, spare parts delinquency, which represents shipments that have been delayed due to material availability constraints grew 20% sequentially in the second quarter. Work scopes continues to be favorable for LEAP and widebody programs and remained stable for CFM56.

Equipment revenue grew 30% and with engine deliveries up 26%, including LEAP, up 24%. Wide-body deliveries were up 30% with the GE NX up significantly more. Profit was $2.7 billion, up 20% from higher services volume and price. As expected, margins were down 160 basis points to 27.3%. A from installed engine growth, including GE9X investments and inflation. Year-to-date, CES has delivered a very strong first half with orders growth of over 50%, revenue growth of 30%, including services up 32% and operating profit of $5 billion up approximately $900 million year-over-year. In DPT, orders increased 12%. Defense book-to-bill was one in the quarter and 1.7% in the first half. Total DPT backlog was over $30 billion, up roughly $5 billion since the start of the year. Revenue grew 16%. Defense & Systems revenue was up 12%, driven by growth in both services and equipment with engine deliveries up 7%. Propulsion and add technologies grew 23%, with growth led by Avio Aero. Profit grew 18%, and margins were up 30 basis points to 13.8% from increased volume and price, partially offset by mix, investments and inflation.

In the first half, DPT delivered solid results with orders growth of 40%, revenue growth of 17% and operating profit of around $900 million, up 17%. Moving to guidance on Slide 10. Our first half exceeded expectations, and we expect strength to continue into the second half. As a result, we are raising our full year guidance across the board. We are expecting overall revenue to grow high teens, up from prior outlook of low double digits. We expect CES growth of around 20%, up from prior outlook of mid-teens. We now expect commercial services to grow low 20s, up from mid-teens. Commercial Services backlog stands at roughly $170 billion, up nearly $30 billion since the end of 2024. Given the sustained demand environment and existing delinquency, we are entering third quarter with more than 95% of spare parts revenue in backlog, similar to second quarter. Engines already off-wing and a pipeline of planned removals in the third quarter exceed our full year shop visit guide by over 40%. This provides us with ample visibility into demand to fulfill our outlook for 2026.

We now expect commercial equipment to grow around 20%, up from mid- to high teens with LEAP deliveries up high teens from 15% previously. And we expect DPT growth of low double digits, up from mid- to high single digits. Operating profit is now projected to be in a range of $10.55 billion to $10.75 billion with improvement in both segments. CES operating profit is now expected to be in the range of $10.25 billion to $10.35 billion, up $400 million versus the high end of the prior guide. This reflects a drop-through of around $1 billion of improvement in commercial services revenue, partially offset by higher equipment growth. We expect DPT profit to be in the range of $1.6 billion to $1.7 billion, up $50 million at the midpoint versus the prior guide, reflecting drop-through from higher revenue. Expectations for corporate costs and eliminations remain unchanged at $1.2 billion to $1.3 billion. Taken together, we are raising our EPS guidance to a range of $7.65 to $7.85, up $0.35 at the midpoint from the high end of the prior guide. This reflects higher profit, combined with a lower tax rate, which we now expect to be below 16.5% for the year.

We are also raising our free cash flow guidance to $8.9 billion to $9.2 billion, up $650 million from the high end of the prior guide reflecting higher earnings and better working capital performance. Overall, 2026 is shaping up to be another strong year with high teens revenue growth and around $1.5 billion of profit and free cash flow growth. Building on the momentum the business has had in the last few years. With that, Larry, back to you.

Rahul, thanks. We're proud of the progress we've made in the first half. It reflects the strength of our leadership positions across commercial and defense and the continued focus of the GE Aerospace team to deliver for our customers. Our performance is underpinned by our sustained competitive advantages. With the industry's largest fleet, 80,000 engines and growing, and more than 2.3 billion flight hours, we operate across decades long life cycles. That unmatched scale keeps us close to our customers, making us the partner of choice.

Our field experience, which enables continuous improvement in time on weighing and cost of ownership, outcomes our customers value most. We offer the best performing products under wing across narrow-body, wide-body, regional and defense, supported by deep technology expertise and a growing services network with roughly $3 billion in annual R&D spend and CapEx investments of over $1 billion. Our world-class engineering and manufacturing teams are advancing next-gen technologies to improve durability and efficiency and turnaround times while building additional capabilities for our defense customers through developing innovative technologies and partnering with disruptors to move at pace. Through FLIGHT DECK, returning strategy into results with a focus on safety, quality, delivery and cost always in that order.

Overall, we're confident in our path ahead as the GE Aerospace team is poised to deliver exceptional value to our customers and our shareholders. With that, Blair, let's go to questions.

Before we open the line, I'd ask everyone in the queue to consider your fellow analysts and ask one question so we can get to as many people as possible. Liz, can you please open the line?

[Operator Instructions]

Our first question comes from Sheila Kahyaoglu with Jefferies.

Maybe if you could just update us on what you're assuming from a macro standpoint at this point? What degree of uncertainty you've maintained in the guidance? Because it seems like the service orders have been very good, up 22% in Q2, 34% for the first half, and that would support higher than the implied 12% services growth in the second half.

Sheila, good morning. There's no question that the environment remains dynamic. And as we look at where we are, as we said in our prepared remarks, I think we feel very good about our position here largely on the back of customer behavior, which hasn't changed. We've seen service orders continue to be robust. Parked aircraft, particularly the has actually declined since the beginning of March. I think Rahul highlighted the fact that we've got our MRO footprint really oversubscribed at this point in a significant way as much as we're pleased with the delivery increases. Our spare parts delinquencies are up, unfortunately.

So I think -- on the back of that, and I don't suspect we'll hear much different in Farnborough, we do expect a return to more modest departure growth in the second half. We saw relatively flattish performance, a little bit of the uncertainty that kept us holding the guide 90 days ago. But we think that will begin to return to a more normal environment through the back half going into '27 clearly at a more robust level. So I think all in all, as we sit here midyear, demand could evolve from here, but it's been far more resilient than maybe many of us would have expected. I think the tone of IATA very much was -- let's all remember that as we saw in the pandemic, demand will return to more normal condition, probably sooner than we would have otherwise anticipated and potentially at a more pitch level.

Therefore, let's continue to be prepared for that. And that's really, I think, what we're seeing in our conversations with our customers, that's what we're preparing for, not only with respect to the back half of 2026, but as we get ready for 2027.

Yes. And Sheila, to your second question on the first half to second half, as you said, that very strong first half for services, both on orders and revenue, and we raised our full year guide to the low 20 percentage growth. And now we're expecting services to be up $5 billion year-over-year. This is up about $1 billion from where we were just back in April which is what led to us improving the CES profit outlook by call it, say, $400 million from the high end of the prior guide.

So we've been striving for linearity for the last several years, and we are making progress in that regard. But even with that, there is sequential growth from first half to second half of 2026. And on a year-over-year basis, the second half services revenue in our current guide up low double digit from a very strong second half last year. Keep in mind, second half last year was up $3 billion from first half. So the compares are getting much tougher. But as Larry said, we feel very comfortable with where we are, with the current guide. And as I said in my prepared remarks, 95% of our spare parts are in the backlog for third quarter. We have 40% over subscribed on shop visits and our CFM56 shop visits also as we think about the number of shops that we're expecting, we had at the higher end of the 2,300 to 2,400 shop visits.

So all in all, we feel very good, and it's great that we're driving double-digit growth for services in the second half and that momentum should carry us into 2027, as Larry said a minute ago.

Our next question will come from Myles Walton with Wolfe.

One on cash flow, if I could. Obviously, you're outperforming that pretty handily this year, $9 billion on $10.5 billion of operating profit, which is obviously much higher than the free cash flow you have out there for on even higher operating profit number. So the question really is this free cash flow conversion performance, should we expect free cash flow to continue to grow as earnings grow from here? Or are we going to be confronted by cash conversion more normalizing and we should expect free cash flow to maybe stay at this level over the next couple of years?

Yes. Myles, thank you for the question. I mean, we're really pleased with how we performed in the second quarter. Cash flow of $3 billion, up 43% year-over-year. And the best part for all of us was that we were able to reduce our working capital in the quarter even with 24% earnings growth. That does not happen easily. So a lot of hard work by several people to make that happen. Great performance on receivables, really good performance on inventory as well. A little bit of help from tariffs, which we got $100 million of refund from tariff in the quarter, but in the grand scheme of things, that's not extremely material.

So when we raised the guide for the year with over 100% conversion in the back half as well now. So -- and if you think about our guide, call it, $650 million from where we were at the high end of the prior guide, I would say about half and half from earnings growth and working capital performance. So we're carrying that working capital performance into our full year guide as well. So we are performing better. And as you said, the $9 billion plus for this year is more than what we expected for 2028 just a year ago, back in July 2025. So really good performance. I think we feel good about our working capital performance, but and there's nothing -- no huge onetime items in nature. So we do expect cash flow to grow here with earnings, but the conversion should normalize. I think we've been saying that as we over the last 12, 18 months, conversion should normalize, but even with that, we expect earning significant cash growth as our earnings growth.

Our next question comes from Seth Seifman with JPMorgan.

I wanted to ask, as we think about where things go from here, you talked about the visibility that you have into the remainder of '26. But maybe as we think about beyond sort of any indication that the strength this year is a pull forward of anything or any indication that the resilience that you're seeing in demand maybe gives you a little bit more confidence in the growth potential next year? And then lastly, on the supply side, talked about record shop visits this quarter being all booked up. To what degree is the supply side, a governor on services growth as we look forward?

Well, Seth if I take those in reverse order. I think we've made a tremendous amount of progress on the supply chain side, right? There's no way you have a print like this otherwise thrilled to see not only 9 consecutive quarters with double-digit increases from our critical suppliers, but maybe more importantly, the underlying work the deep technical collaboration and joint problem-solving that we'd see underway. I mentioned GKN. We could have mentioned a number of folks that are really working with us in ways that are materially better than a few years back. Hopefully, we're a better partner.

We're a better customer, and that is just unlocking unleashing capacity. It's busting bottlenecks that otherwise would constrain us. I won't recite some of the demand numbers that we've shared. But as we think about the back half, as we think about '27 and frankly beyond, it's much more a supply side challenge than it is demand. Not that we would ever take the demand environment for granted, but we know despite this morning's news, we need to have a bigger, better second half, that's where our team is focused. There are no victory laps here and even [indiscernible] today.. And as we get ready for next year, that is very much the mindset. I think if we just focus on services for a moment, we know longer term, that in addition to that backlog that we've talked about, right, $170 billion commercially. The installed base should continue to grow gradually every year at a low to mid-single-digit rate. That's definitely the way we see things through the rest of this decade.

We know we're going to have favorable effects from both work scope and price. I think Rahul mentioned that earlier. And to the extent that we can continue to make the progress with FLIGHT DECK, we think we're going to reduce that overdue, that delinquent backlog, which is a nice kicker over the next several years, not only from a revenue perspective, but to miles is an earlier question, it should help us from a working capital and cash flow perspective. So we know with LEAP becoming a larger part of the installed base eclipsing the CFM56, we know we'll get the GENX doubling between now or really between 24 and 30 that, that installed base with our growth platforms is definitely going to grow. Work scope, we believe, is a structural tailwind, largely as a function of the natural agent of the installed base. And we'll get a little bit of price here and there as we move forward. So I think we said earlier this spring, this summer, no reason should diverge from that double-digit commercial services growth, medium-term outlook, even as we go into next year will clearly be a higher trimming off point than we imagined.

Again, the environment is dynamic. We're mindful of that. But with our backlog, with that framework and algorithm in place, and just the overall tone we're hearing from customers, I think we feel very good about where we are at this point.

Our next question comes from John Godyn with Citi.

Larry, last quarter, you held back raising guidance despite a strong 1Q because of the concerns in the environment. And I recall you mentioning a number of possible tail risks that were on your mind, completely understandable in the moment. But now with the benefit of hindsight, not only did GE serve a hype, but obviously thrived. And ultimately, we've got this large guidance revision today. I was hoping you could just spend a moment maybe reflecting on your own learnings from the experience elaborating a bit on what you're hearing from customers. Are we just structurally underappreciating the resilience of the business and its ability to compound value through complex macro backdrops?

Well, John, I would never suggest anyone underappreciates what we do in the value of the franchise. I'll leave that to others to make that assessment. There's no doubt, I think in our minds that we would play April all over again in the same way that we did. We did not know at that time when the conflict was still fresh what our customers would do. Perhaps we know more definitively that, that lesson from the pandemic that we've touched on a few times over the last several months, which was certainly [indiscernible] in IATA that we need to make sure we are prepared for the other side of the uncertainty has really played out, right?

And again, lots of different data points here to speak to the resiliency of demand, particularly in the aftermarket. There is no way, I think, in the moment, given the uncertainty, just given the headlines that we would have been well served with investors to get out with an early bump in the guide. But here we sit mid-year. We know how the market has responded to the uncertainty to the dynamic conditions that are clearly out there. All the while, we continue to do what we do, right, from an execution perspective, not taking anything for granted, but also knowing that with the backlog with demand remaining robust that we needed to continue to invest. We need to continue to procure we need to continue with our FLIGHT DECK work. So I think we play it the same way all over again and are thrilled to see the resiliency in demand and expect that, that gives us -- helps give us a little bit of a lens on how the second half is likely to evolve.

Our next question comes from David Strauss with Wells Fargo.

Good morning. I wanted to see if you could just touch on your expectations for the shop visit profile from here. I think over 50% growth first half of the year. I think you had talked about a compounding kind of -- at 25% here. So if you could just revisit that, if you could also just touch on these durability upgrades, the durability kits, how that's kind of factoring into all this? How long it's going to take you to get through kind of upgrading the existing fleet? And how does that influence numbers? Are you effectively pulling forward work today that you might see now in the future with these durability upgrades?

So David, let me start and then I'll hand it to Larry to talk a little bit about the benefits that we are seeing from the durability upgrades. So I think on shop visits, as you said, we are expecting the shop visits to probably grow at kind of a 25 percentage CAGR from now to 2030. It's all a function of the installed base that's largely out there and will continue to grow over the next couple of years. But most of the engines that we're shipping now are probably not going to come in for a shop visit between now and 2030. So it's largely a function of the installed base that exists in the globe today. So with that, the big change that we are going to see is that our external channel is going to continue to grow. Our external channel has gone from like sub-10% of our overall be services portfolio to call it mid-teens right now, and we expect that to grow to, say, 30% by the time we get to 2030.

So I think that's the transition you're going to see here and we are seeing the benefit of that. As I said in my prepared remarks, we saw spare parts growth from that channel contributing to our second quarter revenue growth as well. So that will continue to build and all we are doing on our side is continuing to invest to build more capacity and then we're adding more channel partners. And the other part is that on the cost side, we do expect continuous reduction in our shop as it costs from 2 main things. One, the fact is that we will be leveraging our fixed cost investments more as volume continues to grow. And then the second part is that we are working really hard on repairs. Our repair CAGR from this year is more than 20%. So we're investing in repairs to bring that shop visit cost down. Because, as you know, repairs help both with the turnaround time and the cost. So and then obviously, the growth of external channel helps a little bit with mix. So that's kind of the trajectory that we are seeing between now and 2030.

David, I would just maybe step back on the durability kit for a moment, whether it be at IATA a few weeks ago, whether it's a recent customer survey that we've done. I think we're encouraged with some of the feedback we're getting. Internally, we've said 1 of our priorities for the year is to be more customer-driven to really see ourselves as our customers do. That sounds obvious, but it's really helped us, I think, see some areas of opportunity, certainly improving durability and time on wing, front and center.

I think from a LEAP 1A perspective. We now have over 40% of the fleet equipped with the durability kit. And the performance has been quite good, right? We've talked about this being the unlock for a doubling of the time on wing putting us in line with the CFM56, really encouraged in that regard. Now we have certification for the LEAP-1B durability kit. So that will give us the opportunity through the back half of this year to really work through the industrialization plan and give us a full cutover, both with respect to the aftermarket and new make really in 2027. It really won't be something that will trigger an acceleration of work. I think we've talked in the past that the fleet retrofits really will be a multiyear effort. Those engines are due to come in for their first shop visit on a relatively predictable schedule.

I don't think you're going to see many engines come in early for the durability kit. So really in the early 2030s until we can look at both the Fleet 1A and LEAP 1B fleets as being fully retrofit. But again, certification is a big step we'll work with the industrialization, encouraged by the 1A field performance. And over the next several years, we'll, I think, be in a much better place in this regard.

Our next question comes from Ronald Epstein with Bank of America.

I was wondering if you both mentioned work scope in your comments about the future growth in the business. Larry, could you give us just more of a feel what you're seeing there and what you expect to see in work scope? And then I've got a follow-up.

Sure. Well, again, in many respects, be it on the wide-body side, on the narrow-body side, it really is a function of the natural aging of the installed base. You think about the growth platforms, Ron, whether it be LEAP whether it be the NX, we're really moving from that quick turn, that early check up, check in to the first performance restoration shop visit. Even with some of the older platforms, you look at the GE90, for example, 70% of that installed base has yet to see shop visit too, which has a significant step-up in work scope. So we have, I think, real direct visibility. We obviously need to plan our own capacity requirements. The airlines need to work through the removals and any third-party work that may be required. I think that is really why we talk about this.

Now when you look at the CFM56, even obviously, the legacy narrowbody platform -- it's still a relatively young fleet, and we'd argue with a lot of life left in it. There are fewer long-term service agreements on those engines than we would see in the widebody segment. But 30% of that fleet hasn't seen the first shop visit, 2/3 haven't even seen the second shop visit. So we think about CFM56 as the older platform, it is. But as we work through next several years, I think we'll see those nations come back. And again, that structural support that tailwind will be helpful.

And Ron, just one -- maybe one additional comment on CFM56. On CFM56, as we said in our prepared remarks, the work scopes continue to be stable. And the growth largely is coming from better volume, better price and higher material levelability. So the dollar per shopper that is getting better, but because it's because it's not driven by increase in work scope, but the fact is that we are able to fulfill some of those heavier work scopes that we could not finish earlier. So the material availability is what's driving the growth in CFM56 in a big way.

But overall, the CFM56 scopes should remain stable from now to '28, '29 because the use -- there's hardly any used material in the market, the retirements are low and a lot of the engines that are coming in now need life-limited part upgrades as well. So that's what we see on CFM56.

Got you. And then just as a quick follow-up. You gave us a little teaser about Farnborough and the PFD aircraft. How are you thinking about hybrid electric and what it could mean for GE?

Well, a teaser to teaser, Ron. And if I answer that question in full, it's no longer a teaser. I think you know as well as anybody that as much as we talk about Open fan as one of the critical building blocks of the RISE technology development program, hybrid electric is 1 of those 4 key pillars. I think on the defense side, the same thing applies and not very much the reason for the investment, the collaboration with beta, right, the turbo generator program we think, has a real fit with a number of defense applications that we can work on together.

So more to come over the weekend and early next week. But I think both on the commercial and on the defense side, you're going to see electrification and thus hydroelectric being a more important part of our logical portfolio -- technology portfolio as we move forward. We'll see you there.

Our next question comes from Scott Mikus with Melius Research.

And Rahul, just a quick question. Given the financial pressure that airlines are feeling from the higher fuel prices, does that in any way impact your pricing strategy on CFM56, GE90, or any of the legacy engine programs?

Scott, so we -- we clearly recognize that, but I think at the same time, there have been several -- the airlines have also recognized a lot of price. So I think the overall -- I think our closer than I am, but the fact is what we have seen is that the airlines are kind of largely holding their profitability levels through this uptick in pricing. But the way we think about our own pricing is that we make significant investments and we add a lot of capability to our customers, and we want to be rewarded for that. So that's the environment we are in. At the same time, we are facing inflationary headwinds as well.

So broadly speaking, our pricing approach for on spare parts catalog for this year is going to be consistent with what we did last year. So that's kind of our approach for 2026. And then obviously, longer term, we continue to get incremental pricing as we kind of moving away from those initial launch phases of LEAP, [ NGINX ] pricing and the dollar per shop visit on those platforms has grown over the years that we've discussed previously. And that higher-priced shop visits will start showing up in our revenue books starting 2028, '29, and that obviously helps us get lead back to CFM56 profitability levels by 2030.

Our next question comes from Kristine Liwag with Morgan Stanley.

It seems like the peak pain from LEAP durability issues and the post COVID supply chain and labor constraints are behind you, and we're seeing this as throughput has improved meaningfully. As these operational headwinds continue to ease, how should we think about incremental margins from this higher throughput and productivity, especially if it seems like the shape of that shop visit continue to be strong. Are there offsets we should keep in mind? Or do you have a very strong line of sight to a greater than 30% CES margin?

Kristine, thanks for the question. Let me start, and I'll see if Larry wants to add anything here. Overall, as you think about our margin trajectory, our what we saw here in the second quarter, what we're experiencing for 2026 is very consistent with whatever we've been talking about. We've got 3 large issues on margins that we're working our way through. One, really strong installed engine growth which is absolutely needed, given the demand that's out there also feeds the installed base that Larry spoke a few minutes earlier about what drives the long-term services growth, right? So -- but strong installed engine growth, both last year and this year, and I expect that to continue.

LEAP services as the platform broke even in for on the services side, we're gradually moving up. Margins are getting better this year, both in the first half and expecting full year margin expansion on. But overall, we expect still below overall CES service margins, and that is putting a little bit of pressure on our margins. We expect LEAP services margins to be in line with our total services portfolio by the time we get to 2028. So that's kind of the second issue we're dealing with. And the third and perhaps the biggest is 9x. Initial units, highest-cost units and those are getting -- we started shipping those out last year, more this year, that volume will grow. And as we've previously said, we expect those losses to peak by the time we get into 2028. And beyond '28, we should see both losses come down and therefore, the margins get better as well. So those are the 3 issues. There's nothing structural that is causing us to have this issue. It is all timing.

But even with all these issues that we're dealing with, our margins at the total company level are largely flat. And that is because our services portfolio is the biggest part of the portfolio, it's the highest margin and it drives the highest dollar growth. So as we -- as those headwinds abate, the inherent mix advantage that we have in our business continues. So overall, both for CES and for total company, we would expect margin expansion in '28 and beyond.

Our next question comes from Ken Herbert with RBC Capital Markets.

Maybe, Larry, you've mentioned recently being at the IATA General Meeting or conversations there. And I think either in your prepared remarks or in the press release, you mentioned cost of ownership. One of the items we hear most from airlines is the new generation cost of ownership for the engines is much higher than before and in some ways, may be almost not sustainable other legacy operating models. How do you think about the airlines and their ability to absorb these costs and obviously continue to pay for the technology that you're investing in? Is this an area that you think maybe needs to be addressed in some form?

