May 9, 2018, © Leeham News: Etihad Airways faces a complex series of decisions to make as it ponders how to restructure and stem huge losses.
Market intelligence revealed last year that the airline has been pursuing a path to dispose of five Boeing 777LRs, 22 Airbus A330s, all its A340s and only a few A320 family members.
The company also wants to cancel or defer a variety of Airbus and Boeing aircraft on order.
The 777LRs are going back to its lessor. Bids from multiple parties came in for the A330s. The A340s were simply grounded.
But over-financing, credits for new airplanes on order used against newly delivered airplanes and return conditions complicate fleet restructuring plans, ballooning costs of some moves to a point where officials are having second thoughts about how to proceed.
In January, Etihad named a new chief financial officer, Mark Powers, whose long career includes stints at Frank Lorenzo’s Continental Airlines and Northwest Airlines, where bankruptcies and financial restructurings were part of Powers’ portfolio.
Powers retired from JetBlue in 2016. He has his work cut out for him.
Plagued by poor investment choices in troubled airlines, over-expansion and factors out of Etihad’s control, officials began a contraction strategy last year that called for the removal of more than 30 aircraft from its fleet, nearly all wide-bodies. Focus was principally on passenger aircraft, but some wide-body cargo airplanes were also involved.
Etihad’s dilemmas are as follows, LNC learned through market intelligence, beginning last year:
A330s: EY last year offered all its A330s for sale. Ridding this type would have simplified and modernized the fleet around the 787s. Multiple bids came in for the fleet, but upon further analysis, the return conditions value adjustments reduced the current market value of the airplanes. Coupled with over-financing, Etihad would take a huge book loss on disposal of the fleet. This effort has been put on hold for further study.
Deferring Boeings: Coupled with the A330 decision is what to do about orders with Boeing for the 787 and 777X. The 787 order includes the 787-10, the first of which is due for delivery this fall. Plans to dispose of the A330s were put on hold, despite receiving multiple bids, because Etihad also wants to defer or cancel Boeing 777X and 787 orders. The problem: credits from Boeing used in connection with some of these orders (believed to be the 777X) were applied toward the purchase price of the 787s. Canceling orders would require repayment, unless some accommodation were reached with Boeing. Deferring orders increases the price of the airplanes through escalation clauses.
Although EY previously rescheduled 787s (see Figure 1), so far 777Xs have not been deferred, according to a review of the Ascend data bases since 2016.
Airbus orders: Etihad has only A350s on backlog with Airbus.
As with Boeing, the airline rescheduled deliveries back-and-forth, according to Ascend dating to January 2016. In some cases, deliveries appear to be accelerated only to be reversed later.
The issues with Airbus are less clear than with Boeing, based on market intelligence. The airline has A350-900s and -1000s on order. Airbus’ backlog for the -1000 is less robust than for the -900, leading to the conclusion that Airbus will be less willing to defer or cancel this model than it may be for the -900.
Airbus and Boeing continue to face soft demand for the larger wide-bodies. Boeing’s sales for the 777X have been weak. So have sales of the A350 over at Airbus. This complicates any movement in the skyline at each OEM.
Boeing’s demand for the 787 appears strong.
LNC first raised the prospect of turmoil with the Middle Eastern carriers in April 2017. Deferrals were already taking place.
Airbus claims 50 A350 XWBs, 36 A320neo aircraft and one A330-200F on order for Etihad.
787s look the best option for EY as they already have them in the fleet, but keeping and extracting further value from their existing a330s may be the wiser decision… Deferring as many 787s as s long as they can.
A350s were designed as 777 replacements so these would be a better fit but as the 777x isn’t going to be available until next decade they’re likely a more natural keep as there is little immediate pressure.
Looks like Boeing may do better IMHO, unless Emirates comes to the rescue.
A merger between Etihad and Emirates is very likely. In such an event Airbus could be out in the doldrums again with the A350’s.
The 350-1000 could just hang-in there in the event of a merger where an aircraft between the 787-10 and 777-9 is required but you don’t need the range (and weight) of the 777-8.
