In the past the large aircraft manufacturers would typically choose engines from two or even three different suppliers. More recently, companies like The Boeing Company (BA +4.17%) and Airbus are picking only a single source. This has important business implications because over the next decade orders for new engines could total $500 billion.
Will this hold up, and how will it affect investors of Boeing and the big three engine makers General Electric Company (GE +3.37%), United Technologies Corporation (UTX +0.94%), and Rolls-Royce Group (RYCEY +5.32%)?
A leap in pure power
A few years ago, Airbus redesigned its family of narrow-body, single-aisle jets, called the A320neo. The model was developed to allow airlines to choose between engines from either the Pratt & Whitney division of UTC or CFM International, GE Aviation's joint venture with the French company Snecma.
Pratt offers the fuel-sipping PurePower PW1000G and CFM has countered with the Leap-1A. The A320neo engine market is potentially worth up to $20 billion including spares and overhauls, and the two giants have just about split the orders 50-50 so far. No small change.
However, two other aircraft in development have been designed for exclusive engine configurations.
Boeing has decided to stay with GE exclusively and picked the Leap-1B for the upgraded 737 Max, which will start flying with passengers in 2017. The 737 is the world's best-selling aircraft to date, with over 8,000 produced. For the Max version, investors would like to see the same success that Boeing and GE have achieved so far in the small to medium range segment of the market.
Airbus chose the Rolls-Royce Trent 7000 to power its A330neo, the European company's answer to the Boeing 787 Dreamliner. The model is scheduled to go into service in 2017. The A330neo is expected to be a big hit among aircraft leasing companies as well as traditional carriers. Rolls also supplies some of the engines that drive the 787, which is sold out until 2020, so it looks like it will have a profitable presence in the medium-haul, long-range market.
For Boeing and Airbus, the decision is driven by simplicity.
The aircraft manufacturers will only have to deal with one organization now and engineering and development costs are sure to be lower. Selling aircraft to the airlines and leasers with only one engine option also might be easier and quicker.
This could translate to a boost in the bottom line at Boeing, which has been growing EPS at a brisk double-digit pace.
UTC shareholders won't be left out in the cold. As mentioned earlier, there is the potential for $10 billion in sales from the A320neo program.
And the ace in the hole for UTC is the F-35 Joint Strike Fighter program. Pratt is the exclusive supplier of the F135 engine used on all three variants of the cutting edge military jet. More than 4,000 aircraft and a corresponding number of engines and spares are expected to be built. The company also builds the lift fan engine used in the Marine "B" version enabling vertical take-off/landing, and hover.
Foolish conclusion
The recent trend in the aircraft business is toward having a single engine supplier for new models. This could benefit companies like GE and Rolls-Royce which have been chosen to be the sole source for the 737 Max and A330neo engines.
Investors of UTC shouldn't fret, even though the company hasn't been picked as the exclusive supplier for any of the newer commercial aircraft. There might be enough money to go around on the A320neo program to keep shareholders happy. And there is always the F-35 program, for which Pratt is the only engine supplier.
