MEA likely to choose Airbus because of delivery date

C O N F I D E N T I A L SECTION 01 OF 02 BEIRUT 002258 
 
SIPDIS 
 
NOFORN 
SIPDIS 
 
STATE FOR NEA/ELA 
STATE PASS USTR 
TREASURY FOR MNUGENT 
USDOC FOR 4520/ITA/MAC/OME 
NSC FOR ABRAMS/DORAN/SINGH 
 
E.O. 12958: DECL: 07/05/2016 
TAGS: EAIR, EFIN, PREL, ECON, PGOV, BEXP, LE 
SUBJECT: MGLE01:  MEA LIKELY TO CHOOSE AIRBUS BECAUSE OF 
DELIVERY DATE 
 
Classified By: Ambassador Jeffrey Feltman.  Reasons: 1.4 (b) and (d). 
 
1.  (C/NF)  Summary.  The Ambassador and econoff met with 
Middle East Airlines (MEA) President Mohammad Hout on June 28 
and Edward Schachle, Sales Director for Boeing in the Middle 
e"QZz[t_Q/=^QtqOa+(5QQQ 2012, and MEA cannot 
afford short-term leases on its aircraft to "bridge the gap." 
 In nine to twelve months, MEA will be considering a deal for 
four additional wide-bodied aircraft for 2012 or 2013; Boeing 
may encounter a similar problem of needing to "bridge the 
gap" between when the planes are needed and when they can be 
delivered.  End Summary. 
 
MEA IS 
EXPANDING ITS FLEET 
------------------- 
 
2.  (C/NF)  Hout briefed the Ambassador on MEA's five-year 
expansion plan.  MEA is interested in purchasing four 
wide-bodied aircraft and four narrow-bodied aircraft within 
the next two to three years to expand its fleet from nine to 
fourteen aircraft.  MEA would like to replace three of its 
currently leased wide-bodied jets and purchase an additional 
aircraft.  In 2012 or 2013, MEA would like to purchase an 
additional four wide-bodied aircraft.  Hout said that he had 
asked Boeing to submit offers for the four wide-bodied jets 
for one aircraft in May 2008, one aircraft in October 2008, 
and two aircraft in the first quarter of 2009.  Hout said 
that Boeing currently does not have an aircraft that competes 
with the A330; Boeing told him that the 777-200 was out of 
production and not suitable for MEA and the 787 would not be 
available until the end of 2012.  Airbus with its A321 
aircraft is currently competing with Empresa Brasileira de 
Aeronautica SA (Embraer) for delivering four narrow-bodied 
jets in 2009 and 2010. 
 
BOEING CANNOT 
"BRIDGE THE GAP" 
WITH DELIVERY OF JETS 
--------------------- 
 
3.  (C/NF)  Hout said he was an admirer of Boeing's 
technology and would "sign right now," if Boeing had planes 
available.  He said that if he could get an early delivery of 
the 787s he would consider delaying MEA's expansion plans, 
but MEA would need assistance for "bridging the gap" between 
when MEA needs the planes and when the 787s could be 
delivered.  Hout said he would "kill the company" if he ended 
up leasing four planes for four-and-a-half years, as lease 
rates have increased dramatically.  Short-term leasing ends 
up being far more expensive than purchasing the aircraft from 
Airbus.  Schachle confirmed to the Ambassador that he was 
working under a "frustrating set of circumstances," where he 
could offer a deeper price discount, but there would still be 
problems with the delivery date.  Hout told the Ambassador 
that there were other elements of Boeing's package that would 
be difficult to sell to the MEA board, even if Boeing could 
offer a better delivery date.  Airbus was only requiring 15 
percent of the financing pre-delivery, while Boeing was 
asking for 30 percent of the financing pre-delivery, 
equivalent to USD 49 million. 
 
AIRBUS AGGRESSIVELY 
PURSUING MEA BEFORE JULY 17 SHOW 
-------------------------------- 
 
4.  (C/NF)  According to Hout, Airbus has given MEA an 
aggressive offer that MEA needs to respond to before the UK 
Farnborough Air Show on July 17.  Hout said that the A330s 
Airbus was offering would only be available before the air 
show, and the offer would be withdrawn if a decision wasn't 
made in Airbus's favor before the show.  Given all of the 
negative press about Airbus, the company is willing to 
discount prices in order to be able to announce deals at 
Farnborough.  Hout said Boeing should think of "changing 
 
BEIRUT 00002258  002 OF 002 
 
 
their marketing strategy" with regards to MEA, as the airline 
could offer Boeing "a foothold" in the Middle East.  Hout 
told the Ambassador on July 5 that MEA's board of directors 
would give Boeing until July 11 to come up with a proposal to 
fulfill MEA's delivery date needs.  If Boeing can't satisfy 
the delivery dates, MEA will then announce a deal with 
Airbus. 
 
POSSIBLE DIFFICULTIES WITH 
SECOND TRANCHE OF PLANES 
-------------------------- 
 
5.  (C/NF)  Hout told the Ambassador that only USD six 
million, a small portion of the Airbus offer for the four 
wide-bided aircraft, was linked with future purchases of 
Airbus aircraft, making the deal to supply four planes for 
2008 and 2009 essentially separate from the deal to supply 
four planes for 2012 and 2013.  Hout insisted that the later 
competition was still "open."  When the Ambassador asked 
Schachle if Boeing's production schedule would be pushed back 
to 2016 or 2017 when MEA begins to look for expanding its 
fleet by four wide-bodied planes in nine to twelve months, 
Schachle conceded that Boeing could be facing a similar 
situation of needing to bridge a gap and help MEA lease 
planes for three to four years.  He lamented the fact that he 
could not "set aside" aircraft for Lebanon or Jordan as the 
production allocation doesn't allow for a "hold" for a 
particular country before a deal is signed. 
 
ENGINE CONTRACT IS NEXT 
----------------------- 
 
6.  (C/NF)  Hout told the Ambassador that he would need to 
decide on a new contract for engines for MEA's aircraft 
within the next four months.  Pratt and Whitney, General 
Electric, and Rolls Royce are competing for the contract. 
Hout said that GE and Rolls Royce were the main competitors 
for the contract.  Hout said GE's maintenance costs per hour 
are good, but GE still needs to improve on price in its 
offer.  He said Pratt and Whitney did not currently have a 
serious offer, as they appear to be awaiting the results of a 
prospective deal with India. 
 
COMMENT 
------- 
 
7.  (C/NF)  The Ambassador has also discussed the Boeing bid 
with two of MEA's directors, Michel (Mickey) Tueni and Marwan 
Salha, as well as with the Governor of the Central Bank Riad 
Salameh on July 4.  (The Central Bank owns 99 percent of 
MEA.)  These three interlocutors confirmed what we feel is 
Hout's sincerity:  MEA would like the 787s and the new 
technology on offer, but the conflict between MEA's 
scheduling needs and Boeing's anticipated delivery dates 
cannot be resolved.  While the chances thus seem slim to none 
that MEA and Boeing will come to a deal for the first four 
wide-bodied jets MEA seeks, we hope that the door is open for 
a Boeing solution to the second tranche of four wide-bodied 
jets.  But even that will require some kind of deal on 
timing, as Boeing's production schedule is likely to be 
pushed even further into the future by the time MEA is ready 
to sign for four additional aircraft. 
 
8.  (U)  This message may contain proprietary business 
information and should be protected accordingly. 
FELTMAN