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Airbus faces tricky hurdles over $16 billion stalled A380 Emirates deal

Dubai Airshow delegates said Emirates and Airbus must now resolve problems of visibility if a deal is to be done

Reuters  |  Dubai 

airbus, plane
Photo: Reuters

A preliminary deal to sell 36 A380s to Emirates blew up in an hospitality chalet moments before the Gulf carrier was expected to shower $30 billion on the planemaker and its US rival at the start of last week's Airshow.

Two top Emirates officials broke the news to CEO Tom Enders and his sales chief, John Leahy, that the widely expected $16 billion deal would not be signed that day, leaving uncertainty over the future of the world's largest jetliner.

The halt came so swiftly that PR executives who were already in place for a double-signing ceremony a hundred yards away found themselves awkwardly among the audience as walked away with the sole Emirates order, worth $15 billion.

The unusual stumble in slick air show choreography highlights problems over timing and trust that may even now complicate a deal between and Emirates, people aware of the matter said.

One of the closest and most successful relations in aviation is looking bruised and throws up new complications for just as it struggles to maintain business as usual at a time when it faces British and French compliance probes.

A day after Airbus's hopes were dashed, airline president Tim Clark publicly delivered a message from Dubai's government saying it wanted a guarantee from that it would keep producing the A380 for 10 years, before the state-owned carrier would agree to placing a new order.

Enders emailed Clark calling the ultimatum, first reported by Reuters, unhelpful, two people aware of the matter said.

and Emirates declined to comment.

"There is a worrying breakdown of the relationship between and Emirates," said a person familiar with the talks.

"was confident of getting a deal," a Gulf source added. "But does not want to be taken for granted."

Engine headache

Airshow delegates said Emirates and must now resolve problems of visibility if a deal is to be done.

Many in the industry say appears directionless as Leahy is due to retire in January, the guardian of the Emirates relationship, Habib Fekih, did so earlier this year and doubts grow over whether Enders will secure a new CEO mandate in 2019. Meanwhile the probes have badly clogged decision-making.

On the Emirates side, top executive Clark - although full of energy at 67 and dismissing talk of retirement - is likely to hand over the baton at some stage, and it is uncertain how committed other managers are to the A380 flagship.

"Nobody knows who is going to be in charge of the other side later, which doesn't help," said a person familiar with the matter.

The board will however have to think hard before giving the guarantee it wants, which would go beyond the scope of a normal contract for specific planes.

"It's not something any company can easily do, especially on something dragging down the bottom line," the same person said.

For Emirates, the problem runs deeper than simply buying an aircraft from

Airlines deal directly with numerous suppliers, from landing gears to tyres and entertainment systems. Each takes its cue from the planemaker as conductor of a large orchestra.

"If you're the only customer your fear is the manufacturer will lose interest and that becomes a signal to suppliers to make support a lower priority," a person close to the matter said. "Then you end up unsure who is supporting what."

The biggest question mark hangs over the massive engines.

In 2015, Britain's Rolls-Royce won its largest-ever order, worth $9 billion, to displace US consortium Engine Alliance to power a batch of 50 four-engined A380s for Emirates.

But to win the deal it gave ambitious fuel-consumption targets and Emirates signalled last week the cards could be shuffled again for the potential new order. "If we ordered more, we might contemplate talking to both sides," Clark said.

But Engine Alliance output ends in 2018. Keeping its assembly lines warm would require a fresh commitment from its parents General Electric and Pratt & Whitney.

"That's a pretty big ask right now. It all comes down to money," a person close to the consortium said.

GE is involved in a major rethink of strategy and wants to be more selective about investments, while Pratt & Whitney is absorbed with fixing delays on smaller engines.

Second-hand market

Keeping engine makers on board is all the more challenging because of the lack of an A380 second-hand market.

Engine makers make money on spares and services over the working life of an engine which is usually 20-25 years.

But in another accident of timing, the first A380 to carry passengers, in 2007, was being mothballed in France just as was trying to cling on to an Emirates deal at last week's show, after just 10 years in service with Singapore Airlines.

That sets a worrying precedent for suppliers of Emirates, which usually operates planes for 12 years and around 20 of whose A380s may exit the fleet to make way for new purchases.

Faced with the possibility that any new A380 engines may have only half their budgeted life, engine makers may charge more for them up-front or more in hourly service contracts.

Still, Emirates believes an guarantee over the life of the programme could break the logjam and generate new orders.

"I would think a revitalisation of the line would bring the big players together and say what can we all do to make this work ... including propulsion," Clark said.

Pride may yet work in favour of a deal over the A380, which is Airbus's only path into business with Emirates for the time being after the airline placed new orders with

"This (Airbus) management took the decision to launch the A380 so killing it now would make them look foolish," a senior air show delegate said.

"They have got to be able to say that when they left, the A380 was still being built."

 

First Published: Mon, November 20 2017. 11:18 IST
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