Airbus to revamp aviation's A320 workhorse

PARIS (Reuters) - Airbus turned up the heat on Boeing Co and emerging competitors for its most popular aircraft by pledging to upgrade its A320 jetliner with state-of-the-art engines offering 15 percent fuel savings.

The world's largest aircraft maker said on Wednesday it would invest just over 1 billion euros ($1.3 billion) in the "A320neo" project to improve efficiency and cut harmful emissions and noise. Now, the aviation world awaits word from rival Boeing on whether it will upgrade its competing 737 narrow-body.

"Boeing really needs to watch this," said Richard Aboulafia, an aerospace analyst with the Teal Group. "They might have to play catch-up if they start losing customers."

The new Airbus planes, with upward-slanting wingtips, will look almost identical to existing aircraft but have larger and more efficient engines from either Pratt & Whitney, a unit of U.S. manufacturer United Technologies Corp , or CFM International, a joint venture between U.S.-based General Electric Co and French group Safran SA .

First delivery of the overhauled jet would come in 2016.

Shares in Airbus parent EADS rose 1.3 percent in Paris, while United Technologies shot up 4 percent and GE rose 3 percent amid a broader U.S. market rally. Boeing was also up 3 percent on the New York Stock Exchange.

The long-awaited Airbus decision, reported by Reuters on Tuesday, hits back at Canada's Bombardier Inc , whose CSeries leads a field of newcomers aiming to challenge Airbus and Boeing for a market worth $1.7 trillion over 20 years.

The Airbus move comes two weeks after China announced the first orders for the country's first viable home-grown commercial airliner, the C919, which it hopes to deliver from 2016.

It is also a critical development in a war between engine makers for dominance as the aviation industry climbs out of recession.

Until now, Airbus and Boeing had resisted changing winning designs that are the backbone of the global airline business and helped give birth to the low-cost sector.

Boeing dismissed the Airbus move, saying it was only an effort to catch up with the 737, its best-selling model.

"This doesn't mean anything different for Boeing. We continue to improve the Next Generation 737," said Boeing spokeswoman Vicki Ray. "We have a 2 percent performance improvement package that will go into service in mid-2011."

Boeing said it was studying whether to follow Airbus in upgrading with new engines or going for an all-new plane, which analysts say would take several years longer.

Ben Boehm, Vice President Commercial Aircraft Programs at Bombardier, had a similar response.

"This doesn't affect anything," Boehm said. "It's business as usual for the C-Series."

"The people who should be more worried are Boeing than us, because the A320 competes with them a lot more than it does with us."

DELTA AIR LINES 'ENCOURAGED'

Airlines eager for the fuel cost savings were positive on the Airbus decision to re-engine.

"We are encouraged by Airbus' launch of the A320neo," U.S. carrier Delta Air Lines Inc said in a statement.

"Delta is satisfied with the more than 150 Airbus aircraft we operate today, and we will study the new Airbus offering very closely to determine if it merits a role in our domestic fleet in coming years," it added.

Airbus did not announce launch customers for the new model but passed on endorsements from airlines including Germany's Deutsche Lufthansa AG and Indian carrier IndiGo, without including any commitments on numbers of aircraft.

The head of AirAsia Bhd , Asia's largest budget carrier by fleet size, said he would discuss buying it.

Airbus said it was talking to several leasing companies.

"We will definitely look at it, but our customers the airlines should be the ones dictating it," a spokeswoman for Singapore leasing company BOC Aviation said.

Airbus said the new engines would be offered as an option on A320 and derivative A319 and A321 models, while classic versions of the aircraft family would remain on sale.

It said it saw a market potential of 4,000 A320neo family aircraft over the next 15 years and sales chief John Leahy told Reuters he expected the first 200 or so sales within a year.

Airbus had delayed a decision for months to ensure work needed on the project did not poach resources from its next new airliner, the mid-sized A350. The plane maker is smarting from delays to its A380 superjumbo and A400M military airlifter.

It must also ensure that sales of the new model do not drive down the value of existing aircraft, as some bankers fear. Critics say the A320neo itself could fail to hold its value as it fills a slim gap until new aircraft appear from 2020 or 2025.

COST PRESSURE

With aviation staging a fragile recovery, jet makers are under pressure to offer savings in fuel. Bombardier's CSeries aims to drive down operating costs by using Pratt & Whitney engines similar to those now to be offered on the A320.

To meet the threat without squandering cash, Airbus aims to extend the life of the 20-year-old A320 until 2025, when it believes the time will be right to develop a new plane.

Rolls-Royce Plc , which teamed with Pratt & Whitney on the original A320, has opted out of the upgrade project.

The decision, which was expected well before recent problems over bigger A380 engines, stemmed from doubts over whether it made sense to build a new engine now rather than invest in more radical and potentially profitable engine changes in the future.

(Additional reporting Karen Jacobs, Kyle Peterson and Scott Malone in the United States and John McCrank in Toronto; editing by James Regan, David Cowell, Gerald E. McCormick and Andre Grenon)

($1 = 0.7676 euro)