By Tim Hepher
PARIS (Reuters) - The world's top two planemakers are heading towards a showdown over the prices of their smaller twin-aisle airliners as Airbus draws closer to a decision to revamp its 20-year-old A330 model.
International airlines meeting last week in Doha witnessed an increase in the marketing rhetoric from the European planemaker and its U.S. rival Boeing, as a proposed revamp of Airbus's 250 to 295-seat wide-body jet threatens to eat into demand for Boeing's newer 787 Dreamliner.
Boasting a carbon-fibre shell and new systems, the 787 aims to render older jets like the A330 obsolete and caused Airbus to come up with its own lightweight rival, the A350, which is now due to come into service in the fourth quarter of this year.
But 787 delays in production allowed Airbus to sell more A330s and it is now expected to revamp the A330 with new Rolls-Royce or General Electric engines later this year to keep production running beyond 2016 and preserve 1,800 jobs.
Critics say Airbus has flip-flopped over strategy after initially rejecting an A330 redesign in favour of its new A350.
But some in the industry say Boeing also erred by over-engineering the 787, leaving the door open to more sales of a wide-body aircraft suited to shorter trips such as fast-growing routes within Asia.
Airbus has already begun promoting the "A330neo" as the most affordable wide-body jet catering to this new regional niche.
Comparing the A330neo to the Boeing 787-9, the most popular version of the Dreamliner, Airbus sales chief John Leahy said it would have the same "cash operating costs" and significantly lower capital costs, making it "an unbeatable plane in that category".
Boeing disputes these claims as well as Airbus's forecasts of more than 1,000 potential sales for the A330neo. But that has not prevented its sales chief stepping up the market battle.
"Clearly our competitor is pursuing this product and thinks it is a great way to compete against the 787-8 and 787-9, which is an interesting change in their strategy because we thought they were building the A350-800 and A350-900 to compete against those airplanes," said senior vice president John Wojick.
"Airbus is saying 'my airplane isn’t as efficient as Boeing’s, so maybe Boeing won’t react'. Well, we are going to react," he told Reuters in Doha. Boeing declined to elaborate.
Analysts say Boeing has three main options: do nothing, fine-tune the 787's design or retaliate with lower prices.
Wojick's comments effectively rule out the first option and Boeing's scepticism about the size of the market for the revamped A330 makes the second, more radical, option unlikely.
787 PRICING SWITCH?
That could leave Boeing looking for ways to put commercial pressure on the A330neo from the outset, with a clue to be found in the pricing structure of its aircraft as to how it could go about this.
Most planemakers offer separate prices for different models but in practice allow buyers even more choice by paying only for the carrying capacity and the engine thrust that they need.
By adjusting official specifications for an individual aircraft to cap or "de-rate" the engine thrust, they can restrict a plane's range and cut the price - only charging for the unused capability later, when it is needed.
Airbus is using this technique to bolster the A330 in China.
But Boeing's strategy for the 787 has so far been different.
The aircraft was designed to perform best over long-range trips such as such as Tokyo to New York and Boeing's marketers have so far emphasised its potential as a long-range jet.
But the financial crisis and growth of trade within regions, especially in Asia, has forced many to reconsider whether airlines will pay for range they don't need. Many airlines are asking for less range than the next-generation jets offer.
Switching to the segmented pricing on the 787 could, experts say, give Boeing more leverage to compete against the A330neo with lower prices. But it may hurt margins and the company would need to tread carefully to protect its investment in the main 787 variants.
"You don't want to spoil the price reference points and in general you don't want to sell a new aircraft on price, but on its benefits," said Societe Generale analyst Zafar Khan.
And even after the estimated $2 billion development cost for re-engining the A330 and adding new fuel-saving wingtips, analysts say Airbus has more ammunition than Boeing for a price battle since most of the capital costs of the A330 were recouped years ago.
And prolonging the production run of the A330 could help Airbus reduce pressure on profitability as it gradually increases output of the all-new A350.
It is the first time that Airbus in its 40-year history has faced the task of replacing a major product, rather than growing by expanding into areas previously controlled by its U.S. rival, and comes at a time when it is promising investors wider margins.
Without more sales of the A330, analysts say Airbus may face gaps in the production line as early as 2016.
For Boeing, its ability to contest a market revival for the A330 will test the business case of the 787, which analysts say would have assumed a shorter life for the A330 and therefore more comfortable 787 margins due to the weaker competition.
Boeing will be keen to avoid tarnishing the high-tech sales pitch of the 787 and getting sucked into a price duel against the older A330, but not at the expense of losing sales.
Reuters reported in December that Boeing has given extra priority to maintaining market share.
After losing ground recently in smaller, single-aisle aircraft, Boeing's fighting talk suggests it will shave prices if needed to protect what it regards as its leadership of the market for big jets.
(This story corrects paragraph 26 to say Airbus may face gaps in the production line as early as 2016)
(Additional reporting by Victoria Bryan and Siva Govindasamy; Editing by Greg Mahlich)