Feb. 25--Boeing is deciding the future of its money-making 737 family of aircraft as competition increases for the single-aisle plane.
Boeing will decide this year whether to put new engines on its 737s to improve performance, Boeing CEO Jim McNerney said last week at the Cowen and Co. Aerospace and Defense Conference.
"We're studying it very seriously," McNerney said.
If Boeing decides to move forward, the refreshed aircraft would be introduced in the middle part of this decade.
The narrow-body 737 -- Boeing's most-sold aircraft to date -- is key to Spirit AeroSystems, where thousands of employees build 737 fuselage and nacelles, or engine coverings.
The program also provides Spirit with more than half of its annual revenue.
Boeing offers four sizes of 737s, ranging from 110 to 220 seats.
The decision whether to replace the engines will depend on how much new ones would increase productivity and performance, McNerney said.
If the improvements aren't large enough, "all it does is suck orders out of your current aircraft," he said. "Yet, if it does provide a big enough leap, it will be worth it."
The engine manufacturers say they have the technology for the increases Boeing is looking for, McNerney said.
"But I think we've got to vet that, and we've got to spend a lot of time talking to customers this year," he said.
Another option would be to wait and replace the 737 with a new model, McNerney said.
But that option seems less likely in the shorter term, said Cowen and Co. managing director and senior research analyst Cai von Rumohr.
Boeing is dealing with its long-overdue 787 Dreamliner and must focus on increasing its production, von Rumohr said.
Analysts also note that the 787 has taken engineers from other aircraft projects who could have designed replacements for the 737 and its 777.
AirInsight analysts Ernest Arvai, Scott Hamilton and Addison Schonland in a new report said they think Boeing will move forward with new engines for the 737.
Replacing the engines would be less disruptive and costly than introducing a new airplane, said Teal Group analyst Richard Aboulafia.
And it would give airlines an immediate cost savings.
"It's a no-brainer," Aboulafia said.
Impact to Spirit
Spirit would have development costs associated with a new engine, however, von Rumohr said. A new engine means a new nacelle. The company would not have to rebid the work, Spirit spokesman Ken Evans said. The only question would be on pricing.--
At this point, replacing the 737 engines is "just talk," said Spirit CEO Jeff Turner.
Refreshing the 737s with new engines is a "great opportunity" for customers, if Boeing decides to move forward with that, Turner said on the last earnings call with analysts.
"Those are great airplanes; they enjoy a huge installed base; they are efficient; they are effective," Turner said. "We build a lot of parts for them. And we're ready, willing and able to help with any upgrades that any of our customers' products need."
Spirit has contracts with Boeing to provide components for the 737 for the life of the program.
Boeing doesn't have an obligation, however, to buy components from Spirit for an all-new replacement.
Spirit would bid for the new work. And Boeing would want to use Spirit for a new plane, von Rumohr said.
Aboulafia agrees that Spirit's chances for getting work on a new aircraft are "pretty good."
But it's too early to say.
For one, a new plane is likely at least 10 years away, he said. Technology must improve enough to justify a new aircraft.
"So much depends on the design parameters," he said.
If Boeing wants a fuselage of the same size as the 737 but made out of composites instead of aluminum, Spirit has a good chance of getting the work, Aboulafia said.
"If they do something bigger or wider, then (Spirit will) be surrounded by competitors, and they'll have less of a home-team advantage," he said.
Airbus is studying an engine upgrade for the A320, its 737 competitor. It's widely believed that it will move forward with the plan.
That puts pressure on Boeing to respond.
"What our competitor does will bear on the decision, and Airbus sounds very aggressive on re-engining," McNerney said.
Bombardier is developing its CSeries family of aircraft around Pratt and Whitney's PW1000G engines.
"There's a lot of people who think the engine is going to be a pretty good engine," von Rumohr said. "That's what's really driving this discussion."
And other competitors likely will emerge.
Some think Boeing will use CFM International's LEAP-X engine, which won't be ready for service until 2016, according to CFM's Web site.
If Boeing can offer 12 to 15 percent more efficient productivity, then it shouldn't wait to do it, especially with competitive threats from Canada and China, McNerney said.
"The way we're going to win is through innovation," he said.
IBM learned the lesson a long time ago, McNerney said. "If you milk a product too long, you invite competition."
There are a couple of downsides, however.
Introducing a refreshed 737 could hurt the resale value of the current fleet of planes because a better version is coming along, von Rumohr said.
It also could hurt the existing backlog of orders as some customers decide to wait for the upgraded version, he said.
Even with the risk, keeping up with innovation is the best way to stay competitive, McNerney said.
"You'd rather obsolete yourself a little bit than have someone else do it," McNerney said.
-- CORRECTION: This story has been updated to correct misinformation that was in the original story posted Thursday. Return to story.
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