Ken, there's no question, right, whether it be cost of ownership, whether it be time on wing, we've heard those concerns loud and clear. I think what I was encouraged by in IATA and also in some of the recent customer feedback that we've got, as I think people see us here in the short term, doing all that we can to support them. We've got LEAP AOGs, aircraft on the ground down to near 0 at the moment despite the fact that the durability kit is not fully installed. And we're doing that through a combination of making sure we've got adequate spare engine coverage in the field.

We're reducing the turnaround time. I mentioned that as well in our shops. And everything that we're doing is to make sure that we are avoiding having asset in a nonrevenue situation. Longer term, there's no question that customers love the engine. They love the fuel efficiency and what they see in LEAP. I think the order book is a proof point in that regard, but we need to make sure that in addition to the short-term measures that we are both with the LEAP-1A and the LEAP-1B getting that durability kit in place, supporting the retrofit of the installed base as quickly as we can so that the issues that you've referenced become a thing of the past as soon as possible. So not in any way declaring victory here. We understand where our customers are in this regard. But again, I think we're encouraged by the state of play and the tone today much better I would submit than it was a year ago, but unfinished business.

Our next question comes from Gautam Khanna with TD Securities.

Yes. I was hoping you could help square the second quarter services growth of up 22% with the intra-quarter comments about spares orders up 40% through the first 2 months. I know that's about 40% of the service business. But if you could just talk to us about what happened in June and kind of the components within service orders, spares, LTSA and the like?

Okay. Thanks, Gautam. Yes, as you said, spare parts make up about 14% of our total revenue. So on those parts, we were talking about spare parts growth order rate of about 40% kind of mid-quarter. And there's been some normalization in spare parts orders in the last couple of weeks from a very high level. Those are exceptional results and kind of honestly unsustainable levels at the first part of end of the first quarter, start of the second quarter.

So we expected some normalcy and that has started to happen. We saw some normalization there. But overall, some first half service orders are in the 34% range. And that 34% for first half this year is actually an acceleration from what we saw in first half of last year on a year-over-year basis and even second half of last year. So we've seen continued sequential growth, continued acceleration of trends in service orders. So I think the momentum is very strong. Obviously, we spoke about the delinquency being up even with the 34% growth in spare parts orders for the first half and delinquency is up 20%. So the demand is there. We're trying to meet that demand. But overall, I think we feel very comfortable with the outlook. Larry, anything you want to add?

No. I mean I think you said it right. We do not have a demand problem. I think we've touched on that a number of times through the course of the call, $170 billion of services backlog, CFM56 retirements, low our shop visit outlook probably trending now toward the high end of that 2,300 to 2,400 range this year and next. We mentioned the fact that we're oversubscribed in '26 from an internal shop visit perspective. So it's largely going to be about continuing the progress and the real progress that we've seen here in the first half with the supply chain. And that is very much the order of the day as we get ready for the second half, let alone 2027.

Liz, we have time for one last question.

This question will come from the line of Robert Stallard with Vertical Research.

Thanks so much. Good morning.

Sorry about the loss day of [indiscernible]

Just a quick question for you. I was wondering if you could give us an update on the spare engine ratio in the quarter. whether you're seeing any change in customer buying patterns as you roll out these durability improvements on the LEAP?

Yes. On spares, Rob, overall, listen, we are seeing some normalization. But the number of spare engines that we are shipping they continue to grow up. So they continue to grow. So it's not -- the spare engine ratios coming down just given our growth in install engine shipments, but the number of spares that we've delivered here in the first half, they've gone up. So that's what we are expecting. But overall, we are kind of in the low double-digit range for LEAP life of program, and that's very close to 10% to 12% that we expect at maturity. So expecting this gradual normalization to continue into 2027, but we're getting to the point where it's kind of at the run rate level by the time we exit the year, it should be at the run rate level.

Larry, any final comments?

Blair, thank you. Maybe just in closing, our priorities remain clear: deliver for our customers, improve time on wing and lower cost of ownership. Flight deck is helping us turn those priorities into measurable results. We have more to do, but are confident in our path ahead and the long-term value creation for both our customers and our shareholders. We thank you for your time today and your continued interest in GE Aerospace.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

Okay. I think we're ready to go. I'm Doug Harned, Bernstein's Global Aerospace and Defense analyst, and I'm thrilled to have with us, again, GE Aerospace's CEO and Chairman, Larry Culp. Larry has got a few things he's going to take us through and then we'll go into the Q&A.

Great. Doug, thank you. Good to be back. We always enjoy this conference, not only it is well timed, we seems to be an opportunity to get out of the details of the quarter and really talk about what's distinctive and unique about GE Aerospace, both today and do we think about the business going forward.

As Doug said, I will run through a few slides here, and then we get into Q&A. Just to level set everybody in the room, GE Aerospace today, last year, $42 billion in revenue. People think of us as a hardware business, but we really are a services play, 70% of revenue coming from the support of an installed base that is 80,000 engines, large cutting across both commercial and defense applications.

We're really proud of that. We're out there with customers day in and day out. You couple that with the fact we've got $210 billion of backlog, $170 billion of that in commercial services. We really think that we're out there in all the right places, well positioned not only to support the customers, but to grow our business and generate returns for shareholders for some time to come.

How do we do that? I mean, very simply, our strategy is focused on today, tomorrow and the future. And we think about the challenge and the opportunity really being running at 3 speeds at once. Will be no surprise to anyone in this room that the airlines are working very hard to make the most of the fleets that they have today, all the while the airframers are looking to ramp production rates to help expand and modernize those fleets, that has us very busy today.

The airlines really aren't going to change course. We don't think the airframers are either. I don't know, Kelly was up here a moment ago, whether you're talking Boeing, Airbus or really anybody else. Tough to get a slot anytime between now and 2031, 2032. So we need to make sure we're preparing ourselves for tomorrow as we work those dual ramps in commercial. We'll talk a little bit about our defense business, the same thing is happening in the fence. So there's a lot in that regard.

All the while, we cannot waste a day with respect to investing and developing the technologies that will define the future of flight. That is really core to our purpose. It's core to our strategy, again, on both the commercial and on the defense side of things.

We'll Talk about flight deck. That's our proprietary lead operating model. That's how we translate strategy into results. Whether we're talking about our operating results, our financial results, our strategic breakthroughs, what we refer to as Hoshin Kanri. And maybe most importantly, the culture that we're looking to build and sustain over time. We think the right culture is what will under good outstanding results.

If we look at what FLIGHT DECK has enabled us to do, there's probably no better proof point than the chart that you see here, both with respect to commercial service revenue growth and total engine deliveries. You can see in the first quarter, both were up about 40% year-over-year, but really building on a very strong sequential and year-over-year trend.

What FLIGHT DECK allows us to do with that maniacal daily focus on safety, quality, delivery cost in that order is make sure that everywhere in our operations, be it a manufacturing facility or a repair shop that we're looking to reduce all of the Mouda, all the waste, so we can improve cycle times and improve deliveries. A lot of ink has been spilled on supply chains. Supply chains have certainly been a challenge for us. But we've used FLIGHT DECK at the same time to go in and really do deep technical, collaborative problem solving. With suppliers that you might own, suppliers you will never hear of. And that has really enabled us to unlock capacity and generate better flow, which in turn feeds our facilities, which allows us to ship new engines to the airframers and allows us to complete shop visits, deliver spare parts to third-parties as well in the aftermarket. And that's really, I think, more than anything, where you can see FLIGHT DECK in action at GE Aerospace today.

We announced first quarter earnings back in late April. One of the things we said is, we'll see at Bernstein. And again, a little bit of the reason we think this commerce is so well timed because we were dealing with the situation in the Gulf. We had a very strong first quarter, talked to everyone at the time about how we -- we're leaning towards the high end of our range, but we held the range by and large because we just didn't think it would be a good form given the uncertainties in the Gulf to do so. If that were not the case, if we didn't have active combat, we clearly would have done something with the guide.

The update that we would share with you this morning, I think on balance is actually quite positive. Now none of us know how things are going to play out in the Gulf. But if we look at parked aircraft, and that's important to us because that's a leading indicator of retirements. We actually have seen parked aircraft decline in numbers, not only here in May relative to April, but we're down from where we were at the beginning of the year. We think that's a good sign, a bow wave of retirements, we do not believe is looming.

Maybe most telling is while we were very pleased with the 30% growth that we saw in our spare parts orders. When we were together at earnings through the first quarter, we've actually seen an uptick. So what was 30% before the last 60 days or so has been closer to 40%. So no real slowdown in terms of what airlines are doing, what third-party shops are doing with respect to spare part procurement. And it's 1 thing to have spare parts, but you need the engine to do the work. And what we have seen is a continued growth in the engines that are being taken off wing, not yet even inducted in 1 of our shops or 1 of our third-party partner shops, but getting ready to come our way. So we think the airlines are continuing to invest and prepare for whatever is on the other side of the current situation and we're well positioned in that regard.

This is probably the most important slide that we will share with you in the course of the opening remarks here. You really think about GE Aerospace, what makes this franchise unique really is the experience in the investment envelope that we have, 2.3 billion flight hours, an unparalleled amount of experience. And with a $3 billion investment spend every year. We continue to invest in the technologies of the future.

I want to take you through all the platforms on this chart, but suffice to say 7 new engine platforms over the last 20 years. A lot of learning, 1 generation to the next. And the lines aren't straight, narrowbodies don't always leverage narrowbody experience, widebody's the same. Well, if you will, cross-pollinate all the experience we can in terms of material science, in terms of durability, in hot and harsh environments to make sure what comes next is even better than predecessor platforms.

And that is really the heart of what we are referring to when we say the future of flight, whether we're talking about RISE, our technology development program for next-generation narrowbodies, let alone everything that we're doing in adaptive cycle engines which really are at the heart of sixth generation combat jets. The investment and the experience that we have at GE Aerospace, we believe allows us to position ourselves very well, again, not only for today and tomorrow, but ultimately for the future.

I'm going to spend a couple of minutes just giving you a quick update on where we are with our key platforms. The workhorse of the industry, as I'm sure many here in the room know is the CFM56. What people, I think, need to keep in mind is while this is maybe not only the largest fleet out there, it is still a young fleet. I say young, the average age of the fleet today is about 15 years. About 30% of these engines have yet to see their first shop visit.

So while we think that we're going to see after 2028, a modest decline in the number of shop visits, this is still a critical engine all around the world. It's 1 thing to have shop visit volume. But clearly, to keep the revenue and the profit profile stable, workscopes and price come into play here. And we really have seen very little to suggest that workscopes will come under pressure, again, in large part because of the age of these engines, some of which haven't seen a first shop visit, I think over half haven't seen their second shop visit. So there's still a lot of runway here, runway that we're well poised to serve.

If we go to the other piece of our narrowbody portfolio, the LEAP engine, clearly the fastest-growing engine platform in the world. We're going to see this installed base double in size between now and 2030. That's going to drive shop visits that will grow at a 25% annual rate and shop visits that will be, frankly, more impactful for us as we go forward. We're going to be moving structurally from basically early quick turn shop business is something that's more of a performance restoration visit, higher calories, higher dollars in that regard. We will continue to push repairs more rapidly now that we're in this point in the cycle, that will improve the overall economic profile. We'll be doing more with third-parties as opposed to seeing these shop visits in our own operations, that's an opportunity as well for us to improve the profile. And that's before we see the full impact of the post-launch pricing in a number of our aftermarket contracts.

So there's a lot here that we're encouraged by. And as you get out to the far right on the slide, you see in 2030, the profit dollar contributions between the 2 narrowbody platforms will be roughly in the same neighborhood. So a lot still to play for with the CFM56. LEAP, very well positioned in a similar fashion.

We go to widebodies. We don't talk a lot about our widebody platform, and I'm not quite sure why, because this in its own right is a really strong business. We have 55% of the commercial departures. In the widebody sphere today, we've got the fastest-growing widebody engine in the GEnx. We will see that continue to grow. As you see on the slide, we're winning over 3 quarters of the jump balls on the back of a 787, and we continue to believe this is going to be an engine that will win in the marketplace. That gives us an outlook to grow our shop visits in the high single-digit range. And again, not unlike what we are seeing with the narrowbodies, we think the structural progress that we're going to make with the new engines, advancing toward more higher calorie shop visits like the GEnx and the stability in the CF6 and the GE90 bode very well for what we're going to be able to do in widebodies.

You put all of that together, you've heard us in other settings talk about a top line double-digit trajectory over the medium term for our commercial services business. There's no reason that, as we sit here today, we see any real change in that regard. We'll be in the -- probably the mid-teens are better here this year given what we've seen so far, very encouraging in that regard. And again, it's really a function of seeing the installed base grow as airlines look to expand and modernize with deliveries outpacing retirements. And at the same time, that volume getting leveraged in large part through FLIGHT DECK, workscopes structurally working for us in a number of ways. And again, some contribution from price. You put all that together, we're going to have a very good '26. At this point is, given what we know with respect to '27, we think we will see growth very much in line with that medium-term outlook, but continue to watch current events. But in terms of what we see on the part of our customers, what we're seeing in terms of our own operations, feeling very good about the current environment.

Doug, you were with us last Tuesday, up in Lynn, Massachusetts, just north of Boston. We had about 30 investors in the house for a half-day deep dive on DPT, our Defense and Propulsion Technologies segment. If we don't talk enough about widebodies, we certainly don't talk enough about our defense business. But it's a business we're very proud of, $12 billion in size, a 30,000 engine strong installed base powering 2/3 of the U.S. and allied jet and rotary fleet that's out there today in a business that we think is going to grow, not only because of the platforms we serve, both rotary the Black Hawks, the Apaches, but also fighters in terms of not only new units and sustainment revenues. But 30% of this business is in international markets, whether we serve that through foreign military sales, or by way of our Avio Aero business in Italy, which really unique here is we've got platforms like the F110 and others that really give us the opportunity to go in and support a number of the indigenous developments that are going on around the world, be it Sweden, be it Turkey, be it India, be it South Korea, well positioned in that regard.

Doug, when you were there and others, I think there was ample evidence of how FLIGHT DECK is helping us drive not only better output, but better productivity across not only the Lynn campus, but the business at large. And again, as I mentioned earlier, with respect to the future flight, everything that we're doing, not only to modernize and upgrade the Black Hawks and the Apaches with the T901 platform, but all the sixth gen activity, we really think that we're well positioned in that regard.

But we're not wed exclusively to the so-called exquisite platforms. Folks that were with us got a deep look at what we're doing in terms of lower-cost platforms with some partners like Kratos and Shield AI, interesting opportunities without question, but also, frankly, infusing a different skill set in our organization. We have incredible engineering capability, sometimes that can come at the expense of cost positions or ramp rates and having some disruptive partners in the room really is conducive, I think, to making sure that we're providing the technologies and the options that the customer wants at both ends of that spectrum.

And then I was just to wrap up here. This is a slide some of you have seen before. But in terms of the key value propositions for investors, we really do think it starts first with that 80,000 strong installed base. That's the ballast in the ship. Our performance in both commercial and in defense applications delivers the highest operational reliability out there. That, in turn, makes us, I think, the preferred platform under virtually any wing in the marketplace. Again, 2.3 billion hours of flight experience, coupled with $3 billion of R&D spend annually, really will position us well to continue to define the future flight, but it all has to be operationalized to make sense, right, for both customers and investors at the end of the day, and that's where FLIGHT DECK kicks in.

So a lot of good things happening at GE Aerospace. And Doug, maybe we'll leave it there and go to Q&A.

Okay. Great. Thanks, Larry. You talked about looking at the impact of the high fuel prices today and that so far, you're still not seeing any real negative impact. Can you give us a sense of how you're looking at Q2 right now, given that?

Well, certainly, I think we have seen, and you've written about this, departures have softened here over the last 8 weeks or so. I think we're looking at year-to-date departure growth being relatively flat. But I think we feel very good about the second quarter. Again, largely because we have really seen no operational impact, no commercial behavioral changes on the part of our customers. Now we knew we were going to have a strong second quarter, just given the sheer backlog, both from a new make and from an aftermarket perspective. But again, the reduction in parked aircraft, continued strength in spare part orders, removals continuing to be strong and frankly, the FLIGHT DECK progress that we're making, particularly in our shops, allowing us to complete more shop visits more rapidly, get spare parts out the door. I think we feel very good about where we are here in late May.

Now the concern that we have had has been not so much the near term. And at least our understanding is for, say, CFM56, you've got more than 12 months backlog of shop visits. You've got a lot of support there. Huge demand. Our concern has been that if this extends that you could start to see some airlines get into financial trouble, be it cash strapped, have a difficult time getting an engine induction or even paying the way through. So can you help us understand kind of the process here, if you imagine, say, just -- can pick a developing market, low-cost carrier type of a situation where they could get hit, not have the cash. What is the process you go through to deal with that if they flat out can't pay?

Well, that -- there's a lot of muscle memory built up around just that question, right, which I think is centered on the creditworthiness of any airline, and you could pick a large airline in the West at a developing or emerging market startup, the LCC or ULCC. So that's not something that necessarily started 6 or 8 weeks ago, right? That's an ongoing conversation for us. But I think that we're not so concerned about that, at least with respect to '26. And again, as I showed on 1 of the slides, I think as we look into '27, given what we know today, we think we'll be up double digits in the aftermarket as well.

But what will happen or what has happened in the past is if there's a restructuring underway, we will work with the airline. If there's a lessor involved, the lessor we'll certainly work with the airline to make sure that there's anything in motion, either off-wing, not getting the shop or inducted that were covered in the short term to make sure we get paid, right? But at the same time, we want to be constructive relative to the restructuring that's underway because at the end of the day, we'd like to see those engines, those planes back in the yard. And we've seen even here recently, evidence that airlines can go through that process and come out on the other side flying those engines. And again, more often than not, given that we fly 3 corners of commercial departures on a daily basis, those are going to be GE Aerospace engines.

If an airline got into a real pickle, right? And it was more of an insolvency situation. Again, in large part because of the role the lessors play, those assets will find a home. And at a time when lift is constrained, what we have seen in the past, and we've seen this even before the most recent environment, those engines, those airplanes find homes, and we think that would continue to be the case both in the narrowbody realm, Doug, and in the widebody.

Now worst case, I think an engine could get parted out. We'll see if that plays out. We've talked in the past about some of these emerging power gen applications that could sponge up some excess if that exists. But given how tight things are, that's not a big concern for us at the moment.

I mean, is there any time frame that you worry about? Like as I said, we're not too concerned about next 12 months, but when you look at this as it extends, I mean, are there customers that you deal with and they're going, we go in at these kind of prices and if we have cash difficulties, next year, '27, '28, are we still -- can we plan for that, I guess, is...

Yes. Well, again, I think we always try to be on watch with respect to credits and our credit profile in the best of days and the worst of days. So there's always going to be a top 5, top 10 watch list. Not going to let you know who those names are today. But that -- anybody providing credit is going to do that.

But again, I think with respect to our business, if that were to happen, let's just say, in a relatively benign way of restructuring, it's hard to think that you're going to have many of those before the back half of next year or in the '28. Or you say 12 months, some people say 18. I don't think I can put the dart right on the bull's eye, but it's -- I think it's out there a good ways.

One of the things we've looked at this and tried to model, what did I mean to say for CFM56. What we have at least estimated is demand that's well in excess of kind of the 2,300 or so shop visits you have, which has the effect of pushing that shop visit profile out to be kind of stable at least through 2030, which is a long way. And so that's kind of what I'm getting at is do we see -- because to get a high multiple and everything, people are looking toward that, right?

Sure, sure. And we understand that. Again, part of what we wanted to do with these prepared remarks and just remind everybody, we're more than just in CFM56, right? We're more than just a commercial play.

But that said, we've talked about relative stability in the 2,300, 2,400 range in terms of shop business for the CFM56 through '28 with a slight fade with content and price picking up any volume pressure which gets you to that profit equivalency with LEAP in 2030. Is that a conservative assumption on our part? I Mean we have gotten wrong the CFM56 peak the last couple of years because we keep pushing it out. I think we're trying to...

Well onetime the peak was supposed to be 2016. So we sort of made it through that.

Well, that's where your experience predates my own. I just speak to more recent times. But that -- I think as long as that continues to be the workhorse and there is demand given what the airlines are trying to achieve globally, we're well positioned.

So if you go to the place where the demand is extremely high, which is on the LEAP side, and -- so when you look out toward 2028, 2029, you're -- at least as we understand that you're doing a lot of work to more time and materials contracts, different kinds of contract structure, should we be able to see those LEAP aftermarket margins start to approach CFM56 type levels in that timeframe?

Yes. I think what we've said, Doug, is in the aftermarket, we went profitable in '24. There's a lot of goodness to come from the doubling of that installed base and that 25% compounded growth rate around shop visits. Just -- it's not only the volume per se, but it's what FLIGHT DECK allows us to do, right? We just get that many more reps to reduce the excess cost, be it labor, be it material, be it overhead in the completion of their shop visits. And at the same time, as we build a third-party network, that profile becomes more spare parts as opposed to spare parts and the work that we do in our own operations.

Repair, again, will become a more important part of our cost structure. And when we talk about repairs, what we love about repairs is it only gives us, frankly, a lower cost bill of material, it frees up capacity that allows us to ramp because if we can repair a part rather than use a newly made part, that newly made part can go into a new engine, it can go into a shop visit or maybe we don't have that repair option.

And that's all before we talk about beginning to see the benefit of the price moves that we've made, particularly, we've gone post launch. I mean you go back to the mid-2010s, we were in the process of launching LEAP. We did a number of things that you always do when you launch. Coming out of the pandemic, there was a desire on the part of customers, understandably the relaunch. We didn't necessarily do that. But we haven't seen, given the long tail nature of some of these contracts, seeing the full benefit of some of that price action.

So we really like where we're headed with LEAP, a lot of work certainly in front of us. But to think that in 2030, we could have a profit pool around LEAP akin to where we are with the CFM56 in that same time period. We think that's a pretty exciting part of the value proposition for investors at GE Aerospace.

Now if we go over to the OE side, you mentioned if you can do more repairs, you have more parts available for OE. Can you update us on the outlook for OE deliveries right now?

