GE Aerospace (NYSE:GE) delivered a strong quarter and lifted its full-year guidance across every major metric. Now the question is whether the margin compression in its core commercial engines business is temporary or structural.
Second-quarter revenue hit $13.3 billion, a 21% jump from a year ago and 12% above the consensus estimate of $11.9 billion. Adjusted EPS of $2.02 beat by roughly $0.16, or 8.5%, and rose 22% year-over-year. The headline numbers are impressive. The real story sits inside the Commercial Engines & Services (CES) segment, where services revenue grew 26% and equipment revenue jumped 30%. LEAP deliveries alone rose 24% in the quarter.
CES operating profit grew 20% to $2.7 billion, but margins contracted 160 basis points to 27.3%. The company attributed the compression to install engine growth (including the GE9X), investments, and inflation. That is a defensible explanation for a single quarter. Margin pressure from new engine programs is not new, and the GE9X ramp has been a known drag. The question is whether the 190-basis-point margin decline in the first half of 2026 signals that the mix shift toward equipment, which carries lower margins than services, will persist as the installed base grows. If services revenue continues to outpace equipment, margins should recover. If equipment growth stays elevated as airlines take delivery of new widebodies, the margin headwind could linger.
Defense & Propulsion Technologies (DPT) put in a quieter but solid performance. Revenue grew 16% to $3.4 billion, and operating profit rose 18% to $475 million. Margins expanded 30 basis points to 13.8%, driven by volume and price, partially offset by mix and inflation. DPT guidance was raised modestly: revenue now expected at low double digits, up from mid-to-high single digits, and operating profit of $1.6-$1.7 billion.
The broader guidance raise was the most emphatic signal from the quarter. Full-year adjusted EPS was lifted to $7.65-$7.85 from $7.10-$7.40. Operating profit guidance rose to $10.55-$10.75 billion from $9.85-$10.25 billion. Free cash flow guidance increased to $8.9-$9.2 billion from $8.0-$8.4 billion. CES now expects revenue growth of ~20%, up from mid-teens, and operating profit of $10.25-$10.35 billion. That is a $600-$750 million increase at the midpoint, driven by services.
Free cash flow of $3.0 billion in the quarter was up 43% year-over-year, reflecting strong earnings conversion and operational improvements under the FLIGHT DECK initiative. The company reported record internal shop visit output and a 31% increase in total engine deliveries in the first half. LEAP deliveries were up 41% in the first half, and the LEAP-1B durability kit was certified, expected to double time-on-wing.
The durability kit certification is a meaningful development. Longer time-on-wing reduces maintenance costs for airlines and improves the economics of the LEAP fleet, which should support services revenue growth over the medium term. The full cutover does not begin until 2027, so the benefit is not imminent.
What to watch next: the trajectory of CES margins. If services growth remains above 20% and equipment growth moderates, margins should stabilize and potentially expand. If the equipment ramp continues at the current pace, the margin compression could persist through 2027. The guidance raise suggests management sees enough visibility to be confident. The margin story is the one that will determine whether this beat is the start of a sustained re-rating or a peak in the cycle.