News Update: Emirates’ cancellation spells end for A380 production

https://www.bbc.com/news/business-47231504#

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Airbus A380: Big is not necessarily beautiful

Courtesy Airbus

BIG is not necessarily beautiful. Now that Qantas has cancelled its order for eight Airbus A380 superjumbo jets while Emirates, the largest operator of the double-decker jet, is also considering switching some orders to the smaller A350, the future of the world’s biggest aircraft hangs in the balance.

A Qantas spokesman said: “These aircraft have not been part of the airline’s fleet and network plans for some time.”

Clearly things are changing and the preference is trending towards a smaller but more fuel efficient aircraft.

The A380, which can carry as many 850 passengers, is supposed to cater to the rising demand for seats and at the same time relieve airport congestion. However, ten years after its inauguration, the industry is yet again shifting. It may seem the ideal solution moving more people at the same time. But as more airlines compete with non-stop flights, filling to capacity becomes increasingly challenging.

Qatar Airways Group CEO Akbar Al Baker said: “As an aircraft, it is very well suited for routes that require high capacity. We have successfully deployed it in markets where we see this large volume of passengers and operate to slot-restricted airports.” However, he was of the opinion that “this aircraft is very heavy (and) has very high fuel consumption.”

Besides, its size does not allow the flexibility to use it on other less populated routes which are dependent on seasonal demands.

Qatar has 10 A380s in its fleet. Other major operators include Singapore Airlines (24), Lufthansa (14), Qantas (12) and British Airways (12). But none comes near Emirates’ fleet of 109 with more than 50 on order.

Emirates removes first class

emirates logoEmirates Airlines made the unexpected move of doing away with the first class cabin in its newest double-decker Airbus A380 jet which will seat 617 people – a record for the industry. This is more than Air France’s capacity of 538 passengers. Emirates is retaining a reduced business class though.

However, Emirates assures its passengers that comfort has not been sacrificed. Economy will continue to enjoy 32-inch legroom.

Doing away with first class is not a new industry phenomenon. Several legacy airlines reputed for their premium service including Singapore Airlines have long flown without first class on some routes, such a shift driven by increased popularity of business class and preference for this over first class, as well as the increased competition for seats in the aft.

While Middle East carriers – Etihad Airways and Qatar Airways among them – are often seen as leading the field in luxury, Emirates’ latest move demonstrates the business acumen of maximising resources to accommodate market demands, introducing the new 617-seater on density routes. The super jumbo will begin flying Dubai-Copenhagen on December 1, with plans to also fly to Bangkok and Kuala Lumpur.

Interestingly the Gulf region is marked by an absence of budget carriers that have proliferated across the world. Next frontier?

Emirates’ Airbus order cancellation raises questions

Courtesy Airbus

Courtesy Airbus


THE cancellation of an order for 70 Airbus A350 aircraft amounting to US$16 billion (based on 2007 list prices) by Emirates Airlines has turned the focus on the Airbus company. In an obvious attempt to play down the drama, Airbus chief operating officer (customers) John Leahy said: “It is not the world’s greatest news.” That did not check Airbus shares from falling 3.7 per cent and engine maker Rolls-Royce by 1.7 per cent on the back of Emirates’ decision. Mr Leahy even brushed it aside as if it was something to be expected, adding that Emirates president Tim Clark “does change his mind from time to time.”

In truth, airlines do change their mind about aircraft orders. In 2012, Qantas cancelled orders for 35 Boeing Dreamliner jets worth US$8 billion following a net loss of US$256 million – its first annual loss since 1995 when it was privatised – and expected lower growth requirements. The Australian flag carrier is keeping its fleet options open. Qantas CEO Alan Joyce said: “We will maintain complete flexibility over the fleet.” He explained: “In this business there is always potential for great headwinds and tailwinds… there is no intention that every aircraft is guaranteed to come or that it’s not going to come.”

Only very recently did budget carrier Tigerair – which is 40-per-cent owned by Singapore Airlines – also cancel orders for nine Airbus A320 aircraft in light of perceived overcapacity in the region of its operations.

But a decision by Emirates which is not in the same financial straits as Qantas and Tigerair must raise questions even as Mr Leahy insisted that he was “not particularly worried at all.” To suggest that it was a whim of Mr Clark was quite unwarranted. But Airbus did express its disappointment. Apparently, Emirates’ decision followed ongoing discussions between the two parties as the airline reviewed its fleet requirement. In fact, Emirates has ordered an additional 50 A380 aircraft.

Courtesy Airbus

Courtesy Airbus

So, naturally, we ask the big “Why?” and speculate on the ramifications of that decision.

