So far, it has been an eventful year in the aviation industry. Of course, we have the foundation for Boeing (BA) 737 MAX, but in February Airbus (OTCPK: EADSF) announced that the Airbus A380 program would be terminated in 2021. For one of the largest customers, Emirates, this had implications but as we expected earlier for Boeing, there would also be implications.
In this The report we will detail what drove Emirates & fleet changes, discuss the changes that have now been confirmed through the Emirates annual report, and we also discuss some unpleasant findings we encountered as we approached Airbus and Emirates to receive some clarification on certain orders and preliminary agreements.
Emirates changing strategy (2003-2014)
While termination of the Airbus A380 program is the consequence o An unsuccessful business case, Emirates strategy and similar fleet requirements have probably pushed the Airbus A380 over the edge.
To get an idea of Emirates strategy, we must go 16 years back and remember that state-owned Emirates was a very important part of Dubai's growth puzzle supporting business travel and tourism, and the growth profile had to fit Dubai & # 39; s ambitions and limitations.
In 2003, Emirates placed its first order for the Airbus A380 and Airbus A340. The airline will suffer delays in the delay when the Airbus A380 ran according to plan. The airline increased its capacity by renting additional Boeing 777 aircraft. In 2006, Emirates also decided that it would not be delivered by the Airbus A340 aircraft previously ordered. This had everything to do with the launch of the Airbus A350 earlier in 2006, which would be much more fuel efficient compared to the Airbus A340, and the first deliveries of the efficient Boeing 777-300ER to Emirates.
Source: Airport transport
In 2007, Emirates ended up booking 70 Airbus A350 jets from Airbus with first deliveries scheduled in 2019. At the same time, Emirates remains committed to the Airbus A380 and Boeing 777-300ER. What became problematic for Dubai is that the major recession hit real estate, so even state-backed units were vulnerable in 2009. The major recession led to a slow decline in passenger traffic growth at Dubai International Airport between 2007 and 2011. Dubai's real estate debt crisis the ever ambitious emirates a little more cautious, and the development of mega projects like Al Maktoum International Airport which would have a capacity of 160 million passengers, was slowed down simply because that capacity would not be needed in the years to come. Given that Dubai had to be bailed out there, there was not much room for ambitious projects either. Instead, money was spent expanding the capacity of the existing airport where the use of larger aircraft became an integral part of Emirate's plan to realize growth.
As part of this strategy, the following orders, changes to (preliminary) agreements were made while some notable events affected the strategy:
- Great Recession hit Dubai's passenger growth between 2007 and 2010.
- A preliminary agreement for the Airbus A350 and the 30 Airbus A330s announced in 2008 were never confirmed.
- In 2010, Emirates ordered 32 additional Airbus A380s with a total of ordered Airbus A380 to 90.
- In 2013, the Emirates ordered 50 Airbus A380s, which totaled the ordered A380s to 140 and ordered 150 Boeing 777X aircraft.
- In 2014, Emirates canceled its order for the 70 Airbus A350s and strengthened its order for the Boeing 777X.
- Oil prices tumbler between 2014 and 2016.
What we observed is that as Dubai became somewhat more risky unfortunate when I There come to large and complex projects such as the development of Al Maktoum International Airport, it went from choosing the Airbus A340 to A350 for A380 and Boeing 777X. To realize growth targets, Emirates began using larger aircraft such as the Airbus A380.
Change segmentation (2015-2017)
However, there was something to play in the background that would trigger another cover in the Emirates fleet strategy. In 2014, oil prices fell and for airlines that tend to be a good thing. For Dubai, however, it meant a decline in demand for business-related travel not only in the United Arab Emirates but also internationally as Dubai is one of the largest transit airports in the world. This led to significant pressure on yields, and in December 2015, Emirates began to set up its new Airbus A380s in denser configurations to focus on increasing profits with economy-class seats. At the same time, Dubai began to focus more on attracting cost-conscious tourists.
So Emirates had to look at improvements in the efficiency of the aircraft to improve returns. Due to the cruel prospects of the Airbus A380, the Engine Alliance, which until that time was the turbofan supplier for the Emirates A380 fleet, did not want to upgrade the engine to the extent desired by the Emirates. Rolls Royce, who had lost at least 140 turbofan orders when the Emirates interrupted the A350 order, for which Rolls Royce is the only turbofan supplier, was more willing to make efforts to reduce fuel combustion. Rolls Royce would end up winning the order to operate part of the Airbus A380 fleet.
