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Originally published July 20, 2011 at 10:24 PM | Page modified July 21, 2011 at 2:55 PM

Big 737 order still leaves Boeing with egg on face

American Airlines announced a split order: firm orders for 260 Airbus A320s, plus options for a further 365 of the planes; and a commitment for 200 Boeing 737s and options for 100 more.

Seattle Times aerospace reporter

What the blockbuster split order means:

American Airlines replaces its aging fleet with a mix of current planes and more-efficient upcoming models.

Boeing wins an order for 200 planes and changes direction on replacing the 737, ensuring work at the Renton factory well into the future.

Airbus gets another big win for its A320neo and breaks Boeing's monopoly on sales to American.

quotes When real Boeing people ran the company they didn't lose American business to Airbutt. ... Read more
quotes Boeing needs to get their act together... I am afraid we are witnessing the demise of a... Read more
quotes A classic McDonell-Douglas move: Why spend the money on an all-new plane? Simply make... Read more

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Boeing raked in around $10 billion worth of commitments for 200 Renton-built 737s Wednesday. Usually that would be a good day.

Yet Boeing Commercial Airplanes chief Jim Albaugh was forced to confront analysts' suggestions that the company's product strategy is in tatters.

First, archrival Airbus won the larger piece of a blockbuster American Airlines order. Second, Boeing was forced into a major strategy shift: modernizing its 737 with new engines rather than launching an all-new replacement plane.

"We view this whole affair as triumph for Airbus," wrote Robert Stallard, of RBC Capital Markets.

The decision to re-engine the 737 is good news, however, for Boeing's Renton factory. It will be ramping up and rolling out large numbers of airplanes for at least another 15 years.

With the large American order and expected orders ahead, Boeing may raise production even higher than the current plan of 40 jets a month.

Albaugh, in an interview, contended the deal amounts to an even split of American's future business. And he predicted the re-engined 737 will preserve Boeing's half share of the huge single-aisle jet market.

Flanked by Boeing and Airbus executives at a news conference in Fort Worth, Texas, American CEO Gerard Arpey announced Airbus had won about $11.5 billion worth of firm orders for 260 of its A320s, plus options for a further 365 of the planes.

Boeing got a commitment for 200 737s and options for 100 more.

The values of the Boeing and Airbus orders are according to pricing estimates by aircraft-valuation firm Avitas.

Albaugh pointed to the 52 unfilled orders for 737s already on American's books. Counting those, he said, "going forward" it's a pretty even split of the firm orders.

Still, John Leahy, head of sales at Airbus, savored the first defection of a major Boeing customer to his company's A320neo, fitted with next-generation engines.

"If we had sold American 26 aircraft, it would have been a victory for Airbus because it broke Boeing's 15-year monopoly," said Leahy in an email.

Just as embarrassing, Boeing will have to follow Airbus in developing a new single-aisle derivative powered by next-generation engines.

And that new plan isn't even ready for prime time. Half the Boeing jets in the American order are re-engined 737s, but that portion of the sale is contingent on a couple of major details not yet in place.

Boeing still has to work out what size engines it wants, which will determine how extensively it needs to modify the nose landing gear and the wing attachments for the re-engined plane.

In addition, the $2 billion program still needs approval from the Boeing board in Chicago.

Albaugh said the formal launch of the re-engined 737 will come in fall. A new small airplane from Boeing is now "pushed out well into the next decade."

But long term, how will Boeing's new plan fare against Airbus?

Analysts react badly

The assessment of the American deal by Wall Street and industry analysts was not charitable to Boeing.

RBC analyst Stallard, surprised that Boeing would unveil its new strategy during a customer news conference alongside Airbus, headlined his note to clients: "A strange way to launch an aircraft."

He noted that the re-engined 737 will come to market a year or so after the A320neo's 2015 debut, and will have only one engine option rather than the choice of two for the Airbus rival.

In her note, Heidi Wood of Morgan Stanley called Boeing's strategy "reactionary."

"Boeing's hasty decision to re-engine the B737 is a clear indication of the success and strong competitive positioning of the A320neo," Wood wrote.

Michel Merluzeau, managing partner with analyst firm G2 Solutions, said he is "astounded at the Airbus smackdown."

At the news conference, Enders said Airbus launched the A320neo in December because it concluded that "customers need more fuel-efficient engines. ... There's one game-changing technology available this decade. That's new engines."

Albaugh, in an interview, explained Boeing's more agonized arrival at the same place.

Boeing could design a suitable all-new plane to replace the 737, but couldn't figure out how to build a production system that could roll out 40 to 60 such jets per month.

Even after the Paris Air Show in June, "we didn't have the answers," Albaugh said. "As we were delaying and delaying and delaying" a decision, "the re-engine team came up with some pretty compelling reasons why a re-engine made sense."

The compelling reason was simple: Airlines were increasingly unwilling to wait for Boeing's answer as their rivals opted for the A320neo.

"They wanted efficiency now and they wanted certainty of delivery," Albaugh said.

American's perspective

American President Tom Horton said the airline spent $500 million more on jet fuel in the first quarter of 2011 than in the same period last year. The re-engined 737s and A320s promise a fuel saving of as much as 50 percent compared with the oldest planes in American's fleet.

That made the decision to buy new planes "a no-brainer economic home run," said CEO Arpey.

One respected aviation analyst, Adam Pilarski of consulting firm Avitas, who challenged Boeing publicly four months ago, gave Albaugh more backing than the Wall Street analysts.

At an airplane-leasing conference in Phoenix in March, Pilarski predicted from the stage that Boeing would be forced to change its mind and re-engine this year.

Speaking after Pilarski, Albaugh bet a bottle of expensive wine that the prediction was wrong.

Wednesday, Albaugh lost that bet.

But in an interview, Pilarski welcomed the end of Boeing's prolonged search for a way to build a new airplane. "They were desperately searching for a silver bullet and they couldn't find it," he said.

Declining to crow about his winning bet, Pilarski said Boeing's engineers "will likely come up with a really good new version of their plane."

While Boeing is starting later than Airbus, and will have to spend more money to modify the 737 than Airbus will on the A320, he said the end product could be superior, "putting Airbus on the defensive."

How will the two planes stack up in future sales battles?

American's decision to split the order could foreshadow what's ahead with Delta and United when those carriers line up big orders later this year and early next.

Albaugh said American would have taken options on more 737s, but Boeing chose to hold onto delivery slots for some other "very very good customers."

Pilarski said those airlines — like American — may order from both manufacturers in order to renew their fleets faster and to get a better deal from both.

Yet he believes Boeing is now better positioned to fight for a share of those pending orders.

Despite the negative commentary from many other analysts, Boeing stock ended the day up 2.2 percent.

Still, the broader consensus on the American Airlines outcome was summed up by aviation analyst Scott Hamilton.

After dismissing the A320neo program and the likelihood of a re-engining for the 737 for most of the past year, Hamilton wrote on his leeham.net blog, "Boeing looks kind of silly."

Dominic Gates: 206-464-2963 or dgates@seattletimes.com

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