Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
- Boeing-IAM contract talks fail, no new negotiations scheduled, no end in sight October 9, 2024
- Boeing 3Q deliveries up despite strike October 8, 2024
- Strike slows Boeing’s march toward improving safety culture October 7, 2024
- Aerospace supply chain still ailing; Sustainable Aviation Fuel isn’t the answer to go green October 4, 2024
- Bjorn’s Corner: New engine development. Part 27. Long developments October 4, 2024
Odds and Ends: ANA, Airbus and Boeing; Era of the jumbo jet; Repo wars
ANA to stay with Boeing? After losing Japan Airlines to Airbus, analysts are split over whether ANA will also defect. Some say JAL’s order will give ANA cover to defect. Others say JAL’s order will increase the pressure on ANA to stay with Boeing. The Seattle Times this story. Our take: compare this with what happened following American Airlines’ order with Airbus. The Delta Air Lines competition was next, and Boeing was determined not to lose that competition–and it didn’t. Market talk says Boeing’s price to Delta was 10%-15% below Airbus’ offer, though this has never been confirmed. We understand there were other considerations besides costs. Regardless, both sides are going to go all-out to win.
SuperJumbo Era: The Financial Times has a story about whether the era of the super-jumbo (the Airbus A380 and the Boeing 747-8) is over (free registration required). Bloomberg has a story about the Boeing 777X being a jumbo killer.
Repo Wars: Here’s an departure from our usual coverage–tactics used to repossess an airplane from a delinquent airline. A decade ago, we were involved in a similar situation, planning the repossession of a Boeing 767-300ER from a South American airline. The lessor obtained a court order while we did some behind-the-scenes plotting to “arrest” the airplane at Miami. It was at the gate, full of passengers when the sheriff served the pilot with the court papers. Secrecy was imperative, as the story linked above references. Once the airplane was seized, the airline rescheduled a second 767 to stay on domestic service so the lessor couldn’t seize that airplane, too.
From the FT article:
“Boeing “has modern, competitive, second-to-none jets hobbled by dubious management”, says Richard Aboulafia, an analyst at Teal Group.”
Couldn’t agree more. Jim McNerney is only interested in stock prices, dividends and stock option payouts. He’s been a HORRIBLE CEO. There are much, much better CEO’s then he is (Airbus CEO comes to mind-look at the effort he took to get JL). The fact Boeing’s stock is going up IMHO is irrelevant of his stewardship. I’m about as “pro-management” as one can get but this is turning out to be a joke.
The whole quid pro quo between management and board of directors is a total farce which our spineless govt. doesn’t want to address or deal with.
Repo aircraft can be a very tricky business and the airline is usually in charge, not the leasing company. Wasn’t it Kingfisher who a few years ago stripped out almost everything of value from some leased A-320s that were about to be repo’d?
Boeing will go all out to win the NH WB airplane. Maybe throw in a few free leased B-747-8Is while waiting for the B-777X to be delivered?
Kingfisher had the advantage the planes were in India. This Russian company doesn’t have that advantage.
I don’t see Boeing offering free B748’s but I do see Boeing giving NH a deal better than it would have received.
Didn’t they allegedly offer JAL the 748 on a “name your own price” basis?
“… is a total farce which our spineless govt. doesn’t want to address …”
Why “govt.”? The government’s got nothing to do with it.
Securities exchange laws, corporate laws, etc. are indeed made/amended by the govt.
“The Delta Air Lines competition was next, and Boeing was determined not to lose that competition–and it didn’t.”
? Delta ordered a pile of cheap 737NGs and ordered NEO’s a while later.. Anyway it was the perception at that time and that counts.
I think we have to watch UA & A321. Is the 737-900ER really the ideal 757/767 replacement, transcon, in the hot South and Caribbean? ..
Re; SuperJumbo Era
It seems people start to realize the 747-8i won’t have a great future. Dragging in the A380 and saying its an industry trend softens the pain I guess.. For the rest the 747-8I is incomparable. Let alone the 50% (!!) smaller 777-9X
DL has not ordered NEOs. It ordered CEOs.