Yes. Well, I think we feel pretty good about where we are in that regard. We were up about 63% in the first quarter with respect to LEAP deliveries. Widebodies were up over 25% with the GEnx, which is really the growth vehicle there, up even more. Again, I think that, that's not something we can take exclusive credit for. You had my friend, John, plan up earlier. The last couple of years, we've really tried to move away from what I would describe as a bit of an industry paradigm at times, where folks like to finger point and negotiate in public. I have never seen in my career that unlock real capacity, particularly at a time of post-pandemic stressors that are out there. So we've used FLIGHT DECK, and we've gone in with some great partners like [ Howmet ] to really make sure we've got our best people at the stove face on the shop floor, identifying where those bottlenecks and constraints exist in doing everything we can, both short and long term to address those. It doesn't mean we're not writing checks for CapEx, right, to make sure we've got adequate physical capacity over the medium to long term. But here and now to support Kelly, who was just up here, Airbus and others, that is really how the game gets played, and I think 1, for us to be able to have, I think, what, 8 quarters now where we've been driving continued improvement sequentially in our inputs. Again, from [ Howmets ] much of the world and from the folks you'll never know, I think is the foundation for us to continue to drive increases in what we're doing with the airframers. We've said that for LEAP, we'll be up 15% this year, that probably looks somewhat modest given the very strong first quarter that we had. But it's not the only thing that we're solving for. And as we look into '27, '28, every platform, every airframer is in a slightly different place. But make no mistake, we are completely committed to making sure that Kelly and company, Guillaume company and others have everything they need to step forward.

Yes. And on Guillaume and company, last year, they were fairly public about -- at Airbus about winning more from CFM. This year, sounds like things have come together. Can you describe how things have evolved?

Well, I would -- but I know they still talk about engine manufacturers, just not us, which is good. I think if you look at the evolution of our relationship with Airbus, I give somebody that you know and some of the audience may know Christian Scherer, the recently retired Head of Commercial, a ton of credit. He's just 1 of the best people I've met in this industry. And Christian said, we have got to get away from the arm wrestling, the negotiating, the finger pointing, you don't get the best of us. And I know in my heart of hearts, we don't get the best of you. So he set an incredible tone at the top. I'd like to think we met him at least halfway, if not more so. And it just allowed us in an Airbus construct, again, to make sure we weren't posturing, we weren't negotiating. We were problem solving. And there is a fundamental difference when you're in that mode, right? And it requires a level of trust. It requires a level of transparency, which I really think has helped the organizations. Lars Wagner, his replacement, very committed to operating in that same way.

That said, Doug, we hit a dry patch with a supplier, and we're short some quarter in the future. I'm sure you'll hear about it with attribution. But I think we're in a very different operating mode. That's my point with Airbus today than we were 3 or 4 years ago. And again, I give Christian a ton of credit.

So can you talk also a little bit about the widebody side, the GEnx, how you're seeing that growth from an OE standpoint? I mean Kelly just talked about rate ramp.

Well, we look at where we are today, right, winning over 3/4 of the opportunities on that platform. That's a winning widebody platform without question. We really like where we're positioned in that regard. But a bit like what we were talking about with LEAP earlier, we're going to have to continue to push our output growth. We were up over 25% in the first quarter. Boeing will take every engine that we can possibly deliver, right?

Yes, they want more.

Well, they need more, but you go down to Charleston, I have been in Charleston over the weekend. They've got planes with engines that haven't yet delivered. So there's that, but there's no question that we want to make sure in Charleston that they've got an engine every time they're ready to hang, right? It is not just how many engines are delivered in the course of a year, at the shop floor with Scott Stocker, who runs that program down there, another outstanding person. He needs that engine when he needs it, right, not later. So we are working with the supply base. I was on with 1 of the critical suppliers fact myself this morning, making sure that we're getting all the right engineering support at Yamba, where the real work gets done to be in a position to step up because Boeing wants to step up down in Charleston, not only in terms of the current footprint, but what's coming online. And obviously, we want as many of those deliveries as we can muster.

When you look at where demand sits right now, both on OE and aftermarket, I think it's unusual when you look at history to see each of those growing so strongly. Then when you go down into your supply chain, including the people we've never heard of down there, does this combination of demand on both sides add to the stress that you have?

Without question. Without question, because it's stressful for at least 2 reasons to come immediately to mind, Doug. One is just the sheer volume. The other is suppliers large and small in the aerospace supply chain. I've always second guest, right, various forecasts. The OE build rate is not the only out-year number they need to focus on because the aftermarket is so important, and that's been part of the post-pandemic calibration in my mind.

But they've got to believe it. And it's easy to say, I don't believe, I'm going to bet against that. Thus, I'm not going to do the best. I won't put capital in over the medium term. I'm not going to bring labor in, in the short term. I mean I bring inventory in.

So a good bit of what we've done has not only been in terms of that technical collaborative problem solving, but just building trust, building transparency so that everybody understands what we're trying to do. We've had some suppliers who have said, well, I don't believe the Boeing ramp rate. And frankly, what we've said is, let us relieve you of that. You don't have to believe it. We believe it, this is what we need, and we'll make proper arrangements.

But by the way, keep in mind that we might need a particular part, but we don't only need it for the Boeing ramp rate. We also need it in the aftermarket. So detach yourself from your mono focus on Boeing or an Airbus announced production ramp rate, understand what we're trying to solve for in the aftermarket, particularly with these installed bases doubling and more so. So it's been a significant exercise to build that trust, not always, frankly, a GE Aerospace forte. But also to be transparent, so that they can plan as we plan.

Yes, because you can't -- given the breadth of the supplier universe, you can't let them all come up with their own forecast for what Boeing is going to do because it just takes 1 to cause a problem. But how -- 1 of the things I know you focused on has been trying to at least dual source on many things, which probably gives you flexibility in that regard.

It gives us flexibility, but you could end up having the same conversation twice, right? And if we need 100 of something, it -- there's certainly benefits to getting 50 from Party A and Party B, but it's really that simple, right? And some people are willing and able to invest in a moment like this, in a moment of scarcity and others, particularly given the situation in the Gulf for the last 2 months, anxious. And that might give them legitimate pause or at least something to hide behind. And what we've tried to do is just to make sure that everybody understands we are all in on these skylines. We were all in on the idea that our aftermarket growth is going to be in the double-digit range through the medium term. And the installed base has continued to grow. If we continue to see the evolution of the content and the shop visit for the LEAP, for the nx as they mature, there's just a lot of demand that we, as an industry, need to be in a position to serve. Let's not arm wrestle over that, let's jointly problem solve the short-, medium- and long-term requirements and get after it.

Now looking forward, the RISE program is 1 that you all have been very focused on. Can you comment on how that's progressing in terms of, I'd say, both time line and how airframe OEMs are thinking about it?

Yes. Well, just maybe to level set everybody, when we talk about RISE, we're really talking about our technology as opposed to product development program for the underlying components of, in all likelihood, the next-generation narrowbody engine. There really are 4 keys here. One is an open fan architect -- excuse me, 3 keys. One is an open fan architecture. The second is a common core. And the third is hybrid electric capabilities. There's a fourth pillar there, in alternative fuels, but let me just focus on the first 3.

Doug, I've been up to the GRC, our Global Research Center probably twice in the last 3 or months or so, in deep with the team. We continue to make progress on the component and the subsystem and the system developments. They really undergird all 3 of those.

We will talk about ground tests and flight tests later this decade as we continue to move forward. The airframers are well aware of where we are. We've been bringing airlines in as well to make sure they understand where we are with these efforts. And I think what's really neat is it wasn't that long ago when anyone -- almost anyone who came to talk to us focus on sustainability. Now you could argue that the industry has always talked about sustainability because it's fundamentally fuel efficiency, true, but it had a sustainability bet. Today for understandable reasons, customers have evolved to a much greater focus on reliability, durability, making sure that when they need the engines to go that they're good to go.

What we've been able to, I think, help people understand with the open fan architecture, it's not just an efficiency play with the higher bypass ratio that you get from the unducted architecture. There's clearly a step function improvement in efficiency. But because you're putting less stress on the core, the hot section of the engine, which is where all the wear and tear takes place over time, you not only get that efficiency benefit, we think there's a significant durability and reliability benefit to be had as well as my friend Jim Collins would say, it's the genius of the hand, it'll work. You don't have to trade 1 for the other. With the open fan architecture, with the advances and what we've been able to do with the common core. And a little bit of hybrid electric thrown in, we think that, that's a winner.

The second part of your question in terms of timing, the airframers are trying to take care of today and tomorrow. I think they are all working on what comes next in terms of the future flight in terms of the next-generation narrowbody, but when you hear people talk about time frames and we'll let them speak to their own specifics, it tends to be in the latter part of the next decade. That -- they will -- those are big decisions that they'll make, we simply want to be ready with the best possible technology under wing to make sure we perpetuate our industry leadership, and that's really at the end of the day what RISE is all about.

Can you give us any sense when you're in discussion with the airframers, how they view this? Because it requires a lot of differences in the aircraft itself. How do they talk to you about it?

Well, I think they understand that we're going to need to have somewhat like what we were talking about earlier in terms of just the near-term ramp rate mode of working, we're going to need to be much more collaborative as we think about the integration of an open fan architecture and the aircraft, particularly on the wing. And when we get into that, and we've done some incredible modeling down at Oak Ridge on the Genesis supercomputer. And we think that's kind of differentiated capabilities from a development perspective. What we're able to do in concert with the airframers from a wing perspective, really is quite powerful. Again, that integration will help us drive both efficiency gains and we think, ultimately, aftermarket maintenance support.

So we jump over to defense. You talked a little bit about it in your opening remarks. I saw a lot up in Lynn, and -- could you tell us a little bit, I mean, you've got you're saying, I think, growth, mid- to high single-digit growth. But your book-to-bills have been particularly strong over time. I mean how are you viewing this as -- I mean it's $12 billion today. What's the growth trajectory you're looking at now?

Well, I think if we continue to build that backlog, right, and we continue to use FLIGHT DECK to get that backlog out the door which is why we wanted you and others to come up to Lynn to see the progress we've made in a facility where we have been operating for over a century. That put -- that gives us the opportunity to be in that high single-digit range. We just know that demand is there. And that's before we talk about anything by way of an uptick in sustainment. I mean we know we support all the platforms being currently used in various hotspots around the world. We haven't really seen that uptick. I think other than maybe on the Eurofighter yet. But come the '27 budget, we think they'll need to be a nice uptick in sustainment. And that is again, at a high single-digit rate really before we see real traction with the sixth generation platforms. Thrilled the President went ahead with the F-47, very keen to see how the NGAD program evolves to support the F-47. A number of you, I'm sure, saw the Chief and Naval operations, talk about the Navy heading towards a decision on the FAXX this August. A lot of what we've been doing with the AX100. More recently, RXA102, our adaptive cycle engine, both from a design readiness review, which we completed last year, the assembly readiness review that we completed here recently, we think positions us well. Now you never know until you know, right? But as these sixth generations for the Air Force and Navy come forward, we're optimistic that we'll be in a position to participate.

And is there any time frame where you might expect this heightened op tempo in the Middle East to come through and affect your defense?

I think we're saying, let's see the '27 budget as opposed to something that's going to happen in the next 6 to 8 weeks. We'd love to be surprised, but...

Okay. Yes. And then certainly, operations in Avio are important in Italy, but can you give us also a little bit of a picture of growth on the international side relative to that overall growth rate? Is it faster or...

Well, it will be at least in that high single-digit range, and it could uptick again. We don't talk much about defense. We certainly don't talk about our international defense business, which represents about 1/3 of our revenues there. But these indigenous programs really around the world have been wonderful opportunities for us just because the F110 in particular has been such an engine of choice. So you've got Sweden, you've got South Korea, you've got Turkey, you've got India, I'm sure I'm missing a couple, I don't mean to do so, looking to GE propulsion underwing as they put together not only their own local fighter aircraft capabilities, but ramp those production lines as well. So we feel very optimistic about where we are internationally, both in terms of the FMS channel, but also what Avio allows us to do in Europe, not only in terms of technologies that Avio is bringing to market, GCAP and the rest, but frankly, things that we might be able to work on in between in Europe with U.S. technology that Avio can bring into the continent.

One of the other pieces you have now on the defense side is your aero derivative business. We had Steve and [ everyone else ] here this morning. John Plant talked about their ITT work is hot area. Can you comment a little bit about how significant that is for GE right now?

Sure. Well, I think that if you go back a few years, we really set Scott and company up and they've been doing a phenomenal job for that to really be the GE play in power gen. But just given the way things have taken off, there have been some innovative companies, new entrants that have said, can we repurpose the CFM56 in particular, we're going to support that. That's still evolving. So I wouldn't say that we have a completely baked strategy. But if there are opportunities for folks to repurpose those platforms, particularly at this stage in the life cycle, that's all good news for GE Aerospace, right, because that will allow us to extend the life -- useful lives of those assets, we'll provide parts into those applications, and that will soak up, we believe some of what may come as we get past '28, like your framework past 2030, if there's an excess of supply given retirement. We'd rather repurpose and retire, of course.

Yes. I was thinking some of your aero derivative that in-house, I mean, you do -- your kind of designed for aero derivative engines as well.

Yes. Supplying both Vernova and Baker Hughes, our -- 1 of our GE cousins. So -- and we really like the idea of putting it with Amy Gowder and the defense team because it's more like their marine business than it is the commercial aero business. So we moved it really just, frankly, for better coherence operationally inside of the company. It changes a little bit of the profile. It's a bigger part of DPT than it would have been the commercial segment. So we end up talking about it a little bit more. But given what's happening in power gen with all things AI, it's all good by us.

So I think I ask you this question every year. But when you look at the landscape out there, I mean, GE's business is centered on propulsion. You have some other things now, systems and -- do you look at -- do you think about potential for expansion into more system and equipment-oriented businesses like a long time ago was done with Smiths?

Yes, a long time ago. Well, Doug, I'd be lying to you if I said I didn't think about it. 25 years at Danaher, we looked at a lot of things, deployed a lot of capital. But the GE Aerospace setup, I think, is fundamentally different. And I sit here today just reinforcing what we have said in the past in terms of our capital allocation priorities. We know we're in a fortunate position. We're going to throw off a lot of cash. That will more than cover what we need to support that $3 billion of annual R&D spend and anything that we might need from a CapEx perspective as we think about the ramp. We will put a lot of capital back to shareholders. We think that's just part of our value proposition for this group. But there will be opportunities for us to do things. But I don't think we're looking to be all things to all people. That's just not who we are. If you look at what we did, we put $200 million of equity capital into Beta Technologies, an outstanding leader in Kyle Clark, we think, a highly innovative company focused on some applications in the near term that will fly. We've done some smaller things in and around DPT as well. So we're going to look to fortify our existing positions, first and foremost before we go far afield. That's -- I think that's served us well thus far, and there's plenty of opportunity for us to stay close to the core, I think, as we look at the foreseeable future.

Okay. With that, let's wrap up. But thank you, Larry, very much.

Thank you, Doug. Thanks, everyone..

Good day, ladies and gentlemen, and welcome to the GE Aerospace First Quarter 2026 Earnings Conference

[Operator Instructions]

As a reminder, this conference is being recorded. I would now like to turn the program over to your host for today's conference, Blaire Shoor from the GE Aerospace Investor Relations team. Please proceed.

Thanks, Liz. Welcome to GE Aerospace's First Quarter 2026 Earnings Call. I'm joined by Chairman and CEO, Larry Culp; and CFO, Rahul Ghai. Many of the statements we're making are forward-looking and based on our best view of the world and our business as we see them today. As described in our SEC filings and website, those elements may change as the world changes. Additionally, Larry and Rahul will speak to total company and corporate financial results and guidance today on a non-GAAP basis. Now over to Larry.

Thanks, Blaire. Good morning, everyone. I want to start by addressing the conflict in the Middle East and the dynamic geopolitical environment our industry is navigating. While we're hopeful for a peaceful resolution, we're also embracing today's reality. With safety, our top priority, we're focused every day on supporting our teams in the region and our customers globally. At GE Aerospace, we remain committed to our purpose. We invent the future of flight, lifts people up and bring them home safely. Right now, nearly 1 million people are in flight with our technology under wing. Our responsibility or 57,000 employees take seriously.

Turning to our first quarter results. 2026 is off to a strong start. Orders were up 87% with CES nearly doubling and DPT, up 67%, included record defense orders for this decade. Revenue increased 29%, driven by CES services and double-digit growth in DPT. Operating profit grew 18%, with both segments up double digits. And EPS increased 25% to $1.86 with free cash flow up 14%. Flight deck enabled us to improve output again with commercial services revenue up 39% and total engine deliveries up 43%. All the while, we're continuously investing to improve time on wing and lower cost of ownership for our customers across our current fleet and for next-generation technologies. I want to express a big thank you to both the GE Aerospace team and our supplier partners for their unwavering commitment to deliver for our customers. Turning to Slide 4 and what we're currently seeing in today's operating environment. In the first quarter, global departures were up low single digits, including a high single-digit decline in the Middle East which represents roughly 5% of our departures. And for the balance of the year, we've assessed multiple scenarios to develop a range of outcomes with our current assumption that the conflict and its effects continue through the summer.

As a result, we're reducing our full year departures outlook from mid-single-digit growth to flat, to low single-digit growth. This includes a low double-digit decline in the Middle East for the year. with modest reductions to other regions. Based on our experience during the global financial crisis, the impact of services will likely lag changes in air traffic demand by several quarters. to be followed by a period of above-average growth. We're well positioned to navigate cycles with our backlog providing resilience through changes in air traffic. And we have a young and diverse fleet with leading programs in both narrow-body and wide-body. For our largest program, the CFM56, about 2/3 of the fleet is yet to undergo a second shop visit and utilization remained stable, supporting continued demand. Additionally, our defense business is supporting U.S. and allied war fighters with our engines powering the Black Hawk, the Apache, the B1, the B2, the F-15, the F-16 and the Eurofighter. We're seeing increased utilization since March, creating future aftermarket demand. Diving deeper into services orders and backlog. Our Commercial Services business is supported by a robust backlog of over $170 billion up nearly $30 million since the end of '24, providing visibility into multiyear demand and supporting our continued growth. Over the last 12 months, commercial services orders increased over 30% and including 49% growth in the first quarter. Within services, demand remains strong for spare parts, which represent roughly 40% of services revenue.

Since the beginning of March, spare parts orders are up over 30% year-over-year and sequentially flat to the first 2 months of the first quarter. And even with over 25% revenue growth over the last 5 quarters, demand continues to exceed supply. As a result, spare parts delinquency, which represents shipments that have been delayed due to material availability constraints, is up roughly 70% since the end of '24. Given the sustained demand environment and our existing delinquency, we're entering the second quarter with more than 95% of spare parts revenue already in backlog. Turning to internal shop visits, which represent roughly 60% of our services revenue. Approximately 2/3 of the engines do for our projected shop visits for all of '26 are currently off link, either in our shops or waiting to be inducted. Additionally, we have high visibility into the engines, which will come off wing over the next couple of quarters based on utilization trends and required removal thresholds in concert with the airlines. Our pipeline of planned engine removals in the second and third quarters, combined with engines that are currently off wing exceeds our shop visit guide, providing ample demand to fulfill our outlook and derisking our 2026 guide.

Overall, we expect a limited impact on services revenue and profit in '26. We're holding our full year guidance across the board given the macro uncertainty, though with our strong start to the year, we are trending toward the high end of that range. Shifting to Slide 6. Flight deck is fundamentally changing the way we operate. And in times like these, it matters even more. Collaborative problem solving with suppliers, air framers, airlines and lessors are key to this effort. For example, we recently hosted a key supplier at our Terra Haute, Indiana site. Leveraging flight deck, we've worked together to improve flow and reduce waste on their lead production line. and they've since increased output by over 40%. Actions like these contributed to priority supplier material input increasing double digits, both sequentially and year-over-year again in the first quarter. resulting in the increased output I mentioned ago, including engines up 43%. Across our MRO network, we're using flight deck to increase output, reduce turnaround times and lower the cost of shop visits. Take our McAllen, Texas site, where we reduced LEAP high-pressure turbine repair time by over 50% by redesigning the cell for better flow. And we know AI will be an accelerator for flight deck.

At our Lafayette, Indiana facility, we expanded the deployment of an AI-based material assistant to predict shop visit work scopes for LEAP engines 9 months in advance. Building on the turnaround time reduction we've recognized in both our [ Selma ] and Malaysia sites. Collectively, our efforts improved shop visit turnaround times for both narrow-body and wide-body platforms year-over-year. With our growing installed base, we're focused on expanding capacity to fulfill customer demand. Within the LEAP external network, Delta TechOps is now the first North American airline MRO provider licensed for both the LEAP 1A and LEAP 1B. And we just announced Iberia as our seventh premier MRO supporting growth in Europe. More broadly, maintaining U.S. aerospace leadership requires sustained investment to meet customer demand. We recently announced plans to invest $1 billion in our U.S. manufacturing sites and supply base for the second consecutive year. to help accelerate engine deliveries, ramp part production that extends time on wing and strengthen our defense industrial base.

Additionally, $100 million will be invested in our external supplier base, to provide equipment and tooling to increase capacity. These actions and investments are driving meaningful progress to increase services and equipment output. And while there's more to do, we're off to a strong start and positioned to ramp even further. Shifting to Slide 7. Our growing backlog reflects our commitment to deliver customer value. We're investing to improve time on wing and cost of ownership. Nearly $200 million of our $1 billion investment in U.S. manufacturing supports expanding capacity for LEAP durability upgrades. And we're making progress upgrading the fleet with durability LEAP now on over 30% of the LEAP 1A installed base. Growing our repair capability is critical to improve turnaround times and lower cost of ownership as a repaired part can cost 50% less than our new part. At our Singapore repair facility, we're investing $300 million to support new technologies and repair processes. Our customer-driven approach is driving backlog growth with more than 650 commercial engine or over $1 billion in wins in the first quarter alone. This included extending our 50-plus year partnership with American as they celebrate their 100th anniversary this month. American recently committed to more than 300 LEAP-1A engines with options for 200 more to power future A321neo and A321 XLR deliveries.

United also celebrating 100 years this month, selected 300 GEnx engines for its 787 fleet, making it the largest GEnx operator globally. And additionally, Delta committed to 60 GEnx engines with options for 60 more for its new 787 fleet marking its first GEnx selection. In services, we signed an agreement with Ryanair, covering approximately 2,000 CFM56 and LEAP engines, providing material support and MRO services to scale their in-house capabilities, consistent with our open MRO strategy. And in defense, in support of the CH-53K and the critical missions it performs for the U.S. Marine Corps, we were awarded a $1.4 billion contract for additional T408 turboshaft engines. With continued momentum, we're looking forward to what should be an exciting [ Farnborough ] Airshow in July. Our experience with our current fleet is also informing next-generation technology investment. RISE is central to that strategy and will enable improved efficiency without sacrificing durability. This quarter, together with the Civil Aviation Authority of Singapore and Airbus, we established the world's first airport testbed for Open fan technology as a part of the RISE program. This testing will validate how next-gen engine architectures operate in real-world airline environments and marks another step forward toward ground and flight tests later this decade.