Is Emirates dissatisfied with the aircraft model?

Allegedly Emirates is unhappy with particularly the performance of the A350-1000 model, which makes up 20 of the 70 aircraft orders, the others being the A350-900 model. Even as Airbus said Rolls-Royce was working on the upgrade, the writing was already on the wall when in November 2012, Mr Clark told Aviation Week that Emirates’ order for the aircraft was in limbo, and that the A350-900 “is starting to look a bit marginal to us because of its size.” That provided another perspective to the issue – one of suitability. Mr Clark explained: “Gauge is the way we grow, you cannot get any more aircraft into the Dubai hub.”

Has Emirates over-estimated its growth capacity?

The focus is so much on Airbus that it has become convenient to not ask any question that may suggest that Emirates’ decision is driven by more an internal than an external situation, or at least in part due to it. It is almost unthinkable in light of Emirates’ sterling performance when it posted a 43-per-cent increase in profit to Dh3.3 billion (US) for financial year 2013-14. According to Emirates chairman and chief executive officer Shaikh Ahmad Bin Saeed Al Maktoum, the airline’s profit margin was more than double that of the industry, the result of flying 44.5 million passengers – up 13 per cent – and close to a 80-per-cent load factor. It was a year of expansion as the airline increased its capacity for both passenger and cargo, and as it added new destinations across the globe.

By all accounts it does not look like Emirates is about to stop expanding, or even slowing down, despite the revised forecast by the International Air Transport Association (IATA) that showed astagnation in profitability for the industry in Africa and a dip for all the other regions with the exception of North America. Of course, the state of the industry does not necessarily reflect the fortune of Emirates, which in the past year has experienced healthy growth in all the regions that it operates. Still, the question must be asked: Has Emirates over-estimated its growth capacity, noting too the limitations of Dubai Airport? To be sure, the airline will continue to expand, having announced plans to add five new routes to Abuja, Brussels, Chicago, Kano and Oslo, but perhaps at a slower rate. It could be in this context that Shaikh Ahmad recognized the need for “efficient new aircraft” amongst other things to sustain profitability,

Will Emirates’ decision affect other airlines’ orders?

Courtesy Airbus

Courtesy Airbus

Emirates’ decision raises questions on the impact it may have on other airlines with similar orders, more notably the Gulf carriers namely Etihad Airways (with an order for 40 A350-900s + 22 A350-1000s) and Qatar Airways (43 + 37). Besides Etihad and Qatar, airlines that have placed orders include Air France-KLM (25 A350-900s), Aer Lingus (9 A350-900s + 9 A350-1000s), Aeroflot (14 + 22), Air China (10 + 10), AirAsia X (10 + 10), Asiana Airlines (12 +10), Cathay Pacific (20 + 26) and Japan Airlines (18 + 13). But Mr Leahy of Airbus was confident that other airlines would take up the slots vacated by Emirates. He maintained that there would “no hole in production” and therefore no impact financially since the first deliveries were only planned for 2019 and spanned out to 2034.

Is Emirates setting the stage for heightened competition between Airbus and Boeing?

This is not a new story about the rivalry between Airbus and Boeing, but more a reminder of it. It is all the more significant when Emirates is the world’s largest operator of the Boeing 777 and Airbus A380 in a fleet of 217 aircraft. In 2013-14, it received 24 new aircraft including 16 A380s, six Boeing 777-300ERs and two Boeing 777Fs. If there is a customer that both manufacturers want to please most, it has to be Emirates. Airbus is unlikely to let Emirates’ concerns go unattended even though the latter had cancelled its order; that will become history. For Airbus, it is more than just about losing an order. More importantly, it is about the competition with Boeing. Clearly, he who pays the piper calls the tune.

It was by the size of Emirates’ order a big deal after all, and Emirates is one of the world’s leading airlines. Mr Tim Clark may well have the last laugh.

Qantas’ dismal performance: The singer or the song?

Courtesy Getty Images

Courtesy Getty Images


QANTAS reported a loss of A$252 million (US$225) for the half year (July-December 2013) which was worse than the loss of A$91 million last year. At the same time the Australian flag carrier announced it would cut 5,000 jobs as part of a three-year plan to reduce costs by A$2 billion. Other measures include deferring delivery of eight Airbus A380 for the parent airline and three Boeing B787 Dreamliner aircraft for budget subsidiary Jetstar as well as relinquishing some of the routes.

Qantas CEO Alan Joyce said: “We must take actions that are unprecedented in scope and depth to strengthen the core of the Qantas Group business.” He added: “We have already made tough decisions and nobody should doubt that there are more ahead.” So what’s new? One may then wonder if the dismal performance of Qantas is more about the singer than the song.