I stand corrected ! To say Boeing didn’t loose DL is questionable however.
@keesje:
The A380 doesn’t need any “dragging”. It less-than-stellar sales (for whatever reason-market dynamics, lack of slots, etc.) has been quite obvious.
Apropos, when is that $4+ billion A380 launch aid (RLI) due?
jacobin777, it is being paid back to the government from 2007 (SQ delivery), with interest. It a loan, contrary to some other $ub$idie$ I’ve heard of. 😉
@keesje,
Airbus only has to pay back the “launch aid,” when the A380 makes a profit. Since the A380 will never make a profit, nothing will be paid back.
@keesje:
LOL…I would like to see some proof the A 380 RLI is being paid back. 😉
Regarding other $ub$idie$, we know both manufacturers get it-but the RLI is in addition to it.
http://trade.ec.europa.eu/doclib/docs/2010/september/tradoc_146503.pdf
Jacbin there is proof about the A380 RLI and how it will get paid back if one likes to search. It has been discussed on a-net many times. Do a search if you can. This is unlike the government handouts Boeing gets that will never ever be paid back.
In other words, if sales of the A380 were to end today, then Airbus would cease to pay royalties on the A380 program even if the sales target was not met. If the agreed upon sales target is indeed not met, then the Member States will not recoup their full expected money (investment plus interest) on the A380 program.
The Member States are essentially risk sharing partners that are too big to fail. Must be nice!
WTO ruling effectively says that R+D paid for by the US taxpayers belongs to US taxpayers, and Boeing’s use of the results is a subsidy. Unlike Airbus’ launch aid, which does pay royalties, I haven’t seen any royalties from Boeing on the US budget. Maybe if US pays “subsidies” to Boeing the deficit would have been fixed?
should read if US subsidises Airbus, of course.
Mike, isn’t this continued preoccupation with the A380 quite silly?
The RLI sales number for the A380 set at the time of the launch, was probably in the same neighbourhood as the original break-even target. The sales will not end today and the member states will in all likelihood recoup their investment.
What is hilarious though, is this bizarre-seeming notion of some people that Boeing, in contrast to the Airbus, is the upholder of the “competitive”, “free- enterprise” system – as if that system is a viable system in the high capital cost, low volume Large Commercial Aircraft (LCA) business — and as such is a “victim” to the gross subsidies shenanigans of Airbus. 😉
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http://www.publications.parliament.uk/pa/cm200405/cmselect/cmtrdind/151/151.pdf
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http://books.google.com/books?id=KcaYjPhRnWUC&pg=PA153&lpg=PA153&dq=airbus+a380+250+break-even&source=bl&ots=rky530UX97&sig=D5NyikpSgVjRBhq4tZ6W2ELitws&hl=no&sa=X&ei=A9pZUp3zMqjt0gWGoYCYCQ&ved=0CF0Q6AEwBTgK#v=onepage&q=airbus%20a380%20250%20break-even&f=true
Given that Boeing types have been far and away the biggest recipients of RB-211 engines, and that a significant number were used in B777s, not to mention the backlog of Trent powered B787s, you could say that Boeing was a considerable recipient of European Launch Aid!
OV-099,
Not preoccupied at all with the A380. I just used it as an example because I’m sure it has not reached it’s sales target yet. I never said that it would not eventually reach it’s sales target. I would also challenge you to explain how I’m preoccupied with the A380.
I could have used the A340 as an example, which I’m sure did not reach it’s sales target, therefore the member states did not recoup all of their expected money.
The point is that if an Airbus program flops, then Airbus is not on the hook to repay the member states. Thus, the member states are risk sharing partners that can absorb the possible loss of their investment (too big to fail) and do not demand repayment of their investment regardless of program success. This is similar to commercial risk sharing partners, except for the fact that a commercial company would really feel the effects of a program flop, unlike a government. It is very different from a commercial loan.