In Defense & Systems, we also continue to execute with speed against high-priority military needs in support of U.S. and allied war fighters. This quarter, deliveries were up 24% and we continue to receive awards across our family of small engines, a key growth area as programs progress. This included an award from the U.S. Air Force to complete an initial design concept of the GEK 1500 in partnership with Kratos with potential applications across unmanned aerial systems, collaborative combat aircraft or CCAs and missiles. This work is being informed by the maturity of the GEK 800 which completed a successful altitude testing last fall. The team designed, built and tested the first GEK 800 in less than 12 months, testing the fifth iteration of the engine last summer. And we're making progress with high-end CCAs through our partnership with Shield AI for the expat vehicle program, pairing our propulsion development testing and certification expertise with their autonomous aircraft capabilities to accelerate delivery of mission-ready capabilities. We also recently completed a preliminary design review on the hybrid electric turbo generator engine system for beta Technologies [ MV250 VTOL, ] autonomous aircraft. This confirms the engine concept and demonstrates the power of combining our technical expertise, accelerating key programs.

Stepping back, we're driving measurable progress on what matters most to our customers, ramping output and improving durability while reducing the cost of ownership, which supports their growth and ours. Rahul, over to you.

Thank you, and good morning, everyone. We started the year with over 20% top line and earnings growth. Orders were up 87% on with CES up 93% and DPT up 67%. Revenue increased 29% with CES up 34%, while DPT was up 19%. The Operating profit was $2.5 billion, up approximately $380 million, driven by services volume and price. Margins, as expected, decreased 200 basis points to 21.8% from the impact of installed engine growth, investments and inflation. EPS was $1.86 up 0.5% from increased operating profit, a lower tax rate and a reduced share count. Free cash flow was $1.7 billion, up 14% largely driven by higher earnings. Working capital and G&A combined was nearly a $500 million source with strong utilization billings partially offset by the expected timing of compensation payments.

Going deeper on our 25% EPS growth this quarter. Growth in operating profit drove $0.29 or nearly 80% of the improvement in EPS with increased profit in CES and DPT. This was partially offset by higher corporate costs and eliminations, which were up around $120 million roughly half from an increase in eliminations and half from an increase in environmental, health and safety expenses off a low base. A lower tax rate and reduction in share count drove an additional $0.10 of EPS growth. Tax rates decreased 3 points to 14.7% from earnings mix and benefit from recent tax legislation. Share count was down $24 million from our previously announced capital allocation actions. Turning to CES. In the first quarter, orders grew 93% with services up 49% and equipment more than tripling to nearly $8 billion. Revenue increased 34%. Services grew 39%, with internal shop visit revenue up 35% from higher volume, including LEAP internal shop visit growth of over 50% and increased work scopes. Spare part sales were also up over 25% from improved material availability and growth of external LEAP shop visits.

Equipment revenue grew 20% with engine deliveries up 50%, including LEAP, up 63%. Widebody deliveries were also up over 25%, driven by GEnx, which was up even more. Profit was $2.4 billion, up nearly $450 million from higher services, volume, price and the absence of charges related to estimated profitability on long-term service agreements taken in first quarter of 2025. As expected, margins were down 230 basis points to 26.4% in driven by installed engine growth, including 9X shipments and investments. Both installed engine and spare engine volume increased year-over-year with growth in installs outpaced spare engine growth. Overall, CES continues to deliver meaningful growth, largely driven by services as OE ramps. In DPT, orders increased 67% and including T408 engines for U.S. Marine Corps CH-53K. Defense book-to-bill was above 2% for the second consecutive quarter. Revenue grew 19% and Defense & Systems revenue was up 14% as units grew 24%, driven by an increase in F-110 and rotorcraft engines. Propulsion and Additive Technologies grew 29%. We with growth across the portfolio, led by Aero. Profit grew 17% from increased volume and price. Margins were down 20 basis points to 11.8% and driven by mix, investments and inflation. DPT delivered a solid first quarter with continued demand strength and improved output.

Moving to guidance on Slide 12. Our first quarter exceeded expectations, given stronger spare part sales growth and shop business increase. We have a robust backlog supporting our growth for several years, and we are taking actions to navigate the current environment. Due to the dynamic macroeconomic backdrop, we are maintaining our guidance across the board. And as Larry mentioned, given our strong start to the year, we are trending towards the high end of the range of low double-digit revenue growth profit of $9.85 billion to $10.25 billion, EPS of $7.20 to $7.40 and free cash flow of $8 billion to $8.4 billion for total company. We are also maintaining our segment guidance for both CES and EPT with a similar trend towards the higher end. Our guidance is based on full year departures growth of flat to low single digits and is underpinned by the following assumptions: Fuel prices remain elevated above current levels through the third quarter and decreasing to current levels by year-end, a near-term impact from fuel availability in certain geographical regions, global reduction in GDP growth impacting air travel demand. This guidance doesn't contemplate a global recession unfolding.

Near-term orders continue to be strong. and we expect the strength in the first quarter to continue into the second quarter with 95% of spare parts in backlog and all shop visits for the quarter already off-line. As a result, we are expecting second quarter services growth of high teens, above our full year guide and supporting total company year-over-year and sequential profit growth in the quarter. For full year, we are now expecting services revenue is up roughly $4 billion year-over-year from approximately $3.5 billion expected previously, supporting our increase of profit and cash to high end of the range. However, as we get into the second half, we are taking a more measured view. Given the evolving environment, and have included the potential impact from deacceleration in spare parts growth, lighter work scopes, delayed spare engine shipments and reduced billings within our guidance. While the external environment remains uncertain, we are taking proactive actions, including managing discretionary spending and conducting reviews to assess risks and opportunities to support our customers.

Overall, balancing the various factors, we are confident in our ability to deliver the high end of our guidance given our strong first quarter outlook for the second quarter and a substantial backlog. With that, Larry, back to you.

Rahul, thanks. Our momentum is further supported by our sustained competitive advantages. With the industry's largest fleet, 80,000 engines and growing and more than 2.3 billion flight hours. We operate at scale with unmatched proximity to our customers across decades long life cycles, which makes us the partner of choice. Our field experience, combined with nearly $3 billion in annual R&D enables continuous improvement in time on wing and cost of ownership directly aligned with what our customers value most. Across narrow-body, wide-body regional and defense platforms, we offer leading performance under wing, supported by deep technology expertise and our growing services network.

Our world-class engineering teams develop next-gen technology to improve durability, efficiency and turnaround times, along with advanced defense capabilities. And through flight deck, we're turning strategy into results with a focus on safety, quality, delivery and cost, always in that order every day. With Flight Deck, our over $210 billion backlog and the actions underway, we're well positioned to manage near-term uncertainty and deliver value. With that, let's go to the questions.

Before we open the line, I'd ask everyone in the queue to consider your fellow analysts and ask one question so we can get to as many people as possible. Liz, can you please open the line?

[Operator Instructions]

Our first question comes from David Strauss with Wells Fargo.

Thanks for the detail on how you're thinking about the aftermarket. But just wanted to clarify. So Larry, it sounds like you ultimately do expect an impact on services growth from your from your lower departures growth forecast, but maybe it sounds like you're thinking more so in '27 or carrying into '27 and '26 in the given your strong Q1 and the backlog that you have on the services side? And I guess in terms of what your -- how you're thinking this might play out, are you thinking at this point that there could be a pickup in CFM 56 or GE90 retirements? Or are you just expecting lower utilization to come through at this point?

David, I think that what you see in the lean toward the high end of the guide is the expectation that we're going to have a strong second quarter given the visibility that we have, both with spare parts and shop visits. We touched on that earlier. And I think that's very meaningful. I think what we're acknowledging it's very hard for any of us to call the duration of what's happening in the Middle East at this point. By holding the guide, I think what we've suggested is that the backlog that we have, the visibility that we do have for the second half should allow us to be within that guide that we offered up 90 days ago.

I think we are acknowledging that if there is sustained softness in departures that there is an effect typically in the commercial services, but with a lag. Let's hope we're not staring at something akin to the GFC. We mentioned that in our prepared remarks, but there will be a lag effect. But at this point, I think given what we know, we feel strongly about our ability to deliver the high end of the guide here in '26.

And David, just to add to that, as we think about 2027, Larry said, we feel good about '26. But having leading positions in both narrow-body and wide-body, 75% share of the narrow-body cycles, 55% share of the widebody cycles, is helpful in times like this when traffic growth is uneven as it dampens the volatility that we see in the market. Also, the fleet is done. You touched on the CFM56 and GE90, 1/3 of the CFM56 have not seen their first shop visit, 2/3 have not seen a second shot of it. And similar trends for GE90, 70% of the GE90s have not seen the second shop visit. And we're not through -- I know it's early days, but as we sit here in April, both the number of parked aircraft and the retirements are really low.

In fact, the retirements in the first quarter for CFM56 were lower than what we experienced in fourth quarter. So we've not seen any increase in either of those 2 trends. And as Larry mentioned in his prepared remarks, as we've seen in prior cycles, the air traffic has a strong recovery after every downturn. So if you see here, delay, if you see any impact here in the second half of the year, it is going to be a push out of demand versus a destruction. So again, it's hard to call '27 just yet. It all depends on how the situation evolves over the next few months. But it is early to call. But overall, we feel good about the trajectory that the business is on through the cycle.

Our next question comes from Sheila Kahyaoglu with Jefferies.

Maybe just a follow-up on David's comments. Larry and Rahul, Service is up 39% in Q1, great quarter, both on shop visits and spare parts and Q2 expected to be up high teens implying only mid- to high single digits in the second half. So maybe delving a little bit more into visibility you guys have through the summer and move you mentioned push out of demand not demand destruction. I guess how do we think about where you guys are seeing those potential risks post Q4, whether it's narrow-bodies or widebodies? And how do we think about retirement rates staying low today and potential assumptions for '26 and '27?

Yes. So Sheila, I think we touched on a couple of things here. as you said, we see good visibility into the second quarter, right? We've said -- Larry and I both said 95% of the spare parts for the second quarter are in the backlog. All the engines that we need to work on for second quarter are in the shop. And are also kind of provided a full year shop visit view here that we are about 1/3 oversubscribed right now from what's already offering and what will come off going here in the second and the third quarter. So that gives us confidence around 2026 here.

Now as we go to 2027 and where the risks may come I think we touched on the retirement. You touched on retirement rates. Now keep in mind that the retirement rates that we resume for, 2026 for CFM56 are in the 2% range. And what we saw in the first quarter is sub-1%. And as we get into 2027, we've already assumed in our prior outlook, the retirements increased to 3% to 4%. So we -- just the outlook that we've provided, we've factored in certain increase in retirement. Now we've not seen that. We are not seeing anything concerning just yet. Our order trends are holding, but it is more what is unknown and that's a little bit of caution, prudence, whatever words you want to use, for the second half of the year, and I think time will play out and give us more visibility into '27. But overall, the business is strong, franchise is strong, and I think we should be able to navigate anything that comes that evolves here over the next few months.

Our next question comes from Ken Herbert with RBC Capital Markets.

Larry and Rahul, really strong spare parts orders in the first quarter. I'm just curious, especially your comment on March strengthening from the first 2 months. Do you get a sense that there was any pre-buying by your customers on the aftermarket ahead of potential disruptions or concerns down the road? I'm just curious as to what was underlying the real strength in orders in the quarter and if there could have been any pull forward in the order demand?

Ken, I don't think we have seen any evidence of a pull forward here to Rahul's comments just a moment ago, when you think about the breadth of the portfolio, narrow-body, wide-body on a global basis, we just haven't seen that sort of behavior. We also mentioned in the prepared remarks that as proud as we are of the operational progress that we've made, we still saw delinquency increase, which means we are past due on the spare part orders that we do have. So I think customers are busy. There's still perhaps some pent-up demand from the pandemic that is working its way through the system. But to your specific question, we have not seen that behavior.

Our next question comes from Kristine Liwag with Morgan Stanley.

Good morning, everyone. Larry, Rahul, you talked a lot about demand, and I just want to dive a little bit deeper here. You talked about 2Q and 3Q engine removal pipelines are above your shop visit guide -- so holding the macro environment you called out, is this higher removal pipeline contemplated in your Upper Reach 2026 outlook? Or could we see revisions higher in the year if oil resolved in 3Q?

Kristine, I think it were not for current events, we'd be talking about an increase in the guide this morning not color and body language toward the high end of the existing range. In many respects, just given the backlog that we've highlighted a couple of times already, both in terms of spare parts, but also shop visits, absent a change in customer behavior and continued progress on our part relative to internal operational execution, that potential does exist, right?

But again, I think given current events, we thought it most prudent to simply stay with the range that we issued 90 days ago, provide a little bit more color, particularly with respect to not only quarter, but the first half year, and I won't repeat what we've already said. But I think in terms of our ability to control the controllable, feel very good about that. The progress that we've made with the supply base has been considerable already this year. I think it's just built on the progress over the last couple of years. And you see that not only in the input numbers we've cited. But in turn, the output numbers as well, both in terms of units and dollars. That should continue.

And Kristine, just as Larry said, to get to higher shop visit number, that is not factored into our guidance. So what we need to see is we'll need to see better material flow through here than what we are currently factored in to burn some of the delinquency that exists on both spare parts and the shop visits out. So that, to your point, will take our services guidance above where we have factored in around $4 billion of growth this year.

Our next question comes from Scott Deuschle with Deutsche Bank.

Rahul, I was wondering if you might share with us an update on LEAP aftermarket profitability and particularly how LEAP aftermarket margins are trending in 2026 relative to 2025. And then I'd love to get your latest thinking on the path to margin expansion on the program beyond 26 for the long term.

Yes. No. Scott, on LEAP, the services business is trending really, really nicely. We are expecting a further improvement this year on margins. Trends have been good for the first half of the year. here. And it's coming from a few things. It's coming from increased volume, right, that we are driving in our shops. It's -- Larry spoke about the repairs that we are developing in our aftermarket business. And this year, we expect the number of repairs that we're developing on LEAP to double over what we developed last year. So that is helping reduce the cost of the shop visit.

The external channel is coming up nicely as well. We are at now about 15% off our shop visits for LEAP and now performed by third parties. That number was close to 10%, just 18, 20 months back. So that part of the business is developing nicely. So if you put all that together, as you think longer term, to your second part of your question, we do expect the LEAP service margins start to get to overall CES service margins by the time we get into 28-ish time frame. So really pleased with the progress, for a business that was just kind of breakeven 2 years ago. I think we made a lot of progress here in the last 18 months.

Our next question comes from Robert Stallard with Vertical Research.

Good morning. Just want to follow up on Slide 5 and that spare parts delinquency chart you've got in there. Is that continued march higher in delinquencies just due to continued demand exciting supply chain strain. And how long do you think it will take to get that back down to a more reasonable number?

Well, it is despite the progress we've talked about a few times now this morning, not only with inputs, but output, just a function of demand outstripping supply. We highlight delinquency simply to make sure investors understand that, that dynamic is in play here. Operationally, it is a number we are not proud of, right? Because we are holding, we're failing to meet customer expectations in that regard. I think it's going to take us a while yet here to get to 0 delinquency. That clearly is the goal, on-time delivery, one of our critical operational KPIs as part of flight deck.

So we're not going to be able to kind of circle that. But I think given the continued momentum we see with our suppliers and our own operations, that is something that we should deliver on in time, regardless of the demand environment.

Our next question comes from Douglas Harned with Bernstein.

I wanted -- Larry, Rahul, I wanted to continue on a look at the current environment because when you look forward and see some of the challenges out there, if we see jet fuel above $200 in Asia, in Europe, there are quite a few airlines that could be in some real, under some real financial pressure. And when you look at the steps you need to take over the next year or so, how do you compare the concerns around say an airline that simply is in finance -- difficult financial straits and can't do an overhaul versus simply reductions in flying hours that could take some dollars out of LTSAs. How do you think about these different, sort of hazards out there over the next year perhaps?

Well, Doug, I think the scenario that we talked about earlier have us contemplating a range of possibilities given that none of us know how things are going to play out here, particularly with respect to duration in the Middle East, I don't think we've tried to tether ourselves to one scenario or another. But we have considerable backlog. We've talked about that a number of times this morning. We are mindful of the risks that we may have in the customer base. Rahul and the team have increased the work we do in that regard.

But first and foremost, we're trying to support our customers as best we can to weather these storms as we have in past situations, be it the pandemic, be it the GFC and even situations that were of lesser impact. We are also putting our spending under greater scrutiny, continuing to invest in the future of flight, of course, continuing to invest and improve durability and lowering the cost of ownership. But given the situation, we are, I think, making sure that as a senior leadership team, we are spending in a, let's say, in a more cautious fashion today given what we know and given what we don't.

Our next question comes from Scott Mikus with Melius Research.

Larry and Rahul, I figured there'd be a lot of questions about the conflict in the Middle East. So I wanted to check in on the GE9X Boeing flagged fatigue issue with engine. So just curious if you could provide an update on that. Is there any change to the expectations you had for losses on the program this year?

No change on schedule, no change on losses. I just start Scott, to reiterate that we're thrilled to be the sole source partner on the 777X. We've got over 1,000 engines now on order and customers want the engines, they want the airplanes. What we've shared with folks is that we saw back in January, a durability issue with the Mid Seal. Remind everybody, this is on an engine that was certified back in September of [indiscernible] The crack that we uncovered during a shop visit, which is part of a flight test engine is something we've seen before. We think we are at root cause, and we're finalizing the modification as we speak and we've been fully transparent with Boeing and the FAA every step of the way. So I think as Boeing has said, we believe we're on track with the certification plan that has been communicated to customers. No change to the schedule.

And of note, the 777X flight test program continues, right? It's ongoing. With respect to deliveries, we had deliveries in the first quarter, currently we're continuing to build up an assembly to the point of the mid seal. We're modifying the tooling and ramping some suppliers for the modified part. So we'll end up having deliveries that will end up more second half weighted. But I think at this juncture, no reason to believe the full year will be any different than what we've communicated.

Our next question comes from Myles Walton with Wolfe Research.

Switch gear a little bit on aeroderivatives off-topic question, but you had a disclosure that had a restatement and moved air derivatives equipment from your CES segment to your DPT segment. And the company, in my eye was you had about 94 deliveries of air derivatives last year to your customers, but the pricing on those looked fairly benign relative to the potential for where pricing could be given the backdrop for power. So can you talk about what the strategy is for error derivatives and what the upside opportunity could be there for repricing and volume?

Yes. So Myles, on aeroderivative, as you know, we provide the engine. And then our partners in the they take the product to market, they do the system integration, adds some controls there's work done by both the parties. But I think what you saw in our disclosure is basically the fact that we are burning the pre-spin backlog by that was backlog that we had sold when we were part of one company that have had seen different agreements. [indiscernible] the pricing to the JV has been revised substantially. And we're kind of working our way through the old backlog, and we should transition to the backlog that we've to the orders that we have won post spin in the next, I would say, 18 to 24 months. So you'll see a gradual increase in pricing here over the next months to quarters, right? So you'll see an improvement.

But overall, listen, I think it's a great business. It is -- we sold out here through 2030. So that's one leg of this tool. And then obviously, everything that you're seeing with now CFM56 getting added potentially to the power generation capacity. That gives another leg of growth towards CFM56 platform. Be it through spare part sales to third parties who are developing that product or some other form of collaboration. So I think we are exploring all those things. But overall, the aero-derivative business is in a really good part of the market both with the existing products that we have and potential new entrants to that market.

And Myles, we moved it over as a reminder for everybody. We moved it over from CES into DPT really to give the commercial team the opportunity to focus exclusively on the airliners -- airlines and the airframers. And at the same time, there are some similarities to part of our defense engines and services business, especially in around marine applications. So there's a little bit more -- there's a better operational home for this business and the other segment. That's the sole reason for the move earlier this year.

Our next question comes from John Godyn with Citi

If I could just come back to CES margins specifically. There's a concern out there that if this fuel shop continues retirement spike in particular, your CES margins would be at risk. You've obviously been very thoughtful about your guidance, embedded a pretty conservative outlook for global aviation. And it doesn't seem like you think that risk is particularly likely. So I thought to just get your reaction to that to the concern on margin risk? And what positive offset to this mix effect might exist that global aviation continues to deteriorate?

So I think there's 2 parts to the question. I think for the current year, right, as you think about the margins, we baked in kind of flattish margins here for the year. Now as you think about the growth for the year, right, the $4 billion of growth that we are now expecting, keep in mind, the first quarter grew by about $2 billion and then we are expecting high teens growth here in the second quarter. So that gets us closer to 2/3 or 3/4 of the growth will be in the first half of the year. So we feel good about the growth rates that we have for the year, and that should support kind of the margin expectations that we have for the business.

Now again, what's happening in the year, as we've discussed previously, is that we're getting good support from our services growth, that's dropping through at a healthy clip. And in the first quarter, service margins were actually up year-over-year. So that was a positive trend. Now we're not baking that in for the full year. Full year, we're expecting service margins to be flat. But good start to the year. And that positive drop-through from the services is getting offset by the OE growth that we saw. You saw that in the first quarter for full year, we're expecting LEAD deliveries to be up 15%. And while both spare engines and installed engines are going to be up for the year, the growth is primarily going to be driven by installed engines here for the year. And then we have 9x shipments. So that kind of -- if you put all that together, we expect kind of flattish margins for the year for CES. Now as you go outside the year, John, we spoke about the LEAP margin trajectory earlier to Scott's question, we expect LEAP margins to approach overall CES levels of service profitability here in the next couple of years. 9X losses should also peak by the time we get to 2028, just given that we're driving a 50% reduction in 9x cost. So LEAP margins improving, 9x headwinds kind of peaking in '28. And as we look beyond that, that is when we expect both accelerated profit and margin expansion in the business.

Our next question comes from Gavin Parsons with UBS.

This is Joel Santos filling in for Gavin Parsons. Moving to Defense, strong results in 1Q and solid margins, stronger order environment. As we look through the rest of '26, how should we think about sustainability of growth margins in the segment?

So for DPT, again, saw our revenue growth in the first quarter. We're expecting high teens revenue growth for the first quarter. And overall, if you look at the results for the first quarter, they keep us at pace for what we've guided for the full year, both on year-over-year profit growth and the absolute dollars of profit that we delivered in the first quarter. Margins were a little bit light in the first quarter, largely because equipment grew more than the aftermarket, but that mix. But I think overall, we're kind of on track as we think about the year. So we're going to drive strong output. The productivity is going to get better. And the mix should also improve as we go through the year.

So I feel we're really -- given the growth rates that we had in the first quarter, we feel good about the year and you took -- as we said in our prepared remarks, we do expect DPT to be at the higher end of the guidance that we previously committed just given the growth rates that we are seeing in the first quarter and the drop-through expected from that.

Our next question comes from Seth Seifman with JPMorgan.

