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.


More precautionary measures from Boeing: The task to reassure



THE latest precautionary measure issued for Boeing’s B787-Dreamliner jet is a recommendation arising from investigations into the fire that broke out on the Ethiopian Airlines aircraft at London Heathrow. The source of the fire was traced to the upper rear part of the aircraft where the Emergency Locator Transmitter (ELT) is fitted. It is recommended that the transmitter be switched off until further review is completed.

Honeywell International that manufactures the transmitters warned that it was “premature to jump to conclusions”.

True, though the measure could not have come at a more appropriate time when only last week All Nippon Airways and Untied Airlines reported faulty wiring on the B787-Dreamliner transmitters.

Boeing has also advised operators of the 717, Next-Generation 737, 747-400, 767 and 777 aircraft to inspect the transmitter, which is used to locate an aircraft in the event of a crash.

It is to be expected that the precautionary call may be somewhat disconcerting to the public. Referring to the Ethiopian Airlines incident, the UK Air Accidents Investigation Branch had said the cause of the fire had not been determined but added that “had this event occurred in flight it could pose a significant safety concern”. While a statement like this could certainly cause a bit of a jolt, the preventive measure as introduced should at the same time be reassuring that airlines, manufacturers and regulators would prefer to be conservative in their assessment.

Whatever said about teething problems being part and parcel of the introduction of any new equipment, it is unfortunate that airworthiness concerns about the B787-Dreamliner are amplified by the quick succession of issues. Boeing vice president marketing for commercial aircraft Randy Tinseth said the checks are meant to “gather data to support potential rulemaking by regulators.” In other words, Boeing’s task for now – working together with regulators and other parties – is one of anticipating and eliminating concerns, making improved changes as necessary, to reassure the public that their jets are safe to fly.

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.

Why Ryanair succeeds

Courtesy Ryanair

Courtesy Ryanair

IF you think of customer service, you will not think of Ryanair. The Irish budget carrier is not known to shine in that department. In fact, it has garnered many complaints about rude and unhelpful staff, non-payment of compensation for flight cancellations and delays, and almost merciless pricing.

Yet – and a big yet it is – Ryanair is making the kind of profits that are the envy of rival and legacy airlines. Despite rising fuel costs, it reported record full-year profits in May. That means people are flying the airline. Passenger numbers continue to grow, reaching just under 80 million. The carrier is expanding capacity and introducing new destinations. By 2018, its fleet would have grown to 400 with the addition of 175 Boeing jets worth US$175bn.

And you wonder why.

While many so-called budget airlines have modified the no-frills model in branding themselves, Ryanair has played by its rules religiously and it has paid off. The carrier continues to look at ways to slash costs and the corollary of that is to charge for extras that might be offered as an entitlement on other airlines. Remember the controversy it created when it suggested a charge for use of the aircraft toilet? (See Ryanair pushes the boundary, Jan 31, 2011) Or the buzz about introducing standing room only in its aircraft? (See Standing room only up in the air, Jul 23, 2010)

Among the list of extras, Ryanair charges for check-in services at the airport if you do not do it electronically beforehand. At some airports, this may not even be available. Once booked, do not dream of changing your flight. Baggage over-limits are scrupulously applied. Think again if you want to lodge a complaint about its service or staff: it would mean expending time and energy, and it jacks up the operating cost.

It may not be that Ryanair does not care about customer feedback and satisfaction. It could well be a case of going for the lesser evil or giving the customer the less offending option which usually turns out to the more economical one. The carrier makes no apologies for what it is doing amidst criticism of mean and uncompassionate handling.

What about customer loyalty, you ask.

Brand loyalty is not a driver of the low-cost model. In reality, neither Ryanair nor most budget carriers rely on that aspect to survive; it is a bonus if it develops into a positive reinforcement. Cost is the primary driver, and for all the complaints about cramped seating, ancillary charges and poor service or an absence of assistance, that will continue to be an irresistible pull for many travellers. That is why the hybrid model attempted by some carriers does not succeed as well. Ryanair may be said to have managed the level of discomfort to be sufficiently below the benefits of low costs that in spite of customer dissatisfaction with its service, it is able to thrive on clientele both old and new.

That also explains why Ryanair has so far not been keen on applying the low-cost model to the long haul that not a few airlines have tried and failed, and that some are still ambitiously hoping it will work. The long haul demands cannot be a mere straight-line extrapolation of the low-cost model formula. There are things that the short haul does not provide but which the long haul cannot do without even if passengers had to pay for them, for example, blankets, refreshments and meals. Travellers strapped in the seat may tolerate the discomfort for a short trip to save a few dollars, but beyond a certain point it becomes insufferable without distractions or relief of some sorts. Ryanair has wisely steered clear of that danger zone when it can no longer ignore the customer’s voice of discontent.

Stick to the knitting, advocate Tom Peters and Robert Waterman Jr in their bestselling book “In Search of Excellence” first published in 1982. Some things remain a hardcore basis for success. Ryanair chief Michael O’Leary could be proud that Ryanair is perhaps the only true disciple today of the budget model: Strictly no frills, and you should know better than to complain. (See Ryanair introduces cash passport, stays true to budget model, Oct 28, 2011)

Putting Dreamliner back up in the sky: More than an act of faith

Photo: Elias Asmore/Associated Press

Photo: Elias Asmore/Associated Press

Ethiopian Airlines became the first airline to put the Dreamliner B787 jet back up in the sky following a formal “air worthiness” directive by US Federal Aviation Administration (FAA) to allow resumption of commercial operations.

The Dreamliner was grounded in January over concerns of fire risks resulting from possible malfunctioning of the jet’s lithium-ion batteries. While the actual cause of the sparks experienced by Japan Airlines would never be known, Boeing has refitted the model with new batteries approved by FAA. The new batteries, encased in stainless steel boxes with a ventilation pipe that goes directly to the outside of the plane, run at a much cooler temperature.