A359’s orders could be converted to an extent to give an A35K fleet size of ~50. The small shorter haul fleet of Etihad could also find itself out in the cold, cancelling of the 321NEO orders therefore most likely?
End of the day Airbus could walk away (again) with a blood nose in that part of the world.
Then there is new developments around the Iran deal which Mr.T seems to be cancelling, that could mean the loss of 28 A339’s and 16 A35K’s orders. Does not look like happy days ahead for AB.
Merger is doubtful, IMHO, as the proud sheiks who run EY would have to take a huge haircut for their built in problems, including a dog’s breakfast of a fleet. EK would have to give up their fleet commonality, which is a major cost advantage.
It wasn’t long ago that Dubai (Emirates) had to go cap in hand to Abu Dhabi (Etihad) to bail it out. I have always seen the Etihad operation as a way that big brother wanted to muscle in on the fun. If something happened here the consolidation of the two airlines would need some finessing and control/ ownership to be modified to reflect the relative power of the UAE entities and not just the airlines.
In simple terms Emirates has to make money but Etihad is a ‘johnny come lately’ vanity project. The fallout of Etihad will continue for some while as their strategic stakes have proven to be foolish in the extreme.
Etihad seem to have had a scattergun or opportunistic approach to building their fleet with proliferation of models as they grew. Perhaps this is down to being on the wrong side of the A345/6/B77w choice going back. Certainly they do not have the simplicity of fleet seen by Emirates or Qatar.
The wider ‘weakness’ in the wide body market is as much to do with over supply than a lack of demand. There is capacity to produce something like 35 per month even ignoring the A380/B748. If you look at historical deliveries over a 10 year period this is a bit top and need everything to go well economically to keep airlines well. Couple that with ever more medium haul routes being taken by single aisle aircraft and it is likely this weakness will be sustained.
My view is that the B787 and A350 are safe and will run near capacity of 23 a month between them. The A330 is going to wobble along with some orders and the B77x is at risk of having a finite demand unless the A380 is killed off sooner than later.
And much further West, if I may say, “here we go again”. UAL looking at major 787 or 330NEO order.
Poor AB just being used again for Boeing to sell at really low prices? But a just maybe, the 338’s and 359’s could could form nice seasonal pigeon pairs on long haul routes.
But if this happens I vow to drink a bottle of Kilbeggan with Cream Soda.
Can’t seem to get the story of the little Dutch boy out of my head, when I think of the current widebodies oversupply situation! He’s standing there at the dike, using fingers on two hands to “plug” the Norwegian and Eithad “leaks”. Now what, if another leak springs?
If you want to talk about more leaks for AB, Mr.Walsh seems unhappy with RR and happy talking to GE. Lets see what happens to Iran, HA and AA history.
Could AirAsia-X be next, its also not going well at Air France, they have 21 A359’s on order with first deliveries next year? This little boy is in big $h#^.
Air France has 25 777-200s which the earliest are nearly 20 yrs old , clearly the A350 are their replacement
What AF could stop doing its flying its 787s from Paris CDG to Heathrow , Lyons or Nice. Doesnt all the profitability numbers point to bigger single aisles with higher frequency for these shorter routes ?
This part has intrigued me:
“The problem: credits from Boeing used in connection with some of these orders (believed to be the 777X) were applied toward the purchase price of the 787s.”
So it seems that not only were early buyers of the 777X getting the normal ‘launch price’ but as well getting credits for buying existing planes ( which are popular anyway).
How could this possibly make sense? Who knows what ‘credits’ are been giveb to buy such planes as the 737-10 . You would think they are competitive on their own merits.
Is this the way Boeing gets rid of ‘surplus capital’, instead of buying back its own shares, airlines get credits to buy more planes.
The 787 order book looks even better, the deferred production costs decrease ( but are instead applied to the 777X).
Perhaps this too explains why some airlines have both the 350 and the 787 when surely one model would be fine.
Its all much closer to personal shopper spending up big on the credit card because of the ‘points’ they accumulate. hello !
