Qantas aircraft punt comes unstuck

It was the high-flying world of aircraft sales. Boeing and its European rival, Airbus, were ''aggressively'' pricing their aircraft to tempt Qantas into handing over billions of dollars for new aircraft.

And Rolls-Royce, the company synonymous with British enterprise, was engaged in similar tactics with its US competitors at General Electric and Pratt & Whitney to win the contract to supply dozens of jet engines worth more than $10 million a piece.

In the end Airbus and Rolls-Royce beat their respective US rivals when Qantas opted for the A380 superjumbo powered by the British company's jet engines over a stretched version of Boeing's 747 jumbo jet. The Americans did even the score later when Qantas committed to a big order of Boeing's much-trumpeted 787 Dreamliner.

Ten years on, a near-disaster involving a Qantas A380 shortly after take off from Singapore has shone the spotlight on aircraft procurement and Qantas's decision to pour billions into new models of passenger jets. Over the next decade Qantas is due to take the keys to more than 150 aircraft.

A lawsuit filed last month against Rolls-Royce, the maker of the engines for the A380s, offers a rare glimpse into the purchasing process and the decision-making from the Qantas hierarchy.

The case has triggered the release of hundreds of pages of documents, including top-level advice to the Qantas board and contracts with Rolls-Royce. The more commercially sensitive parts have been kept from the public gaze after Qantas lawyers sought to have them blacked out.

The scramble to fill the gaps left by the temporary grounding of its A380s has also raised questions about whether it is now paying the price for betting on two new types of aircraft to make up the bulk of its long-haul fleet. Apart from the controversy surrounding its A380 fleet, Qantas faces the double-whammy of yet another delay - the seventh - to the delivery of 50 Dreamliners.

Early last decade Qantas chose the high-risk strategy of leapfrogging from the dependable 747 to completely new models in the A380 and the 787. Before then Qantas had a tendency to buy later versions of aircraft to avoid the teething problems that often beset new models.

As far back as 2000, the court documents reveal unease from some quarters of the Qantas board about putting its faith in the A380 - or the A3XX as it was then known.

Qantas was weighing up its choice of replacement 500-seat aircraft for ''2006-07 onwards'' - the A380 or a stretched version of Boeing's 747.

''Both manufacturers have priced their aircraft aggressively in an attempt to secure a launch customer base. It is anticipated that these prices cannot continue to be offered, given the investment required,'' says a confidential ''request for approval'' in November 2000 from Qantas executives including Grant Fenn and David Cox.

''The competition for launch customers has helped Qantas secure from Airbus greater delivery stream flexibility and superior walkaway right conditions for the significant elements of project risk, compared with Boeing.''

Later that same month the ''request for approval'' to buy 12 superjumbos, as well as six Boeing 747-400 and 13 A330 aircraft, went before the Qantas board.

Confidential minutes of a meeting shows that Qantas committee members discussed at length the paper and ''details of reductions in price offered by Airbus and Boeing'' for a swag of new aircraft including 12 A3XX-100 superjumbos and an option for 12 more.

The minutes highlight that ''while not opposing the resolutions'', Roger Maynard, the then British Airways representative on the board, ''expressed reservations on whether acquiring a very large aircraft fleet is the correct long-term decision for Qantas''. The committee subsequently approved the purchase of 12 superjumbos for an undisclosed price and an option to buy 12 more.

Documents made public from the legal tussle also show that Rolls-Royce was similarly aggressive in trying to win over Qantas's business. The British manufacturer proposed a ''competitive package of concessions'', including a reduced price and a ''further package of credits''.

Qantas eventually selected the Rolls-Royce Trent 900 engine for its A380s over that from an alliance of GE and Pratt & Whitney because it offered the ''lowest capital requirement and superior NPV [net present value]''.

It also believed that the Trent 900 engines had a ''reduced risk of exposure to entry-into-service teething problems (i.e. will enter service on other carriers six months prior to Qantas)''.

Airlines are forced to make big bets on their financial future when they buy aircraft. They spend countless hours weighing up the virtues or otherwise of planes.