In the outlook where you talk about Brent prices remaining fairly elevated through Q3, I think. In addition to Brent prices, we've seen significant increase in the spread for jet fuel. Are there special things we should be thinking about there and reasons why from a jet fuel perspective, this could carry on longer and/or be more disruptive than simply what's happening with oil prices?

Seth, I don't think we're trying to be too granular in the underlying assumptions, right? I mean I think the economic realities as you've just pointed out, there. And I hope what we're taking is a conservative set of assumptions on board here between now and, let's say, Labor Day. Time will tell. But by and large, we know that between the inflation and potential scarcity in other parts of the world that we could see some near-term airline behavior shift, right, by near term, I mean the late summer, early fall, call it, the second half.

But we're also assuming that by the end of the summer, we're on our way back to more normal conditions. And given what we've seen before, we may have a lag in the aftermarket on the commercial side of the business from what's happening currently. But then we tend to have a spring back, which is why we've kind of alluded to some of our historic reference points in that regard. That demand tends to get pushed out as opposed to going missing indefinitely.

We have time for one more question.

This question comes from Gautam Khanna with TD Cowen.

I had actually 2 questions. But the first one, just on supply chain, you mentioned delinquencies and the like. But if you could just characterize how material improved sequentially and where -- and maybe just an update you've given in the past on how many suppliers and where the pinch points are strongest? And then just secondly, I was wondering on the company's aftermarket exposure to kind of low-cost carriers or business models in the airline industry that might be more affected by of the top oil environment? Maybe if you can rate on that.

Yes. Maybe I'll take the supply chain question. I'll let Rahul speak to certain customer segment risk. I think from an input perspective. We mentioned earlier that we've seen double-digit increases again sequentially and year-over-year from some of the critical suppliers. I think we've said all along, we're going to be the problem solvers, not the finger pointers. And I just am really pleased with the way we've had suppliers across the board engage with us. It's been a journey at every point but I think we're just simply getting better. We're more transparent, we're more trustworthy with each other. And in turn, we've just allowed our best people to go -- to [indiscernible] to go to where the constraints the bottlenecks exist and sold them.

Again, there's no way we take engine output up 43%, right, without that sort of support from the customer base. Likewise, commercial services up 39%. There's no way we're able to get that volume out the door to serve our airline customers without really good progress using flight deck with the supply base. That is not to suggest that we're all clear between now and 2030. There's still a lot of work because we're going to have to do more every year. But what a wonderful challenge to have, and again, kudos to our team, kudos to the supply base, we're engaging and supporting us with our ultimate customers in mind, particularly here in the first part of 2026.

And [ Gordon, ] to your second question, let me if I step back here and just look at the environment that we've seen. We spoken to the order trends here through the start of the conflict. There's nothing in the environment here that's giving us falls, right? The customers are eager to get back in the air. Yes, they're experiencing temporary disruptions just given everything that's going on directly in the Middle East, a little bit from lack of availability of fuel prices, but everybody is super eager to get back and support the flying public. So that's what we are seeing right now.

We spoke to the strength that we're expecting here in the second quarter. And as we think about the full year, had it not been for the environment that we're in, and I'm repeating something that Larry said earlier, we would have raised our guidance. Because the first quarter was about $300 million better than what we had expected at the beginning of the year. And then we're carrying that strength into the second quarter that the momentum is clearly carrying through, and we spoke to more sequential and year-over-year profit growth here in the second quarter with high teens services growth expected. So -- and then the second half is just about what we don't know. I think that is the question. So hopefully, as Larry said earlier, we're being conservative and cautious, prudent whatever words you want to use, I think, again, time will tell, but we feel good about the year as we sit here today.

And we're not seeing any disruptive behavior on part of the customers. We're not seeing risk that we didn't have maybe just a couple of months back. So -- but we're monitoring the situation very, very closely, as you would expect us to. And we would give updates throughout the quarter as we learn more.

Larry, any final comment?

Blaire, thank you. Just in closing, flight deck will help us deliver what our customers value most, higher outputs, improve durability and lower cost of ownership even as we navigate the current environment. We're confident in our trajectory and our ability to deliver value for customers and shareholders. We appreciate your time today and your interest in GE Aerospace.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

Good day, ladies and gentlemen, and welcome to the GE Aerospace Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] My name is Liz, and I will be your conference coordinator today. [Operator Instructions] As a reminder, this conference is being recorded.

I'd now like to turn the program over to your host for today's conference, Blaire Shoor from the GE Aerospace Investor Relations team. Please proceed.

Thanks, Liz. Welcome to GE Aerospace's Fourth Quarter and Full Year 2025 Earnings Call. I'm joined by Chairman and CEO, Larry Culp; and CFO, Rahul Ghai.

Many of the statements we're making are forward-looking and based on our best view of the world and our businesses as we see them today. As described in our SEC filings and website, those elements may change as the world changes. Additionally, Larry and Rahul, consistent with prior quarters, will speak to total company and corporate financial results and guidance on a non-GAAP basis.

Now over to Larry.

Blaire, thanks, and good morning, everyone. I'd like to begin with our purpose. We invent the future of flight, lift people up and bring them home safely.

Right now, nearly 1 million people are in flight with our technology underwing, connecting people and goods worldwide. We play a vital role in powering the war fighters, who defend freedom. And while we work to deliver for our customers today, we're also inventing technology that will propel the industry forward tomorrow.

Our purpose is our call to action, and I couldn't be prouder of what our team achieved in 2025, but also how we got there with our culture of respect for people, being customer-driven and continuous improvement.

Turning to our results on Slide 4. 2025 was an outstanding year for GE Aerospace as we made operational progress, delivered on our financial commitments and continue to invest in our future.

The fourth quarter was a strong finish to the year. Orders were up 74%, reflecting continued robust demand for our services and equipment. Revenue increased 20% with double-digit growth in both segments.

EPS was up 19% to $1.57 and free cash flow grew 15%. For the full year, we drove substantial improvement across all key metrics. Orders were up 32%, revenue increased 21%, operating profit grew $1.8 billion and free cash flow was up $1.5 billion.

In CES, orders were up 35% and revenue grew 24%, including services orders up 27% and revenue up 26%. This supported our profit growing 26% to $8.9 billion. In DPT, orders increased 19% and revenue was up 11% with increased deliveries in Defense. Profit increased 22% to $1.3 billion.

Our performance reflects the impact of FLIGHT DECK, driving incremental gains that compounded into meaningful improvements. This enables us to accelerate output to deliver on our roughly $190 billion backlog, which is up nearly $20 billion over the last year.

We are also investing to improve time on wing and reduce cost of ownership to deliver value to our customers, supporting growth today, tomorrow and into the future. I want to thank the entire GE Aerospace team, our suppliers and our customers who put their trust in us.

Looking to 2026, we're poised for another year of substantial revenue, EPS and cash growth. Demand remains robust with 2025 orders up 32% and continued backlog growth. This supports our expectation for revenue to be up low double digits, including commercial services up mid-teens.

We expect operating profit of $9.85 billion to $10.25 billion, up $1 billion at the midpoint. This translates to EPS of $7.10 to $7.40, up nearly 15% at the midpoint. And we expect to generate $8 billion to $8.4 billion of free cash flow with conversion remaining well above 100%.

This outlook builds on the progress we made in '24 and '25. We expect to deliver mid-teens revenue growth between '24 and '26 compounded and $10 billion of profit in '26 2 years earlier than our outlook has been. We continue to convert this into cash, expecting to generate more than $20 billion of cash between '24 and '26 to reinvest in our future, including in U.S. manufacturing to support both our commercial and defense customers.

GE Aerospace is an exceptional franchise, servicing and growing the industry's most extensive installed base of 80,000 engines. As we further embed FLIGHT DECK, we'll unlock greater value for our customers and shareholders.

Turning to Slide 6. In their first year, our technology and operations or T&O team made a meaningful impact. We partnered more effectively with our suppliers, resulting in material input from our priority suppliers growing over 40% year-over-year in 2025 and up double digits sequentially in the fourth quarter, both translating to higher outlooks.

While we're making progress, we know our customers need more from us. To further accelerate our progress in 2026, we're expanding CES to include T&O now led by Mohamed Ali. Integrating our front line engineering and supply chain teams will improve our end-to-end engine life cycle management.

We're also elevating our customer-facing teams, led by Jason Tonich, now reporting directly to me, aligned with our customer-driven approach. These changes will enable greater cross-functional problem-solving, agility and alignment to deliver for our customers.

I also want to take a moment to thank Russell Stokes, who announced to retire from GE Aerospace in July after 29 years of service. His continuous improvement mindset and passion for developing leaders to help build this world-class business.

Russell was one of the first leaders I met here at GE, and he's been a critical partner over the last 7 years. We wish him nothing but success in his next chapter. These changes, along with FLIGHT DECK will further support growth in deliveries in '26. Across our MRO network, we are removing waste to improve shop visit output and turnaround times.

For example, we're converting from batch to flow production, which supported LEAP CFM56 and GE90 turnaround times, improving over 10% year-over-year in the fourth quarter. Additionally, at our Wales facility, CFM56 turnaround time improved by 20%. And at SOMA, we sustained turnaround times below 80 days.

This enabled us to deliver our highest LEAP shop visit output of the year. With LEAP installed is expected to roughly triple between '24 and '30, we're expanding capacity across our global MRO network to support aftermarket demand.

In 2025, we added MTU Dallas is our sixth premier MRO partner, supporting third-party shop visit growth, now representing around 15% of total LEAP shop visits. We're dedicating approximately $500 million of our more than $1 billion of investment in MRO to LEAP. This includes exceeding several MRO sites, including Malaysia, Selma and Dallas and a new on-wing support facility in Dubai.

We expect these investments will roughly double LEAP internal capacity. Taken together, these actions drove meaningful progress in services and equipment output in 2025. CES services revenue increased 26% with internal shop visit revenue up 24% and including LEAP internal shop visit volume up 27%. Spare parts revenue grew more than 25%. Deliveries across commercial and defense increased 26% for the year, including a strong finish with 8% sequential growth in the fourth quarter.

Commercial units increased 25%, including LEAP up 28%, exceeding 1,800 units, a record output for this program. And defense engine deliveries increased 30%. While 2025 marked a year of progress, we know there is more to do to meet customer demand. And I'm confident we will deliver.

Turning to Slide 7. One of the behaviors that guides us is to be customer-driven all that we do. We're leveraging over $2.3 billion flight hours and nearly $3 billion in annual R&D to drive meaningful improvements for our customers.

Our focus remains on delivering mature levels of time on wing and lowering cost of ownership. In November, the GEnx fleet leader equipped with the upgraded HBT blade, which has improved time on wing over 2.5x in hot and harsh environments, achieved a new milestone, surpassing 4,000 cycles.

Informed by our progress with the GEnx, the LEAP-1A durability kit will improve time on wing by more than 2x, matching our industry-leading CFM56 performance. This is now incorporated in all LEAP-1A, new engine deliveries and shop visits with nearly 1,500 kits shipped since certification.

In addition to improved durability, we're also expanding our pair catalog, which will lower cost of ownership and improve turnaround times. In '25, LEAP parts certified repair increased 20%, and we expect continued growth in '26. Combined with our progress on delivery, we're actively working to meet customer expectations on LEAP.

At the same time, utilization of our mature engines remains robust. CFM56 is the most widely owned and operated engine in commercial aviation with retirements in '25 consistent with '24 levels. The third-party MRO ecosystem provides customers with optionality for servicing their fleets, supporting higher asset values and lowering cost of ownership.

And we continue to strengthen MRO access to OEM materials to support further CFM56 longevity. Last quarter, for example, we reached a materials agreement with Aviation to support service of its growing fleet of CFM56 engines.

We're also progressing the next generation of engines. We recently completed a ground test campaign demonstrating our first hybrid electric narrowbody engine architecture. This first-of-its-kind milestone demonstrates systems integration, advancing the technology from concept to practical scalable application.

As we deliver greater customer value and advanced breakthrough technologies, we're growing our backlog. At the Dubai Airshow, we've recorded over 500 engine wings across narrowbodies and widebodies, including Riyadh Air's commitment for 120 LEAP-1A engines and flydubai's selection of 60 GEnx engines.

Additionally, Pegasus Airlines committed to up to 300 LEAP-1B engines to power its future Boeing 737-10 fleet. And we're honored that Delta, a new GEnx customer selected us to power and service their new fleet of 30 Boeing 787s. In Defense, Hindustan Aeronautics ordered 113 F404 engines for our Tejas fighter jets, demonstrating our position as a trusted partner for Allied Fighter programs. Overall, we're driving progress, improving field performance, turnaround times and advancing future propulsion technologies. We're well positioned to strengthen our leadership across both the commercial and defense sectors in 2026. Rahul, over to you.

Larry. Thank you, and good morning, everyone. We closed out 2025 with another strong quarter. Fourth quarter orders were up 74% with CES up 76% and DPT up 61%. Revenue was up 20%, led by CES services up 31%. Operating profit was $2.3 billion, up 14%. Services volume, productivity and price were partially offset by the impact of lower spare engine ratio, OE growth, including 9X shipments and investments.

Margins as per prior guidance were down 90 basis points to 19.2%. EPS was $1.57, up 19% from increased operating profit, a lower tax rate and a reduced share count. Free cash flow was $1.8 billion, up 15%, largely driven by higher earnings with over 100% conversion.

For the year, our results exceeded the high end of our guidance on all key metrics. Orders were up 32%, with commercial services orders up 27% and total equipment up 48%. Revenue increased 21% from commercial services that was up 26% and higher deliveries of both commercial and defense units.

Operating profit increased 25% to $9.1 billion, with margins expanding 70 basis points to 21.4% as commercial services volume and price offset OE growth and investments. EPS increased 38% to $6.37. Free cash flow grew 24% or $1.5 billion to $7.7 billion with conversion over 110%, driven by earnings growth and continued contract asset favorability, which was partially offset by inventory growth to support continued output increases in 2026.

Overall, a very strong performance for GE Aerospace, positioning us well for 2026. Turning to our segments, starting with CES. In the fourth quarter, orders were up 76% with services up 18% and equipment more than doubling. Revenue increased 24%. Services were up 31%, internal shop visit revenue grew 30% from higher volume and increased work scopes. Spare part sales were up over 25% as improved material availability supported increased output.

Equipment grew 7%, with engine deliveries up 40%, including LEAP, up 49%. This more than offset a decline in spare engine ratio due to timing of back-end loaded spare engine deliveries in 2024. For the year, spare engine ratio was lower than '24 as planned. Profit was $2.3 billion, up 5% from higher services volume with improved margins, price and favorable mix.

This was partially offset by the impact of lower spare engine ratio, higher installed shipments, including 9X and an increase in R&D. As expected, margins were down 420 basis points to 24%. For the year, CES delivered outstanding results with orders growing 35% and services revenue and engine output, both up roughly 25%. This supported profit growing 26% to $8.9 billion and margins expanding 40 basis points to 26.6% from services growth, productivity and price.

Moving to DPT. Orders were up 61%, with defense book-to-bill above 2%. Revenue grew 13%. Defense and Systems revenue was up 2%. Defense units were down 7% due to a difficult compare which was more than offset by price and customer mix.

Sequentially, this was the third consecutive quarter of strong defense engine shipments with full year deliveries up 30%. Propulsion and Additive Technologies grew 33%, led by higher commercial and military volume at. Profit was up 5% from volume, favorable mix and price that was partially offset by investments and inflation.

Margins were down 70 basis points to 8.9%. DPT also had a solid year with orders up 9% and defense book-to-bill 1.5% with backlog now at $21 billion, up nearly $3 billion. Improved output supported revenue growing 11%. Profit was $1.3 billion, with margins up 110 basis points to 12.3% from volume, mix and price.

Going deeper into the drivers of our 38% EPS growth for the year. Growth in operating profit drove $1.32 or 75% of the improvement in EPS. With the increased profit in CES and DPT, partially offset by higher corporate costs and eliminations.

Corporate cost was roughly $570 million, up about $170 million due to lower interest income. Eliminations were about $530 million, up approximately $70 million. Lower tax rate, a reduction in share count and interest expense accounted for an additional $0.46 of EPS growth.

Tax rate was down 3 points for the year, primarily from the benefits of long-term tax planning projects and share count reduced by $26 million.

Turning to Slide 12. We are updating our segment reporting to reflect the organizational changes announced last week. Importantly, there is no change to total company metrics. Aero derivative engines, which were previously reported in CES will be included with DPT to drive better supply chain alignment with the Marine and Mobility business. As a result, roughly $1.4 billion of revenue and a couple of hundred million dollars of profit will move from CES to DPT.

With the expansion of CES to include T&O, we are also transitioning the cost of remaining sites and external engineering revenue to their respective businesses. This results in a small change to corporate cost and eliminations.

The resegmentation impact is reflected in the 2025 segment financials on the left side of the page. We've also included a preliminary bridge in the appendix and plan to provide recasted segment financials for first quarter earnings.

Turning to guidance. Starting with CES. We expect mid-teens revenue growth, including services up mid-teens. This includes internal shop visit revenue and spare parts revenue, both up mid-teens from low double-digit revenue -- low double-digit engine removals combined with higher work scopes and price.

LEAP internal shop visits are expected to grow 25%. We -- we expect equipment up mid- to high teens, including LEAP deliveries up 15% with higher growth from widebody programs. We expect $9.6 billion to $9.9 billion of profit, up about $1.2 billion at the midpoint. This reflects the benefit of services growth and price which is partially offset by OE growth, including 9X, a lower spare engine ratio and continued investments.

In DPT, we expect mid- to high single-digit revenue growth and profit of $1.55 billion to $1.65 billion. Higher deliveries will be partially offset by inflation, mix and investments. Corporate costs and eliminations are up year-over-year to $1.2 billion to $1.3 billion from lower interest income, AI investments and higher eliminations from internal PAT growth. In total, we expect low double-digit revenue growth for the company with profit in the range of $9.85 billion to $10.25 billion, up $1 billion or more than 10% at the midpoint.

Further unpacking the drivers of EPS and free cash flow growth. We expect EPS in the range of $7.10 to $7.40, up nearly 15% at the midpoint. About 85% of the improvement will be from higher operating profit. The balance will be from a marginal improvement in the tax rate to below 17% and a reduction of 18 million shares from our previously completed and announced capital allocation actions.

Interest expense is expected to be roughly $900 million. We expect to generate $8 billion to $8.4 billion of free cash flow, primarily from higher earnings. Working capital and AD&A combined will be a source year-over-year from slower inventory growth. We continue to expect CapEx at roughly 3% of sales. Overall, we expect another year of conversion solidly above 100%.

Taken together, GE Aerospace is poised for another year of solid growth ahead. With that, Larry, back to you.

Rahul, thank you. 2025 was another outstanding year. Our sustained competitive advantages support our leadership positions across both commercial and defense. With the industry's largest fleet, 80,000 engines and growing, we've accumulated over 2.3 billion flight hours. This experience keeps us close to our customers through decade long life cycles, building enduring relationships and making us the partner of choice.

This field experience combined with our nearly $3 billion in annual R&D investments allows us to drive continuous improvement across our services and products, enhancing time on wing and lower cost of ownership. As a result across our narrowbody, widebody regional and defense platforms, we offer the best performing products underway.

Our world-class engineering teams developed next-gen technology to improve durability, efficiency and turnaround times, along with advanced defense capabilities. Through FLIGHT DECK, we're turning strategy into results with a focus on safety, quality, delivery and cost always in that order.

Stepping back, the GE Aerospace team is focused and ready for what's ahead in 2026. We're well positioned to deliver for our customers and shareholders, and I'm confident in our trajectory. With that, Blaire, let's go to questions.

Before we open the line, I'd ask everyone in the queue to consider your fellow analysts and ask 1 question so that we can get to as many as possible. Liz, can you please open the line? .

[Operator Instructions]

Our first question comes from John Godyn with Citigroup.

I was hoping you could elaborate a bit on the commercial aftermarket backdrop. Obviously, it was a great services quarter with revenue growth accelerating versus last quarter. So I'm just curious to what extent this momentum has carried through to start the year? And if you could just unpack some of the assumptions underlying the mid-teens services growth guidance for 2026. Is there any room there to outperform if recent momentum continues?

Well, John, thanks for getting us started. I would say we haven't seen anything here at the beginning of the year that gives us pause relative to the tailwinds, the momentum that you referenced continuing, right? We've all seen Delta and United out in the last week, for example, I think talking confidently about 2026.

So when you couple their outlook, the fact that we come in the year with $190 billion of backlog. We know our share of cycles with LEAP in particular, the narrowbody segment being up and the opportunities to leverage that underlying unit volume in the aftermarket with both expanded work scopes in both narrow and widebody as well as price. We feel like we have another very strong commercial services year supporting the aftermarket.

Again, I think as we commented in the prepared remarks, at a rate that should be up mid-teens. Will we be able to do better than that? We're certainly going to aim to do that, but as we talked through the course of 2025, we're not, I think, particularly concerned about the demand environment.

It's really all about our ability to move spare parts out to third parties to complete our own internal shop visits. And while we were pleased with the sequential and the year-over-year numbers that we cited in the fourth quarter, there's much more to do here in 2026.

It's a bit of what undergirds the organizational move that we announced. And to the extent that we can continue to make progress, and we think we will perhaps not in line with the 40% bump we saw from our priority suppliers last year on a full year basis, I think we'll be able to satisfy that demand better than we did in 2025. Rahul, anything you'd add there?

Yes. Just a couple of things. John, welcome to our call here. Just as we said in our prepared remarks, we expect both shop visits and spare parts to be up kind of in the same range as mid-teens as the overall services growth. .

On spare parts first, our delinquency when we ended 2025 was up 50% over where we ended '24. So as Larry mentioned, strong demand environment. And as you think about the spare parts growth, the spare parts growth is going to be primarily driven by narrowbody. And that's coming as a LEAP external channel continues to grow and about more than 15% of the LEAP shop visits are now performed by a third-party channel partner.

And CFM56 continues to be strong as well. Larry mentioned in his prepared remarks about how we ended '25 retirements which were similar to '24. And as we think about 2026, we expect retirements to be in the 2% range. Our prior expectations were 2% to 3% range. So trending a little bit better and that puts CFM shop visits in the 2,300 to 2,400 range between '26 and '28. So external demand environment looks good. Shop visits, the same thing. We're expecting double-digit removals this year from engines that they've already flown, plus the work scope continues to increase a little bit of price. So all that adds to that 15% growth that we mentioned on shop visits. So overall, we feel good about the services outlook for '26.

The next question comes from Myles Walton with Wolfe Research.

I was wondering on the LEAP breakeven, LEAP profitability on the original equipment side. Are we crossing the root counted profit or breakeven in '26 still? And Larry, you must be feeling a lot better about the trajectory to get output on LEAP to 2,500 by 2028. What, if anything, is required from an investment within the supply chain, not the MRO network, but more the OE side of the supply chain still to get to where the manufacturers want to production rates...

