American Airlines announced a record-setting order for new aircraft today, and it shows where the airline industry is headed.

The Dallas-based company will buy 460 planes from Airbus and Boeing, with options for another 465. The massive order comes as airlines rush to reduce operating costs by replacing their aging fleets with new, more fuel-efficient aircraft. The order brought with it an announcement from Boeing on the fate of the 737, which will be updated and not replaced.

With the current state of the economy and many airlines still counting pennies, the giant order has raised questions in some quarters. But airline analyst Richard Aboulafia says it’s all about the race toward efficiency.

“It’s fundamentally a defensive move,” he says. “Everybody is looking for a hedge against expensive fuel.”

In the world of single aisle, narrow body airliners, that hedge comes from new, fuel-efficient engines.

New engine designs and technology are driving the efficiency push we’re seeing from Boeing and Airbus. We’re also seeing improvements in the airframes, including weight reduction and aerodynamic improvements. Both companies claim efficiency improvements of around 15 percent for the newest narrow body models expected to fly within the next several years.

The technology is available to dramatically cut fuel costs with re-engined airplanes compared to the airplanes in many fleets that have been flying 20 years or more. This gives the industry the motivation to purchase new airplanes, says Aboulafia. The key is there is money available to buy the jets — about $13 billion in the case of the American deal.

“You’ve got access to jet finance coupled with high fuel prices,” ” Aboulafia says, “and that shifted the cost burden away from capital costs and towards operating costs.”

Airbus appears to be the winner in the American Airlines order with 260 airplanes. It begins with current A320 series airplanes in 2013 and 130 orders for the new A320neo (new engine option) beginning in 2017. The A320neo was the big hit of the Paris Air Show last month. American placed options to purchase another 365 airplanes from the European company.

On the Boeing side, the order includes 200 airplanes. Half will be from the existing lineup of 737s known as the 737NG (Next Generation). But the big news was Boeing’s announcement that it will not replace the 737 with a new model, but instead re-engine the current 737 and make improvements to the airframe. This is similar to what Airbus did with the A320neo. There’s no word on the new name for the improved 737. May we suggest Next Next Generation, or NGSquared?

Boeing CEO Jim Albaugh says the decision was driven largely by the need to have airplanes available sooner rather than later.

“Our customers wanted more efficiency now and certainty of delivery,” he said.

American placed options to buy an additional 100 airplanes from Boeing’s 737 family in the announcement today.

Image: Airbus