Mr Joyce attributed the poorer results to competition, high fuel prices and unfavourable foreign exchange rates – all the stock answers you can expect from any airline in a similar situation, not that they were in any way invalid but that they were definitely not the unusual suspects. The unions, naturally disenchanted by the announced staff cuts, had suggested that this might have been in part due to creative accounting in recent years.

It does not bode well for Qantas when the global economy is on the road to recovery with some major airlines already reporting profitable performances in sync with the optimistic outlook forecast by the International Air Transport Association. The flying kangaroo has been struggling to regain profitability on the back of a major restructuring initiative filled with such promise that would have observers believe in its certain recovery although not everyone was convinced. Something seemed to have gone amiss along the way.

A major thrust of Mr Joyce’s “transformation” strategy was to capitalize on the growth in Asia, which saw Qantas mounting more direct services in the region. But the flying kangaroo suffered from an image problem that even Australians preferred to book with competitor airlines such as Singapore Airlines (SIA) and Cathay. According to Mr Joyce, “82 out of every 100 people flying out of Australia are choosing to fly with an airline other than Qantas, not including Jetstar.” That might still hold true considering the airline’s latest results. The Asia plan to avert what Mr Joyce then referred to as an Australian “tragedy” was to launch a premier regional carrier based in Asia code-named RedQ, which never took off, and to promote Jetstar aggressively across the region. Jetstar Japan was launched in 2012 jointly with Japan Airlines, and Jetstar Hong Kong was established with China Eastern Airlines much to the displeasure of Cathay. But even Jetstar, once the star performer, was reporting a loss. Did Mr Joyce misread Asia and underestimate the competition? Was there a mismatch between his enthusiasm and the reality? Or did the fault lie in the execution?

Today Mr Joyce is reiterating the call for renewal he made two years ago when, announcing a 52% dip in first half profits, he said: “The highly competitive markets and tough global economy in which we operate mean that we must change.” At that time, 500 jobs were axed consequently. Then Cathay also reported a plunge of more than 60% in full-year profits (2011) and the results for SIA were just as lacklustre. The airline industry was suffering. To avert further losses largely incurred by its international arm, Qantas split its international and domestic operations into separate autonomous units in May 2012. Mr Joyce could be right that international and domestic operations faced different demands and challenges, and an independent Qantas International would have a freer hand in pursuing the Asia dream and other channels of growth. He said then, “We have begun the process of restoring Qantas International to a sustainable position.” Then as higher losses were expected for the full year came the glimmer of hope when the mega alliance with Emirates Airlines was announced, an initiative that looked likely to hurt rival SIA with the shift of Qantas’ hub for the kangaroo route from Singapore to Dubai that expands its accessibility to Europe, the Middle-East and Africa through Emirates. While Mr Joyce admitted that the alliance had cushioned the losses, the impact was far below expectations.

Only last year did Qantas send out signals that it was back on course, reporting a reduced loss for the first half. Mr Joyce, pleased with the turnaround, said: “We are now beginning to realise the benefits of the tough decisions that we have made over the past 18 months.” The improved performance of international operations was encouraging. It turned out to be a lull before the perfect storm. To be fair to Mr Joyce, one has to take a long term view of the strategy and recognize that external and unexpected events can affect the initial plans adversely and avert the desired results, and that under the circumstances a change of course would be expected of any dynamic organization. So one should cut Mr Joyce some slack lest one becomes too hasty in one’s judgement of the supposed “Qantas transformation program” which he would now accelerate to achieve a cost reduction of A$2 billion by 2016-17.

But the future looms large with uncertainty. It is not quite clear how Qantas would move ahead as the added measures appear to be short term and expedient, which may decelerate the growth of the airline and open up more room for the competition. A press release issued by the pilots’ association stated: “Qantas management has today outlined a demolition of jobs, but failed to follow through with a strategy for how it will grow the business and serve the national interest.” As if in preparation to ameliorate the negative impact of the devastating results, Mr Joyce has been harping on the Australian government’s unfair treatment of Qantas compared to Virgin Australia. The rules limiting foreign ownership have apparently put it at a disadvantage; rival Virgin on the other hand enjoys the investment that comes from partial ownership by Air New Zealand, Etihad Airways and SIA. Mr Joyce asserted: “The Australian domestic market has been distorted by current aviation policy.”

That restriction might be a hurdle to Qantas’ expansion, but it did not explain satisfactorily the failure of the airline to perform in progression with Mr Joyce’s grand restructuring plan. Above the sound and fury, as Australian Prime Minister Tony Abbott had commented, Qantas would have to first put its house in order.

