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Abu Dhabi, UAEFriday 22 June 2018

Emirates' A380 deal with Airbus a lesson for all

Opportunities to learn about complex negotiations for big regional industrial and consulting firms relying on few government clients

The Emirates-Airbus deal is a win-win for both. Eric Gaillard/Reuters
The Emirates-Airbus deal is a win-win for both. Eric Gaillard/Reuters

On January 18, Airbus and Emirates Airlines agreed to a deal that will see the latter order 20 Airbus A380 planes, with an option for 16 additional aircraft.

Emirates is today the world's largest operator of the A380, with 162 ordered planes and 101 already operating, far ahead of Singapore Airlines and its 24 planes. The purchase was initially expected to have been announced back in November during the Dubai Airshow and the eleventh-hour cancellation took observers by surprise.

The weeks since have been rich with opportunities to learn lessons about complex negotiations and many industrial and consulting firms operating in the Arabian Gulf countries, relying on few government clients, can benefit from them.

While Airbus is leading Boeing in terms of sales in the global aeronautics industry, Emirates has emerged over two decades as one of its most important clients. When it comes to the A380 superjumbo, with the airline cornering 50 per cent of the plane's orders, the aircraft maker's heavy dependency on Emirates is obvious.

In the past four years, Airbus recorded more A380 cancellations than orders. This spurred the France-based firm to continue the dialogue - it needed Emirates. Emirates, on the other hand, had the Boeing card to play if needed, possibly in the form of the 787 Dreamliner, although a no-A380 deal would have had potentially costly consequences for the carrier, too.

Independent of a deal's size, the ability to say "no" because you have alternatives is essential. You can choose to disclose this alternative to influence the other party, or to keep it for yourself. During the French president Emmanuel Macron's visit to China this month, Airbus hunted for its own and tried to convince the Chinese to acquire A380s. The European plane maker offered an industrial partnership with China on the A380 if Chinese airlines placed orders for the world’s largest passenger jet, the Financial Times reported on January 7.

Such an agreement would have relieved pressure to close a deal with Emirates. Unfortunately for Airbus, no decision was taken by the Chinese, thus maintaining the status quo.

Although the Emirates negotiations turned dramatic, according media reports, the importance of deal - some US$16 billion at catalogue prices - kept the main players rational and ultimately helped to avoid what could have been the end of the A380 programme. It was a close-run thing. On January 15, John Leahy, the Airbus head of sales, told journalists during the company’s results presentation: “Quite honestly, if we can't work out a deal with Emirates there is no choice but to shut down the programme.” This comment, just three days before the deal announcement, was both meant to illustrate a reality, but also part of the communication effort from Airbus to show Emirates it was serious. Use of the media played an essential part in this great game to influence decisions and strengthen key messages.

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Read more:

In relief for Airbus, Emirates saves A380 with new $16 billion order

Airbus reportedly in talks to sell A380s to British Airways

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In securing the deal, Airbus committed to produce the A380 for at least another 10 years. That was the commitment Emirates requested back in November, and the lack of such a commitment was the reason the deal was not concluded then.

But Emirates' determination was not without risk for itself. Without that 10-year assurance, and if Airbus stopped the A380 programme, Emirates would have had to incur an significant depreciation on the value of its huge A380 fleet. The multibillion-dollar risk to its financials was major, and represented the main issue at stake for the airline. During Dubai Airshow, Tim Clark, the president of Emirates Airlines, declared to Reuters: “I think the ownership here are concerned about continuation [of the A380]. They need some copper-bottom guarantees that if we do buy some more, then the line will be continued for a minimum period of years and that they are fully aware of the consequences of cancellation and leaving us high and dry … These are vast capital investments for us and we can’t afford to have anything less than 10 years [commitment]; hopefully it would be 15. But it is their call ... Those assurances, I am sure, will come. Quite when, I don’t quite know."

The message from Dubai was clear, and well received by Airbus. What was at stake for the plane manufacturer was even more important, and it would mean badly hurting its overall commercial relationship with a key client. The impact on future sales could have been huge across the Airbus range.

While the price was certainly an important factor in the negotiations, both companies also wanted the same thing. Emirates needed the A380 programme to continue, and Airbus required an order that would ensure its production stayed profitable for few more years, allowing it to hunt for more clients in the future - with the global aeronautic industry anticipating decades of intense buying activity. Both players were in the game to win.

Many books on negotiation value a win-win approach, but you cant choose your counterpart's tactic or style. While hardball negotiations cause discomfort, they push players to precisely understand what’s important to them and to build stronger strategies, products and services.

In the end, Airbus and Emirates Airlines successfully concluded this complex negotiation with a positive outcome for both - and that provides a lesson for all.

Radoine Nachdi manages the Abu Dhabi activities of Chalhoub Group, is a negotiation consultant, and a guest lecturer on business negotiation at Paris-Sorbonne University Abu Dhabi.