Jet Engine

A Jet Engine is a complex propulsion system that generates thrust to power aircraft. For an investor, however, it's much more than a marvel of engineering; it's the centerpiece of one of the most powerful business models in the industrial world. The industry is dominated by a small oligopoly of giants—namely General Electric (GE Aerospace), Rolls-Royce, and Pratt & Whitney (a subsidiary of RTX Corporation). These companies operate what is essentially a “razor-and-blades” model on a colossal scale. The engines themselves (the “razor”) are often sold to airlines at very low margins, or sometimes even at a loss. The real, long-term profit (the “blades”) comes from decades of lucrative, high-margin service agreements, repairs, and spare parts sales. This creates an incredibly sticky customer relationship and a predictable stream of recurring revenue, a characteristic highly prized by value investors like Warren Buffett.

Understanding the jet engine business is to understand the power of a deep, unbreachable Economic Moat. The product's lifecycle and the structure of the market create a uniquely defensible and profitable enterprise for those who can afford the price of entry.

The genius of the jet engine business model lies in the aftermarket. An engine can remain in service for over 30 years, requiring multiple major overhauls and a constant supply of proprietary parts.

• Initial Sale: An airline buys a new fleet of Airbus or Boeing jets and selects an engine option from one of the “big three.” This sale locks the airline into a multi-decade relationship.
• Long-Term Service Agreements (LTSAs): Most engines are sold with an LTSA, often called “power-by-the-hour” contracts. The airline pays the manufacturer a fixed fee for every hour the engine is in operation. In return, the manufacturer covers all maintenance, repairs, and overhauls. This transforms unpredictable capital outlays for the airline into a predictable operating expense, while giving the manufacturer a steady, annuity-like cash flow.
• High-Margin Aftermarket: The parts and services provided under these agreements carry extremely high profit margins. The manufacturer has a virtual monopoly on its own aftermarket, as using uncertified, third-party parts is a major safety and regulatory risk.

The competitive advantages enjoyed by engine manufacturers are immense and multifaceted, creating some of the widest moats in the business world.

• High Barriers to Entry: The cost to design, test, and certify a new jet engine runs into the tens of billions of dollars and can take over a decade. The extreme R&D, immense Capital Expenditures, and punishingly strict safety regulations from bodies like the FAA and EASA make it virtually impossible for new competitors to emerge.
• Intense Switching Costs: Once an engine type is certified for a specific airframe (e.g., a GE engine on a Boeing 787), it cannot be swapped for a competitor's engine. The airline is locked in for the entire 20-30 year life of that aircraft. The only way to switch is to buy a whole new plane.
• Vast Intellectual Property: Decades of research have resulted in a treasure trove of patents and trade secrets covering metallurgy, aerodynamics, and combustion technology that are impossible to replicate.

Despite the powerful business model, no investment is without risk. Investors must be aware of the industry's vulnerabilities.

The aerospace industry is highly cyclical. The profitability of engine manufacturers is directly tied to global air travel.

• Economic Downturns: Recessions reduce travel demand, causing airlines to fly less. Fewer flight hours mean less revenue from “power-by-the-hour” service agreements.
• Black Swan Events: Unforeseeable events, such as the 9/11 attacks or the COVID-19 pandemic, can ground fleets worldwide, causing aftermarket revenues to plummet.

The push for a greener, more sustainable aviation industry presents both opportunities and long-term threats.

• Next-Generation Engines: Manufacturers are in a constant race to develop more fuel-efficient engines. A misstep on a new engine program can cost billions and cede market share for a generation.
• Sustainable Aviation: The long-term transition towards alternative propulsion, like hydrogen or electric, could eventually disrupt the entire industry. Investors must monitor the progress of SAF (Sustainable Aviation Fuels) and other green technologies, as they will shape the future of flight.

Jet engines are built using highly complex global supply chains.

• Specialized Materials: The production relies on specialty metals and components sourced from around the world.
• Global Tensions: The Supply Chain is vulnerable to trade wars, sanctions, and geopolitical instability, which can disrupt production and increase costs.