MGLE01: MEA LIKELY TO CHOOSE AIRBUS BECAUSE OF

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