Business

Airbus A320 engines to get 1bn-euro upgrade

A320 production line, Finkenwerder near Hamburg
Image caption With new engines fitted, the A320 planes will be more fuel efficient and less noisy

European planemaker Airbus is to invest more than 1bn euros ($1.3bn; £840m) to replace the engines on its A320 single-aisle planes.

The new, less noisy engines will be 15% more fuel efficient and emit less CO2.

All eyes are now on Boeing, which is considering a similar upgrade of its Boeing 737.

The aerospace giants are responding to the emergence of new rivals in the market for relatively small passenger jets seating more than 100 passengers.

"Just two weeks ago I had continued to push them on bringing a new engine into the market," said Tony Fernandes, chief executive of AirAsia. "I am thrilled they have launched the [upgraded] A320."

"Airbus are doing this because their airline customers want them to do it and because they are worried about the competition from Canada's Bombardier CSeries and from the Chinese-made Comac C919," said Paul Sheridan, aviation analyst with Ascend Worldwide.

Russian planemaker Irkut's MS-21 is also set to encroach on a space that has belonged to Airbus and Boeing for a long time.

New engines or new planes?

The question of whether Airbus and Boeing would upgrade the engines of their best-selling aircraft or redesign their ageing planes has also been driven by technology.

"The industry is now at a stage where it is developing and producing a new generation of narrow body aircraft engines that promise a step change in economics and operating costs," according to Ascend.

According to the Association of European Aviation Industries "technological leadership is becoming the major competitive differentiator".

"It is an advantage that Europe enjoys today, [but] it is not guaranteed for our future without sustained investment."

Teal Group aerospace consultant Richard Aboulafia applauded Airbus' New Engine Option (NEO) decision.

"It is a necessary and smart move," he said. "It is not without risk, but the altermnative of doing nothing and being outflanked by competitors is far worse".

But not everyone agrees.

Image caption Planes made by rivals in China, Russia and Canada threaten Airbus' and Boeing's dominance

"It is hard to find too many people in the banking and finance world who think that the NEO is a good idea," said Mr Sheridan.

"They are worried about the effect it will have on the values of current generation A320 aircraft.

"At Ascend we are more concerned about the residual value performance of the NEO aircraft. If they are to be replaced by an all new A320 aircraft within, say, 10 years then it runs the risk of getting stuck with the dreaded 'interim' label and will have poor residual value performance as a result."

The prospect of weak residual value could spook customers and thus benefit Airbus' rivals, including Boeing - even though its 737 plane would be less fuel efficient than the upgraded A320.

Moreover, Ascend reasons, "it is also possible that the development of one could trigger an all new product response from the other" - though it would take at least a decade to develop a new plane with new engines.

In the meantime, Ascend predicts, "Boeing looks unlikely to re-engine.. and we view this as the best step available to them".

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