Emirates A380 Switches Engines To Rolls-Royce

| About: Rolls Royce (RYCEY)

Summary

The engine switch from Engine Alliance was a surprise.

The cost benefit of this switch has not been made public by Emirates.

Rolls-Royce may face some risk mitigation challenges.

Airbus' (OTCPK: EADSF, OTCPK:EADSY) A380 always attracts attention. Whether at an airport or in the news.

The latest saga is about an order Emirates made in 2013 for 50 A380s at the Dubai air show. This order led to a fight over engines. All previous Emirates A380s were powered by Engine Alliance, a partnership between GE (NYSE: GE) and Pratt & Whitney (NYSE: UTX). In the end, Rolls-Royce (OTCPK:RYCEF, OTCPK:RYCEY) won the engine order.

The order details were never discussed. But they must have been onerous. We are aware that Engine Alliance fought hard to keep the customer, offering an unprecedented price. But Engine Alliance lost to Rolls-Royce. What Rolls-Royce offered is anyone's guess. Our guess is that Rolls-Royce "bought" that order with an irresistible price.

This week saw the first delivery of a Rolls-Royce powered A380 to Emirates. The delivery came two weeks later than originally scheduled. The reason for late delivery was that the airline was unhappy with the engine's "performance and maintenance concerns". What was that about?

We understand there were concerns about the Rolls-Royce engine operating in the dusty conditions of Dubai. Aircraft turbofans suck in enormous amounts of air, especially big engines like on the A380. Running these engines as the aircraft taxis to and from the runway allows lots of sand ingestion. Sand inside the engine causes excessive wear and tear. For example, sand can block the air cooling ports inside the compressor blades. Sand also chips the blade surfaces, which reduces efficiency. In short, engines don't like sand.

Rolls-Royce clearly looked riskier for Emirates than they initially may have thought. Emirates decided to hold off delivery until they could be sure of their concerns. Bloomberg reports "There were some issues on performance, but we've come to a satisfactory conclusion," (Emirates CEO) Clark said. "Rolls are taking care of everything, so we are neutral to the repercussions."

It appears that the initial deal Rolls-Royce and Emirates concluded has now been tweaked. Whatever additional risk emerged is now on Rolls-Royce. The cost of this risk is not clear yet. What we do know though is that the key number to watch is this - Emirates runs its Engine Alliance engines for 3,500 hours before a shop visit.

Anything less than this is going to cost Rolls-Royce. Emirates will not like their A380 fleet schedule disrupted. Unplanned shop visits will be disruptive. An A380 costs about $29,000 per hour to operate. That number offers a guideline of what Rolls-Royce now must work with in risk mitigation.

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