Scrambling to rescue a potential $20 billion plane order from American Airlines, Boeing Co has offered to put a new engine on its current version of the 737, retreating from an ambitious plan to completely redesign its best-selling aircraft, sources said on Tuesday.

If AMR Corp's American accepts Boeing's offer to build a re-engined 737, the carrier would become the launch customer for the upgraded narrowbody, which has yet to receive the official green light from Boeing's directors, two sources with knowledge of the talks told Reuters.

A deal is not final as American Airlines is still weighing a generous offer from Boeing's chief rival Airbus, a unit of EADS, for the A320neo, a re-engined A320.

Two knowledgeable sources predicted a split order. The order could be for 200 to 300 narrowbodies, but the exact number is unclear, and there could be last-minute changes.

American is very active with Airbus in talks right now, a senior industry source said, asking not to be identified.

AMR, Boeing and Airbus declined to comment on the talks.

The Wall Street Journal reported that the airline had asked Boeing to counter an Airbus offer that included a generous $6 billion financing package, and that Boeing had responded by offering to re-engine the 737.

American Airlines last ordered Airbus planes in the late 1980s but declared in 1996 that Boeing would be its exclusive airplane provider through 2018. If Airbus wins all or even part of a big order from the carrier, it would be a coup.

AMR managers are expected to make their recommendation to the company's board of directors at a two-day board meeting that starts on Tuesday. The company could announce a decision with its quarterly earnings report on Wednesday.

Top aircraft leasing companies are said to be jockeying for position to help facilitate a transaction.


The market for narrow-body jet sales is estimated at $1.7 trillion over the next 20 years and is split between Boeing and Airbus, whose A320 has made substantial inroads in U.S. markets.

The European company said last year it would put a more fuel-efficient engine in its A320 and call it neo. The A320neo aircraft is scheduled to enter service in late 2015.

Airbus dominated the Paris Air Show last month as it basked in orders for the A320neo while Boeing asked airlines for six months to make a decision on the 737. Airbus has firm orders or provisional commitments for 1,029 neos.

For more than a year, Boeing has debated whether to redesign its 737 narrowbody, a workhorse for airlines around the world, or put a new engine in it.

Experts say re-engining should deliver cost savings of as much as 15 percent. Savings of up to 25 percent could be achieved by an all-new plane. A re-engined plane could be brought to market around 2016. Boeing says it could deliver an all-new 737 around 2020.

The option to re-engine the 737 has remained under consideration, although Boeing has long said it would prefer to redesign the aircraft with new technology showcased in its upcoming 787 Dreamliner.

The 787 is a wildly popular airplane that has attracted more than 800 orders, but it is three years behind schedule due to snags in development.

Boeing's recent history of 787 delays, coupled with a lack of a definitive plan for a redesigned 737, could make buyers skeptical that Boeing could produce an all-new 737 only a few years later than a re-engined one, said Adam Pilarski, senior vice president at AVITAS, an airline consulting company.

They know that it is not a few years, Pilarski said.

If American Airlines places an order with Boeing or Airbus, or both companies, pressure will be on rival carriers in the United States to follow with their own orders to blunt the advantage American Airlines would gain from flying more fuel-efficient planes.

Delta Air Lines also is in talks with plane makers and says it aims to decide on an order for as many as 200 planes by the end of the year. Southwest Airlines and United Continental Holdings reportedly are also talking about potential orders.

Given the time requirements for the U.S. majors, I don't think Boeing has much of a choice here besides new engines, Richard Aboulafia, an aerospace analyst at The Teal Group. There's not that much else worth paying for.

(Additional reporting by Karen Jacobs, editing by Gerald E. McCormick and Tim Dobbyn)