Source: Rolls Royce
The hit for Rolls Royce came when the first deliveries were delayed by unspecified technical issues and mail service entry. Emirates were not happy with the turbofan's performance, but it never became clear what the pain tests were. For Emirates or other airlines it is only worth adding another type of turbofans if the total cost savings (maintenance, operation, and possible costs associated with maintaining reliability and durability) exceed the initial cost of a new propulsion system.
Finally The first Airbus A380 with Trent 900 turbofans from Rolls Royce was delivered in December 2016, and it was expected that this would pave the way for an order for 30 super jumbo in the Dubai Airshow in 2017. When Airbus fully trusted Emirates for its A380 order book, the airline is seeking a production guarantee from Airbus for the next 10-15 years, which will mean that if Airbus ever fills the order book for the next 10-15 years, Emirates will still be able to choose the Airbus A380 to support the growth from the new Al Maktoum hub. To get that point in 10-15 years, Airbus would demand sales to new customers. If the jet maker were to find them, it would increase the possibility of an updated Airbus A380 that the business case of the Airbus A380 would be validated. What Emirates initially said to Airbus was "Go find additional customers" and it was an almost impossible task. An agreement at the 2017 Dubai Airshow for extra super jumbo was not signed.
From Airbus to Boeing and back (2017-2019)
Source: Emirates  Instead of Airbus taking the stage with Emirates in 2017 Dubai Airshow, took the Boeing stage and announced a preliminary deal for 40 Boeing 787-10 aircraft with the capability of converting any orders to the lesser -9. When it is finished, it will be a big blow for Airbus. The use of smaller aircraft will fit into the Emirates according to 2021 requirements as capacity requirements begin to look for Expo 2020.
Because Emirates tends to order from Boeing and Airbus, an A380 order was still expected. This order came in 2018 when Emirates ordered 20 aircraft and bought options for another 16. But while Airbus and Emirates reached an agreement, Rolls Royce and Emirates could not reach a price and performance agreement with Trent 900 turbofans. The result was that Emirates orders, seen as crucial for superjumbo's production life, became appalling again. With a preliminary agreement that Dreamliner was not terminated and no agreement between Rolls Royce and Emirates, Airbus A350 and Airbus A33neo came back in the picture. If an order for the A380 were to fall through, Airbus and Rolls Royce could offer a sweet deal to Emirates that would probably be better than anything Boeing could offer at a price point.
The reasons are simple:
- Emirates has been extremely supportive of the Airbus A380 program that takes delivery when other airlines postpone their deliveries.
- Airbus was determined not to lose an order for the Airbus A350 again.
- Rolls Royce was determined not to lose a deal once again.
It really left Boeing in the cold. It now appears that Emirates has staged an entire signing ceremony with Boeing to gain influence in negotiations with Airbus, but there is very little that the US jet-maker can do about it. Emirates bought itself influence to get the sweetest deal for Airbus A350 and Airbus A33neo.
The airline had three sticks to strike with:
- The first stick is that the airline requested something that was almost impossible when ordering or planning to order extra Airbus A380s, namely a production guarantee that knows that no airline was interested in Airbus A380. Without any obligation from other airlines, Emirates still ordered the A380.
- The second stick was the fiance talks with Rolls Royce.
- The third stick was a preliminary deal with Boeing.
Emirates positioned themselves so that it could adapt its strategy to change demand patterns, adopt industry trends that favor two-motor vehicles over firemotors, and use smaller aircraft that make the fleet more flexible, allowing more discriminated capacity deployment … to lowest possible price.
Boeing 787 engagement and commenting on preliminary character
One thing that we continuously emphasize especially before and during air exhibitions is the preliminary nature of some agreements. When Airbus announced the deal with Emirates for the A350 and A330neo, I spoke to readers and members of The Aerospace Forum who asked about the fall in the Dreamliner book. The fact is, however, that the preliminary agreement was never strengthened.
We have been following all Boeing and Airbus flight programs for many years now, and there is one thing that readers should be aware of, and that is what preliminary agreements never do in the booking book and A fixed order can always be canceled . When reviewing the Emirates annual report, we also stumbled upon something that suggested that the company ordered that Emirates placed not as firmly as believed, to further strengthen our belief that, just as the Dreamliner preliminary agreement, the Airbus A380 agreement was used as an influence for future negotiations.
