Emirates Ready To Jettison Airbus?

FORBES MARKET NEWS | Chris Noon - - Media reports have suggested that Middle Eastern airline Emirates, frustrated by further delays to the jinxed Airbus A380 program, is close to cancelling at least half of its orders for the aircraft and is discussing with Boeing terms for an initial order of approximately 20 of their 747-8s.

The Boeing 747-8 is penciled in for 2009; Airbus has promised Emirates it will take delivery of its first superjumbo in August 2008.

Why would Emirates cancel half of their order for a larger plane that is supposed to arrive earlier? The answer could lie in the duality of Emirates' make-up. It is a carrier funded entirely by oil money and owned by the royal family. However, its senior management, such as Chief Executive Tim Clark, is almost entirely British. It is likely that the royal family lost patience with Airbus and feels insulted by not being properly kept up-to-date with the delivery problems. Clark is no doubt hopping mad as well, since he surely gave the royal family a lot of guarantees that are now worthless.

Emirates may need the extra capacity right away or even by 2008, but to be the first to operate both the largest Airbus and the largest Boeing (nyse: BA - news - people ) is something which would mean little to Clark and everything to the airline's owners, whose avowed aim is to make Emirates the airline of choice in the Middle East.

"It's more of a cultural than capacity issue. The royal family feels insulted. Never a good strategic move if you want to do business with them," says Doug McVitie, a former Airbus employee and managing director of the France-based Arran Aerospace consultancy.

At any rate Franco-German aerospace giant EADS, Airbus' parent, will now be flying with a CreditWatch negative ticket. On Wednesday, Standard & Poor's Ratings Services placed its 'A' long-term corporate credit and 'A-1' short-term ratings on the company on CreditWatch with negative implications.

The CreditWatch placement followed the company's profit warning and disclosure of further significant delays to the A380 aircraft delivery schedule earlier this week.

"This delay will result in a substantial downward revision to the group's forecasted earnings and free cash flow, which is likely to weaken EADS' key credit metrics," said S&P credit analyst Leigh Bailey.

In other news, a spokesman for the German government has said that EADS' future was currently under discussion. "With regards to EADS' capital structure, the government also wants for the future a leading role of private investors," he said at a press conference Wednesday.

The spokesman's comments came as Germany's Deputy Finance Minister Thomas Mirow was reported to be pushing for state-owned KfW Banking Group to buy a stake in EADS when German automaker DaimlerChrysler (nyse: DCX - news - people ) sells some of its 22.5% shareholding. This would maintain German influence over management of the company.

Media reports have also suggested that EADS is considering moving Airbus A380 production from Hamburg in Germany to Toulouse in France. Airbus' Chief Executive Christian Streiff is apparently meeting on Thursday with Germany's Economics Minister Michael Glos.

"I imagine this is because the German government is up in arms at his plans to move the A380 out of Hamburg and to Toulouse after the German taxpayer has forked out an enormous amount to extend and equip the Hamburg site," said McVitie.

Nevertheless, McVitie thinks it could be a blessing in disguise. "In exchange for 'losing' the A380, Hamburg would of course 'gain' the A320, which is a little like losing a betting-slip for an also-ran and finding instead one for a 100/1 winner," he wrote in an e-mail to Forbes.com.