Air France A350 contract stalled; here’s the way forward

Bloomberg News has this report that the Air France-KLM talks for 25 Airbus A350s remain stalled over the long-running dispute between the company and Rolls-Royce over AF’s desire to overhaul the Trent XWB engines.

The Air France-KLM group offers its own maintenance, repair and overhaul services and wants the ability to provide MRO to others as well as perform the work itself.

Engine suppliers are loath to grant MRO rights to others. Engines are often sold at deep discounts, and in extreme cases, even given to airlines in exchange for the exclusive parts and MRO contracts. This is where the engine makers truly make their profits.

Rolls-Royce is known to be particularly hard-nosed in this regard.

So how will the log-jam be broken?

Rolls wants Air France to order the Trent 1000 for the 25 Boeing 787 orders announced last year. Given the long relationship between Air France and GE, the supplier on AF’s current fleet of a variety of aircraft, this will be a tough pill to swallow. But don’t count it out.

13 comments on “Air France A350 contract stalled; here’s the way forward

  1. Absolutely Rolls Royce must resist , or drive a hard bargain with Air France. Don’t see why RR should give up its crown jewels for a medium size contract. And what precedent would it be setting around the industry? Can any other airline demand maintenance rights in exchange for orders?

    Airbus are, I guess, completely helpless in this tussle and can only watch in the sidelines as the power brokers thrash out a deal.

  2. Well LH negotiated a common Trent 500, 700, 900 engine shop, N3. A precedent. AFI and KLM E&M prabably don’t want to be fully dependent & milked for 30 yrs. Apparently they have reason to fear.

  3. This whole PBH is a relatively new (in its widespread use) form of engine services and ownership (last decade or so it has significantly increased.). The engine OEM’s like it because it allows them to sell/ provide the engines at little or no upfront cost to the airlines (minus the monthly service fee / hour usage fee) and secure the maintenance rights for the life of the engine.

    RR is the largest PBH user by percentage of business, and is also the hardest to let go of this form of sales (as evidenced in this AF deal). In the past, Airlines where still able to get great discounts from the engines OEM’s. In this case the OEM’s planned on making the majority of their profits on the spares contracts.

    Whats happening now is the engine OEM’s not only want the spares contracts, they want the maintenance portion that was traditionally handled by the Airlines/ MRO facilities. In the case of AF and say LH that have vast MRO facilities, PBH is a money loser. They would rather buy the engines and maintain them themselves. In addition, they can sell their MRO services to other Airlines often at better pricing then the OEM’s. This is another source of revenue to the Airline/ MRO.

    The problem we are now seeing is that government is starting to question PBH from a anti-competitive legal stance. It has been noted, that the engine OEM’s are moving quickly to consolidate these gains in order to fortify their positions before new government regulations take effect.

    Regarding Ebbuk’s comments:

    “Even more reason for RR to demand AF’s 787 business.”

    As far as AF is concerned, they already have the OK from GE to do their own and MRO work on the GEnx. Why would they want to jeopardize this much larger engine pool (60% of current of orders) to go with RR, when they are predominantly a GE shop?

    One could speculate that the A350 orders are in jeopardy? If RR doesn’t fall on their sword…

    AF seemed to be put in a bad position to start with regarding the purchase of A350’s to begin with as a result of political pressure?

    Quote:

    “May 25, 2012 – Bernard Carayon, a deputy of the conservative UMP party, said Gourgeon was fired because he was pushing for Air France to buy aircraft made by Boeing Co (BA) instead of planes assembled in France by Boeing rival Airbus, a unit of European Aeronautic Defense & Space”

    Gourgeon was the former CEO of AF.

    • Gourgeon was fired for consuming KLM’s piggy bank without visible effects on AF performance.
      ( my guess. I don’t think Monsieur Carayon’s interview for the expecting breathless is all that relevant. Don’t forget about the changed political environment )

    • Observer, AF was never pressured into ordering A350. A solely opposition member from parliament was apparently publicly putting pressure, it seems he was fired later on a marginal event. AF/KLM have been a major Boeing customer for years, they have a mountain of 777 and 747s, KLM uses 737 rather then A320 and both used to operate 767s and ordered 787s.

      AF/KLM need to replace a substantial fleet of A340s and MD11s the coming years and older 777s later on. You can’t argue the 787 is the perfect replacement for that. The bigger 350-900 and -1000 are the better fit.

      The engine choice remains an issue Both AFI (GE90, GP7000, CFM56-5) and KLM E&M (CF6, CFM56-7) are in deep cooperation with GE, moving engines around, outsourcing to each other at various levels, spreading workpackages etc. If GE offered engines for the A350 (-1000!) it would have been a done deal yrs ago.. No doubt AF/KLM are putting pressure on Airbus & GE to come up with something creative. Putting pressure on RR at the same time.

  4. If this deal does somehow fall through, I wonder what the implications will be vis a vis the relationshipe between Rolls Royce and Airbus as well as Airbus and AIr France, not to mention France and the UK.

  5. Everyone from the very beginning knew that the 350 deal with AF was on hold because of the RR MRO deal from AFI.
    The fact that AFI has no MRO aggreement with RR also explains why they operate (virtually) only 777 as opposed to the 346 from LH.

    I can see why RR is asking for more engines from AF side, but they also have to give back a little if they expect to do some work with AF.
    Needless to say that having RR out of the NEO market is a huge issue for them, and could explain why they want to grab as much as possible from the large twins market.

    I’d say ultimately both of they will give back something, we’ll see which one has the least to loose (or gain) on this. Somehow, I consider that AF fleet has more to gain from having 350 on its fleet replacing the olds 330/340 and the aging 777 in the long run, opposed to the 787, but KLM is also to be considered (and I don’t know enough the typical routes of KLM to confirm or not this).

    • I suggest you take a look at RR’s financials Bob. The narrowbody (IAE) market makes up the smallest slice by far (around 13%) of the civil aviation pie for RR. The trent family makes up around 60% and corporate the remainder.

      They’re not that desperate for the narrow body market, hence they can afford to drive such a hard bargain on the AF/KLM order.

      • For J66,

        Can you provide more info on these Percentages (%)? RR’s 2011 EOY Financial staement claims that 49% of all revenues were from the commercial aviation side and the other 51% came from Military engines, power generation and maritime applications?

        Just looking for a link to support you point… Regarding WB vs. NB percentages?

        Thx…

  6. AF has ordered the A359XWB, it will be an exceptional B772E replacement with some room to expand in terms of cargo, range, fuel efficiency, etc.

    That being said, the B789 would be an excellent B77E replacement as well-though of course, it won’t offer as much cargo & capacity as the A359XWB would.

    Its going to be interesting what AF does. Personally, I see AF in the “drivers seat” here. They can always “walk away” from the Airbus order. I’m sure Boeing would be more than happy to have them add more B787’s.

    I give it a 70% chance AF will eventually sign the A350XWB contract.

  7. AF could probably live with 789 and 77Ws on the high end, that would get an update in the future. It all depends on how important MRO is for AF. Money talks..

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