Monday, June 6, 2016

Airbus A380: The Death Watch Begins

Last week saw an astonishing moment of frankness from the A380’s biggest customer. Tim Clark, President of Emirates, told Bloomberg that not only had discussions on a new re-engined A380neo version of Airbus’s 525-seat jet “kind of lapsed,” but that his “main concern is that they stop producing the plane.”

This was the first intimation that sudden death is a possibility for the troubled super jumbo. And the numbers highlight this risk.

It has been years since there was any significant commercial demand for the A380, aside from Emirates steadily growing its position to 142 orders. In April, Airbus executives admitted that output in 2017 could be as low as 20 aircraft. This is far below the 30 aircraft needed for annual recurring breakeven (this excludes program nonrecurring costs; there is no way to even begin to recover the $25-30 billion or so invested in the development of this aircraft).

Plummeting output reflects a creaky order book. Emirates still has 65 outstanding orders, on top of the 77 jets it has already taken. In theory, there are another 67 A380 orders on backlog. But many of the remaining jets have little or no chance of being delivered. Qantas’s remaining eight planes have been deferred indefinitely. Ten “undisclosed customer” orders are basically dead. Virgin Atlantic’s ever-deferred order for six is basically dead too. Amedeo, a speculative and poorly conceived leasing venture, will not take any of its 20 orders.

All told, we can only identify 18 truly firm non-Emirates A380 orders on backlog. Clearly, Emirates will need to do the heavy lifting in terms of line program sustainment.

Emirates took its first A380 in 2008, with 72 delivered through the end of 2015. That’s an average of nine per year. But as demand elsewhere has vanished, Emirates has been forced to ramp up its intake. In 2015, Emirates took 14 of the 27 A380s delivered.

How long can this keep up? Emirates has just reported its first annual sales decline in a decade. Its load factor dropped 3.1 points to 76.5%. Its yield fell 10%. Ramping up capacity hardly seems like the right move now.

Meanwhile, Emirates has ordered 150 Boeing 777-9Xs, with deliveries starting in 2020. This jet has the same range as the A380, more belly cargo, just 25% fewer seats (the discounted ones, of course) and has two fewer engines. They’re more modern engines, too.

Thus, the question becomes, how long is Airbus willing to lose money, particularly when there’s no doubt about the ultimate outcome? Assuming that next year’s rate of 20 isn’t too ruinous, and assuming that Emirates can keep taking 14 per year (despite declining traffic growth rates and falling load factors), that means Airbus can sustain about three more years of production (14 Emirates planes per year, plus six for other customers). But then again, since Airbus is losing money on all of these planes, Tim Clark is correct to worry that Airbus could simply end the program at any time.

Teal Group has always provided the most pessimistic A380 forecast. But it turns out we may have been much more optimistic than reality.

(Richard Aboulafia - Forbes)

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