Well, Myles, from a new make perspective, and as you know as well as anyone, the supply chain that supports the new make also supports the aftermarket. So no one can really isolate the new make demand and invest for that without being mindful of the aftermarket demand as well.

I think we have improved over the course of 2025, our visibility further out and deeper into the supply chain, further out time wise, deeper in the supply chain with respect to readiness, to satisfy our needs to serve both the airlines and airframers. There will be capital investment in various places.

I'll let different suppliers and different commodity categories speak to their own plans. But I think we're confident that as we move forward here through the rest of the decade, we'll be able to satisfy what the airlines need in the aftermarket and with the airframers looking to do for the airlines as well, right, from a new delivery from a modernization and expansion perspective.

But there's work to do. Again, I don't think we're going to be up 40% every year, not that we have to. But I feel very good that with the body work we put in 2025, we're poised to step up again with the supply base be it process improvement, be it capital expansion and the like to keep pace with these considerable tailwinds that we're all fortunately exposed to.

And Myles to answer your question on the LEAP profitability, yes, we expect LEAP OE to be profitable in 2026 as per our...

The next question comes from Douglas Harned with Bernstein.

You talked about the improvement in turnaround times across the board, like LEAP, CFM56, GE90 by about 10%. And we -- I can see that. But CFM56, GE90, very mature engines. Is this turnaround time improvement, is that both for internal and third-party shop visits? And what levers enable you to do that? And if I can just add to that, how should we see that improvement reflected in financials since CFM56 is largely time and materials in GE90, you'd be on CSA, I would assume.

Doug, it is an internally oriented number, right? We've watched that turnaround time closely at every one of our shops across platforms across the network. The way I think about CAD improvement, it's really driven by 2 things: one, material availability and two, efficient execution of our standard work on the shop floor.

We've talked a lot about supply chain. You've written about it as well. To the extent that we are getting not only more from our suppliers, but getting what we get in a more predictable way, the teams on the shop floor are better able to execute to bring down turnaround times. We talked about 3% year-over-year improvement from our priority suppliers. We talked about those suppliers delivering at a 90%-plus level to their commitments, takes a lot of news out of the system. That is an unlock for us, I think, to take full advantage of the process improvements by way of FLIGHT DECK we've laid into the various shops. It's not equally spread across every shop, but those turnaround times, I think that you see improved in the fourth quarter, for example, really is a combination of better input materials and better execution.

How does that show up in the financials? Well, we should be getting more shop visits completed in terms of the top line, but also we believe it's a considerable productivity unlock. If a team on the floor has to stop a shop visit if they are idle, waiting for a hard delivery, that's obviously unproductive time. If they have everything they need from induction to certification we will see, and I think I have seen the early signs of real productivity bumps there as well.

The next question comes from Scott Deuschle with Deutsche Bank.

Rahul, can you quantify what the GE9X headwind ended up being in 2025 and then what the incremental profit headwind is from 9X in 2026? And then if you could comment on the quarterly earnings cadence you're expecting at CES in '26 as well, that would be helpful. So the question is around 9X losses in the earnings cadence. .

Yes. So Scott, on 9X, our losses ended. I mean, we set a couple of hundred million bucks of losses in 2025, and we've ended right about there. So right in line with our expectations. And for '26, as we previously said, we are going to ship more engines in '26 and the volume continues to grow up.

And with that, our losses on the 9X programs will double year-over-year. So our current guidance for '26 incorporates those losses getting to that level. So all consistent with what we've said previously.

On the first quarter, and let me just elevate the question a little bit, Scott, and just kind of speak to total company here, including CES. I mean, first, we expect a solid start to the year. As you probably remember, our output started out slow last year in the first quarter. So we expect our engine and shop visit output to grow substantially here in the first quarter and that will drive our revenue growth.

And we expect kind of if you put all that together, the total company level, we expect high teens revenue growth for the company with both CES and DPT above their respective full year guidance. So the stronger start is going to come from both the segments.

And now getting into the CES, services, we ended 25% 27% orders growth. So we're entering '26 with a strong backlog and about 85% of the parts that -- the spare parts that we need to ship in the first quarter are already in the backlog. And then we had a CMO charge in first quarter of last year that we're not expecting to repeat. So it will be a strong start for us business.

And commercial equipment output will be strong, that will drive revenue growth. But if you -- first quarter last year was our strongest spare engine shipment quarter. So there'll be some impact from that here as we think about the year-over-year revenue growth, but still it will be a strong revenue performance despite that. And then there will be 9X shipments here in the first quarter as well, which we did not have in '25. And then DPT, they're on a good run here on sequential performance. Expect that to continue and that should drive revenue growth for the DPT segment.

Now as we switch to profit, expect that profit to be up year-over-year growth, up year-over-year, primarily from the services growth and the absence of the CMR charge that we took, which will offset the higher deliveries and the 9X shipments. But because of the lower spare engine ratio and 9X shipments, our total margins for the business will be kind of in line to slightly better, marginally better here versus where we ended fourth quarter of 2025. And free cash flow we expect certain payments here in the first quarter. So free cash flow will be down year-over-year. But overall, as we think about revenue, we think about profit, we expect to get out of the gate here strong.

The next question comes from Sheila Kahyaoglu with Jefferies.

Great quarter. Maybe Rahul, since you were just speaking about CES product guidance for '26. If you could walk us through margins at the midpoint, it implies margins are flat. And you gave a few pieces, the GE9X headwinds. How are you thinking about shipments there? What are you seeing offset the goodness to help overcome some of the mix issues you're facing with equipped growth outpacing services? 9X headwind, as you mentioned, spares ratio and just LEAP growing double digits while CFM is flat, how do we think about that?

Yes. I think, Sheila, you kind of outlined some of the key drivers here in the math. I think the margin story at the CES level is exactly the way you said it, strong services growth here, we expect $3.5 billion of services revenue growth in 2026, which drops through at a healthy clip despite LEAP being a bigger share of that growth, we still expect strong drop-through from our services revenue improvement year-over-year.

And then the OE shipments are increasing, the spare engine ratio gradually comes down as we expect it too as time passes on and then 9X shipments and with R&D coming in as well. So I think those are the big drivers for the CES margins here in 2026.

Now keep in mind that the margins ended up better than what we'd expected back when we gave the October guidance. We -- the margins were about 70 basis points better than where we thought we will be in October. So we have a higher jumping off point. And despite that, you see at the -- as you said, our margins are expected to be flattish here in 2026. So we feel good about the trajectory that we're on.

The next question comes from Seth Seifman with JPMorgan.

maybe just to continue along that line of questioning. As we think about the headwinds that we know are accumulating from a mix perspective in CES, and then we look out beyond 2026. How should we think about the margin trajectory there with LEAP OE becoming profitable leave aftermarket continuing to become more profitable, but maybe OE aftermarket mix headwinds and more 9X, I guess the -- I'm getting to like a in CES for for 2026. And so kind of where do we think about that going directionally in the years beyond?

Well, I think you captured the some of the headwinds that we've talked about not only for '26, but much for '28. I think it's important to recognize that when we spun, we thought we would be at a $10 billion operating profit level 2 years from here, right? So we were able to hit that milestone.

We think we'll hit it at the midpoint in 2026. So there's a lot of things that are clearly outweighed the headwinds as we continue to grow the installed base. And as we ramp with our suppliers, grow that installed base at a low to mid-single-digit level, and get the full benefit of utilization in terms volume work scopes and price, the commercial services business really will be expressing the LEAP engine that that drives the profit growth. You talked about how LEAP will be better for us as we go forward, we'll certainly -- we'll look to have the 9X do the same. And all the while, we don't want to forget about the progress that we made in Defense, right, where we were up 11% last year, top line operating profit up over 20%.

So I think we have plenty of opportunity to deliver on that $11.5 billion of operating profit that we've talked about for 2028, potentially do better. But that's really the plan. We continue to serve the airlines as best as we can in the aftermarket ramp the airframers as they look to deliver to help the modernization and expansion programs from those same airlines, all the while supporting war fighters to the fullest strength of our ability.

so Seth, just maybe add a couple of things here. If you go back to July when we gave our '28 guidance, we said we expect 21-ish percent margins in 2028. Now we got there last year. So the jump-off point is substantially better than where we thought back in July. So we're jumping off that higher point. And as even '26, we are maintaining that margin profile. So I think we're getting to the margin outlook that we get laid out for '28. Again, not just on profit, but also on the margins.

So that's a good trajectory. And I think we spoke about the CFM56, goodness here. Retirements are still trending low, shop visits in the 2,300 to 2,400 range now, which is maybe slightly better than what we thought back in back July. And as you said, LEAP service profitability continues to get better with the external channel. Larry mentioned, the repairs that we are driving inside the company. We expect the number of repairs that are certified to continue to grow this year over '25. So that's helping.

And with the incremental shop visits, we'll drive productivity in the LEAP services as well. So all that points to the LEAP services tailwind kind of continuing here. So I think those would be the big levers along with continued strong performance on the widebody programs GE90, as we think about the retirements are pretty much nonexistent there. So all of that lends well to how we think about 2028. And clearly, it's a big margin profile than what we thought back in July.

The next question comes from Ron Epstein with Bank of America.

So yes, a lot has been asked already, but just coming back to your prepared remarks, you mentioned that you guys are spending about $3 billion a year on R&D. That's a big number. Can you maybe for a lack of better, double-click on that, maybe give us some feel for how you guys are spending that and what you're spending it on where those investments are being made?

Yes. Ron, I would say that in many respects, is where you would anticipate it being, right? Very much focused versus lost on improving the customer experience with the engines that we are ramping. And we've about LEAP in that regard. We want to make sure we continue to deliver improvements like the durability kit and the like to improve time on wing and to reduce the total cost of ownership.

We've got the 9X coming under wing with the 777X. So it's those newer programs that are either headed EIS or that are ramping that are really the first order. All the while, we're making sure that we are investing in the future of flight. We've talked a lot with you in particular about our RISE program. It's a technology development, not a product development program. Nevertheless, garners a big chunk of that annual spend.

And then, of course, on the Defense side, there are a number of next-gen programs that represent another meaning portion of our R&D spend. So you put that all together, coupled with the field experience we have on that 2.3 billion flight hour experience base we think we're well positioned to shape the future of flight. And as we move forward, we've talked a lot about the puts and the takes on '26 on the road to '28, rest assured, we're going to work very hard to protect and expand the size of the R&D envelope because we know this business has led through product cycles really on the back of innovation and technology. And that won't -- we can't let that change into the 2030s..

The next question comes from Gavin Parsons with UBS.

You guys talked about CFM56 retirement is trending lower than you expected. I think at 2%, even though you're performing very well on LEAP deliveries. So I'm curious if you're still expecting that to pick up to 3% or 4%? What's changed there? And if you still expect that shop visit peak in '27?

Well, I think it's really -- you have more than anything, a function of demand that the airlines are trying to satisfy, right, which has them keeping the CFM56-powered planes in the air. And I think as we look at retirements in 2025, we ended up at about 1.5% of the fleet relatively in line with what we saw in '24. I think on balance '26, probably a little bit better for us, likely in the 2% range compared I think to a 2% to 3% range we offered up in July.

So at this point, from a shop visit perspective, we think we're going to be in that 2,300 to 2,400 range through 2028. And that's better than what we said in July where I think we were soft circling 2,300. So there'll be a gradual decline come 2030. But here in the next couple of years, given utilization, given demand, we think retirement is going to be a little bit more muted and the CFM56 is going to be stronger for longer. All good.

The next question comes from Noah Poponak with Goldman Sachs.

Could you elaborate on the agreement that's been announced with, what that means? What are the implications? And then Rahul, on the free cash flow, you're now -- this year, you're going to part with what you had provided for 2028, anything abnormally high in '26 that has to fade? Or just how should we think about the bridge from '26 to '28 now?

No, I would say just on the agreement, as you all know, we have an open third-party aftermarket, we think that open network has really been a strength for us over time. We want to make sure that customers have as much optionality as possible in how they service their fleets that clearly in turn, supports asset values and lower cost of ownership. And that's really, I think, the foundation for what we've done.

And I mean it's -- on cash flow, no, nothing abnormal here in '26. The -- our challenge last year was inventory growth, right? I mean we added about a couple of billion dollars of inventory last year. And part of that is we -- the supply chain is getting better, but it's not all there. So we get some pass, but not everything. So that adds to inventory. And some of that is an investment that we are making to make sure that we get new increased output in 2026.

As we think about '26, we're expecting less contract asset favorability and that is getting offset here with slower inventory growth. So we added -- our total working capital in AD&A last year was about $0.5 billion of net headwind, and this year, we expect slightly less than that, which is not bad given low double-digit revenue growth that we are expecting this year. So really nothing abnormal coming through our cash number here and more opportunity on inventory as we get out and maybe slightly less on contract assets, which is all in line with what we previously communicated.

Liz, we have time for one last question.

This question comes from Gautam Khanna with TD Cowen.

And congrats to Mohamed and Russell. Just wanted to ask on customer behavior in the aftermarket. Have you seen any change? Do you anticipate seeing any change in terms of scope of overhauls either on widebodies or on CFM56? Any indication, any pricing pushback? I'm just curious, are you seeing any sort of discontinuity relative to what we've seen over the last couple of years?

Nothing that really jumps out, frankly. Again, the demand environment post pandemic has been robust for the airlines. They need all they can possibly get from us. And that's why we've talked so much about FLIGHT DECK and the supply chain over the last several years, particularly as it pertains to supporting the fleet they have while making sure they're also able to expand and modernize.

We talked a few minutes ago about the CFM56 and all likelihood being more stable over the next few years. That clearly will create then to work scopes in certain instances, work scopes that will expand as the engines get older. But I would say on balance, we were with a lot of customers just this past weekend. They want more and they want it faster without any compromise with respect to safety or quality. It's a fair ask and one the team is committed to delivering on in the new year here.

Larry, any final comments to wrap the call. .

Blair, thank you. The hour there. Now I would just say to close, GE Aerospace remains a differentiated franchise defined by our enviable market position and flight deck supporting enhanced performance. As we look ahead, our outlook reflects confidence in our ability to deliver consistent value for our customers, shareholders and the millions of people, who rely on our services and products every day. We appreciate your time today and your interest in GE Aerospace.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect. .

Good morning, everyone. Thanks for joining us. My name is Peter Arment. I'm the senior aerospace defense analyst here at Baird. We are delighted to kick off the very Global Industrial Conference with GE Aerospace. With us from GE Aerospace, we have Rahul Ghai, who's been a long-time executive in the aerospace and multi-industrial universe for a long time. He joined GE Aerospace or GE back in 2023 before the spin-off in 2024.

GE operates really through 2 main segments: Commercial Engines and Services and Defense Propulsion Technologies. And clearly, we're going to go through a Q&A, but first Rahul is going to make a couple of opening statements, and then we'll jump into questions. So Rahul, welcome. Thank you.

Thank you, Peter. We're glad to be here. This is the first time at Baird, so we're excited. It's a great lineup we have today, and glad to kick this thing off, right, and early. So well, as you introduce GE Aerospace, I mean, it's a fantastic franchise. It's a leader in propulsion systems and services. So -- and what makes GE different, GE Aerospace different, Peter, in my mind, is our 78,000-engine installed base, which is the largest in the industry by far.

And through the installed base, we power 3 out of every 4 commercial aircraft and 2 out of 3 U.S. combat and rotary craft aircraft. So -- in this installed base, given our R&D investments of more than $3 billion, given our flight hour experience of more than 2.3 billion flight hours, there is -- we continue to reinvest in the business, applying both our learnings and financial capital to improve durability, performance, time on wing, which is helping us win in the market.

So -- and this installed base is -- continues to grow. We're expecting low to mid-single-digit growth in this installed base depending on the platform. And this installed base is what drives the business, both our current revenue and future revenue. So in 2025, about 70% of our revenue will be from the services business, which is generated thanks to this installed base. And services also makes up majority of the $175 billion backlog that we have currently, which obviously powers growth over the next several years.

And '25 is shaping up to be a good year for us. If you look at our year-to-date performance, really strong results. And in October, we increased our guidance across the board on revenue, profit and cash. And that was driven by both segments, commercial and DPT, as you said earlier. On the commercial side, what is really helping us this year is the services orders growth. Our orders growth year-to-date on the commercial services side have been up more than 30%, and that has driven about a 25% growth year-to-date on the commercial services side. And we increased our full year outlook on commercial services to between low to mid-20s from high teens previously. And that's about an incremental $1 billion of services revenue, which you know drops through at a pretty healthy clip to the bottom line.

And on DPT, we increased our revenue expectations to high single digits from mid-single digits and tightened the profit range to the high end of the range that we had previously. So -- and both segments are doing better, and we increased expectations for both the segments. And what's really helping us achieve these results is FLIGHT DECK, which is our proprietary lean operating model. And FLIGHT DECK is not only helping us improve our own operations, but also its driving improvements across the suppliers, which improved our material flow in the third quarter, material flow was up more than 30% year-over-year and up high single digits sequentially, which is what we really need because the demand has been very strong, and we've been kind of behind on meeting that demand and fulfilling all the customer orders.

So increase in material flow is really helping thanks to FLIGHT DECK. So as we look back at the year, we're going to have high teens revenue growth, $1.5 billion of profit growth, more than $1 billion of cash -- free cash flow growth over 2024. So it will be a solid year. And we see this momentum kind of continuing into 2026 as well.

Commercial air traffic is holding up. We have the backlog that we need. On the OE side, we expect our LEAP engine deliveries to grow next year. We'll increase our volumes on the 9X platform. And on DPT, we have $19 billion of backlog that drives good growth. So should be a good '26 as well as we sit here today. So with that, I'll open it up and go where you want to go.

Well, I think I'll probably start right where you left off, which is '26. You've had such a great '25 year-to-date performance. Just maybe how you're thinking about the framework for '26 for those who maybe don't -- you haven't followed it as closely?

Yes. Also on '26, Peter, as we sit here today, first, the air traffic environment feels better, right, from back in July. In July, we were thinking that '26 is going to be a slight step down over 2025. Second half is shaping up for '25 to be better than what we thought a couple of months ago. And then we expect '26 to look very similar to 2025 in terms of air traffic growth, which is good news.

But the bigger thing for us is that if you look at the total number of shop visits, which is basically an engine overhaul for all the engines that have flown, which they need to come in for -- to get overhauled, the total number of shop visits globally, not just at GE Aerospace, but globally on our platforms is lower in 2025 than they were back in 2019. So despite all the air traffic growth, first, airlines were conserving cash, then we had all the supply chain challenges. So put all that together, it's been -- there's a lot of pent-up demand here. So what we see in '26 is that the engines that will need overhaul will be up double digits over 2025. So that's a good underpinning of the growth.

The second thing that's going to help us is that our LEAP external shop visits are growing. So this year, our LEAP external shop visits will -- will be up about 30% year-over-year total and about 40% externally.

So the LEAP external shop visits are growing, and that will drive the spare parts growth rate on the LEAP platform. And then on the wide-body side, the work scopes are increasing for our GE90 and GEnx platform. 90 is coming for the second shop visit. NX is coming for the first shop visit relative to a quick turn earlier. So that is going to drive.

So if you look at the overall services growth rate, well, we don't expect low to mid-20s growth again next year because those are really strong numbers. But we've guided to a double-digit growth rate over the medium term between '24 and '28. So we think that it's -- as you think about '26, it's normalizing towards that double-digit growth rate between what we're delivering this year and what we're delivering -- what we've guided to for the long-term guidance.

And then on the commercial engine side, we -- on the equipment piece, we expect LEAP to be up. This year, we grew probably in the 17 -- [ 1,750 ] range. We expect another 15% to 20% growth rate next year. So that puts us in the 2,000-engine range that we've guided to.

9X engines for the 777X platform will continue to grow as well. And we expect a little bit of normalization on the spare engine ratio for OE. So -- and then 9X, given the -- even the cost per engine is going to come down, this increase in volumes, that will more than double our losses on the 9X platform that we're experiencing this year. So that's a headwind as we think about '26.

And on DPT, I think we expect kind of mid-single-digit growth rate, good margin expansion. And then FLIGHT DECK is expecting -- we're driving productivity in the market, which is helping us cover inflation. So you put all that together, we expect services margins to be flattish given the LEAP growth and overall margins will be flattish as well as we think about 2026. But still, we expect a really good year. It will be a step along the way through our guidance for '28 and then about $1 billion or so of profit growth between '25 and '26.

Terrific. You mentioned kind of thinking about the algorithm of departures and comparing to that on services. How do you think about that? And has there been a little bit of either a decoupling? Or how are you thinking about kind of that connection?

Yes, it's a great question, Peter. There has been a decoupling. There has been. If you look at the overall services orders growth has trended above the departure growth for '25, and we're expecting the same for '26. I think there are a couple of reasons for that. One is that just -- as I mentioned earlier, the pent-up demand that has been there. So there's a lot of -- again, if you just compare to shop visits in '25 being lower than 2019. So there's a lot of pent-up demand that needs to get fulfilled now over the next couple of years.

The other thing that's happening is the work scopes are increasing. So if you take a wide-body engine, the shop visit for -- the second shop visit for a wide-body is 50% more intensive than the first shop visit. So if you look at GE90, about 70% of the engines have not gone through the second shop visit. So that is a huge driver of our growth here over the next few years.

And then obviously, pricing helps as well. So there's a little bit of -- and then our installed base is growing. So there has been a little bit of decoupling, and we expect that to kind of stay this way for the next couple of years. And that's where we feel that our algorithm around that services can be a double-digit growth business holds given a little bit of work scope increases, departure -- fundamental departure growth, installed base growth, whichever way you want to take it, and then pricing, that's what gets us to a double-digit growth algorithm on the services business.

Great. Terrific. You mentioned LEAP earlier in your kind of overview. Let's talk a little bit about it. How are you thinking about just kind of the output? I think you mentioned you're tracking well towards that kind of goal. And then a lot of things that came up recently, you talked about durability and kind of how things are improving there. Can you talk a little bit about that?

Yes. No, it's -- LEAP has been a great story over the last couple of years. I think there are a few things that we've gotten right here. Let's start with kind of the product performance. To me, what has been key here is that LEAP now for Airbus, which is a LEAP-1A engine, has now similar levels of performance for everything new that we are shipping out of our factories as the CFM56. So we expect to have stay on time on wing for the blade -- the new blade and the durability kit to stay on wing for as long as the CFM56 does.

And we're also retrofitting all the LEAP-1A engines with the same durability kit when they come in for the shop visit. So it doesn't drive incremental shop visits. But as and when they come in for the regularly scheduled shop visit, we put that. So the product performance is really getting back to where we really needed it to be.

