Airbus (EADSY 1.32%) suffered a huge setback when its most-prized customer, Emirates, cancelled a multibillion-dollar deal for 70 A350-XWBs in June. What rubbed salt into the wound was that a month later, the Gulf carrier confirmed the order for 150 Boeing (BA -0.76%) 777Xs. This has raised several questions regarding the relationship Emirates shares with the aviation majors. What led Emirates take such steps? Is the airline favoring one over the other? How would this impact Airbus and Boeing? Let's take a look. 


Emirates Boeing 777 fleet at Dubai International Airport, Source: Wikimedia Commons.

What's Emirates' rationale?
Slated to be A350-XWB's launch customer, Emirates had placed orders for 70 units in 2007 with deliveries to begin in 2019. Bloomberg thinks this delivery schedule could have influenced the airlines' decision to cancel the order. Timely fleet expansion is critical to future prospects of all Gulf airline operators because Dubai, Doha, and Abu Dhabi are emerging as the most popular stopovers for passengers flying between Europe and Asia. Emirates has ensured a fleet growth rate of 15.5% to date since 2007. Deliveries of A350s starting in 2019 would mean Emirates' fleet expansion rate would have dropped to 10% or below in the 2017-18 period.

Besides, with the A350-XWB being a built-from-scratch plane, one could not completely rule out the possibility of unforeseen delays. The A350-XWB was initially slated to enter service in 2010, but owing to some key alterations, this got postponed to 2013. The program faced further production challenges in 2012, and Airbus had to push service entry to the fourth quarter (September to December) of 2014, with the first delivery slated to go to Qatar Airways. 

More orders for Boeing?
Analysts at Bloomberg think that if Emirates were to ensure double-digit fleet expansion rates till the end of the decade and keep pace with other fast-developing operators like Turkish Airlines, Qatar, and Etihad, it would have needed to place orders for another aircraft along with the A350s. So, analysts feel that to keep its fleet simple and maintain the desired growth rate, Emirates could order more Boeing 777s to fill in the entire requirement. Bloomberg predicts that Emirates could place an order for 50 777s to replace the A350s and maintain a growth rate of 12% through 2020. The airline is the largest operator of Boeing 777s in the world, with 140 planes in service.


Source: Bloomberg Intelligence, Ascend.

There could be yet another reason for potential 777 orders by Emirates. In July, the airline operator confirmed orders for 150 777X aircraft at $56 billion list prices together with options for 50 more. The duo first announced the deal at the Dubai air show last November. Boeing will start producing the 777X planes in 2017 and begin deliveries from 2020. As the aero major makes the transition from 777 to 777X, it's likely Emirates can get a deal for the current generation planes at attractive rates.

In addition, the Dubai-based operator may consider the 787 Dreamliner to structure its fleet for routes where it requires smaller aircraft. Emirates said that it would be weighing its options between the Dreamliner and the A350 in the near future. Boeing forecasts that the Middle East will account for nearly 3,000 deliveries over the next two decades. With Emirates being the biggest Gulf operator and the fourth largest carrier in the world in terms of international passengers, the American aircraft manufacturer expects to get a fair share of these orders.

What it means for Airbus?
The order loss is definitely not great news for Airbus. It formed 9% of the total A350-XWB backlog with estimated worth of $11 billion. The Toulouse, France-based company had a backlog of 812 A350-XWBs that was reduced to 742 in the second quarter of the year ended June 2014, post the cancellation. 


Source: Bloomberg Intelligence.

But the scrapped deal doesn't necessarily signal a rift in the healthy relationship between Airbus and Emirates. The airline's president Tim Clark said they will consider having A350-XWBs in Emirates' future fleet. According to Clark, either this year-end or starting next year, Emirates will arrange talks with Airbus regarding a deal for 50 to 70 A350-XWBs for medium-range routes. 

Other airline operators have also gotten in touch with Airbus to find out if they could book better delivery slots in the absence of the Emirates order. Airbus COO John Leahy said that most of the A350-XWB slots are filled through 2020, signifying that the aircraft is selling well. 

The Emirates president says the A380 and 777 would remain the airline's flagship long-haul international fleet in the future. This is a big boost to Airbus' fuel-guzzling, tough-to-sell jumbo jet A380. Out of the total backlog of 189 A380s, 89 are for Emirates, and of the 142 jumbos in service, 52 are being flown by the Gulf carrier.

Foolish takeaway
Emirates is investing massively to expand capacity and serve future passenger growth. The current cancellation may be a temporary setback for Airbus and a precursor to more orders for Boeing, but both aero majors' planes are part of Emirates' mainstay fleet. And there's enough room for the duo to forge long-standing business relationships with the airline.