Analysis: Boeing engine move is key Airbus win

Boeing 737s

Airbus is savoring a victory that tastes even sweeter to the European company than a $23 billion deal to sell 260 aircraft to American Airlines: it has just forced Boeing to climb down over product strategy.

After years of finding itself repeatedly outflanked by its competitor in the market for large intercontinental jets, Airbus has effectively decided where its arch-rival should spend its money in the $2 trillion market for best-selling smaller jets.

The breakthrough came as Boeing shelved the option of making an all-new 737 short-haul jet and followed Airbus by choosing the cheaper and quicker route of new engines, unlocking its own share of an American order for a total 460 jets.

The move restores balance to a duopoly after months in which Airbus has clocked up over 1,000 sales of its A320neo, a similar model to the 737 due to be equipped with fuel-saving engines.

Despite confidently predicting Boeing would do exactly this, Airbus may have worried more than it cared to admit that Boeing would build an all-new airplane. The threat had severe implications for its top-selling product and cash cow, the A320.

"Obviously it is not in Airbus's interest that Boeing should invest in a new airplane that makes the A320 look a little old," said a source familiar with the European company.

Airbus Chief Executive Tom Enders denied the firm had been running scared, but clearly felt Airbus took control of events.

"No, not scared ... but it is always good to be the leader not the follower. (Boeing) played defense and I much prefer to play offense and that worked out very well," he told Reuters.

By piling pressure on Boeing with sales of the A320neo, analysts say Airbus has dodged a nasty bullet. Some, however, question how aggressive it had to be on prices to achieve this.

"The worst case scenario for Airbus was a new Boeing airplane that was a good one and available in 2019 -- it would have made the A320neo far less attractive in the early 2020s," said aerospace analyst Robert Stallard of RBC Capital Markets.

For many in the industry, these calculations eclipsed even the $40 billion jet order which helped Wall Street on Wednesday.

"Airbus forced Boeing's hand. They made Boeing do exactly what they wanted them to do," said an industry official with detailed knowledge of the rivalry between the companies.

It sheds light on a little-discussed battle waged by the two planemakers behind their daily struggle for market share -- how to direct the R&D budget of the other side to where you prefer it to be spent, and away from where you feel most threatened.

"There are some things you want the other side to invest in so that they don't invest in others," said one strategist.

Aware of growing threats from new competitors in Canada and China" href="http://www.reuters.com/places/china">China but unable to afford an all-new plane, Airbus launched the A320neo last year with much-improved engines. Having done so, it could not afford to sit back while Boeing built an even bolder and more efficient plane that rendered the A320neo obsolete.

"Their thinking was if Boeing does the new aircraft, how do we get them to re-engine. So they swamped the market with 1,000 orders," said an industry official with ties to both suppliers.

Airbus argues the torrent of orders reflects genuine demand, especially in emerging economies where it is most strong.

Boeing, on the other hand, will have been anxious to avoid repeating the shock loss of a 100-plane deal in 1992, when it was unable to convince United Airlines it was committed to modernizing an earlier type of 737. It ended up doing so anyway.

R&D FLEXIBILITY

By winning the poker game over re-engining, Airbus has for now prevented Boeing undermining the A320neo at a stroke.