And on the OE side, obviously, you've seen our deliveries this year will be up more than 20%. Next year, we're going to hit that 2,000-engine mark. So the OE side is getting better. And our overall spare engine ratio on LEAP is kind of in the low double-digit range, like of program. So we're not too high. We do expect slight moderation, as I said earlier, as we get in '26. So that will normalize, settle around at the 10%, 11% mark that we expect. So that will happen. And on the services side, we achieved breakeven last year in '24, and we expect a real improvement in services profitability as we get into '26, '27 time frame. And a few drivers of that. First is just an increase in volume, right, with more volume through the same fact -- our MRO shops or overhaul shops, that drives productivity, which helps with profit.

Second, we're working hard on repairs. If you can repair a part, that costs like 50% lower than a new part. So on LEAP, we have -- if you look at our GE90 platform, we have like 3,000 repairs. And on LEAP, we did 200 repairs last year. So we've got a long way to go, and we're investing a lot of time and effort into developing these repairs for LEAP. So that's going to be the second piece.

Third is that our external shop visits have now started to grow. So last year, we were at 10% external shop visits. As we get into 2030, we expect that number to be 30%. So overall LEAP shop visits are growing. And within that, these external shop visits are growing.

So that obviously unlocks the spare parts revenue stream. So that is going to be a huge help as well. And then pricing has improved as well over the launch pricing that we did earlier. So that is where you put all that together, we expect LEAP to have a really good trajectory on profit over the next few years. And as we look back towards the end of the decade, call it, by 2030, we expect LEAP profit dollars to be similar to what CFM56 is generating.

So it's been a smooth transition. Obviously, CFM56 is hanging in there as well. So it's ending up being a very smooth transition between the 2 platforms.

Do you see -- where do you see CFM56 kind of leveling off?

Well, what we -- in July, we updated our expectations. So now what we are expecting is that the shop visits kind of plateau at that '25, '26 level through '27, '28, and then that's kind of the peak of the shop visits and then revenue peaks by the 2030 time frame, which is even this year, the retirements have been really low. I mean the retirements on CFM56 are lower this year, year-to-date than they were last year. So we do expect retirements to pick up. It can't stay at this level forever.

So next year, embedded in this guidance on shop visits that I just gave, we expect retirements to be in the 2% to 3% range for next year and then go to 3% to 4% by the time we get to '27, '28. So even with that, we expect shop visits to kind of level and stay at this level through at least through '27.

It's hard to retire an engine with that kind of reliability record. So -- yes, so maybe just back on the durability. So how are you thinking that tracks as we kind of move forward comparing to kind of when we think about CFM56?

Right. So as I said, 1A is now at the CFM56 levels. 1B, we expect certification in the first quarter of next year, so early 2026. we'll get 1B there. Again, now 1B has flown fewer cycles than 1A. So there's a little bit of time. So 1B, we introduced the durability kit in early part of '26. So 1B gets there as well.

And then we continue to make improvements. I mean we -- again, we introduced a new blade middle of last year. We are working -- we've made some changes to that. So the producibility gets better. We're now starting to work on the software so that we achieve better trust out of the engine. So we'll keep -- we're making these enhancements to the engine. And hopefully, it gets better from this point on, but we are glad where it is for now.

Terrific. You mentioned FLIGHT DECK. Can you talk a little bit about that, how that's impacting your kind of operations?

Yes. No, it's been a game changer. Obviously, when Larry took the CEO job at GE Aerospace, he thought hard about it. And -- and the question was, obviously, we've been -- he'd been pushing lean since we took the GE job, right? So he's been working on it and business has made a lot of traction, but he thought that maybe we needed a catalyst here. And that do we need to brand this kind of make it our own, think about it slightly differently. And so that's where we came up with FLIGHT DECK early last year.

And the key tenets of FLIGHT DECK in his mind are safety, quality, delivery and cost, right? Obviously, at any given point, even as we sit here right now, there are about 1 million passengers that are flying on a GE-powered aircraft at this point in the sky. So you think about the safety and quality, absolutely has to be paramount. So that's what FLIGHT DECK starts with. And then you get into improving delivery, which we just spoke about because it really helped unlock performance here in the last 6, 9 months and then productivity and inventory improvement comes second.

But Peter, what this really means to me is that we are now running GE Aerospace as one company. If you visited our factories 2 years ago, you would have said like every factory felt different, had kind of their own metrics, what they were tracking, felt what was relevant to them, and you couldn't really connect the dots, right? We felt like, okay, we're tracking shop visit output as one number of days to complete a repair in some other place. So it was really hard to connect the dots. And okay, how does this improvement translate into overall performance.

Now if you go to our factories, you see similar metrics across every single site.

And similar dashboards, and they all go SQDC, safety, quality and delivery costs. Everywhere is the same thing. How we run the factories is the same. Every morning, at the beginning of every shift, there is a daily standup, right? What do you need to do for the day? What happened last -- yesterday, what went right, what went wrong, what problems do we need to fix and how we're going to run the business for today. So it's bringing in a daily disposition versus a quarterly target or an annual target.

But the other big unlock is the culture, which you cannot underestimate because no matter -- and some of you, obviously, in the audience have seen a lot of our factories. When you come to our factories, if it was a good day, you'll see green. If it was a bad day on any of these 4 metrics, you'll see a red. And that's what happens when you come, when I go, when Larry goes, there's nothing to hide. It's not -- we're not putting on a dog or pony show. We're not talking about just things that are going right.

So it's fundamentally changing the culture of the company to be more transparent, more visible where -- and there's no presentation. There's no PowerPoint. You go to the factory, you watch the metrics, and you leave a few hours later and you talk about everything, all the discussions with everybody who is running the shops is happening on the shop floor, not in a conference room. So I think it just drives the visibility. And you've seen the results even as you go through like we've had several union negotiations this year.

And I fundamentally do believe that the reason we've achieved the results that we've achieved is because if you're working on the floor, you see the investment that the company is making. You see the culture that Larry is trying to drive in the organization, and you have a management that listens to you and is interested in your well-being. And I think that's a huge unlock for the organization.

Yes. Transparency, huge. So you mentioned unlock. Can we talk about unlock of the supply chain and kind of how you think about the sustainability of that because that's been a big focus.

Yes. No, and it needs to be sustainable, Peter, because the demand is really strong as you look out. So it's been great. But I think transparency to me, Peter, is the key here. And the unlocking the supply chain, transparency is the key. So if you go back to last year, '23 was a good year for us. We were driving output all that. First quarter last year was good as well. And then we just hit a roadblock. And we got blinded a little bit by -- we were -- our suppliers had -- we were -- we thought we had communicated to our suppliers. They had hurt us.

But we had not -- it was very clear that we not communicated clearly enough, right? So people were looking at different signals coming from different parts of the industry, what's happened, what are the airframers saying, what are other aftermarket providers saying. So nobody really believed in the signal we were giving. And we were not standing behind that signal as well because we were making rapid changes.

So there was lack of transparency and there was lack of consistency in our behavior. So we spent a lot of time understanding what was -- what did we do wrong? And we started this really deep journey to understand how can we make what are the problems our suppliers are having, where do we need to insert ourselves.

So we have 550, 600 engineers at our supplier sites at any given point in time. So we work hard with them on problem solving in -- if you're having a problem in a process, if you're having a problem in a machine, we'll help you solve it because these suppliers go from some of the suppliers you own, you have in your portfolio, others you've never heard of. So these are -- and all these suppliers are having different types of problems. So that was key.

And then the second thing is we really stood behind the demand signal that we were giving. We share a lot more about this is what's coming from different parts of the market. So driving that consistency in our behavior, giving suppliers visibility into the demand algorithm, I think it's a combination of the problem-solving approach that we've taken and the visibility and the conversations we're having with the suppliers, that's the reason for the unlock.

And we need this to continue because if you look at the ramp rates from this point on, I won't go through the mates. I mean, you know what you guys follow these companies that give us the demand signal. And the new engine demand for the narrow-body and the wide-body is immense. You look at what Airbus is trying to do, you look at what Boeing is trying to do. Both airframers are trying to really increase their output.

And then on the aftermarket side, our LEAP shop visits are going to -- like are going to be up 25% a year from now to 2030. And you combine that with the work scope. So we have a really strong demand outlook. So we need this to keep getting better. And I'm sure as you go into '26, '27, we'll find other things that are -- we thought are working will not work, right, because everybody needs to grow at the same rate, as you know. So there's a lot of work to be done. We'll be talking about supply chain for a long time to come. But I think the actions we are taking are definitely helping us here.

Yes. The pressure on the output is big. But there was one area where there was a delay. So we've seen a delay with the 777X entry into service to '27. How are you thinking about that, how that impacts you?

Well, I think Jay is going to be here, right? I think he's here tomorrow, so I'll let him kind of talk to it, what Boeing is saying. But as far as we are concerned, we are continuing to ship. We started shipping engines on the 777X platform last year, and these are production engines that we've been shipping. We'll ship more this year, including fourth quarter is a big quarter for us for the 9X shipments. 9X is the engine on the 777X. So we -- that's a big quarter for us.

And then we go from this point on into '26 and then '27. So we'll continue to ship engines to Boeing, I think, as we sit here today, and we'll take the lead. So that is where we expect 9X losses, we expect a couple of hundred million dollars this year. In our financials, we expect to more than double the losses next year.

Got it. Appreciate that. Let's move over to DPT. Can you talk about how you're thinking about the growth, the opportunities there as we move into '26?

Yes. Now this has been a really good year for DPT, Peter. I would say, again, as I said earlier, we increased our revenue expectations to high single digits. Margins up 100 basis points in that segment for the year. So it's shaping up to be a really good year on DPT. I would -- and again, in the third quarter, our defense engine shipments were up 80% year-over-year for second quarter in a row. So a huge unlock, up 50% year-to-date. So it's been a really good year.

And then even on the propulsion and additive side, which is the second part of our DPT segment, which -- and we have 4 businesses in that segment, and each for all the 4 businesses had more than 20% growth in the third quarter. So really good broad-based results in that segment.

Now as we think about the future, to me, the growth in that business is going to come from 3 places. One, we have a $19 billion backlog, right? So that backlog is going to drive substantial growth. And that backlog includes our orders that we have on Black Hawk, Apaches, the F-16s, F-15s, the spare engines, spare parts that go through that and also some of the international platforms. So we've got the India and the Turkish fighter jets. We've got the trainers for Turkey and Korea. So we've got all these international platforms that will continue to drive growth between the U.S. demand and the international demand, which is growing.

On -- in Europe, we have a business called Avio Aero, which is our European defense business. And that has engines on the Eurofighter and also has a 1/3 share of the GCAP platform, which is the sixth-gen fighter that Europe is trying to develop. So Avio is experiencing really strong growth as well. And the third pillar of growth is going to be what we call Edison Works, which is a classified business.

And within Edison Works, obviously, you -- we guys have been tracking everything that's happening on the sixth-gen fighter in the U.S. that we are encouraged by the progress that is happening. We appreciate the continued investments. We appreciate the move forward on the F-47, hoping the Navy award is announced soon as well, and that program moves forward as well. So we'll keep our fingers crossed there.

Then we've made a couple of different investments to grow that business. One, we have a JV with Kratos to develop engines on the lower trust side of the CCAs. So as you think about the CCA side, we're working on the CCAs, we're working on 3 different angles. The low thrust engine, which is less than 15 pounds -- 1,500 pounds of thrust, that's with Kratos. On the higher end, above, say, 5,000, we can take our commercial engines, and we can put them. So if you take the Eurodrone, which is the Airbus platform that has our engine on our turboprop that is on that platform.

And then we are working in the middle range, we're developing our own engine that goes from like 1,500 to 5,000 pound thrust. So the CCA is -- again, that's not a market that we are in today. We are keen to kind of invest on our own, which is what Secretary Hegseth said last week is that is hope that the industry is investing. So that's what we are doing is we are ensuring that we have off-the-shelf products, depending on whichever way both U.S. military or international armed forces want to go, we have an engine on that.

And then obviously, the investment in -- with data to develop hybrid electric technology for the military aircraft. And then you saw the announcement last week with Shield AI to power their vertical lift aircraft. So that is another third leg of our growth. So it's existing platforms, it's the European growth and then the classified side. So we are encouraged about that. And as we think forward, international growth will be faster than U.S. But overall, we expect kind of mid-single-digit growth in that platform. And that...

So a lot of opportunities for DPT. So let's wrap up in the last minute here or 2. So poised for finish a strong '25, optimistic about '26. Does it change your kind of '28 outlook that you kind of talked about in July?

Well, we -- it's always better to be closer to the finish line and further away. So obviously, when we gave guidance $11.5 billion, we were expecting $8.2 billion, $8.3 billion of profit in '25. Now we are at $8.7 billion, $8.8 billion. So we are closer to the $11.5 billion. But listen, the business is on a good trajectory. '26 will be a step along the way towards those targets.

And -- but I think the algorithm that we spoke on DPT just now and commercial services earlier and then obviously, the OE demand is really strong through 2030. So it's a good environment. We just need to continue to execute. And I'm sure we'll talk more about '28 as we get closer there.

Terrific. Well, why don't we end there? I appreciate it.

Rahul, thanks for kicking us off. We appreciate it.

Thank you. Yes, of course. Yes, thank you.

Thank you.

Good day, ladies and gentlemen, and welcome to the GE Aerospace Third Quarter 2025 Earnings Conference Call. [Operator Instructions] My name is Dustin, and I will be your conference coordinator today. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the program over to your host for today's conference, Blaire Shoor, Head of Investor Relations. Please proceed.

Thanks, Dustin. Welcome to GE Aerospace third quarter 2025 earnings call. I'm joined by Chairman and CEO, Larry Culp; and CFO, Rahul Ghai.

Many of the statements we're making are forward-looking and based on our best view of the worlds and our businesses as we see them today. As described in our SEC filings and website, those elements may change as the world changes. Additionally, Larry and Rahul, consistent with prior quarters, will speak to total company and corporate financial results and guidance on a non-GAAP basis.

Now over to Larry.

Blaire, thank you, and good morning, everyone. At GE Aerospace, our purpose is simple. We invent the future of flight, lift people up and bring them home safely. Every moment, nearly 1 million people are flying with our technology under wing, an incredible responsibility that we take seriously.

FLIGHT DECK, our proprietary lean operating model is how we turn strategy into results, and our exceptional third quarter and year-to-date results demonstrate FLIGHT DECK in action. We're making meaningful progress to accelerate delivery of our services and products to meet robust customer demand. And our commitment to ongoing investments in LEAP durability and the future of flight is centered on delivering value to our customers. Guided by our purpose, our team is energized every day to define flight for today, tomorrow and the future.

Let's take a closer look at our third quarter performance. Orders were up 2% with solid growth in commercial services, partially offset by the timing of equipment orders in commercial equipment and defense. Year-to-date, orders are up 13% with services up 31%. In the third quarter, revenue grew 26% and profit was $2.3 billion, also up 26%, driven by strong deliveries across aftermarket, OE and defense. This supported 44% growth in EPS to $1.66 and over 130% free cash flow conversion.

In Commercial Engines and Services, or CES, we're servicing and growing the industry's most extensive commercial installed base. Services demand remains robust with orders up 32% and services revenue up 28%, as improved material availability helped fulfill customer demand, driving total CES operating profit growth of 35% year-on-year.

In Defense and Propulsion Technologies, or DPT, we're improving delivery of our leading platforms, while developing mission-critical technology. We delivered very solid results with higher output supporting revenue growth of 26% with profit up 75%. Given our year-to-date results, combined with our fourth quarter expectations, we're raising our full year guidance across the board. I want to thank our team and our supplier partners for delivering for our customers and for another quarter of strong performance.

Shifting to Slide 5. We continue to experience significant demand for our services and products, and we're encouraged by how FLIGHT DECK is taking hold across the supply chain to deliver on our roughly $175 billion backlog. Much of this improvement is due to the progress within our technology and operations team, bringing together our safety, quality, engineering, supply chain and manufacturing teams to hardwire problem-solving, resulting in an improved delivery for our customers.

Our team is working better cross-functionally to deliver improved outcomes and in turn, accelerating the same type of collaboration with our supply base. For example, this quarter, we partnered with a critical supplier to address several key constraints utilizing FLIGHT DECK tools such as problem solving, 5S and standard work. This resulted in the supplier improving first-time yields meaningfully and, in turn, delivering a more than 2x increase in their output.

Our priority suppliers also continue to improve shipments against their targets, shipping more than 95% of committed volume for the third consecutive quarter. Greater stability enables us to meet our commitments. As a result of these actions, material input from our priority suppliers continues to grow, up 35% year-over-year and up high single digits sequentially. And we continue to advance on our durability road map with our next iteration of the LEAP-1A HPT blade now in production, and that will further enhance output. As you can see, operational momentum is building, leading to significant growth.

CES services revenue was up 28% with internal shop visit revenue up 33% and spare parts revenue up more than 25% year-over-year. Total engine deliveries were up 41% year-over-year and 18% sequentially. Commercial units were up 33%, including record LEAP deliveries, up 40% year-over-year in the third quarter. Year-to-date, commercial units were up 19%, with LEAP up 21%. Based on this progress, we now expect to grow LEAP deliveries more than 20% for the full year, up from our prior outlook of 15% to 20%.

Defense units were up 83% year-over-year, marking the second consecutive quarter of defense output exceeding 80% growth. Additionally, while CFM56 continues to fly for longer and with LEAP's fleet size expected to triple by 2030. FLIGHT DECK is also helping us expand our capacity and capabilities to reduce turnaround times and improve shop visit output, 2 top priorities to meet the demands of our customers.

For example, we've made progress with LEAP turnaround time at our Malaysia MRO shop. Our team there improved flow and delivered a 30% reduction in engine disassembly time. As a result of actions like these, total LEAP internal shop visit output grew by more than 30% in the third quarter.

We're also investing in incremental capacity to support our customers' growing fleets. This quarter, our XEOS' MRO facility in Poland completed its first LEAP shop visits. And our LEAP third-party MRO network also continues to grow rapidly with external shop visits up roughly twofold.

In addition, we collaborated with our leasing partner for LEAP to reduce the time it takes to redeploy spare engines between customers, resulting in improved spare engine availability. We're also investing nearly $1 billion in our supply chain to expand capacity, and we're counting on our suppliers to also make like investments to support the growth ahead.

While this is progress, we know there is much more work to do to improve LEAP turnaround times to meet customer expectations. We're accelerating our use of FLIGHT DECK, taking lessons learned and applying them across our network, to deliver a better experience for our customers. This quarter clearly marked another step forward with year-to-date commercial services revenue and total engine deliveries, both up 25%. We're well positioned to ramp further as we go into 2026.

Turning to Slide 6. One of the FLIGHT DECK behaviors that guides our company is to be customer-driven in all that we do. Earlier this month at our GE Aerospace Research Center, we had the opportunity to share how our experience across 2.3 billion flight hours and our roughly $3 billion of annual R&D investment is enabling continuous improvement in our field performance. For reference, we've posted these materials on our Investor Relations website, and I encourage you to take a look.

We're applying insights from our experience and investments to improve reliability and durability of our products as time on wing remains critical for our customers. For example, the lessons learned from 15 years of enhancing the GEnx durability over 2x are being applied to LEAP to achieve the same level of improvement. And we're increasing our investments in LEAP services technologies such as our analytics-based maintenance, which predicts the optimal time for a shop visit and repairs, which reduce reliance on new material, benefiting both cost of ownership and turnaround times. Combined with our progress on delivery, we're actively working to meet customer expectations on LEAP.

We're also applying similar lessons from GEnx and LEAP durability to our next generation of engines. We just launched our second dust test on the 9X, which will continue to mature the design pre-entry into service. This builds upon over 30,000 cycles of testing, including 9,000 endurance cycles, which will make the 9X the most tested engine in our history.

Earlier this month, we began similar dust testing on next-generation HPT blades for our RISE compact core development. This marks the earliest we've ever started this type of testing in development. While we're investing in compact core to mature RISE technologies, there could be applications of these learnings for today's fleet as well.

We recently announced the first ever Chief Mechanic and Architect for our Open Fan technology, making durability a top priority in engine design with an uncompromising commitment to safety.

Our focus on delivering for our customers across current and future platforms is driving success in the marketplace. And a couple of key wins this quarter. Of note, Korean Air announced the largest fleet commitment in its history with 103 Boeing aircraft powered by GEnx, GE9X and LEAP-1B engines plus long-term services. We also secured a commitment from Cathay Pacific for GE9X engines to power 14 additional 7779s, bringing their total commitment to 35 777Xs aircraft powered by our GE9X. These will -- these wins build upon our solid backlog and were sold out in effect, both on LEAP and GEnx through the rest of this decade.

Stepping back, we know our customers are counting on us to deliver reliability, predictability, time on wing, and at the right cost of ownership. With FLIGHT DECK, we're making daily progress to meet those objectives, supporting their and our growth.

Rahul, over to you.

Larry, thank you, and good morning, everyone. GE Aerospace delivered another strong quarter marked by robust services growth and an improvement in engine deliveries, driving substantial earnings and free cash flow.

Revenue was $11.3 billion, up 26%, with both segments growing over 25%. Operating profit was $2.3 billion, up 26%. Services volume, price and productivity were partially offset by OE growth, investments and higher corporate costs. Operating margins were flat at 20.3% with margin expansion in both segments offset by corporate cost timing.

Adjusted EPS was $1.66, up 44% from increased operating profit, a lower tax rate and a reduced share count. Free cash flow was $2.4 billion, up 30% from higher earnings with over 130% conversion. Working capital and AD&A combined increased by roughly $300 million from increased inventory. Cash flow from long-term service agreements continued to be favorable and days sales outstanding declined 3 days year-over-year.

Year-to-date, revenue is up 21% and operating profit is up more than $1.5 billion from 25% growth in commercial services. We have delivered $5.9 billion of free cash flow, up nearly $1.3 billion year-over-year at 115% of net income. Given the momentum during the first 9 months, we are poised to deliver another solid year.

Going deeper into the drivers of 44% year-over-year EPS growth. Increase in operating profit drove nearly $0.35 or 70% of the improvement in EPS, with increased segment profit in CES and DPT, partially offset by higher corporate and other costs of roughly $300 million. The increase in corporate was primarily from timing of reserves for environmental, health and safety expenses. Eliminations were roughly $140 million, up about $30 million year-over-year.

Additionally, our tax rate declined from approximately 20% to 15% from benefits of long-term planning projects and timing of favorable audit settlements, improving EPS by $0.10. Impact from stock buyback actions and reduction in interest expense also contributed to EPS growth.