The Ethiopian flight took off from Addis Ababa and landed safely in Nairobi, Kenya some two hours later – paving the way for the other operators of the global fleet of 50 aircraft to follow suit. Boeing expects to complete repairs of the entire fleet by May. All Nippon Airways (ANA) which has the largest number of 17 Dreamliners said it would commence retraining of its pilots to resume flying the aircraft in June.

The task at hand now is to convince the travelling public that the revamped B787 is safe for flying. ANA plans to reintroduce the jet for freight only before using it to carry passengers. The Ethiopian flight was full of Boeing executives in an act of faith. All this may in the end prove to be academic since not many people know about the aircraft make and model that they have booked on or make it a necessary condition of their flying. The airline brand (its safety record implicit) and other factors such as schedules and costs are likely to matter more.

Courtesy Reuters

Courtesy Reuters

All said, ANA is probably more concerned about the perception than other airlines. If it is of any comfort, closest rival JAL also operates the B787. But that would be taking a diffident stand for all the hours that Boeing has put in to rectify the problem and the assurance it has given of its improved design. Surely, it must be more than an act of faith.

Happily for Boeing, the scare over, it may again sell on how much more fuel efficient the lightweight Dreamliner is compared with other similar jets. The company reported a 20-per-cent jump in net income to US$1.1 billion for the first three months of the year – in spite of the Dreamliner grounding.

Boeing blues

Three months after the grounding of the B787-Dreamliner and while Boeing struggles to resolve the issue to get the plane back up in the sky, a new problem has landed on its lap – this time, concerning the B737 jets. The US Federal Aviation Administration has issued an airworthiness directive for more than 1,000 B737 planes operating in its airspace (which also applies in Canada) to be inspected for faulty tail pins that may have prematurely corroded, causing pilots to lose control of the plane.

The FAA said: “We are issuing this AD to prevent premature failure of the attach pins, which could cause reduced structural integrity of the horizontal stabilizer to fuselage attachment, resulting in loss of control of the airplane.”

It is a precautionary move, but likely a costly one for the airlines that have a large number of the B737 jets in their fleet, such as WestJet Airlines of Canada. Since the B737 is a short to medium-range aircraft, it is likely that regional airlines including cargo operators are likely to be the most affected. But safety is not something that you can or want to downplay in the business of flying.

This could not have come at a worse time upon the heel of a Lion Air crash into the waters, short landing at Bali’s Ngurah Rai International Airport in Indonesia just this week. Fortunately all passengers survived. There was no connection between the incident and FAA’s directive – the way that the grounding of the B787-Dreamliner was consequent upon sparks aboard a Japan Airlines plane initially suspected to be caused by the lithium-ion battery pack – and investigators have yet to establish the cause. It might even be extraneous to Boeing. Lion Air, which is Indonesia’s second largest airline and one of the fastest growing in the region, is banned from operating within the US and European Union over safety concerns.

Photo: Reuters/Stringer Indonesia

Photo: Reuters/Stringer Indonesia

But what came across as frightfully familiar was how the fuselage of the Lion Air plane broke apart, recalling similar mishaps experienced by four other airlines that include Continental Airlines in 2008, American Airlines in 2009, Aires Airlines (Colombia) in 2010 and Caribbean Airlines in 2011. Mind you, the B737 has been around since the 1960s and is a favourite plane for regional flights. It is in fact the best selling jet in the history of aviation.

Boeing will have much to do to repair its image. The aircraft business is dominated by two players – Boeing itself and Airbus, and the competition is such that for the bigger jets, the decision to buy which make and model usually comes down to either one of them. Aircraft orders can span several years, and timing is important.

Then, of course, as things settle, there is the looming question of compensation for downtime if Boeing is found to be contributory to its customer airlines losing out on opportunities. At least one airline – Qatar Airways – affected by the grounding of the B787-Dreamliner has publicly announced it will seek compensation from Boeing. Qatar chairman Akbar Al Baker said: “Definitely we will demand compensation. We are not buying airplanes from them to put in a museum.”

Lion Air roars

Picture courtesy Boeing

Picture courtesy Boeing

LION AIR is roaring and living up to its name. Indonesia’s privately-owned airline – the second largest in the country – is making news with two recent record-breaking plane orders. It has just placed an order for 234 Airbus jets worth 18.4 billion euros (US$24 billion), following up on an order of 230 Boeing aircraft worth US$22.4 billion last year.

The two orders would place Lion Air, which currently has a fleet of 92 aircraft, among the world’s top 10 by number of aircraft. This is an impressive leap forward considering that the airline is banned from flying within both the European Union and the US because of safety concerns. Lion Air operates a large domestic network, capturing 45 per cent of the Indonesian market, and to Asian destinations. Outside the region, it operates to Saudi Arabia, ferrying mainly labour traffic.

But with the growing Indonesian air travel market at a predicated 20 per cent per annum and the impending liberalisation of the Asean (Association of Southeast Asian Nations) skies by 2015, Lion Air is pitching early to be a regional dominant player. It looks set to jostle with Malaysian AirAsia – the regional’s largest budget operator – and has recently inked a deal with Malaysia’s National Aerospace and Defense Industries (Nadi) to set up an airline based in Malaysia (Malindo Airways) in tit-for-tat reaction to AirAsia’s expansion into Indonesia.  (See Malindo Airways to challenge Airasia, Sep 19, 2012)

Lion Air was founded in 1999 by two brothers Kusnan and Rusdi Kirana. Already their ambition has outpaced the dream of many of their rivals, and may even be putting pressure on the national agenda to accommodate their expansion plan.