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Dubai Aerospace Enterprise Order Cancellations

There's nothing worse for an OEM than to have deadweight orders.
COMMENT, Business Trends

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As had been mentioned before, Dubai Aerospace Enterprise’s (DAE) financial woes originate from its shareholders who themselves are having severe financial difficulties. Of these shareholders, one is a subsidiary the Dubai Government entity, Dubai World which astonished the world financial markets when it asked for its debt payments to be delayed by several months, forcing the conglomerate to seek aid from the Emirate of Abu Dhabi to service some of its $23bn-plus debts.

The knock-on effect is clear.

DAE had paused/halted pre-delivery payments to Airbus and Boeing – continuing to build jets for DAE would have been a mistake, in part because the entity had no capital to pay for them and also because it has struggled to place jets with customers.

Cancellation of the 787s was predictable given that Emirates doesn’t have any on order and equally at risk are the remaining A320s – none of the low cost A320 operators have talked about speeding up deliveries of their own existing orders, largely because they are worried by the pace of FlyDubai’s growth.

DAE will more than likely chop-and-change the remainder of what it still has on order and much of that will be driven not just by extended deferrals to ease the cash flow pressure, but also by Emirates negotiating with the big two OEMs about how many and of what models of airplanes it needs and over what period of time.

The June order for 32 Airbus A380s and last months announcement at the Farnborough Air Show for 30 Boeing 777-300ERs are just two examples of the order changes being traded off against DAE’s commitments.

Lessors in the Middle East have faired poorly to their European and U.S. rivals. While the Persian Gulf airline ambitions and growth plans are still in synch with the vast populous it has on its doorstep, the likes of LCAL, ALAFCO and DAE are still in their infancy and are nowhere near what we could consider mature players. Further DAE order changes are inevitable - the reality is that this is to do with a cash flow crises born out of Dubai’s construction sector, all under the banner of the Dubai Government leadership which owns many an enterprise and shares their ownership and managerial links across various operations.

Growth in the Persian Gulf is sustainable in the long term. A six hour flight radius outside of Dubai puts them within the reach of a third of the Earths population. An eight hour flight radius increases that figure to almost two-thirds.

The volume is there and the growth from the likes of Emirates, Etihad Airways, Qatar Airways, FlyDubai, Air Arabia, Jazeera Airways and others is there.

It is not surprising that many ill-informed cynics understand so little about this dynamic and explosive region - thankfully, Airbus and Boeing do and will no doubt be pleased that they themselves will not be forcing a customer to hold on to orders that end up being delivered and parked with nowhere to go - that just adds to a market glut that depresses prices and would eventually force production rates to come down as airlines source jets from the open market rather than through the OEMs themselves.

Losing some orders and swapping others with more stable carriers like Emirates is a far more digestible plan of action in contrast to constant deferrals purely to play the numbers game with one's backlog.

This column was written by FBE Aerospace analyst Saj Ahmad, the views expressed are his own.

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