Figure 1: Fleet information March 2018 as presented by Emirates (Source: Emirates)
We looked at Airbus's order overview in February 2018 and it was actually an order for 20 Airbus A380s. But if we look at Emirates fleet information (Figure 1) from the annual report, it became our attention that the Airbus A380 order that was said in February 2018 was in the category of "authorized and non-contract" in the Emirates annual reports, which gives the impression that It is not a fixed purchase agreement, and the "regular order" that was signed was actually still a preliminary grade or slightly more than just a preliminary one.
AeroAnalysis compared this to Boeing's Boeing 777X and Boeing 787 order overview to verify whether these future deliveries were included and what we found was that the fixed part of the Boeing 777X order is as expected included in the Boeing order book, but the preliminary agreement for the Boeing 787 is not. This supports our view that preliminary agreements do not end up in the order book. Another important observation is that while it was rumored that Emirates had 60 options for Boeing 787, there has been no such event.
We went out to Airbus to clarify the matter; We wanted to know how it is possible that an order is logged, but the customer himself says that there is no contract. We have also asked Airbus to explain what is required for an order to be logged. By email, Airbus confirmed to AeroAnalysis that Emirates signed a purchase agreement and it requires a purchase agreement to add an order to the books.
A similar request was sent to the Emirates to clarify how it was possible that the airline claimed it signed a firm order but still noted the orders as "not contracted". Emirates Group Vice President of Public Relations, Social Media and Internal Communication, Valerie Tan, refused to comment on the February announcement of a firm order and only confirmed that the agreement was announced in January was of a preliminary nature. When we pressed for openness about the order announcement in February 2018, Emirates left our request for information unanswered.
The only reason we could think of an order ending up in the order book but not being categorized as such by the customer is the inclusion of clauses that will not create direct obligations for Emirates as long as Airbus Not fulfilling their end of engagement, and I think the Airbus part of the commitment in this case would not be just collecting, testing, and delivering the aircraft, but also finding customers for the aircraft. Another possibility is that the entire order will be considered to be entered into if an agreement was reached for the propulsion systems as well. AeroAnalyse does not believe that Airbus actually logged a Memorandum of Understanding as an order. If they did, it would be an incredibly bad thing that would remove all credibility in the company's order book.
The time of the cancellation is also interesting as it comes a year after the order was placed. Eventually, Emirates gave Airbus a year to strengthen the order book, but the jet-maker was not and probably not willing to do so. Looking back, the order from Emirates in February 2018 has been more cautious than company and less firm than an addition to the booking book would justify the criteria for adding the order to the book had been met. Perhaps there were no more clauses that were to be fulfilled, or the order was suspended on an agreement with Rolls Royce. Regardless, it is regrettable that a company like the Emirates refuses to clarify order confirmations.
Figure 2: Fleet information March 2019 as presented by emirates (Source: Emirates)
What we observed in the Emirates' latest annual report is that it changed the way it reports "orders" compared to last year. In previous years, Emirates listed "fixed order". Last year, Emirates split its orders into "contracted for" and "non-contract" for categories and in 2018-2019 Emirates collected these two columns in future deliveries without any difference between preliminary and fixed orders. For me, I explain why Emirates had no clarity in fleet information: The way the airline tabled its fleet and obligations is at best not inconsistent and selective.
Anyway, what we see is that Emirates future deliveries dropped from 262 to 234:
- Airbus A380 future deliveries fell by 46 units.
- Boeing 777-300ER future deliveries fell by 12 units to 0, signaling that Boeing has not yet canceled or converted 6 orders from the Emirates.
- Boeing 787 preliminary future deliveries fell by 40 units to 0.
- Airbus A350 future deliveries increased by 30 units.
- Airbus A330neo future deliveries increased by 40 units.
What should be considered is that future deliveries to the Airbus A350 and Airbus A330 are under preliminary agreement. It is likely that during this year's Dubai Airshow, this order will be enhanced. In addition, Boeing 787's future deliveries do not disappear to a fall in the order book for Dreamliner. For Boeing, the loss of the preliminary agreement is painful. Tentative agreements expire is not uncommon, and I think if you consider Emirates' current fleet and future deliveries, there is no reason to assume that Emirates will not use the abducted Dreamliner agreement to get a good deal from Boeing in the future.  Summary
Investors should be aware that preliminary orders are not logged by jet makers, and even fixed orders are not as fixed as they appear. While Airbus A380 program cancellation is one that was expected, the order event is not one-dimensional. There are many things backed up in Dubai's (not just the Emirate's ambitions) that run the Emirates fleet strategy and change that strategy. From efficiency to global crises to real estate oil price shock crises to shifting passenger mixes to more disciplined distribution of money and capacity … it has all affected fleet decisions Emirates made over the past 16 years.
