Three years ago, during an economic expansion in the commercial airline industry, Flagship Airways decided to purchase new planes to expand its mid-size and jumbo fleets. They ordered 10 jumbo (four-engine) aircraft and 30 mid-size (three-engine) aircraft from two different airframe builders. Then, after several negotiations, they signed a ten-year, $1 billion contract with Eureka Aircraft Engines to outfit both types of aircraft with Eureka engines.
However, during the past three years, Flagship's revenues have steadily decreased. It has canceled its order for the 10 jumbo aircraft, preferring to expand only its mid-size Skyline fleet. Correspondingly, the number of total engines it requires is now 90 rather than 130. The delivery schedule remains the same: these engines are to be delivered to Flagship over a three year period that begins one year from now.
Originally, Eureka agreed to provide two types of engines for the 30 Skyline planes: the XJ5 and the new C-323, still in development. The C-323 was to contain a new "LT" turbine that promised better fuel burn than the conventional AT turbine (like the one in the XJ5). Equipping half the new Skyline planes with C-323s seemed like a good solution to both sides, even though carrying two different engines would mean higher maintenance costs for the fleet as a whole.
In addition, Eureka had agreed three years ago to sweeten the deal by including, free of charge, 100 engine kits worth a total of $150 million. These kits were to be used to upgrade the engines in Flagship's aging Firebird fleet, one of its commercial mainstays. Included in each kit were four kinds of parts: fans, compressors, frames, and the new LT turbine.
Today, at Flagship's request, the two companies are meeting to discuss how to restructure the agreement. This is not an unprecedented procedure: the two companies have in the past met to restructure deals when circumstances have changed significantly for one side or the other, and it is common practice in the airline industry as a whole. Each side is sending a lead negotiator and two support members.
In the lead for Eureka is P. Stiles, General Manager of Commercial Engines Operations. Accompanying Stiles for Eureka are L. Atchison, VP of Product Development; and A. Delling, VP of Finance.
Flagship's lead negotiator is S. Gordon, VP of Engineering. Accompanying Gordon for Flagship are L. Ross, VP of Maintenance; and M. Langton, VP of Finance.
The four issues they must seek to resolve include: