GE Aerospace is soaring. After a successful spin-off from its parent company, GE, the newly independent entity is reporting stellar growth, strong orders, and a healthy backlog. On the surface, everything looks primed for continued success. But beneath the gleaming exterior, a potential phantom lurks – an unsettling inventory situation that hints at a deeper story.

The company's recent Q1 2024 earnings call paints a picture of triumph. Orders are up, driven by strong demand in both commercial and defense sectors. GE Aerospace is powering the industry's largest and youngest fleet, with their CFM engines propelling millions of passengers daily. Their aftermarket services, representing a whopping 70% of their $32 billion revenue, contribute significantly to their success. The future seems equally bright, with a $150 billion backlog and over $2 billion allocated to research and development.

Yet, amidst the celebratory tone, one recurring theme whispers a note of caution: the supply chain. While GE Aerospace acknowledges their success in meeting increased demand for services, their ability to further expand their shop visit output hinges on a critical factor – improving turnaround times.

And that's where the ghost in the machine emerges. GE Aerospace recognizes that material availability challenges are directly impacting their ability to deliver on the ramp, particularly in their shop visits. Although total engine deliveries improved by 9% year-over-year, the company admits that these deliveries fell short of their objectives due to persistent material availability constraints.

The focus on supplier sites, the deployment of hundreds of engineers, and the Gemba walks all point to a company grappling with an inventory conundrum. While FLIGHT DECK, their proprietary lean operating model, appears to be instrumental in pinpointing the constraints, the question remains – is it enough to exorcise the inventory ghost?

Here's where the hypothesis takes flight. Could this seemingly innocuous inventory challenge be the very key to unlocking GE Aerospace's true profitability potential?

Let's crunch some numbers. GE Aerospace is investing over $650 million this year to bolster manufacturing facilities and strengthen their supply chain. This commitment signals their recognition of the critical role inventory plays in achieving their growth ambitions. They've reported a doubling of free cash flow year-over-year, reaching $1.7 billion, with a strong contribution from working capital improvements. However, a closer look reveals that inventory was a headwind to this cash flow improvement.

Here's the intriguing bit. While GE Aerospace celebrates a 10% reduction in LEAP shop visit turnaround times, from 100 days last year to 90 days this quarter, their goal is an aggressive 50% reduction by year-end. Achieving this ambitious target would require a dramatic shift in material availability and efficient inventory management.

The hypothesis is this: If GE Aerospace can effectively conquer their inventory challenges, optimizing their supply chain and achieving their turnaround time goals, the company could potentially unlock a significant margin expansion opportunity.

Imagine this: Faster turnaround times lead to increased shop visit capacity. This increased capacity, coupled with a growing installed base and strong demand for services, could lead to a substantial boost in service revenue. Furthermore, a well-oiled supply chain would translate into a more efficient manufacturing process, reducing costs and further enhancing profitability.

Of course, taming the inventory ghost is a formidable task. It requires a delicate balance between maintaining safety and quality standards, optimizing production rates, and ensuring smooth material flow. But the potential reward is immense.

GE Aerospace Revenue Breakdown (Q1 2024)

Data Source: GE Q1 2024 Earnings Call Transcript

GE Aerospace has the pedigree, the technology, and the vision to define the future of flight. But their ability to truly soar to new heights of profitability might hinge on their success in vanquishing the ghost in the machine – their inventory challenge.

"Fun Fact: The GE9X engine, developed for the Boeing 777X, is the most powerful commercial jet engine ever built. It can generate over 100,000 pounds of thrust, roughly equivalent to the power of 100 Formula 1 race cars!"