(Reuters) - Pratt & Whitney said on Wednesday that it will spend $1.5 billion (953,000 pounds) to buy Rolls-Royce Holding Plc's (RR.L) share of the International Aero Engines consortium that produces the engine that powers the Airbus EAD.PA A320 plane family.
The two engine makers also said they will form a partnership to develop engines for mid-size aircraft that in future years will replace new, revamped versions of the Airbus A320 and Boeing (BA.N) 737 narrow-body jets.
Pratt, a unit of United Technologies Corp (UTX.N) and Britain's Rolls Royce will hold an equal share in this new venture, which will focus on geared turbofan technology and study open rotor technology and other engine configurations.
"The buyout of Rolls-Royce is not unexpected; the stunning part of this announcement is the creation of a new joint venture to go for the heart of the market with an initial focus on the geared turbofan," said Seattle-based aerospace analyst Scott Hamilton.
The move crystallizes a spat between the two leading members of one of two trans-atlantic alliances that have quietly dominated the market for aircraft engines for more than a quarter of a century.
International Aero Engines, founded in 1983 and based in Glastonbury, Connecticut, brought together Rolls-Royce and Pratt & Whitney and German and Japanese partners to provide a four-nation alternative to CFM International, a French-American joint venture between General Electric Co (GE.N) and Snecma, now part of French state-controlled group Safran (SAF.PA).
The two alliances compete to power Airbus A320 passenger jets, while CFM has a monopoly on Boeing's rival 737, the world's most-sold aircraft. Such aircraft are the backbone of most airline fleets, generating many thousands of engine sales and a thriving long-term spare parts business.
But Pratt & Whitney and Rolls-Royce disagreed over the next step as Pratt took a gamble on a new engine known as the Geared Turbofan.
Airbus's decision to offer the new Pratt geared turbofan engine and a competing CFM model on a revamped version of its A320, called the neo, produced a surge of sales and prompted Boeing this year to announce plans to sell a "re-engined" version of its 737 called the MAX. But Rolls vetoed the engine being sold through IAE.
Both companies, however, denied that IAE, which has more than 4,500 engines in service and about 2,000 on order, had ended in divorce.
"IAE has not resulted in divorce. Rolls-Royce is going to remain a very full partner of IAE for the next 15 years at least," said Mark King, president of civil aerospace at the U.K. company.
"The two companies are saying we want to work together in the future despite the fact that we are not participating in the (A320) neo," he told reporters on a conference call.
As part of the IAE restructuring, Rolls-Royce will continue to make engine parts and assemble 50 percent of the V2500 engine that powers the A320 family. Rolls will also get payment for each hour flown by the current fleet of V2500-powered aircraft for 15 years.
"We have found a way to continue working together currently and then plan for the future," said Todd Kallman, president for commercial engines and global services at Pratt & Whitney.
Rolls-Royce and Pratt & Whitney have set out different visions of what the next generation of engines to be seen from the middle of next decade might look like, with the U.S. company expressing little interest in the Open Rotor or unducted fan concept favoured by Rolls-Royce. This would see engines with twin rows of visible fan blades rather than powerplants that are fully encased inside engine housings.
Rolls and CFM both believe such engines will mark a clean break from current technology and will be far more efficient, but they say about a decade of work is needed to develop the required technology and overcome problems like noise.
Though the buyout makes Pratt the majority shareholder in IAE, the company said it intends to offer a portion of the Rolls shares it is buying to its other IAE partners: Germany's MTU Aero Engines and Japanese Aero Engines Corp.
"This looks like a good deal for both parties, allowing them to focus on their current engine priorities (the Geared Turbofan for Pratt, and the Trent for Rolls), whilst laying the groundwork for the successor to the V2500 on the next generation of narrow bodies in the middle of the next decade," RBC Capital Markets analyst Robert Stallard wrote to clients.
Rolls-Royce will also make a "modest financial investment" in the Pratt geared turbofan that is an option for the Airbus A320 neo narrowbody.
Pratt's geared turbofan engine, which also powers the all-new Bombardier (BBDb.TO) CSeries jet, has secured more than 1,000 orders.
Reporting by Karen Jacobs in Atlanta and Tim Hepher in Paris, editing by Matthew Lewis and Bob Burgdorfer