The A-310 was also a not well seller. Only about 250 sold.
“Not preoccupied at all with the A380”
OK.
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“I just used it as an example because I’m sure it has not reached it’s sales target yet.”
And your belief is based on what kind of evidence?
Again, the sales target is based on a conservative forecast of future sales when a programme is launched. AFAIK, the original business case, or “sales target” for the A320 was only around some 500 units. Hence, what’s your reason to believe that a conservatively set sales target should exceed the break-even point; and for the A380, the break-even point was originally set to be about 250 airframes (i.e. per Noel Forgeard).
However, the whole point of RLI is to finance the heavy ‘front-ended’ development costs of new aerospace projects, since the return is high risk and long-term. 17 years after programme launch the risks are obviously no longer there, thus repayment of the last loan levies at that time should be a no issue.
Now, as you should have seen from the links that I provided, additional payments are made if a program is successful.
Once the actual sales exceed the target, as has happened, investing governments continue to collect “royalties” or “upside” on the additional sales, which will further increase their rate of return. Airbus has paid significant amounts of royalties to the Member States which exceed by far the Member States’ investments since 1992. Therefore, this instrument is characterised by “success-sharing” (i.e. extra profit for the investing government) rather than a certain element of risk inherent in any kind of investment (in the present case insofar as payback is linked to the actual sale of aircraft).
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“I never said that it would not eventually reach it’s sales target.”
Well, if it was me I would’ve chosen not to pontificate about something I didn’t know too much about. 😉
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“I would also challenge you to explain how I’m preoccupied with the A380.”
Well, it’s just this impression that I’ve got. But, of course, if you’re not, that’s good for you! 🙂
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“I could have used the A340 as an example, which I’m sure did not reach it’s sales target, therefore the member states did not recoup all of their expected money.
Again, is your belief based on knowledge and insight, or on something else?
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“The point is that if an Airbus program flops, then Airbus is not on the hook to repay the member states.”
The point is that RLI is legal under WTO law.
The Appellate Body report, which is final and will soon be adopted by the WTO’s Dispute Settlement Body, contains a number of clear findings – vindicating many of the EU’s long held positions – including: Repayable Launch Investment (RLI) for the A380 granted by Germany, Spain and the UK is not a prohibited export subsidy.
http://trade.ec.europa.eu/doclib/press/index.cfm?id=709
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“Thus, the member states are risk sharing partners that can absorb the possible loss of their investment (too big to fail) and do not demand repayment of their investment regardless of program success.
The member countries are stakeholders in Airbus. Similar to how Washington State is a stakeholder in Boeing. The difference being, of course, is that where Airbus member countries stakeholders have been investing in the company, Washington State has been giving generous tax breaks that has been very beneficial primarily, it seems, to Boeing share holders and the ridiculously high-paid corporate management and CEO at the company.
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“This is similar to commercial risk sharing partners, except for the fact that a commercial company would really feel the effects of a program flop, unlike a government. It is very different from a commercial loan.”
You’ve got to be kidding.
http://uspolitics.about.com/od/economy/a/lockheedBailout.htm
@Mark Airubs has received govt. hand outs as well-on top of the RLI.
Isn’t the “break even” now somewhere north of 450 frames? Does that mean Airbus doesn’t have to repay?
I thought it was “breakeven” or some “X” years later (17)?
“Well, if it was me I would’ve chosen not to pontificate about something I didn’t know too much about. ;-)”
I really think you should take your own advice here, but I’m not holding my breath.;-)
“And your belief is based on what kind of evidence?”
The fact that Airbus has delivered about 111 A380’s so far, so the program has not yet reached break even. Or are you trying to tell me that the A380 program has already broke even at 111 frames? I don’t think so. Same for the A340. Or, are you also trying to tell me that the A340 program reached break even?
“The member countries are stakeholders in Airbus. Similar to how Washington State is a stakeholder in Boeing.”
Your first sentence here is true. However, your second sentence is BS. The two situations are not at all similar. There is no financial risk taken by giving tax breaks.
