Embraer will develop a second generation of “E-Jets” with new engines, wings and landing gear, forgoing the option of creating a larger aircraft that would challenge Airbus and Boeing head on.

The enhanced family of Embraer 170, 175, 190 and 195s is slated to enter service in 2018, 1-2 years after the re-engined Airbus A320NEO and Boeing 737 MAX hit the market. The Brazilian aircraft builder plans to invest about $2 billion in the project. More details on the design and initial customers are expected by mid-2012, but Embraer confirms it is looking to stretch the family beyond its current capacity of 122 seats.

The decision to keep its focus on the 70-130-seat market was announced Thursday afternoon, 19 months after Embraer created a new organization to study its next move. Paulo Cesar Souza e Silva, president of Embraer’s Commercial Aviation unit, said his engineers were convinced the company could develop a clean-sheet narrowbody airplane with 130-160 seats that could have surpassed the A320NEO and 737 MAX in efficiency. But Embraer ultimately concluded that Airbus and Boeing, which have long dominated that market space, would use their financial clout and pricing power to undercut a new challenger.

“Airbus and Boeing will do whatever it takes” to defend their dominance, he said in a conference call with reporters.

“We are not seeing a good business case.”

Embraer would have been more likely to jump into the 130-160-seat market if Boeing had opted to grow out of that segment by replacing the 737 with a larger, brand-new jet, Souza e Silva said. But the huge sales success of the A320NEO forced the U.S. airframer to announce in August that it would instead re-engine the current 737 family.

The four aircraft in the E-Jets family entered service between 2004 and 2006. Today they are being challenged from the lower end by the Mitsubishi Regional Jet and on the upper end by Bombardier’s CSeries jet. Both of those new jets will be equipped with Pratt & Whitney’s next-generation Geared Turbofan (GTF) engine.

Embraer has not chosen a new engine for the enhanced E-Jets, but has a longstanding relationship with General Electric, which has offered an NG-34 advanced turbofan as an alternative to the GTF. “GE is already our supplier,” Souza e Silva said. “We are looking at other options also.”

Souza e Silva said Embraer continues to solicit design input from the more than 60 operators that currently fly E-Jets. Though he did not rule out the use of composites or other advanced materials, he said current operators have stressed the need for commonality between existing E-Jets and the new family. “We have a rough idea of what this aircraft should be,” he said. “By the middle of next year we should have a very good idea.”