Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ======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]]. ===== The Investment Thesis: More Than Just Metal ===== 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 "Razor-and-Blades" Model in the Sky ==== 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. ==== A Fortress-Like Moat ==== 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. ===== Risks and Considerations for the Value Investor ===== Despite the powerful business model, no investment is without risk. Investors must be aware of the industry's vulnerabilities. ==== Cyclicality ==== 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. ==== Technological and Environmental Disruption ==== 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. ==== Geopolitical and Supply Chain Risks ==== 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.