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Analysis: Boeing engine move is key Airbus win

By Tim Hepher

PARIS (Reuters) - 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 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.

What is less certain and potentially more troubling for Airbus is what Boeing decides to do with resources that will theoretically be freed up. Developing a re-engined jet will cost Boeing about a fifth of the $10 billion needed for a new one.

Boeing's climbdown on the 737 leaves it free to come back more strongly in the fiercely contested wide-body market for larger jets including the Boeing 787 or 777 and Airbus A350.

The 787 has been hit by delays. But assuming no further major surprises, Boeing faces a more benign set of options on R&D than Airbus, which remains constrained by bottlenecks.

Analysts speculate Boeing may ease up on R&D spending to reward investors for staying loyal as it battled production problems, build a cushion against mounting overruns on a U.S. air tanker project or invest in strengthening its attack against Airbus in the market for long-distance jets.

Boeing is keen to develop a 300-seat stretched version of the 787 called the 787-10 to stamp out a resurgence in popularity of the older A330-300 and will want in due course to refurbish or redesign its successful 777 mini-jumbo.

In the short term, the result of Boeing's decision to match Airbus in re-engining is that the planemakers once again have a more or less even playing field in the key narrowbody segment.

In the realpolitik of aircraft design, the interests of the world's dominant planemakers are more or less aligned.

After flirting with new airplanes, with Boeing advancing the idea furthest, both companies now have an interest in leaving their more radical designs in the bottom drawer to give their re-engined planes a decent economic life span, usually 10 years.

Boeing originally targeted 2019 for a new plane, then 2022, compared with 2017 for the revamped 737, two sources said. Analyst Scott Hamilton said that 2022 date could be quietly deferred, as Airbus has done with its own ambitious projects.

Doing otherwise could eat into the value of the very aircraft both firms have sold to American and now hope to sell to Delta and United -- something for which U.S. airlines would likely offer little thanks and even fewer orders.

(Editing by Phil Berlowitz)

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