08/30/2011 09:48 EDT | Updated 10/30/2011 05:12 EDT

Boeing commits to new engine for 737 as competition heats up from rival plane maker Airbus

NEW YORK, N.Y. - Boeing has landed approval from its board to put a new engine on its 737, matching a competing plane offered by Airbus and giving its bestselling plane the fuel efficiency that airlines crave.

Boeing said Tuesday that it has received commitments from five airlines for 496 airplanes with the new engines. Its shares rose more than 2 per cent in midday trading.

The decision has been expected since last month, when American Airlines said it would buy 100 of the new-engine 737s if Boeing builds them. The airline, a unit of Fort-Worth, Texas-based AMR Corp., said it intends to order at least 460 new jets, including 200 from Boeing and 260 from Airbus. The deal ended Boeing's exclusive grip on the fleet of the country's third-largest airline.

Boeing, based in Chicago, is a massive company that typically plans years in advance for airplanes it will build for decades. As recently as May it said it was leaning toward building an all-new replacement for the 737 rather than putting a new engine on it. A growing number of orders for a competing plane made by Airbus — capped by American's willingness to place a big order — forced Boeing's hand.

Deliveries of the new 737 are scheduled to begin in 2017. Boeing said it would use Leap-1B engines made by CFM International.

It says the new "re-engined" 737 will have lower operating costs than any similar airplane, including Airbus' comparable single-aisle jet, the A320. Airbus calls its new-engine version the A320neo, for "new engine option."

Boeing says its re-engined 737 will burn 4 per cent less fuel than the A320neo.

The 737 is assembled in Renton, Wash., the A320 in Toulouse, France. Both planes are already in such high demand that their makers are boosting production to 42 per month — Boeing in 2014, Airbus by early next year.

Boeing shares rose $1.26, or 2 per cent, to $65.86 a share in midday trading.