LEAP Engine

The LEAP (Leading Edge Aviation Propulsion) engine is a modern high-bypass turbofan engine that has become the workhorse of the single-aisle commercial jet market. Developed and manufactured by CFM International, a 50/50 joint venture between General Electric (GE) of the United States and Safran of France, the LEAP engine represents a massive leap in technology. It was designed to be the successor to the incredibly successful CFM56 engine, which powered thousands of aircraft for decades. The LEAP engine's primary claim to fame is its significant improvement in fuel efficiency—around 15% better than its predecessor—along with reductions in noise and emissions. This efficiency makes it a critical component for the world's most popular aircraft, the Airbus A320neo family and the Boeing 737 MAX, and, as a result, a product of immense interest to investors in the aerospace and industrial sectors.

You can't buy shares in the LEAP engine itself or even in its manufacturer, CFM International. However, because CFM is a joint venture, the engine's staggering success flows directly to the bottom lines of its two publicly traded parent companies: GE and Safran. For a value investor, understanding the LEAP program is key to analyzing these two industrial giants. The engine's value proposition is built on three powerful pillars.

In the lucrative market for single-aisle jet engines, there are essentially only two games in town: the LEAP engine and its rival, the Pratt & Whitney PW1000G (also known as the Geared Turbofan).

• Airbus A320neo: Airlines choosing the A320neo family can select either the LEAP or the PW1000G. The LEAP has consistently maintained a market share of around 60%.
• Boeing 737 MAX: The LEAP engine is the exclusive powerplant for the entire Boeing 737 MAX family. Every single 737 MAX built comes with two LEAP engines.

This duopolistic market structure, with an exclusive position on one of the two major platforms, creates a formidable competitive moat. The barriers to entry for creating a new jet engine are astronomically high, requiring decades of research and billions of dollars. This ensures that GE and Safran will be reaping the rewards from this program for many years to come.

The LEAP engine is a perfect illustration of the razor-and-blades business model. The real money isn't just in the initial sale of the engine (the “razor”), which is often sold at a slim margin or even a loss to secure the deal. The true profit center is the decades-long stream of high-margin aftermarket revenue (the “blades”). Jet engines are incredibly complex machines that operate in extreme conditions and require regular, mandated maintenance, repairs, and replacement parts over their 25 to 30-year lifespan. CFM locks airlines into long-term service agreements (LTSAs), securing a predictable, recurring, and highly profitable revenue stream for decades after the initial engine sale. For an investor, this transforms a one-time capital goods sale into a business that looks more like a subscription service, generating reliable cash flow year after year.

For any airline, fuel is one of the largest and most volatile operating expenses. The LEAP engine's ~15% fuel efficiency improvement is not just a technical specification; it's a direct solution to a major business problem. It translates into millions of dollars in savings per aircraft per year. This powerful economic incentive is the primary reason for the LEAP engine's widespread adoption and massive order backlog, which numbered over 20,000 engines at its peak. This backlog provides investors with exceptional visibility into future revenues for GE and Safran's aerospace divisions.

While the LEAP program is a crown jewel, it's not without risks. Investors should be aware of the following:

• Execution Risk: Meeting the demand for thousands of engines has created immense pressure on the supply chains of both GE and Safran. Any production stumbles or quality control issues can lead to costly delays for both the manufacturers and their airline customers.
• Geopolitical and Economic Sensitivity: The aviation industry is highly cyclical and vulnerable to economic downturns, trade wars, and black swan events like pandemics, which can curb the demand for new aircraft and air travel, directly impacting engine orders and service revenue. The lengthy grounding of the Boeing 737 MAX, for example, caused a significant disruption to LEAP production and deliveries.
• Long-Term Reliability: While the LEAP has proven more reliable than its direct competitor in its early years, any unforeseen long-term technical issues that increase maintenance costs could damage its reputation and financial performance.