Clearly, the Airbus A380 didn't live up to expectations, and Emirates was the only airline that could really absorb this aircraft in large quantities, but to understand why the Airbus A380 really made sense to the Emirates, we must go back a decade and notice the financial difficulties that Dubai had during the debt crisis triggered stricter cash and debt control that changed the need, timeline and appetite to invest in Dubai's new mega airport.
Figure 3: Oil prices between 2013 and 2019 (Source: Macro trends)
An additional layer to this is the collapse of oil prices in 2014-2016, which even for Dubai who relies on being largely independent of Oil money, had consequences such as high yield business class The focus that was usually filled with people from the banking and real estate industry declined, and one of Dubai's major growth drivers, tourism, began to focus more on cost-conscious travelers to maintain the growth rate.
Airbus A380 without any obligations from Rolls Royce at lower engine-related costs that become less sensible as a future fleet solution such as oil prices despite being volatile, going up again and after the Expo 2020 is hosted in Dubai, Dubai's growth will current airport flat something. So, Emirates began to look at the less broad body aircraft Boeing and Airbus have on offer. Boeing seemed to be raking in an order for 40 Dreamliners, but in combination with extra pressure from the Dreamliner agreement, Rolls Royce did not meet Emirates demands in negotiations and Emirates long-term support from superjumbo, the opportunities opened for Emirates to acquire small broad body jets from Airbus at prices that were too good to pass. I think that even without the hassle of the propulsion system, Emirates is at a point where there is a need to get smaller jets to grow efficiently. Having supported Airbus's miserable Airbus A380 program really gives them a strong lever to negotiate big discounts on the purchase of smaller jets. The reason for releasing the Airbus A380 order is probably far greater than negotiations with Rolls Royce.
The preliminary agreement that disappears from the Emirates annual report can be disappointing for Boeing, but it is certainly not that there are no opportunities for Boeing to sell more flights to the Emirates. Just as Emirates used the January 2018 temporary agreement for the Airbus A380 to get a nice deal on the other Airbus airline deals, Emirates can look for an equally good deal from Boeing for either Dreamliner or Boeing 777X and when it the chance arises there is little doubt that Boeing will also bite.
At the IATA General Assembly, Tim Clark said Emirates is still committed to Boeing 787-10. While they may still have intentions to purchase the aircraft, it still looks like the preliminary agreement lapsed without a fixed agreement being signed. As we pointed out in mid-May to subscribers to The Aerospace Forum, there are still chances for Dreamliner in the Emirates fleet. It will only be difficult to reach a price agreement.
Expected agreement is good news when Airbus takes back an order like that lost many years ago. For Boeing, the preliminary agreement for the A350 and A330neo means that if they want to sell Boeing 787-10 to Emirates, they must offer a very attractive price. Another possibility is that the company sells more Boeing 777X jets to the Emirates, but the question remains whether Emirates will use the Boeing 777X as growth vehicles or choose the flexibility that the smaller jets offer. An investor will not see much of a difference in the charts; Since the announcement of the preliminary agreement on Dreamliner, Boeing's shares achieved 33% against 37% for Airbus. Since February 14, when Airbus completed the A380 program, Airbus shares received 11% against a 15% decline for the Boeing shares. However, price developments are not driven by these preliminary agreements, and are more closely linked to the Boeing 737 MAX crisis and general market directions.
Single orders will not have a lasting impact on the development of stock prices, but investing wisely This industry should once again be aware of how complex and multidimensional the procurement process is and which factors strongly affect fleet decisions. The aviation industry is moving slowly at times, so having a thorough look at orders is important when you want to get a complete picture and understand why certain order books are the way they are.
I continue to believe that as we enter the 2020s we will see which product airlines prefer, whether it is the Boeing 787 or the Airbus A350, which are both small / medium wide body beams or the Boeing 777X. Both jetmakers are expected to order meaningful orders over the coming years, so both jet manufacturers will prove to be good long-term investments, provided Boeing can fix its current problems.
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Enlightenment: I am / we are long BA, EADSF. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (other than from Seeking Alpha). I have no business relationship with a company whose stock is mentioned in this article.
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