Etihad must position itsef, maybe as “better than Emirates”. Their A380’s can claim to be better than Emirates. They can get out of narrowbodies, keep the A330’s matching the emirates 777 routes in Middle East/Africa. Keep the A350 to be better than Emirates 777 on similar long haul routes, sell its 787’s as the A350’s start to arrive.
To compete with Qatar is a bit harder as they are getting a very modern fleet if they can afford it. Matching their A330’s with Etihads on similar routes, Qatar has to fly around its neighbours while Etihad can fly direct.
Matching Etihads 787-9 against Qatar 787-8, trade in their 777’s to A350-1000 maybe the ones Qatar cannot afford to take and matching their A380s agianst Qatar A380. Cancel the rest. It will be expensive, painful and bloody but you have to have a good fleet mix and be better than your neighbours.
Maybe they should put a bid in for Alitalia. They could use quite a few of those aircraft0
They own or did own 49% of that Alitalia messed up operation which is foundered.
What the status is since the demise I have not followed.
Part of their mess is the messes they bought into.
Surely the comment was tongue in cheek
Fill the Airbuses up with spare parts and fly them over to Iran.No doubt the US has this all locked down.Airbus needs to learn not to trust US supply chain.
Why aren’t 330s being wet leased to replace grounded/ETOPS limited 787s? RR has said it won’t fully fix Trent 1000 Pkg C problems until 2022.
330-200s may be the closest Airbus WB to MoM. That EY can’t sell them portends poorly for Airbus’ WB MoM sales.
They can sell them, there were/are willing buyers. The problem is the financing at the Etihad end…
The problem was that EY couldn’t get the price it wanted/needed.
Both buyers and sellers must be getting more desperate by the day.
Missing I think is the weird strategy of theirs that they have invested in all sorts of other Airline operations.
So the fleet ordering may have had that in mind to fill and or change the operations of those other entities .
Clearly there are failed airlines (Air Berlin and Alitalia)
House of cards falling down.
I was looking over at Etihad fleet on Wikipedia and it indicated that the A340’s were sold in 2017 to European Aviation. Did something happen that they returned to Etihad?
Wasn’t Delta accusing Etihad of being a state-sponsored airline with deep pockets a few years back? Those deep pockets don’t seem to have panned out in Etihad’s favor right now.
I’m surprised that given the engine issues in narrowbody and widebody, I’d think Etihad should have a much easier time dry/wet leasing their a330 and narrowbody aircraft. Even Qatar resorted to that approach to some extent.
They had been stored since 2017 and the stories indicate they were sold to European Aviation just a few months back. Hard to think who would use them unless you were desperate.
The deep pockets is true, they could not have gotten into this mess without there could they?
So now the deep pockets has expressed “concern” that their deep pockets may not be enough and are tired of having to pay out and not take in.
Deep pockets always want something back.
Wouldn’t your comment invalidate Delta’s argument of an unfair advantage of Middle East state sponsorship then?
After all, whether your deep pockets are public shareholders or a private State sponsor, so long as they both express concerns about feeding losses year after year into a money pit and respond similarly, is there really a difference in the end?
I would think that Etihad’s financial troubles and uncertain future would provide a lot of evidence supporting the ME3 defense against Delta’s claims in their discussions with Washington over access to U.S. airports & routes.
I believe EK will also have some contemplation to do once Ramadan is over this year. They’ve stored many planes at Al Maktoum due to low demand and some say pilot resignations. I think its the latter. EK will have several new 787’s alongside many new 777’s in about 2 or 3 years time & if there’s another slow down in Middle east, then EK will have a problem storing Boeings all over Dubai. Seems like trump just scuttled the Iran deal & neither boeing nor airbus can sell new planes now… which makes for a scenario where new orders for aircraft by incumbent airlines a little less possible.. the one’s who’ve already booked A350’s/B787’s etc. Qatar has a pretty fleet now & enough PLF to get past FIFA in 2022. Is it true chinese airlines are attracting pilots in droves owing to around 300k annual package? Which is twice as good for many pilots serving in the middle east..
