Airbus will formally announce the NEO – New Engine Option for its Airbus A320 family tomorrow, AirInsight has confirmed. Multiple press stories also confirm the pending announcement.

This is significant on several levels:

1. For Airbus: It gives the A320 a competitive advantage with the 737NG, to which it had lost ground, and leapfrogs the Boeing by a significant margin, offering better operating economics, lower emissions and lower noise profile–the latter two particularly important in Europe.

Using which burn 15% less fuel should result in 10-12% improvement on wing, with an additional 3.5% from “sharklets”. This should net an improvement to operating economics in the 6-7% range, which will enable the A320 family to regain the economic advantage over the 737NG.

(Rather than a straight-forward 15% operating economic gain, after taking into account higher capital costs and other operating factors, the net margin is reduced. Boeing believes the net margin is only 3%-4%, a figure Airbus hotly disputes.)

Recently, residual values for the A320 family have not maintained value as well as those for the 737NG. The NEO, with superior economics, should reverse that trend for new models, although some appraisers and most lessors believe will have a negative affect on current A320s and will have an accelerated depreciation level as the A320 replacement airplane (now forecast for 2025) approaches.

2. For Pratt & Whitney: It validates the new technology Geared Turbofan Engine from Pratt & Whitney, which secures a fourth customer (joining Bombardier, Mitsubishi and Irkut) for the new technology powerplant. This is significant, as PW will go back into the narrow-body engine market solo, for the first time since the JT-8D-200s on the MD-80. It also means that IAE will become a support, rather than development, organization as relations between PW and RR have deteriorated.

This gives PW a major boost in its effort to market the GTF. Although BBD, Mitsubishi and Irkut contracts were good starters, obtaining this contract is a major stamp of approval from which PW can now proceed to develop GTF in the 40,000 lb thrust-and-up range. This truly creates a family of engines.

3. For Bombardier: The CSeries’ significant economic gap over the A318/319 shrinks, but remains a double-digit advantage as a result of the new technology associated with the airplane, including a composite wing, aluminum-lithium fuselage, and systems. Airbus and Boeing are both quite concerned about the CSeries, and with the NEO, Airbus can play its “commonality” card to partially offset the economic differential, but still falls short. Airbus, and Boeing, need to continue to worry about the CSeries, which offers a true step-change in aircraft economics.

In an investors’ conference held even as news was breaking about the pending announcement, lessor Aircastle called the CSeries a “credible threat” to Airbus and Boeing, saying it is more so to Airbus than Boeing.

Additional points:

4. The A321 stands to benefit the most from re-engining. The A321 has always been short on range, and with the NEO, can now become a true transcontinental and perhaps even trans-Atlantic aircraft. The Boeing 757 remains active because of its unique operational profile, and the A321 (and 737-900) have never quite matched its performance. With a new engine, the A321 may benefit through additional mission capability.

5. The A319 stands to benefit the least from re-engining. Even with new engines, the A319 remains 10-11% higher in cost than the CSeries, which will be available before the NEO. Most rational airlines would choose the lower cost alternative.

With the authorization to offer, the market must now decide whether the is a viable alternative. There has been a fair amount of criticism from lessors that the aircraft is simply a re-engining of existing technology, that it will negatively impact on residuals for existing A320 models and as an interim airplane not hold values well, and whether the NEO will be worth the additional capital costs from. opinion leaders are currently offering mixed reviews, which typically means a poor market reception.

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