Airbus A320 tweak puts pressure on Boeing to upgrade

Airbus SAS's move to offer new engines for its A320 aircraft series is set to intensify competition with Boeing Co. in the biggest part of the civil- aviation market and may force its rival to follow suit.

Airbus unveiled its decision today after the two companies circled each other for months over who would make the first move. Boeing panned the announcement as an “attempt to reach the superior performance” of its own 737 aircraft. Aviation experts said the Chicago-based company may have no option but to follow in Airbus's footsteps if it wants to remain competitive.

“There's a 95 percent chance that Boeing, too, decides to re-engine,” said Yan Derocles, an analyst at Paris-based Oddo Securities, who advises investors to buy shares of Airbus parent European Aeronautic, Defence & Space Co. “They don't have any other choice. They can allow themselves six months or so to see what response Airbus gets before making a definitive decision.”

Success in the single-aisle market determines the pecking order in the industry because both Airbus and Boeing derive the bulk of their earnings from these aircraft. Airbus made its name with the A320, introduced in 1988 with novelties such as fly-by- wire electronic handling, and has racked up 6,745 orders for the series, to leapfrog Boeing as industry leader in 2003.

Airbus predicted today that it can sell as many as 4,000 of the modified A320 aircraft over 15 years. Airbus will make available two new engine choices on the model that would increase fuel efficiency by 15 percent, and can start delivering the new versions starting in early 2016. Engineering the changes will probably cost no more than $2 billion, Airbus predicts, a fraction of the money a new aircraft would devour.

Both the A320 and 737 are twin-engine models that seat about 125 to 185 people. List prices for each plane range from about $65 million to $95 million, depending on the version. A successor to the A320 won't come before the middle of next decade because materials won't be advanced enough before then to justify the development expense, Airbus has argued.

Boeing retains the ability to add new engines to its 737 airliner or develop a new model, the company said today in an e- mailed statement. The existing 737 will achieve a 2 percent fuel saving from the middle of next year, Boeing said. By 2012 consumption will have improved by 7 percent since the model's introduction, it said.

“If indeed the Airbus product offering offers a 15 percent more fuel efficient aircraft, then Boeing has to respond,” Henri Courpron, chief executive officer of Los Angeles-based International Lease Finance Corp., the largest lessor by the value of its aircraft portfolio, said in an interview.

Unlike the A320, the Boeing 737 now only comes with a single engine, made by the CFM International joint venture of General Electric Co. and Safran SA. Fitting different engines under the wing would be more challenging for the Chicago-based manufacturer because the aircraft already sits so close to the ground that the landing gear would need to be redesigned to allow clearance for the newer, bigger engines.

Jim Albaugh, CEO of Boeing Commercial Airplanes, said in an interview in October that the business case for new engines “is not as compelling as we'd like to see,” even after Boeing customers including Southwest Airlines Inc. and Ryanair Holding Plc urged manufacturers to offer powering options that would increase fuel efficiency.

Airbus took its time to decide on the new plane, as it's already working on the A350 wide-body airliner that will enter service in 2013 and is trying to increase production on its A380, which has suffered delays, CEO Tom Enders said. Engineers needed for the revised A320 will come from the A380 and A400M programs, and won't be diverted from the A350, he said.

The new A320, dubbed Neo for new-engine-option, promises cash operating costs that are 8 percent lower than those of the current model, Sales Chief John Leahy said in an interview. Customers will likely wait until next year before ordering the new variant, which will cost $6 million more.

“It was a no brainer,” Leahy said by telephone. “We know the business case is excellent.”