Sir Tim Clark, President of Emirates Airline, has been vocal in pushing Airbus to revise the A380. As we pass through the A380’s first decade in service, the recent decision by Emirates to switch to Rolls-Royce from Engine Alliance got a lot of attention. The other news was Airbus provided a nice video on the anniversary of the A380 – but that did little to offset the general negative media coverage. Take a look here and here for example.
We were pleased to see Airbus President Fabrice Bregier describe the arrival of the A380 as perhaps “ten years too early” – a view we stated in our A380neo Business Case in January. As many critics of the A380 have their moment, it is, in the end, still the backbone upon which Emirates has built a tremendous business. Consider this. Absent the A380, Emirates would not be as big an airline as it is, the old guard EU-airline network would not be up in arms over Emirates’ competitive pressure, and the US oligopoly would not be seeking protection. The A380 turned out to be a very effective weapon. So far Emirates has used it most effectively. But other airlines have also been able to deploy it successfully – albeit in much smaller numbers. Were Emirates growing its business using 777s, we doubt that its competitors would be as vocal.
Emirates decision to switch engine makers does warrant some review. That they seek 10-13% economic improvement needs to be understood in the context of the forthcoming 777X. Emirates is not only the largest A380 operator, they also have the world’s largest 777 fleet. Consequently the airline has a deep understanding of both the A380 and 777 economics.
As matters stand, Emirates is not going to get its A380neo any time soon. Airbus’ A380 program is already way too dependent on Emirates. It would be adding risk to undertake the program for one customer. Which is why we notice in the Bloomberg story linked above that Sir Tim might think his potential order for another 200 A380s might entice US operators to also step up for the aircraft. The 200 is up from his earlier talk of 140, an attempt perhaps to push the program. Isn’t it intriguing that Emirates now has to help Airbus sell the A380 to help justify the business case for the A380neo?
So how to accomplish the task at hand? It begins with getting to double-digit economic improvement on the A380. Current engines on the A380 are already very good in terms of fuel burn. Both companies have tweaked their engines to deploy advances to ensure these engines offer the latest efficiencies. It is fascinating that the Airbus Orange Book (Airbus’ official fuel-burn specification) reports the Engine Alliance offering 1.3% better fuel burn than the Rolls-Royce Trent 900. Therefore if the rumors that the Rolls-Royce engines being offered to Emirates are going to be 4% better, simple math says that Rolls must have improved their existing engines by 5.3%. This is a staggering number. Could it be that perhaps Rolls is thinking of offering a Trent XWB engine which might get closer to these numbers? But there would be some certification time needed.
Rolls has not publicly made such an announcement. Which is just as well, because the aerospace industry would not buy it for a minute. Were Rolls to have made some terrific improvement like this, they’d announce it in a second and shout it from the rooftops.
Next consider that Engine Alliance is, in essence, a one-trick pony. Its only business is making engines for the A380. There is no way it would not fight for the Emirates order with everything it has. In other words, they would have offered Emirates the best pricing (i.e. marginal pricing) and offered proven economics. And yet they still lost. Emirates must have had more than engine economics in mind. What that is has yet to be revealed.
Meanwhile, Rolls shareholders need to ask what exactly their company had to do to win this order. Interestingly, Rolls’ share price declined when the order was announced. This order surely came with onerous warranties on performance. Sir Tim will have made certain of that. He will have pushed all the risk on to Rolls, using Engine Alliance as the threat. Rolls no doubt wants to deliver on its promises, and try to rekindle any A350XWB interest at Emirates which might help offset some of the extra risk it picked up with the A380 order. The combination of Airbus and Rolls-Royce provides Emirates with a particularly attractive fulcrum by which it will extract maximum benefits.
The way Emirates gets its A380s to double digit improvements has to depend on more than engine improvements though. The most obvious one is capacity. Which is why we see the airline moving from 517 seats to 615. The extra 98 seats means a 19% capacity increase. It’s true this model will be used in specific markets, but we expect to see Emirates generally start to increase seating capacity on all its A380s. It has to in order to move towards that double digit improvement goal.
Airbus has told us they can improve the current A380’s economics more before they have to consider an A380neo. The engines as they are today can likely continue to offer around 0.5% better fuel burn every few years. Deploying lighter materials and moving to 11-abreast seating in economy play a role too. The A380, despite the criticism, is an airframe with a lot more potential. Airbus is in too deep to abandon it. And the same applies to Emirates. Both firms are eager to see more airlines deploy the aircraft and both will continue to collaborate to ensure the A380’s attractions grow.
Meanwhile the latest chapter of the A380 starts off with an engine switch by Emirates. In our view this story has not been fully told. As more is revealed, it will be of interest to the industry, and most particularly, Rolls-Royce shareholders.