Airbus: Emirates poses tricky questions June 2014

The cancellation by Emirates of its $16 billion order (list prices) for the newest version of its A350 highlights a number of issues facing the manufacturer in the run-up to next month’s Farnborough air show.

The first challenge is what to do in the wake of the Emirates cancellation.

Even the ebullient chief salesman John Leahy had to admit at the opening of the group’s innovation days in Toulouse in mid-June that the loss of the deal for 70 A350 XWB airliners was “commercially, not good news”. It looks as though the super-connector might now proceed to firm up its order for at least 150 rival Boeing 777Xs. Not only would this be the biggest civil aircraft order ever, it would be a strong endorsement of the American company’s two-pronged approach to the long-haul widebody market: the 787 family and a new 777 that can outfly the top end of Airbus’s twin-engine models, with more range and seats.

In reality, it is not all that bleak for Airbus. First, the cancellation might be a blow to prestige, but no more than that; the A350 development is proceeding (so far) without the delays and dramas that befell Boeing’s 787. Second, as Fabrice Brégier, the Airbus CEO, explained, the Emirates cancellation will have no financial effect since the delivery dates were for so far ahead that Airbus would have no problem filling the slots with other orders, most certainly at better prices than Emirates obtained as a launch customer. Third, it not entirely clear what is a firm cancellation any more than what is a firm order: it has subsequently been reported that Airbus may be given another chance to re-tender for the A350 order.

Airbus’s basic challenge is how to sharpen its competition in the widebody market. It is offering two versions of the A350 (the smallest of three seems to be in the process of being withdrawn, as customers opt for the larger two) against three versions of the 787s and two of the 777. This means Boeing seems to be offering a range tailored to a wider variety of airline needs. From here, the challenge breaks down into how to respond, segment by segment. Like Boeing, Airbus is on record in recent weeks of saying that there is no desire to launch further whole new programmes, each of which can cost upwards of $10bn. So Airbus’s response must be to produce significant upgrades.

The most obvious opportunity is the A330, which could be fitted with new engines to compete with Boeing’s 787s. Although a re-engined A330 could not compete on range it would be able to fly 90% of the missions the 787s will be used for. With competitive fuel economy thanks to the fitting of more modern Rolls-Royce (or, less likely, General Electric) engines and with competitive pricing thanks to development costs of the 1993 aircraft having long been written down, Airbus could hold on to market share. Talks have been going on with Rolls-Royce; and Airbus wants the engine maker to assume some of the cost of adapting the airframe for the newer engine. Unless it opts for an A330 neo, Airbus risks losing the 250-300 seat segment to Boeing’s 787s. Although the A330 has been an outstanding Airbus success, orders have been drying up recently.

The next challenge is the A350 stretch. A350-800 (276 seats) orders are regularly being switched to larger models, with the encouragement of the manufacturer. But Emirates has made no secret of its interest in a twin-engined aircraft carrying more than the A350-1000’s 369 passengers. Their view of the world is of stronger growth at slot-constrained airports, thus putting a premium on larger aircraft. Indeed, the surprise order last year for 40 more A380s looks almost like a swap of the super-widebody for the larger twin. But this only serves to point to Airbus’s next challenge.

A bigger, better A380 is now being sought by Emirates. Tim Clark, Emirates President, has for some years talked about the eventual need for a larger aircraft carrying up to 800 passengers in some configurations. Now he is calling for a re-engining of the plane to improve its cost per passenger kilometre in the light of what the biggest Boeing twin, the 777X will offer when it comes into use in five or so years. It is likely that Rolls-Royce would get an exclusive deal to supply new engines for both the A330neo and the A380neo, if they happen. This is a reinforcement of the way the civil widebody market is lining up as a transatlantic duopoly: Boeing/GE on one side and Airbus/Rolls-Royce on the other.

Below these strategic challenges, Airbus faces tactical decisions. For instance, one other option for prolonging the life of the A330 (about 1,000 in operation) is the development of a so-called regional variation aimed at the Chinese market. This has de-rated engines and a lower certified fuel capacity (with attendant reductions in maintenance and operating costs) to cram in up to 400 passengers in single class to fly two- to four-hour hops between Chinese cities. The larger capacity planes would counter limits to air-traffic control capacity. Airbus is already working with China to help them improve air-traffic control but may be forced into a deeper involvement (to add to its A320 final assembly line in Tianjin) to assemble or adapt A330s in China to secure the order which had been expected during the Chinese leaders’ visit to France several months ago.