updated 4/6/2004 5:55:40 PM ET 2004-04-06T21:55:40

Boeing Co. chose General Electric Co. and Rolls Royce PLC to supply the engines for its planned new 7E7 Dreamliner airplane, striking deals that could be worth billions of dollars to the two companies.

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The announcement Tuesday was a blow to Pratt & Whitney, the No. 3 commercial engine maker, who analysts had said needed the business the most. Richard Aboulafia, an analyst with the Teal Group, had called the contract Pratt’s “best chance for a renaissance.”

The contracts to supply the engines could be worth a total of $40 billion if Boeing’s projections for the airplane market are correct, said Paul Nisbet, an analyst with JSA Research.

The fuel-efficient, 200-plus passenger jet is slated to compete with rival Airbus’ A300 and A310 airplanes and to replace Boeing’s older 757 and 767 airplanes. It is expected to fly in 2008.

Mike Bair, Boeing’s 7E7 senior vice president, said the newly designed engines “will enable the 7E7 to fly higher, faster, farther, cleaner, quieter and more efficiently than comparable airplanes.”

The decision also could pave the way for Boeing’s Seattle-based commercial airplanes division to announce a first customer for the 7E7. Boeing has yet to announce any takers for the 7E7, which it formally offered for sale in December. Analysts said airlines may have been waiting for the engine announcement before deciding whether to buy the new plane.

Boeing has said it believes there could be a market for 2,000 to 3,000 airplanes similar to the 7E7.

“It could be a very big deal, depending of course on the success of the 7E7,” Nisbet said.

Aboulafia said the engine makers could expect as much as $1 billion in revenue each year from the 7E7 deal.

It’s also a major undertaking for the engine companies. Nisbet estimated that a staff of 100 to 200 engineers toiled for months to just win the bid. After that, the real work — and expense — of building the engine begins.

Boeing has said it would offer the planes at a list price of around $120 million, comparable to the company’s 767-300ER. Executives expect the relatively modest price to be a big selling point.

Airlines typically pay far below list price for an airplane, although Aboulafia said the company may not be willing to discount as much on the 7E7 since the price is already so low.

Another scenario, which Aboulafia considers more likely, is that Boeing will instead push its suppliers to cut costs as much as possible so customers can be lured by those savings. Such a model — pioneered by Wal-Mart Stores Inc. — would squeeze profit margins for everyone, including the engine makers.

Other analysts agree.

“It’s difficult for the suppliers and for Boeing because to be competitive that airplane has got to be kept at a minimum price,” Nisbet said.

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