June 19 (Bloomberg) -- Boeing Co.’s 787 Dreamliner, absent from the Paris Air Show this week after two years of delays, may not be the jetmaker’s biggest problem.

Airbus SAS’s bigger A350 has won almost 500 orders, 10 of them at the show, forcing Boeing to turn its attention to the market for bigger planes with more than 300 seats. The Chicago- based company is considering an upgrade of its 15-year-old 777. Airlines say it should spend billions on a new aircraft instead.

“What Boeing makes next is the big question,” said Doug Runte, a New York-based analyst at Piper Jaffray & Co. who estimates the U.S. company would need to spend $15 billion to develop a new model. “Airplanes require a huge investment of money and effort. If you get it wrong, the consequences are enormous and you have to live with it for a very long time.”

Boeing, which said it had “bet the company” in the 1960s when spending twice its market value on the 747 jumbo jet, faces a conundrum after adopting a rival strategy to Toulouse, France- based for the long-haul plane market.

Airbus opted to build its 555-seat A380 superjumbo on the basis that surging economic growth would spur demand for bigger planes. Boeing argued that the increasing complexity of global business travel required smaller aircraft flying direct to a greater number of cities. It came up with the 260-seat 787, which is due to make its first flight this month.

Dreamliner Ahead

While both planes have proved popular, the Dreamliner has the edge in sales, ranking as the world’s fastest-selling aircraft with 865 contracts worth about $138 billion at list price compared with the A380’s 200 valued at $65.4 billion.

Boeing, though, may become a victim of its own success. The Dreamliner proved so popular that when Airbus offered a similar plane its airline customers said they didn’t need one and lobbied for a bigger aircraft altogether. That resulted in the A350, a model that has attracted 493 orders worth $115 billion.

“The 787 had considerable early sales success, which forced Airbus to respond,” Raymond Jaworowski, senior aircraft analyst at Newtown, Connecticut-based Forecast International, said in a note from the Paris show. “However, the A350 is more than simply a 787 competitor. Airbus has positioned it to cover a broad spectrum of the widebody market.”

The A350 is scheduled to enter service in 2013, giving Airbus two 300-plus seat models less than six years old to range against the 777, which debuted in 1995, the 767, dating from 1982, and the 747 jumbo, an aircraft that was delivered to airlines the year after man first landed on the moon.

Maturing Model

Boeing’s Scott Carson, who runs the commercial airplanes unit, said this week in Paris he’s concerned that the “maturing” A350 “will create some market expectations” as it gets closer to flying and Airbus develops new versions.

Carson said Boeing will respond with either a 777 incorporating a new wing design that would improve efficiency and bring down operating costs, an enlarged Dreamliner, or a completely new aircraft.

Airbus Chief Operating Officer John Leahy said Boeing has been forced to review its strategy because the A350 will be 25 percent cheaper to fly than the older 777. He spoke after the company announced 58 firm orders at the Paris show, including an A350 contract from AirAsia X of Malaysia.

“Scott didn’t just wake up one morning at the air show and decide that he had $5 billion burning a hole in his pocket, so let’s just re-wing the 777,” Leahy said today in an interview in Paris. “It’s only when being faced with a threat that you want to spend money like that. He’s going to lose the market if he doesn’t do something.”

Show Contracts

Airbus’s Paris orders were worth $6.4 billion at list price. The unit of European Aeronautic, Defence & Space Co. also announced 69 commitments worth $6.5 billion, including two A350s for Vietnam Airlines. Boeing won seven commitments for 777s from Turkish Airlines and two firm orders for other planes.

Airbus said it has kept pricing “firm” even amid the global recession, though neither manufacturer would offer projections for deliveries next year and both said they spent much of the show reassuring suppliers about build rates.

Boeing will evaluate additions to its aircraft lineup for the next decade in terms of customer demand, competing products, available technology and the resources available, Seattle-based spokesman Jim Proulx said by e-mail.

Emirates Lukewarm

Tim Clark, CEO of Gulf carrier Emirates, which will become the biggest 777 operator later this year, has little interest in a larger-winged version of a plane with a fuselage made from metal rather than the light-weight composites used in modern designs, he said June 16 at the air show.

Clark, who has also dismissed Boeing’s proposed 310-seat 787-10 as likely to be underpowered, said in Paris that a clean- paper design is the only way for the U.S. company to go. Even then, Boeing needs to act before Airbus offers a stretched A350 to narrow the capacity gap with the A380, a move that would leave Boeing with little room for maneuver.

“Given the challenging economic environment, the sector will be forced to set priorities and make difficult trade-offs about what programs they can really afford,” David Raistrick, a manufacturing specialist at Deloitte LLP, said in a note.

Standing in the way of a new widebody is the multi- billion-dollar bill that could harm the company if the plane doesn’t sell. Boeing must also decide whether pouring its energies into building a successor to the 777 will diminish its ability to compete with Airbus when the pair come to design a new generation of single-aisle planes.

Overlap Risk

Both companies say they plan to replace their A320 and 737 short-haul jetliners in a little over 10 years, suggesting they will need to ramp up spending on research and development from the middle of the next decade. That may overlap with construction of a new Boeing widebody.

“That’s part of the problem,” said Airbus’s Leahy. “That’s the tough call they’ve got and I guess it’s why a 777 derivative is tempting. You’ve got all these other things you need to do and you say, if I could just get away with five or six billion dollars and come up with a good derivative that would hold my place against the A350, that would be the ideal solution. But history has shown that rarely ever works.”

While Boeing’s 737 is the world’s best-selling aircraft and still in production after 40 years following the introduction of so-called Next Generation models in 1999, the passenger version of the latest 747-8 jumbo has won orders from only one airline, Deutsche Lufthansa AG.

Boeing Response

Boeing will reach a decision on its response to the A350 in the next one or two years after studying the competitiveness of a planned 350-seat version of the new Airbus, spokesman John Dern said in Paris.

Should Boeing opt for a re-winged 777 it could be first to the market with a single-aisle replacement, though any new plane will require a “vast improvement” in fuel efficiency based around new engine technology, Morgan Stanley analyst Rupinder Vig said.

“If Boeing suddenly decides to come out with something earlier, in around 2015, Airbus has told us they’d have to do something very quickly,” he said. “But I think both of them now are comfortable with a later date as they’re grappling with their own problems in the bigger-plane category.”

To contact the reporters on this story: Andrea Rothman in Paris at aerothman@bloomberg.net; Susanna Ray in Paris at Sray7@bloomberg.net

Last Updated: June 19, 2009 13:37 EDT