Will Boeing’s performance continue to surprise?

Courtesy Seattlepi/Associated Press

Courtesy Seattlepi/Associated Press

YET again, Boeing the company has surprised aviation observers with better-than-expected second quarter performance – in spite of recent problems with the B787 Dreamliner jet as many of them are apt to point out. Really, should they even be that surprised?

Boeing reported a 13-per-cent increase in March-to-June profit (US$1.09 billion) on the back of growing sales of commercial airplanes and military equipment, fuelled by demands from Asia and the Middle East. Following the lift of the global order that grounded the Dreamliner pending investigations of the fire hazard posed by the plane’s lithium-ion batteries, Boeing delivered 16 of the jet in the second quarter. This, together with the growing sales of the B737s and B777s along with military equipment – again, in spite of cuts by the Pentagon on military spending – has contributed to large inflow of cash.

Consider nevertheless how the sizeable jet business is almost one duopolized by Boeing and Airbus Industries. For many major airlines, it is often a choice of either Boeing or Airbus for an aircraft that boasts similar range and capacity. Also, commitment by airlines to an order is usually made months and years in advance, and so long as the economic climate holds up, default on orders is not expected. Airlines such as British Airways and Virgin Atlantic have openly declared their support of Boeing.

In fact, airlines are known to jostle to be the “first to operate” as an added not just marketing edge but also PR hoopla, as in the case of Singapore Airlines launching the Airbus A380 jet and All Nippon Airways, the Dreamliner. So, with the Dreamliner back up in the sky, the immediate and short-term prospects for Boeing is not going to look any worse – and, as it turned out, better in fact – as the company fulfills its obligation. Boeing has an order for 930 Dreamliner jets to date, and only 66 have been delivered so far.

Early observers had said compensation for the grounding of the Dreamliner in January until late April this year would run into millions and impact negatively on Boeing’s bottom-line. Boeing chief executive W James McNerney Jr said such details of the compensation had been finalized but that the payout would not have a material impact on the plane-maker’s earnings. Referring to the more recent incident when smoke was detected in the Ethiopian Airlines’ Dreamliner jet parked at London Heathrow Airport, Mr McNerney reiterated that the downtime cost of repairing the aircraft would have “very little” financial impact on either Boeing or Ethiopian since the tab would be picked up insurance.

Now, that should take out any more surprise in the near term, and investors might reconsider picking up the Boeing stock before it is too late. If it does surprise yet again, it may not be in spite of but because of the Dreamliner.

ANA’s Dreamliner pain deepens

Courtesy Reuters

Courtesy Reuters

Singapore Airlines (SIA) which sought to be the first to operate the Airbus A380 in 2007 must be heaving a sigh of relief that it had passed over the Boeing 787 Dreamliner. It was All Nippon Airways (ANA) that made the wrong bet.

When the Boeing aircraft was grounded in early January following the unknown cause of a fire that was at first suspected to be caused by the lithium battery (see Dreamliner: Not quite a dream start, Jan 17, 2013; Japanese carriers remain positive despite Dreamliner grounding, Feb 5, 2013), it was widely hopeful that operations would resume by the end of the month as the aircraft maker moves quickly to investigate the cause and fix the problem. Then some of the airlines affected moved the delay to mid-February, and now it all seems but uncertain when this is likely to happen. ANA, the biggest operator of the aircraft – 17 out of the world’s 50 B787 in operations – is cancelling all flights using the aircraft till at least the end of May.

ANA announced its decision even as Boeing said it expected to fix the problem to get the Dreamliners back in the sky by mid-April. The US Federal Aviation Administration (FAA) is reviewing Boeing’s proposal but said: “The safety of the public is our top priority and we won’t allow the 787 to return to commercial service until we’re confident that any proposed solution has addressed the battery failure risks.”

Unfortunately for ANA, Japan’s Golden Week holiday which normally experiences peak travel will fall during the extended period of cancellation of 1,700 flights in April and May.  This will bring the number of flights cancelled to 3,600. As many as 60,000 ANA customers have been affected.

The cost to ANA has so far been US$15.4 million (January), and it remains an open question as to how much more this will affect the airline’s profitability. While ANA may be protected by compensation that it will seek from Boeing, the bigger issue in the long term is one of opportunity cost and the loss of customers to competitors. Boeing itself recognizes this, saying it would take “every necessary step to assure our customers and the travelling public of the integrity of the 787.” (See Prolonged Dreamliner grounding is not good news for Boeing and its customers, Jan 28, 2013).