Heading into last week's Dubai Airshow, it was a pretty good bet that Middle Eastern airline giant Emirates would make news of one sort or another. The airline frequently announces major orders at the biennial air show that is held on its home turf.
Emirates stayed true to form in 2019. But while it placed firm orders for dozens of widebody jets from both Airbus (OTC:EADSY) and Boeing (NYSE:BA) at the Dubai Airshow, it also reduced its firm orders for other aircraft types. Let's look at what Emirates' recent moves mean for the two leading aircraft manufacturers.
The A380 is dead, but Airbus gets a consolation prize
Back in February, Airbus finally bowed to the inevitable and announced that it would halt production of its A380 jumbo jet in 2021. Emirates was the only remaining customer of note, and slowing passenger traffic growth in the Middle East made it wary of continuing to expand its A380 fleet rapidly. Airbus agreed to deliver 14 more A380s to Emirates and cancel the other 39 orders from Emirates in its backlog.
In conjunction with this announcement, Airbus announced that Emirates had ordered 40 A350-900s and 30 A330-900neos instead. However, in the months that followed, the Emirates orders never appeared as firm orders in Airbus' backlog, nor was the A380 order officially canceled.
On Monday, Emirates finally completed a firm order with Airbus. But it didn't line up exactly with what was announced earlier this year. Instead, Emirates is ordering 50 A350-900s while dropping its plan to buy the A330neo. That's good news for the A350 program, which booked just 19 net firm orders in the first 10 months of 2019. On the other hand, Airbus has been struggling to build up a sizable order backlog for the A330neo, so losing that part of the order definitely hurts.
A similar story at Boeing
Airbus shouldn't feel bad about Emirates downsizing one promised order and not fully following through on another. Boeing got the same treatment.
Two years ago, at the 2017 Dubai Airshow, Boeing and Emirates announced a long-rumored deal for 40 787-10 Dreamliners. That order would have helped support Boeing's planned production rate increase for the 787 family, which had been confirmed just two months earlier. However, this order was never finalized, and Emirates CEO Tim Clark stated earlier this year that it had lapsed.
On Wednesday, Emirates finally signed a full purchase agreement to buy Dreamliners. That said, it is only ordering 30, and they will be the smaller 787-9 variant. Furthermore, deliveries won't start until 2023 and will be spread over five years.
Moreover, the Dreamliner order is being offset one-for-one by a reduction to Emirates' 777 family order commitment. Emirates, which had firm orders for 150 777X jets and six more 777-300ERs, will cancel the remaining 777-300ERs and reduce its 777X order to 126 units. This represents another setback for the 777X, which hasn't resonated with customers nearly as much as the smaller (and arguably more technically advanced) 787 Dreamliner.
Emirates 777X cancellations may not be what they seem
Boeing had to postpone the 777-9's first flight from 2019 to 2020 earlier this year, due to a durability problem related to the new General Electric engine that will power the plane. That issue has now been fixed, paving the way for a first flight in early 2020. Nevertheless, the delay means that the 777-9's first delivery won't occur until 2021.
Earlier this week, Tim Clark, the Emirates CEO, said he wasn't even confident in that revised schedule. If the 777-9 isn't ready by 2021, it would interfere with Emirates' growth plans. That might lead the airline to further reduce its 777X order book and order Airbus' competing A350-1000 instead to fill the gap, according to Clark.
However, investors shouldn't necessarily take these comments at face value. Clark clearly wants to put pressure on Boeing to hold to its revised schedule for testing and entry-into-service. And if forced to do so, Emirates certainly could add some A350-1000s to its fleet. However, there's a reason why Emirates placed such a big 777X order in the first place. Most notably, the 777-9 can carry more passengers and more cargo than the A350-1000, which will probably give it lower unit costs.
Emirates has more than 250 passenger planes in its fleet today, split between 777s and A380s. Given that it typically retires planes after about 15 years, virtually all of these planes will need to be replaced by the early 2030s. The 777-9 is the clear successor to Emirates' fleet of more than 100 A380s. The 777-9 and its smaller 777-8 sibling will also replace many of the airline's 777-300ERs, although the A350 could also fill that role. Adding in growth opportunities, Emirates is likely to need significantly more than 150 777X jets in the long run.
It won't need most of those planes for a while, though. More than half of the aircraft in its current fleet were delivered between 2012 and 2016, when Emirates was on a growth spree. Those planes will be up for replacement beginning in the late 2020s.
Given the 777X's small backlog, Emirates has no need to reserve delivery positions for the late 2020s and beyond right now. By cutting its 777X orders, it will likely be able to apply the deposits to the new 787 order while putting pressure on Boeing to avoid further delivery delays. But in the long run, there's a good chance that Emirates will take every one of the 150 777X jets it originally ordered -- and then some.