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The AF/KLM Factor

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A story floated out on the other side of the Atlantic yesterday while the US was enjoying its Thanksgiving dinner that has serious implications for both major aircraft manufacturers. Air France/KLM, soaring after it announced a doubling of its profit, is soliciting bids from Airbus and Boeing for up to 100 new widebody long range aircraft. The number alone is staggering. The order would be worth around $20 billion. KLM will use the replacements on its 747 Combis and MD-11s and AF needs to replace its 777-200s.

That's not the most important piece of this, though. AF/KLM is requiring that the long range aircraft fly with General Electric engines to "ensure commonality with the existing fleet."

Based on the requirements of this bid, General Electric is about to secure itself an order worth about $5 billion. In the battle for this order between Airbus and Boeing, GE is king.

However, both manufacturers will have to do some serious maneuvering to try and win this order. Ultimately, AF/KLM may play a significant role in shaping the strategic direction of each airframer's product line.

What will these new aircraft replace?

A closer look at the shoes that these new long range aircraft will fill reveal something about aircraft preference.

KLM
747 Combi - 280 Pax
Likely replacements: A350-900/800, 787-9/10
# Operated: 16

MD-11 - 294 Pax
Likely replacements: A350-900, 787-10
# Operated: 10

Air France
777-200 - 270 Pax
Likely replacements: A350-800, 787-9
# Operated: 25

Total replacement: 51

If AF/KLM goes for the full 100 aircraft, that would mean half for replacement, half for expansion and have indicated a desire for a 350 seat aircraft. Just yesterday Boeing announced an order for two additional 777-300ER aircraft bringing its total to six.

GE Politics (Advantage Boeing)

The question at hand here is the GE90, the sole engine supplier for the 300ER. With the AF/KLM requirement of General Electric engines, Airbus is backed into a very difficult corner. All models of the A350 are powered exclusively by the Trent XWB engine from Rolls Royce. GE has offered Airbus its GENx engines for the -800 and -900, which solves the question for the replacement aircraft, but not for the -1000 plans for expansion. Advantage Boeing.

In perhaps one of its shrewdest moves, Boeing has a binding exclusivity agreement with General Electric:

Engine Spat Could Slow Airbus

By Daniel Michaels and Kathryn Kranhold
Wall Street Journal
July 10, 2007

Officials from Airbus and GE say they are at loggerheads because the largest version of the A350 is designed to compete with the largest version of another Boeing model, the 777, for which GE is the exclusive engine supplier. GE officials say they won't build a new engine that competes with the one they already supply for 777 jets.

[GE Engine Division President Scott] Donnelly also said GE doesn't want to see a split across the Atlantic. Meanwhile, Boeing is happily watching the fight. "Airbus happened to build an aircraft that overlaps with the 777, where we have an exclusivity agreement with GE," said Scott Carson, chief executive of Boeing's commercial-aircraft division, in an interview. "Are we going to give that up? Not on your life."

A 777/MD-11 Replacement (Advantage Airbus)

When looking at the requirements for Air France and KLM in terms of capacity and range, the A350 has a distinct advantage over the 787. With 270 seats on KLM's 747-400 Combi aircraft, the 787-9 or A350-800 are perfect aircraft (engine choice not withstanding). On the flip side, the MD-11 replacement gives Airbus the upper hand. A 787-9 can up its capacity to 290, however there has to be a cost in performance at this load, and still falls short by four seats. The A350-900 holds 314 and fits with the capacity and range profile KLM is looking for.

On the Air France side, the 270 seat 777-200ER is nicely replaced by the 787-9 in an ideal configuration. However, by operating the -200ER in a lower capacity configuration, Air France has show its willingness to provide lower capacity on a larger aircraft rather than the same capacity on a smaller aircraft. I don't necessarily see why this trend wouldn't continue.

This leads, of course, back to the question that I've been talking about a lot here this week. Boeing does not have a natural successor defined for its 777-200ER in the 787-10. Without a clear offering on its configuration for the aircraft, Airbus may have the upper hand in filling the 280-300 seat requirements that Air France and KLM are looking for.

The size and significance of this order will provide another spur for Boeing to firm up the configuration of the 787-10. With the order decision being held until 2009, Boeing does have time, however, it shouldn't wait too long. Taking this one step further, the 350 seat requirements could even mean that we see further development of the next generation 777. However, Boeing clearly needs an answer in the 300 seat market in the near term.

An Open Question

With yesterday's announcement, AF/KLM joins Emirates, QANTAS, American and Delta on the list of highly anticipated orders. What is currently unclear is whether or not AF/KLM would split the order across manufacturer models and across airlines. There was no indication in yesterday's announcement that they were bound to only one manufacturer. Before these bids move forward in any kind of serious way, both Airbus and Boeing need to firm up their own plans before they can bring their A game to the negotiating table.

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