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Just about two weeks ago, Dubai-based Emirates airline and European airframer Airbus S.A.S. announced the cancellation of the 70 aircraft A350 XWB order, 50 A350-900 and 20 A350-1000 citing outcomes “as a result of a fleet requirements review.”
While the cancellation was downplayed by Airbus as “not good news commercially” but “not bad news financially”, it is most definitely a blow and a disappointment to lose nine percent of the total A350XWB order book, and that too by one of the most prominent of Airbus customers.
Emirates deliveries would have started in 2019 giving Airbus ample time to recover, but considering the behemoth 777X order Emirates placed at the recent Dubai air show, the message is quite clear; the B777X can easily perform the missions of the A350XWB.
We are certain the fleet requirements review went well beyond the A350 cancellation. Emirates has been at pains to emphasise that the passenger growth forecast has not been changed, which makes one ponder the eventual fleet composition of Emirates?
Current Emirates’ fleet
At present the gulf behemoth operates four main types of aircraft. The Airbus A380 superjumbo in very large aircraft (VLA) category offering 500+ seats, all variants of the Boeing 777 which offer from 290 seats of the 777-200ER to 427 seats in the two class 777-300ER, [though the most common configuration Emirates is now taking delivery of is 777-300ERs with 360 seats], the A340 with 267 seats and the A330 with 278 seats.
The cancellation has many advantages for Emirates
- Rationalizing the airline’s fleet back to two types; the A380s and B777s
- Removing the resources burden of inducting a new aircraft type (maintenance facilities, simulators, parts, human resources, hiring, transitioning, training, etc.)
- Improving their cash flow due to reduced pre delivery payments
- Reducing the carrier’s financing requirements by about $16 billion
No mid-size aircraft in Emirates fleet
The order cancellation though leaves a major hole in the Emirates fleet. The carrier will have no aircraft for their thinner routes which demand a mid-size aircraft of around 250 passengers and which is currently covered by the A330, A340 and the 777-200/ER fleet, which was partially hoped to be covered by the A350. One can argue that with the newer standards of first and business seats, cubicles and apartments the seat capacities of the aircraft will automatically be reduced, but history shows us the gulf carrier believes in stuffing its planes to the maximum, even in business class, with narrow seats. A more plausible explanation could be the carrier’s preference for capacity dumping by deploying a larger aircraft than required on the route. Or the use of flyDubai with its narrow body Boeing 737s to supplement.
Conclusion
Emirates wants an A380neo [new engine option] which, Airbus is starting to look at. However Airbus has many more customers demanding an A330neo, and this remains the priority at the airframer. Airbus lacks the capacity to operate two neo programmes simultaneously, so it is not an easy decision for Airbus. Emirates is an influential customer and very persistent. Remember the history of the B777X? It is an almost forgone conclusion that Airbus will develop the A380neo. The only unknown is when?
In the meantime Emirates and Boeing are discussing the B747-8i which has slightly lower passenger load than the current A380 configuration but the same range capability and as the latest reports show, a slightly better fuel consumption on a seat-mile basis. Whether Emirates will accept the B747-8i fuel efficiency argument, consider it against the costs of inducting a new type, and actually buy the B747-8i? Or, it is only meant to pressure Airbus towards the A380neo? That remains to be seen.
In any case, the Farnborough Air Show 2014 is just round the corner.
This analysis was jointly authored by Oussama Salah and Devesh Agarwal.
Interestingly, Emirates is giving Airbus another chance (or so it seems). I guess they might want to wait till the delivery of the first A350 to evaluate it completely. Like the A380, it might do better than predicted. http://www.businesstraveller.com/news/100601/emirates-reconsiders-cancelling-order-for-70-a350s
Hi Devesh and Oussama – A well balanced analysis of this big news, rather than the hyped and denial led reports published by a few other blogs. I posted the link on my facebook page, facebook.com/iispot. Cheers!
In march’14, Mohammed Al Shaibani- CEO of Dubai Finance, had suggested possible launch of an EK IPO on LSE. The cancelled order does look good on the Debt-Equity ratio of EK for the underwriters. I have always claimed that the rulers of Dubai are the RISK INVESTORs in the A380 project. The large A380 order by Doric and EK (60%+ of total aircrafts) is one of the circumstantial evidences. In 2003 it was predicted that Dubai would start a Leasing co and a Budget airline. DAE and Flydubai emerged in 2005/6. With DAE collapsing and Flydubai offering ‘J’ Class, these are early indications of the fate of EK.
The EK story started after 9/11, on the back of QE1. Subsequently the Iraq invasion 2 saw OIL prices skyrocketing fuelling a gulf boom. The last 15yrs have just started unravelling. EK will have to prove its mettle operating out a region where Egypt, Syria, Iraq, Iran, Bahrain and Pakistan are witnessing their markets evapoarate due to instability. Todays attack on PIA aircraft at Peshwar might result in EK crew refusing to operate to Pakistan or even worse insurance companies raising a war premium, effectively killing nearly 10% of EKs revenue.
EK has just got out of its teenage exhuberance and entered the real world of adulthood where it has to now earn its living. It makes sense to get pragmatic.