Every Which Way But Loose

After taking delivery of its first Airbus A380-800, (complete with showers for First Class passengers) Emirates decision to exercise 30 options on A350’s and commit to a new purchase of 30 A330-300’s will surely get people wondering just how many more widebody airplanes can the airline absorb and operate.

(Quite why anyone would pay a ludicrous amount of money for the luxury of an on board shower when it could be better spent on hiring a private jet is of course an entirely different matter! Fractional ownership, anyone?)

On the back of a historic order placed just a few weeks ago at the Farnborough Air Show by neighbouring Abu Dhabi based Etihad Airways, the Middle East now is not just a battleground divided on religious and political grounds, but its a theatre of intense cut throat competition to both lure tourists and transit passengers to the ends of the Earth using its geographic location as a springboard to cover the globe.

 

All images courtesy of Emirates

Only recently EADS clinched a deal with (Abu Dhabi based) Mubadala Aerospace to supply a variety of components for new and existing Airbus airplanes. It comes as even less of a surprise that EADS has announced a potential deal with Dubai Aerospace Enterprise (DAE) to shift some manufacturing work from Europe to Dubai.

Such deals are not without their sceptics and perhaps rightfully so. There is widespread belief that the majority of these big orders won by Airbus in the Middle East are not without strings firmly attached.

“(The United Arab) Emirates owns Airbus. They don’t need a manufacturing facility in the Middle East when they have one in France,” says Doug McVitie, Managing Director at Arran Aerospace.

“This has little to do with the dollar and everything to do with their new Middle East paymasters,” he goes on to say.

Another US-based industry commentator was riled at the announcement of Emirates decision to opt for Airbus A330-300’s without so much as giving Boeing a chance to compete in the absence of an RFP, confirming a sea of change in its industrial and geopolitical strategy.

“It looks like the [Boeing] 777 was an “anomaly”; otherwise this is an Airbus airline,” he said on the condition of anonymity.

“Boeing only prevailed in cases of  clear superiority over a competing Airbus product, i.e., the 777-200LR / 777-300ER vis-a-vis the A340-500 / A340-600, or the fact that Airbus did not have a competing product, i.e., the A380-800F vs the 747-8F,“.

 

Teal Group’s Richard Aboulafia gave his candid opinion at the end of last years bumper “orderfest” and noted how a third of Airbus’ widebody orders lay firmly in the Middle East region.

“Mideast orders comprise 9% of Boeing’s backlog and 13% of its twin aisle backlog. But the Mideast market accounts for 19% of Airbus’s total backlog by value and an astonishing 33% of Airbus’s total twin aisle backlog,” he wrote in his newsletter published in December 2007.

Critically, of the (circa) 200 firm orders for the A380 family, 73 of those come from Emirates, Etihad Airways and Qatar Airways, representing a third of the entire orderbook. (Data kindly supplied by Uresh Sheth, correct as at July 14, 2008).

The A350 too, has a heavy reliance on two of the three above named carriers. According to wikipedia, there are 477 firm orders for the A350 family, of which 227, are based on Middle East based carriers, representing over 47% of the program orderbook.

Of course, the question of European airlines staring in despair at the prospect of a tirade of flights from the Persian Gulf peninsula could ultimately lead to the death knell of some carriers. Emirates itself has made known its plans to boost its presence in Germany, much to the ire of Lufthansa.

“What exactly will the French government do when confronted with thousands of job losses at Air France-KLM or cancellation of hundreds of combined A350/A380 orders,” says the US commentator.

One source on Capitol Hill points out that the furore over Washington’s reluctance to bless the Dubai Ports World deal in 2006 is one reason for the UAE’s tacit acceptance to align itself more towards Europe for commercial reasons while placating the US politically by agreeing with the latters policies in the region.

Despite delivering Emirates first A380 on July 28th, 2008, EADS stock dropped to an intra-day low of E12.2 before closing at E12.22 (Source: Bloomberg.com).

“There is still a lot of work ahead of us,“  Airbus CEO Tom Enders said in relation to the A380 program, raising fears that the projected delivery targets for 2009 and 2010 may be revised for a second time.

Airbus’ success in the Middle East is not without merit. Having borne the wrath from (Qatar Airways CEO) Akbar Al Baker on the undefined A350XWB late last summer and soon after signing the deal at the Paris Air Show and then irking Emirates with delays to the GP7000 powered A380 by some 21 months, Airbus has ridden the waves of distress and success remarkably well.

There is little doubt that Emirates, Etihad and Qatar Airways will eventually induct all the airplanes that they have ordered over the last few years. The bigger question is just how hard costs will bite into their cash flows to finance these jets and also whether between the four key airports in the region (Abu Dhabi, Dubai International, Al Maktoum International and New Doha International airports) there is enough traffic to fill all those seats the three big airlines will have on offer.

Airbus’ production plans runs the inherent risk that any major deferrals by any of the three big Arab airlines will throw those plans into disarray. With Power8 being stretched out to 2012 and seeing the overall EADS workforce grow by 1% since 2007, questions over the success of the cost cutting regime while ploughing ahead to offer work to the UAE and China remain.

“Like any offset program, the China A320 line is an expensive waste of time and money,” says Aboulafia.

“Airbus is now held to ransom in China and in the Middle East - in both cases a hostage to someone else’s fortune,” McVitie says.

Emirates, Etihad and Qatar Airways’ hold on the A350XWB program is the one area most analysts fear Airbus’ exposure could end up being fatal. Having seen countless iterations of the ill-fated A330-derived A350, the A350XWB is not only the near two decade old response to the Boeing 777 family, Airbus also has its work cut out to prove its credentials of being able to deliver the airplane on time.

Seeing the 787 Dreamliner being delayed three times due to varying supplier, logistic and production issues, the workshare distribution on the A350XWB will equally be under the watchful gaze of the entire industry, not least because Airbus is also taking a new panel approach to building the airplane, also using composites like the 787.

Resources are starting to get stretched somewhat at Airbus - the flagship A400M still has a mountain of challenges to overcome and EADS boss Louis Gallois admitted that progress was “slower” than expected. Already running several months late with a charge of almost E900m against it, the A400M is another needless distraction for EADS as it struggles to balance a greater backlog on its commercial side with a view to meeting those order commitments whilst decreasing the size of its workforce.

The recent decision by the GAO to uphold Boeing’s protest on the USAF tanker award has only served to stifle Airbus’ ultimate aim of shifting A330 production to the United States. Given the popularity of that twinjet, the company hasn’t contemplated using its UAE partners in assembly just yet - if Northrop Grumman/EADS lose the tanker deal, the prospect of Mubadala/DAE pushing for final assembly of A330’s just as Tianjin has the A320 line, may be something Airbus gives serious consideration to. As to how that would be taken in Europe remains to be seen, although it will be a bitter pill  for Franco-German workers to swallow if such overtures are entertained.

In any direction that it turns in the Middle East, the powerhouses of Emirates, Etihad and Qatar Airways possess the power to turn Airbus every which way but loose. At the same time, will some of these carriers regret their alignment to Europe over the United States?

Airbus’ major wins in the region does not mean that Boeing has “lost” much, if anything. According to this order spreadsheet, Boeing has also secured some sizeable orders too. (Data kindly supplied by Uresh Sheth, correct as at July 14, 2008).

Only time will tell whether Airbus comes good on the A350XWB, and we have three big carriers all waiting on the sidelines watching closely too.

28 comments August 4th, 2008