GE Aerospace (GE) shares dipped on Thursday even after the company delivered a solid second-quarter earnings beat and raised its full-year outlook. The reason? Investors are focusing less on the strong demand and more on the supply chain headaches that are keeping the company from growing even faster.

Adjusted earnings per share came in at $2.02, topping the $1.86 consensus estimate. GAAP earnings from continuing operations rose 23% to $2.30 per diluted share. Revenue hit $13.35 billion, up 21% and well above the $11.85 billion analysts were looking for. GAAP profit increased 17% to $2.80 billion, while adjusted operating profit rose 18% to $2.75 billion.

But here's where the story gets interesting: adjusted operating margin fell 130 basis points to 21.7%. That drop reflects higher costs tied to more installation engines, ongoing investments, and inflation. In other words, GE Aerospace is selling a lot, but it's costing more to deliver.

Total orders climbed 17% to $16.53 billion, and the backlog now sits at over $210 billion. That's a lot of future revenue already locked in.

Commercial Services: The Engine of Growth

The commercial engines and services segment was the star, with revenue up 27% to $9.73 billion. Services revenue rose 26%, while equipment revenue jumped 30%. Operating profit for the segment increased 20% to $2.66 billion, but margin contracted 160 basis points to 27.3%—again, the cost of doing more business.

First-half commercial services revenue grew 32%, and engine deliveries rose 31%, including a 41% jump in LEAP engine deliveries. Those are the engines powering many of the new narrow-body jets from Boeing and Airbus.

Defense Holds Its Own

The defense and propulsion technologies segment also put up solid numbers. Revenue increased 16% to $3.44 billion, and operating profit rose 18% to $475 million. Margin expanded 30 basis points to 13.8%. Defense & Systems revenue was up 12%, while Propulsion & Additive Technologies revenue grew 23%.

Cash Flow and Guidance: Up, Up, Up

Cash flow was a bright spot. Operating cash flow increased 39% to $3.26 billion, and free cash flow rose 43% to $3.03 billion. Free cash flow conversion hit 143%, meaning the company is turning earnings into cash efficiently.

GE Aerospace ended June with $9.3 billion in cash, or $10.3 billion including short-term liquidity investments. Total borrowings were $19.2 billion, and the company bought back $2 billion of its own shares during the quarter.

Management raised full-year adjusted EPS guidance to $7.65 to $7.85, up from $7.10 to $7.40 and above the $7.58 analyst estimate. Operating profit guidance was lifted to $10.55 billion to $10.75 billion from $9.85 billion to $10.25 billion. Free cash flow is now expected at $8.9 billion to $9.2 billion, up from $8 billion to $8.4 billion.

The Real Story: Supply, Not Demand

During the earnings call, management painted a picture of a business that's firing on all cylinders—but hitting a ceiling. They said aftermarket demand remains more resilient than expected, with customer behavior unchanged and parked CFM56 aircraft declining since March.

The company described itself as supply-constrained rather than demand-constrained. Spare parts delinquencies rose 20% sequentially, meaning GE Aerospace is struggling to get parts out the door fast enough. Maintenance, repair, and overhaul (MRO) capacity is oversubscribed.

Executives made it clear: supply chain capacity and production constraints—not weakening demand—are the primary factors limiting how quickly the company can grow. More than 95% of third-quarter spare parts revenue is already in backlog, and planned engine removals exceed the full-year shop visit outlook by more than 40%. That gives the company strong visibility into 2027.

Management expects LEAP shop visits to grow at roughly a 25% annual rate through 2030, while the external service channel expands to about 30% of the portfolio. CEO H. Lawrence Culp Jr. also noted that GE Aerospace has several months of GEnx engines sitting at Boeing's Charleston facility—a sign that even when GE builds them, the customer isn't always ready to take them.

Looking ahead, management expects free cash flow to grow with earnings, though cash conversion should normalize over time. They also warned that persistent supply chain constraints and a sharp further rise in fuel prices could weaken air travel demand.

Shares were down 3.59% at $347.41 at the time of publication.