After all, it is an airline's biggest capital outlay. Qantas is investing billions of dollars in the A380 and 787 (those aircraft are worth a total of $US22 billion at list prices). And with 50 on order, the Australian airline has the second-biggest order in the world for the 787 Dreamliner.

To its dismay, the superjumbos began arriving at Qantas's jet base in Sydney two years late, and the delivery of the Dreamliner is almost three years behind schedule.

Those setbacks and the latest A380 incident have raised questions about Qantas's mix of aircraft and why it did not buy Boeing's much lauded 777 aircraft, which has proved highly valuable for Singapore Airlines and Cathay Pacific in the aftermath of the global financial crisis.

Singapore Airlines has 65 of them - making up the biggest slice of its 105-strong fleet - while Cathay Pacific has 33. Known as a ''hub buster'', the long-range 777s are suited to more routes than the A380 or the jumbo jet. Not only can the more modern versions carry almost 400 passengers, but the total cost of flying the 777 is about a third less than operating a 747-400 jumbo.

''The 777s should always have been in Qantas's mix,'' an industry insider says. ''It is a perfect aircraft to fill this void caused by this incident [involving the A380]. Those in the industry shake their heads in disbelief - they have a gaping hole in their fleet.''

As the global economic slowdown hit, Singapore Airlines was able to park some of its jumbos in the Mojave Desert, California, and at its Singapore base while using its 777s on routes where demand had dropped. It was still able to retain the same flight frequency on the routes, which is especially important in order to retain lucrative business travellers.

Another insider says: ''I think it was the biggest mistake [for Qantas not to buy the 777]. They don't have the right aeroplanes. You can't buy them now because there is such demand.''

Last month Boeing announced that it would step up its production rate for the 777 due to strong demand.

But Macquarie Equities believes the biggest headache for Qantas from the repeated delays to the 787 Dreamliners is the likelihood of it having to extend the operating lives of its ageing Boeing 767s.

By next year the average age of Qantas's 26-strong 767 fleet will be 20 years. A further delay will mean that Qantas is likely to have to keep its 767s in service until at least 2015. The less fuel-efficient 767s, which mainly fly domestic routes, are more expensive to maintain the older they get. Jetstar has also been forced to use Airbus A330s as a stop-gap measure for the delays to the Dreamliner.

The debate within the industry about Qantas's fleet selection is often highly emotive.

Ian Thomas, a managing consultant at CAPA Consulting, is one who does not believe Qantas can be criticised for its fleet planning. He doubts the airline saw the 777 as a credible replacement aircraft, and believes the A380 and, to a lesser extent, the 787 remain game-changing aircraft for Qantas.

''In their minds, and I am sure it's still the case, they are very positive about those aircraft types. I really think they went through the process in a reasonable way.''

It is easy to be critical with the benefit of hindsight. If the superjumbos and 787s had arrived on time observers would now probably be describing their purchase as a top strategic decision.

And, despite the delays, Qantas did secure the planes at prices insiders describe as a ''steal'' because it was a ''launch customer''. It has also gained compensation from Boeing for the late delivery of the Dreamliner, a figure Macquarie Equities has estimated at almost $300 million.

The Boeing 777 is anything but a cheap aircraft, with a list price of $US246 million. Buying them would have required an enormous capital investment for Qantas. It is likely to have meant the airline would have had to delay the acquisition of the superjumbo and the 787, or drop purchases of other planes.

However, even those who speak in defence of Qantas's aircraft purchases believe the latest woes reinforce the need for contingency plans to cope with unforseen events such as fleet groundings and late deliveries.

For its part, Qantas argues that its efforts to shift other aircraft from its fleet to plug holes in its network left by the grounding of the A380s in November demonstrates that its contingency plans work effectively.

And despite the problems besetting the Dreamliner program, the airline says it remains committed to the aircraft and does not have any plans to splash out on the 777.

A Qantas spokeswoman, Olivia Wirth, says: ''We are very much committed to the make-up of the Qantas fleet, including ongoing commitment to the 787.''

But the fallout from the grounding of Qantas's A380 fleet shows that much hangs on purchase decisions made years ago. Given that some passenger jets can remain in service for more than 20 years, the importance of choosing the right aircraft and engines from the get-go is paramount.

No one wants to be stuck with a dud.