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Kingfisher drives hard bargain for 50 new jets

Kingfisher drives hard bargain for 50 new jets
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First Published: Thu, Jun 21 2007. 01 20 AM IST

Updated: Thu, Jun 21 2007. 01 20 AM IST
New Delhi: Kingfisher Airlines Ltd placed a surprise order for 50 Airbus jets with a list price of up to $7.3 billion (Rs29,930 crore), more than double what the airline had been expected to order at this year’s Paris Air Show.
“It was a last-minute thing,” said A. Raghunathan, chief financial officer of the UB Group-owned airline. “Last Saturday night, the proposal came in and they were hardened as of today morning.”
But given the current market conditions and the financial troubles for Airbus SA, Kingfisher may have been able to negotiate a discount of up to 28% on the list price, said analysts who track Airbus’ parent, the European conglomerate EADS. Neither Airbus nor Kingfisher would discuss the discount estimates, which, if accurate, mean the deal could be worth a little over $5.25 billion, including up to $1 billion for Rolls-Royce engines on 25 of the jets.
“We got a good deal,” said Raghunathan. “We are Airbus’ biggest customer today. So, we were able to leverage a better deal from them.”
The Kingfisher purchase is a shot in the arm for Airbus, which has been struggling to keep up with its rival, US-based Boeing Co., in the wide-body jet market. Airbus will likely announce $45.7 billion worth of orders and memorandums of understanding this week in Paris, according to Airbus chief operating officer John Leahy. That will help Airbus close the distance with Boeing, which landed almost three-fourths of the $94 billion orders placed for wide-body aircraft in 2006.
Airbus’ continued delays with the massive 600-seater A380, which resulted in the company’s first-ever loss-making year and a massive restructuring, coupled with the lack of buyers for the A350, are likely to have led Airbus to offer massive discounts for the planes that Kingfisher has ordered, note analysts. Five separate analysts who track EADS said they expected discounts to have been up to 28% for the A350, which lists at $215 million, and even deeper for Kingfisher because of the size of its order.
Kingfisher may have timed its purchase of the aeroplanes perfectly, said a London-based analyst with Standard and Poor’s, who declined to be named because of the company policy. Airbus has been struggling to find buyers for the A350, which won’t start delivery until 2013, because airlines have already agreed to buy over 600 of Boeing’s 787 Dreamliner which will start delivery in 2008. At a time like this, the analyst said, Airbus is open to making deals that would have seemed impossibly cheap just two years ago, when the manufacturer enjoyed a record-setting performance at the 2005 Paris Air Show.
It is not uncommon for airlines to negotiate discounts for large orders, said Bruce Ashby, the chief executive of Gurgaon-based IndiGo, which ordered 100 of Airbus’ A320s in 2005.
Indian carriers have been at an advantage until recently, buying aircraft at a time when US carriers, usually the world’s biggest customers, have held off on purchases due to financial problems.
Airbus’ Leahy earlier dismissed suggestions that Airbus had been forced to heavily discount its prices for the A350 to woo back customers after the problems with the jet. Leahy said the prices being achieved were comparable with those of the Dreamliner, adding that he had seen 787 pricing below the A350 price during negotiations with customers.
Kingfisher’s order includes 15 of the A350-800 ‘Xtra Wide Body’ jets, bringing Kingfisher’s total orders for the A350 up to 20 (it had previously ordered five A350s in an older design). In addition, Kingfisher will buy five four-engine A340-500 planes, 10 A330-200 wide-body models and 20 single-aisle A320-family jets.
Under current regulations, the two-year-old Kingfisher is not allowed to fly overseas, but a proposal to amend that regulation will be examined by the Union cabinet soon. Civil aviation minister Praful Patel said in Paris that it was likely that the policy would be approved.
“What we’re proposing is to go on capabilities of the airline, not just the track record” on how many years it has flown inside India, Patel said. “We’ll look at the financial capabilities of airlines.”
Kingfisher’s Raghunathan said the new orders, taken in tandem with the remaining deliveries for Air Deccan, in which the UB Group will soon own a majority stake, required some reshuffling of deliveries. The airline has deferred about 10 of its A320 deliveries by up to a year, and is not likely to order any more A380s than the five it has already confirmed.
Jet Airways (India) Ltd, Kingfisher’s biggest competitor and India’s biggest airline by market share, placed orders for 13 ATR turboprops, which are used mostly on non-metro routes, bringing its total fleet size to 76.
Andrea Rothman of Bloomberg and Jane Wardell of AP contributed to this story.
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First Published: Thu, Jun 21 2007. 01 20 AM IST
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