Taking a closer look at our businesses. Starting with CES in the quarter, orders were up 5%, with services up 32% and equipment down 42%, due to timing of some wide-body and regional orders shifting from 3Q to 4Q. Revenue was 27% with services up 28%, internal shop visit revenue grew 33% from higher volume, wide-body work scopes and price. Spare part sales were up over 25% as improved material availability supported increased output. Equipment revenue grew 22% with engine deliveries up 33%, including LEAP, up 40%. This more than offset a sequential and a year-over-year decline in spare engine ratio.

Life of program, the spare engine ratio for LEAP remains in low double digits. Profit was $2.4 billion, up 35%. Services margins were strong, driven by higher volume, price and a favorable shop visit and spare parts mix. This more than offset the impact of higher installed deliveries, including 9X shipments and an increase in R&D spend.

Segment margins expanded 170 basis points to 27.4%, with services revenue growth, mix and price, more than offsetting OE growth and impact from adverse mix. Year-to-date, CES has delivered revenue growth of 24%, operating profit of $6.6 billion, up $1.7 billion year-over-year with margin expansion of 210 basis points, while delivering around 20% increase in engine shipments.

Moving to DPT. Orders were down 5% due to timing across quarters. Defense book-to-bill remained above 1 in the quarter and is 1.2x year-to-date. Our total DPT backlog is at $19 billion, up $1.5 billion year-over-year. Revenue grew 26% in the quarter. Defense and Systems revenue was up 24%, driven by higher engine volume, up 83% year-over-year and improved pricing. Propulsion and Additive Technologies grew 29%, with all businesses growing over 20%. Profit of $386 million was up 75% year-over-year. Higher volume in Defense and Avio, customer mix, price and lower losses at additive offset continued investments and inflation. Margins expanded 380 basis points to 13.6%. Year-to-date, DPT has delivered 11% revenue growth $1 billion of profit, up 27% with 170 basis points of margin expansion.

Turning to guidance on Slide 11. Given the strong year-to-date performance and trajectory entering the fourth quarter, we are raising our full year guidance across the board. We expect revenue to grow high teens, up from our prior outlook of mid-teens. At CES, we now expect growth of low 20s, up from our prior outlook of high teens. This is driven by higher services revenue, which we now expect to grow low to mid-20s, up from high teens. We continue to expect equipment to grow high teens to 20%. We now expect DPT growth of high single digits, up from mid- to high single digits previously.

Operating profit is now expected to be in the range of $8.65 billion to $8.85 billion, up $400 million at the midpoint from the prior guide. CES operating profit is now expected to be in a range of $8.45 billion to $8.65 billion, up $450 million at the midpoint from prior guide. This reflects the drop-through from roughly $1 billion improvement in services revenue in the second half versus our prior guide and favorable services mix.

We expect DPT profit to be in the $1.2 billion to $1.3 billion range, up $50 million at the midpoint versus the prior guide, reflecting year-to-date performance from improved deliveries. Corporate costs and eliminations are expected to be roughly $1 billion. Additionally, we are improving our interest expense and tax rate outlook for the year and now expect interest expense of approximately $850 million and tax rate of 17.5%.

Taken together, we are raising our EPS guidance to $6 to $6.20, up $0.40 at the midpoint from the prior guide. We are also raising our free cash flow guidance to $7.1 billion to $7.3 billion, up $500 million at the midpoint, primarily from higher earnings. We are all set to close out another excellent year in 2025 and well positioned for continued growth heading into 2026.

With that, Larry, back to you.

Rahul, thank you. I'm encouraged by our progress this quarter, which builds upon our leadership positions across both commercial and defense and in turn, supports the improved financial outlook we're sharing today.

GE Aerospace has sustained competitive advantages. With the industry's largest fleet, 78,000 engines and growing, we have accumulated over 2.3 billion flight hours and have certified 7 commercial engine programs in the last 20 years. This experience base keeps us close to our customers and provides unmatched insights on performance, making us the partner of choice.

We use these insights to continuously improve our services and products, delivering reliability, predictability, time on wing and lower cost of ownership. We offer the best performing products underwing across our narrow-body wide-body regional and defense platforms. Our world-class engineering teams combined with roughly $3 billion in annual R&D investment, drive next-gen technology to improve durability, efficiency and turnaround times, along with advanced defense capabilities.

And through FLIGHT DECK, we're turning strategy into results with a relentless focus on safety, quality, delivery and cost, always in that order. The GE Aerospace team is poised to deliver exceptional value to our customers and shareholders and I'm confident in our path ahead.

So with that, let's open it up to questions.

Before we open the line, I'd ask everyone in the queue to consider your fellow analysts and ask 1 question so we can get to as many people as possible. Dustin, can you please open the line?

[Operator Instructions] Our first question comes from the line of Sheila Kahyaoglu from Jefferies.

Maybe if we could peel back the layers behind the services outperformance up 25% year-to-date, which is pretty phenomenal. And on a dollar basis, up $750 million sequentially, Q3 versus Q2. So how much of that is pure volume unlock through FLIGHT DECK in the supply chain versus tariff price surcharges or any other factors that you would say play into it? And why the step down sequentially in Q4?

Yes. Sure, let me start. So I agree with you, we had a really strong quarter on services. We were expecting high-teens growth for the year and year-to-date results; we are at about 25%. So now we've raised the outlook for the year to be low to mid-20s growth. And the improved outlook is both in our shop visit revenue and in the spare parts. So a lot of that from the strength that we observed in the third quarter.

So if I start with the shop visits, we've had year-to-date growth of, call it, 22%. And what's driving that, as you hinted at, is improved material availability is driving higher volumes. So that's a big piece of that. But along with that, the work scopes continue to increase, so that's helping as well. And the demand environment just continues to be strong. I mean, year-to-date, our inductions have outpaced output even with the results that we have delivered. And this improvement in output is especially visible in LEAP, that is up 30% year-to-date, and part of that is the incremental capacity that we've set up for LEAP.

On the spare parts, the year-to-date results have been equally strong, growth of more than 25%. Orders have remained strong. As Larry mentioned, our orders -- services orders growth of greater than 30% year-to-date, but the improved material availability is now helping us achieve those orders and execute on the demand that we are seeing. And as we look at the fourth quarter, our backlog still remains strong, 90% of the spare parts that we need to ship in the fourth quarter are in the backlog, which is 15 points higher than where we have been historically.

So really strong external LEAP shop visits up 2x is helping mid-single-digit growth in total worldwide shop visits in CFM56 is helping. So all that. So again, as we look at that, it set us up for really well, not only for 2025, but also for '26. Now as we think about the fourth quarter, we typically have a seasonal step down in our third quarter to fourth quarter revenue, largely driven by spare parts because you don't expect the same level of improvement on material availability, a little bit of seasonality in demand. So -- but still, if you step back and look at the full year, really strong year and -- versus where we were in July, more than $1 billion of revenue increase in the services revenue, and that's a large part responsible for the incremental $450 million of guidance raise on profit for CES.

The next question comes from the line of Doug Harned from Bernstein.

You've been talking about the improvement in margin -- the margin outlook for LEAP on the services side to get up to sort of services overall margins once you get out to 2028. Now that's a strong trajectory. But could you talk about how you have plans -- what gives you confidence in that because you're still in the very early days of PRSVs and I would expect really understanding what the cost is for full shop visits. So how do you think about that 2028 LEAP services margin? And how does price and cost factor in?

Doug, I would say that the road map to 2028 with respect to LEAP really is something that we're looking to manage every day, really a combination of the field performance that you spoke to. And frankly, what we're doing in our own operations with FLIGHT DECK to make sure we not only have the material availability, the improvements of which you see here in the third quarter financial results, but also in the underlying operational data points that Rahul just mentioned a moment ago.

As we project that forward, I think we've been making the improvements in the supply base in the field performance witness the durability kit with the 1A that's now in the field, very much -- and the cost reductions as well, be they productivity, which material availability will really does unlock in our shops, very much in line with our expectations.

So there's a lot of work to do between now and 2028, but I think given the multiple levers that we have to pull and the underlying product improvements that we have the conviction not only behind the strength of today's results, but the road map from here, both in terms of the eyes of investors, as you just framed it as well as customers.

Rahul, anything you'd add there.

Just -- Larry, just maybe a couple of things to add here, Doug. Larry spoke about the FLIGHT DECK improvement. We spoke about all the improvements that we are driving this year in LEAP output. As we see us ourselves to 2030, we expect this 30% year-over-year internal shop visit growth to continue, right? So that the volume is going to be a big piece of that. And as you think about the external channel, we spoke -- I think Larry spoke earlier in his prepared remarks about the external channel being up 2x year-over-year. I mean, that drives -- that unlocks the spare parts revenue stream for us. So that's helping.

We also spoke about the investments that we are making on repair technology. That reduces the cost of the shop visit in addition to unlocking our shop visit output. So all those things are helping. And durability is kind of hanging in there. I think with the introduction of the durability kit, we are very confident of getting to CFM56 levels of performance on LEAP-1A, and then soon on 1B as we look forward through 2028. So all those things are what gives us confidence about the trajectory that we have on LEAP.

The next question comes from the line of Myles Walton from Wolfe Research.

I was hoping to touch on capital deployment, the operations are all going fantastic, you're generating ton of cash, the stock price is reflecting it. Where and how do you balance capital deployment, share repurchase in particular at this point vis-a-vis your stock price, you haven't slowed down your pace. So I imagine that gives us a good indication that you still think there's good value there. But is the dial going to turn towards M&A at any point do you think in the near future?

Myles, I would say that the capital allocation approach that we and the Board have taken since the spin is very much intact. And I don't really see that changing materially anytime soon, right? We've talked about what we've described as a balanced approach, first and foremost, making sure we're reinvesting in the business to drive technology improvements we've talked about here already on this call, which you know well, and the footprint required to support the growth.

Of course, we are going to return capital to shareholders and reserve some when those M&A opportunities, large or small come along that makes sense. We're proud of the fact that we've increased our shareholder returns since the spin of, what, 4x. And as we said back in the summertime, we've increased our return of cash to shareholders to $24 billion in the '24 to '26 period, which is, I think, up 20% from where we were at the spin.

So from an M&A perspective, we want to make sure we're looking at anything and everything that might make sense in the neighborhood, but investors should continue to see from us a disciplined approach where we really look to strategic fit, then operational value add and in turn, financial returns.

So your question, I think, recognizes the tremendous capacity that we have. But again, organic reinvestment, return of capital to shareholders will be the first 2 priorities. But that gives us still, I think, ample room given the cash flow projections that we have here to look at things that fortify our existing positions.

You saw here in the quarter, something that we're really excited about our $300 million investment in BETA Technologies, a company that some people are well aware of, others maybe not so much. But we really like the team. We like the underlying technology and our collaboration to codevelop a hybrid electric turbo generator, we think will yield benefit to both of us, both in defense applications and ultimately in the commercial space.

The next question comes from the line of Seth Seifman from JPMorgan.

I wanted to zero in on the spare's performance a little bit within services and kind of given our -- I think our usual starting point for how to think about spares is like departure growth and so outpacing that by a bit, and also dramatically outpacing the outlook that you had for 2025 at the start of the year.

So when we think about what's driving that, is it all material availability? Is there a part of that, that comes from outfitting LEAP shops out in the network? And if so, what's kind of the tail on that, that allows spares growth to kind of exceed that underlying departure level? And also, given the mix of engines that do internal shop visits versus the mix of engines that are not on internal plans, should we think about CFM56 being the main driver of spares growth?

Yes. So Seth, let me start there. I think you had a lot of the data points that actually drove the performance kind of in your question here. So if we start unpacking that, I think if you look at the spare parts performance, obviously, we spoke to the orders growth. Orders has remained really strong. And what's driving the orders growth besides the increase in departures where you started is a lot of pent-up demand.

If you look at the number of shop visits that will be done in 2025 globally, worldwide shop visits, that's still below where we were in 2019. So the worldwide shop visits still have not recovered to the 2019 levels. So there's a lot of pent-up demand here on volume. And that's a big piece why the total demand is kind of outpacing the departures growth.

The second is the increase in work scopes. So we've been talking about increase in work scopes, both internally and externally. So if you look at GE90 as an example, the GE90 is now going -- like 70% of the shop visits haven't gone in for a second shop visit. So we're beginning to see the second shop visits come through, and that could be 60% to 70% heavier than the first shop visit. So that's the increase in work scopes is a big piece. And the same thing is happening on LEAP, the same thing is happening on nx.

You spoke about material availability. I think that's -- now that's an unlock here as well because we've spoken about the delinquency continuing to increase. And our output has been increasing, but we are still behind on meeting demand. And that continued even into this quarter, right, even with the spare parts growth we've had.

So I think all of that is kind of driving this. And as we look forward into '26, we still expect that -- we expect departures growth of where we have been in 2025, kind of 3% to 4%, but the number of engines that will come off wing are going to be up double digits. So we do expect this kind of difference between departure growth and spare parts demand to continue for a while, just given everything I've said, plus the engines that are going to come off wing. So hopefully, that answers the question.

The next question comes from the line of Scott Deuschle from Deutsche Bank.

Rahul, would you be able to share any of your current thinking on 2026 at this point, particularly as it relates to CES revenue growth and then margins as well. But also, I guess, just more broadly on anything you think is important for us to keep in mind as we sharpen the pencil on 2026.

Okay. Let me start, and Larry, please jump in here. As we think about '26, Scott, firstly -- and especially on the commercial side, the environment today feels better than where we were 3 months ago, right? I mean 3 months ago; we were expecting second half departures growth to be kind of flat to maybe low single digits. Now it's solidly in the 3% to 4% range. So I think the air traffic growth has stabilized. So '26 feels a little bit better than where we were a couple of months back.

But the more important part here, and this goes partially back to Seth's question a minute ago, is the basic algorithm of the demand and performance on the CES business has not changed. Installed base is growing, right, both on the wide-body and on the narrow-body side. As I said in response to Seth's question, the number of engines that need a shop visit is projected to be up double digits in '26, just based on the number of cycles that they've already flown. And that will add to the demand that's out there. And then the work scopes on wide-body, low single-digit kind of net price increase that we are expecting, which seems reasonable. So we do expect the services business to continue to our overall growth.

And then as we get into -- as you think about specifically on the '26 growth, we don't expect a repeat of the '25 performance. We don't expect '25 growth to be -- '26 growth to be kind of at the '25 levels, but it will start normalizing towards our double-digit levels that we had projected over the medium term.

And then on the new business -- new equipment business, obviously, the backlog is very strong. And we expect, call it, 2,000 LEAP engine shipments and then incremental 9X shipments here because our volume assumptions on 9X have not changed since we were together back in July. And we do expect 9X losses to kind of double on a year-over-year basis or more than double on a year-over-year basis as we think about '26. So that will offset some of the positive drop-through that we will see from services.

So -- and then DPT, I think we expect continued kind of mid-single-digit revenue growth, some margin expansion that we outlaid back in July. So you put all that together, productivity is a plus, but we're facing inflation. We have the 9X losses. So we expect kind of margin expansion opportunities to be limited here. But we are optimistic as we look at '26. We expect revenue growth, strong revenue growth, profit growth, cash, and we think of '26 kind of as a step along the way to 2028. So that's our current thinking. Obviously, you put a sharper point on it.

Larry, anything to add?

No, just maybe that, right? We're just in the process of wrapping up our strategy reviews. We'll spend the fourth quarter working through the details of the '26 budget. I think Rahul did a nice job there providing the general contours of that work that is underway. We'll take the Board through it at the end of the year, and then we'll come back in earnings and talk about '26 in more detail is basically our practice here.

But I think net-net, we're more or less in line with the '28 framework we talked about back in July with a lot of good tailwinds in terms of the demand environment and clearly, operational momentum building with FLIGHT DECK, put those 2 dynamics together, I think that's what you're going to see come January.

The next question comes from Ronald Epstein from Bank of America.

Yes. Maybe just changing gears a little bit. You called out the work you all are doing on the hybrid electric turbo generator and implications that might have for defense. And your defense business grew quite well during the quarter and also last quarter. Can you speak to maybe -- can we pull back and get some detail on kind of what you all are doing in defense and maybe what -- from an R&D perspective?

And then maybe more importantly, and this is really a question you'd asked the other way around. But what lessons have you all learned in commercial, given the size of the fleet and all the experience you have in -- with commercial engines that you can then apply in the defense world where most other defense contractors just don't have that experience base?

Well, Ronald, I can maybe take those in reverse order. A lot of the work that you see or a lot of the work that we've referenced vis-a-vis supply chain with our team in FLIGHT DECK courses through the results, both on the commercial side and on the defense side, right? Talk about a quarter where you've got revenues up 26%, profit up 75%. Of note, the defense engine output was up 83%. We hung an 8 handle on that for the second quarter in a row, I believe. That really speaks, I think, to the strength of the backlog there, maybe some of the underperformance a year ago, but the just outstanding work that the teams have done, leveraging a lot of what we've done in commercial and in turn the shared supply base.

When we look at what we could do, if you will, more commercially, I think we are keen to take advantage of the moment at the Pentagon to share some of our best practices with respect to moving at pace through development cycles, perhaps and how we think about sustainment models to be creative and be responsive to some of the investment and budgetary realities that are out there.

Ron, you know well that the investment that we've seen that we've put into the business, both government funded and our own, has been concentrated on next-gen platforms, be they sixth-gen propulsion in conjunction with the NGAP program with an eye toward both the opportunities with the Air Force and the Navy, but everything that we're doing to upgrade the Apache's and the Black Hawks with the ITAP, the T901 engine.

So there's a lot that's in progress with respect to future platforms. I think some real opportunities not only to fulfill this incredible backlog that we have in defense, but at the same time, rethink some of the business models, either internal to our customers or in collaboration with them. But here and now, making sure that we are reducing the delinquency, servicing the backlog, as Rahul mentioned a moment ago. And fortunately, the good work that's driving the results on the commercial side are helping us out a great deal on the defense side as well.

Our next question comes from the line of Robert Stallard from Vertical Research.

A quick question for Larry. You mentioned durability a number of times in your initial comments. I just wonder following up from that, how the initial performance has been on that new blade on the LEAP-1A? And how long is it going to take to roll that blade out across the installed base?

Well, we're very pleased with the performance of the durability kit on the LEAP-1A, the new blade of which is at the heart of that durability kit. We think that will drive a 2x improvement, I think 8,000 cycles in harsh environments, think 17,000 cycles in neutral environments. So, so far, so good. No surprises in that regard given the testing -- we're in the certification process on the LEAP-1B equivalent and are expecting to see that come through the pipeline in the first half of next year.

So I think, again, we're encouraged by what we are seeing in that regard. It's probably a multiyear effort, Robert, to upgrade the installed base, certainly having the LEAP-1A durability kit in production helps in that regard. We're tending to the aftermarket now. And we'll do the same thing with Boeing once we're on the other side of certification. So I'd say no surprises to date. A lot of work still ahead of us, but fundamentally encouraged by the impact that will have on durability and in turn, the performance for our customers.

Our next question comes from the line of Gautam Khanna from TD Cowen.

I was wondering if you could elaborate on where you're seeing the greatest improvement in supply chain material availability because it's been pretty consistent year-to-date. And just -- has it been any breakthroughs, or if you could just give us some color inside baseball, please?

Yes. Well, it's hard to say that we have seen a breakthrough. I really think it is the cumulative compounding effect of all the good work that's been underway with intensity and urgency over the last 18-plus months, particularly with the supply base. If you segment where we're seeing that improvement, wide-body versus narrow-body, legacy platforms versus new platforms, large suppliers that you would know by name, some on the call my own versus smaller companies you may have never heard of. I can't pull any major theme out because we depend on all of them, and this has been a universal challenge as the airframers have been ramping the aftermarket, given airline demand doing the same. And again, a third stream in the form of defense demand holding on us and our supply chain.

I think the common denominator is where we've been able to go in around these priority suppliers, which are either current constraints or anticipated bottlenecks and really getting out on the factory floor, staring down a problem on a machine, an assembly line, whether it be throughput, whether it be yields, what have you, and really driving deep problem solving, truly collaborative. Our best engineers with our suppliers' best engineers, not trying to negotiate there on the factory floor, but to identify the problem, contain it in the short term and put it in permanent corrective action going forward.

There are fits and starts that we manage in that regard every day, every week. But I think we've gotten better at that. And going forward, we want to be not just excellent in that near-term problem solving, but we want to make sure we're investing time and talent in getting out ahead of those sorts of issues, both in the medium and long-term. So as we look at readiness going into '26, let alone some of the longer-term conversations that we might have, say, with Airbus as they talk about rate 75 and the path there as Boeing now has the latitude to go up to the next rate break, making sure that we've got visibility and that we're communicating the same with our airframer partners. It's just critical, right, for our planning purposes and theirs.

So no one breakthrough other than just the relentless application with urgency of our FLIGHT DECK tools deep into the supply base wherever we have a constrained or bottleneck. It's that simple, ain't that hard.

Dustin, we have time for one last question.

The next question comes from Scott Mikus from Melius Research.

Quick question on commercial aftermarket revenue growth. I mean, historically, for the industry, it's been strongly correlated with flight activity and ASK growth, but the commercial services revenue growth has continued to reaccelerate despite the deceleration in ASK growth. So just has anything structurally changed about the business model that could cause your aftermarket growth to decouple or sustainably outperform ASK growth over the long-term? Or is it simply just strength driven by heavier work scopes, better throughput because of a healthier supply chain and the FLIGHT DECK productivity?

Yes, Scott, so I think Seth had a similar question earlier in the call. So I think some of the things that I said earlier, I'll kind of touch upon -- a lot of this -- the disconnect that we're seeing with our demand outlook and the departure growth goes fundamentally back to the pent-up demand on kind of shop visits, right? As I said earlier, shop visits in '25 are going to be below 2019 levels. The increase in work scopes that we are seeing, especially on the wide-body side, both on GE90 on GEnx as those migrate to the next level of shop visit. So that's a big piece of that.

The growth of our external LEAP channel. We spoke earlier about LEAP channel -- LEAP external shop visits being up 2x in the quarter, right? As we think longer term for the year, we expect LEAP external shop visits to be kind of in the mid-teens, slightly above that range. And as we project that to 2030, we expect that to be 30%, right? So that will drive a huge amount of spare parts growth and not only do the LEAP shop visits ramp, but also the participation of the external channel grows. And then -- you combine that with a little bit of price increase that we drive every year.

So I think those are the fundamental reasons why we are seeing this increase in demand. It's pent-up demand, work scopes and then growth of external channel.

Larry, any final comments?

Blaire, thank you. Just to close, GE Aerospace is an exceptional franchise with enduring competitive strengths and a clear path for continued value creation. Our updated outlook today reflects growing confidence in that trajectory as we deliver for our customers, our shareholders and the flying public.

We appreciate your time this morning and your interest in GE Aerospace.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.