Airbus has 1000 WB’s and 6000NB’s on order and Farnborough is in 2 months. Both A320NEO and A350 seem superior platforms. The A380 & A400M are good, sell slow & have no competition.
I sense a clear effort to create a happy “Airbus is in Trouble” atmosphere. I see no real reason.
Probably the NEO engine delivery issues will be overcome and A330NEO/ A35K deliveries will ramp up. CSeries will probably land additional orders this summer while increasing deliveries.
They are in trouble in relation to the new paradigm where we expect ever increasing order books and almost infinite demand for what are high value units. It had to stop sometime.
>almost infinite demand
Demand in the thousands is no-where near infinite
Regarding: “Both A320NEO and A350 seem superior platforms”
Based on the total numbers of each aircraft type that have actually been sold, it would seem to me that the people who actually place orders for airliners agree with you regarding the A320neo, bot not regarding the A350.
Following are total orders according to Wikipedia, through 3-31-18 for A320neo and 737 MAX, and through 4-30-18 for A350 and 787.
A320 NEO: 6,031
737 MAX: 4,474
A320 NEO orders – 737 MAX orders = 6031 – 4474 = 1557
A320 NEO orders / 737 MAX orders = 6031 / 4474 = 1.35, thus A320 NEO has 35% more orders than does the 737 MAX.
787 orders – A350 orders = 1365 – 832 = 533
787 orders / A350 orders = 1365 / 832 = 1.64, thus 787 has 64% more orders than does A350.
And if you include the 777x against the A350-1000, and giving the benefit of double counting A350’s one adds 326-168= 158 more.
Just see it the other way round:
A330neo is loosing against B787 and has a hard time to create sales.
A380 is not selling at all.
A35k is low on orders.
A320neo has engine issues –
is this a good situation for you?
I did not yet mention the fact that major managers left the company and Enders is about to leave.
Enders leaving migh make room for a new generation at Airbus. By Farnborough we will see how sucessful the new sales ex RR manager is or if John has to come back to teach another rookie the tricks of the Aircraft sales trade.
The A330neo is an unwritten boook as we don’t have service experience yet and it is delayed, one can wonder if RR has time to make T7000’s now that they must make as many T1000-TEN as possible.
The A380’s are getting due for $30-45k cabin makeovers and more seats instead of new purchases. Airbus can make Money doing the makovers and a Heavy check at the same time. Airbus might wait for the RR Advance test flights performance numbers before designing an A380neo that should have superior range and economy at those ranges.
Etihad should cancel all 777-X orders, sell all current 777’s and A330’s and stick to a fleet of light and efficient 787’s and A350’s.
Its been pointed out that 777X orders came with ‘credits’ to buy 787s.
Plus 787s arent ‘light’ compared to A330 for regional routes where the long range fuel isnt needed ( OEW is roughly similar around 120t for 788 and 333 versions)
For me it sounds like Etihad should built their fleet around B787 and A350.
Use the A330 pilotes for A350 ops and phase them out with rising A350 numbers.
Revaluate the orders for the Ten, as it’s same size as the A359 – 30 of B787-10 and 40 A359 seem too much for a struggeling gulf carrier.
Thus the Ten should be very efficent (as it’s a stretch) and especially for the routes to Europe it should be fine, as it doesn’t need the range. Still, I’m not so sure if they can make it out of the gulf region fully loaded in summer, but all 3 order reasonable amouts.
Most likley it’s to late to cancel the A350 order, but it should be possible to postpone some planes.
The B777x order is to cancel, and maybe some Ten orders have to be converted to smaller -9 models.
The A330 and B772 will leave the fleet as the A340 already did.
A320 & A320 neo
A321 & A321neo
41 B787 -9 + converted from B787-10 order (replace A330)
maybe some B787 – 10
A359 (40 on order, some delayed or canceld)
A35K (22 on order, some delayed or canceld)
19 B77W ( to be replace by A350 somewhen)
10 A380 (to leave fleet )
4 A332 F ( to be sold)
5 B777f ?