Airbus Plan for A320 Engine Puts Pressure on Boeing to Upgrade Its 737 Jet

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.

Airbus unveiled its decision today after the two companies circled each other for months over which would act first on a new single-aisle jet or upgraded engines. Boeing isn’t committing yet to a new engine for its 737 or a replacement aircraft, Nick West, a spokesman said in an e-mail.

Success in selling narrow-body jets determines the industry’s pecking order because Airbus and Boeing derive most of their earnings from the planes. Analysts are now watching for the response from Chicago-based Boeing, which was leapfrogged by Airbus in 2003 as the global leader in airliner deliveries.

“We do not look for a formal announcement as Boeing prefers to leave its options open,” Julian Mitchell, a Credit Suisse analyst in New York, said in a note today. Instead, Boeing is likely to unveil an all-new successor to the 737 “in 2-3 years’ time,” Mitchell wrote.

Airbus said it will make available two new engine choices on the A320 to increase fuel efficiency by 15 percent, and can start delivering the new versions starting in early 2016. Making the changes will probably cost no more than $2 billion, Airbus predicts, a fraction of the money a new aircraft would devour.

Twin-Engine Rivals

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 the next decade because materials won’t be advanced enough before then to justify the development expense, Airbus has said.

Boeing last month began testing small tweaks to its existing 737 that will make the plane 2 percent more fuel efficient by the middle of next year.

“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 option, made by the CFM International joint venture of General Electric Co. and Safran SA.

‘95 Percent Chance’

“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.”

Fitting different engines under a 737’s wing would be more challenging for Boeing because the aircraft already sits so close to the ground that the landing gear would need to be redesigned to allow enough clearance.

Boeing is “happy” to await engine developments from GE and Pratt & Whitney since it has an order backlog of more than 2,100 of its latest-model 737s, said Peter Arment, a Gleacher & Co. analyst. The planemaker “wants a bigger and much more capable narrow-body aircraft, which can only come from a clean- sheet design,” he said in a note.

‘Not as Compelling’

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 customers including Southwest Airlines Inc. and Ryanair Holding Plc urged manufacturers to offer options to increase fuel efficiency.

“We expect that Boeing will have to respond, although Boeing has been very negative about the likelihood of it re- engining the 737,” said Douglas Harned, a New York-based analyst with Sanford C. Bernstein & Co., in a note today. “Despite Boeing’s objections, we continue to see the best option for Boeing as re-engining.”

Harned recommends buying Boeing shares, as do the analysts at Gleacher and Credit Suisse.

Airbus made its name with the A320, introduced in 1988 with novelties such as fly-by-wire electronic handling. The 737 entered commercial service in 1968 and is the world’s most widely flown airliner.

EADS gained 22 cents, or 1.3 percent, to 17.48 euros in Paris. Boeing rose $1.95, or 3.1 percent, to $65.72 at 4:02 p.m. in New York Stock Exchange composite trading.

To contact the reporters on this story: Andrea Rothman in Paris at aerothman@bloomberg.net; Juliann Neher in Washington at jneher1@bloomberg.net

To contact the editors responsible for this story: Benedikt Kammel at bkammel@bloomberg.net Ed Dufner at edufner@bloomberg.net

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