Finally, I’m not kidding. Commercial loans are not the same type of investment as that provided by a risk sharing partner.
“I really think you should take your own advice here, but I’m not holding my breath.;-)”
Thanks for the advice, but since a misunderstanding is easier to correct than a misconception, it take some time, unfortunately, to debunk the latter. This is quite similar, in fact, to what it takes to debunk the moon landing hoax crowd. 😉
If you believe that’s pontificating, that’s fine with me. 😉
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“The fact that Airbus has delivered about 111 A380′s so far, so the program has not yet reached break even. Or are you trying to tell me that the A380 program has already broke even at 111 frames?”
You are moving the goalposts, whilst now suddenly talking about deliveries. I’m talking about firm orders. In the industry, the word “sales” means firm orders.
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“Same for the A340. Or, are you also trying to tell me that the A340 program reached break even?”
No, it’s not the same for the A340.
BTW, which model are you talking about?
The A340-200 and A340-300 were launched together with the A330-300. It’s the same programme and the loans are long since been paid off.
The A340-500 and A340-600 was a €3.5 billion programme (i.e. including Trent-500 R&D). If the engine accounted for €1 billion of the total costs (i.e. a conservative estimate), the the R&D costs per airframe would be around €19 million; or about 6.3 million in RLI per airframe built. That would be around 3.5 percent (excluding interest) of the catalog prices at the time.
Since the A345/A346 programme had more than 50 percent commonality with the in-production A332/A333 models, and used apart from the wings most of the same production infrastructure, the production costs for the A345/A346 was much lower than what would have been the case if it had been a standalone programme; just like the MD-11 and the 747-8. Hence, the A345/A346 did, in all likelihood, reach “break-even” before the programme was terminated.
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“Your first sentence here is true. However, your second sentence is BS. The two situations are not at all similar. There is no financial risk taken by giving tax breaks.”
The discussion is about subsidies.
According to the WTO, a tax-break is a subsidy when the government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax credits).
http://www.wto.org/english/docs_e/legal_e/24-scm_01_e.htm#ArticleI
Hence, if a government wants to grant tax-breaks, it’s got to be across-the-board ones.
As for the sentence being BS, you seemed to have missed the point. Washington State has been granting extremely generous tax-breaks to Boeing, especially for the 787, while seemingly getting less and less in return as Boeing has been moving ever more production to Charleston and elsewhere. What the tax-breaks seems to have done is in helping to enrich the few at the expense of the many hard-working Boeing employees in the Seattle area.
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“Finally, I’m not kidding. Commercial loans are not the same type of investment as that provided by a risk sharing partner.”
Of course, it isn’t. That was not the point.
The 787, for example, was not launched by relying on just commercial loans. Few aerospace programmes are. However, the aerospace business is just not “another” business. It’s a strategic industry that’s supported world wide by a number of governments. The large OEMs, therefore, are seemingly “too big to fail”, and the US government would have rescued Boeing if worse would come to worst., just like they have rescued the major US airlines, banks and god knows what.
“Isn’t the “break even” now somewhere north of 450 frames? Does that mean Airbus doesn’t have to repay? I thought it was “breakeven” or some “X” years later (17)?
@jacobin777, as has now been mentioned, over and over again, the RLI “sales-target” is set at the official start of a programme. If the break-even point moves to the right, it’s inconsequential to the agreed upon “sales-target” number.
As for Airbus and the reapayment of RLI loans, why do you continue to spread FUD on this and seemingly “everything” A380? Is that really necessary?
I thought it was only Fleetbuzz and Friends, and a few others, who are doing that as their favourite past-time activity. 😉
As you should be able to see from the link below, and which I’ve previously posted further up-thread, RLI is usually paid back on a per-aircaft and a per-engine levy, sonething which they have been doing since the delivery of A380 MSN-003 in October 2007.
69. RLI payments are made for eligible development costs to companies in the early years of a project. Repayments, when paid, are usually based on a per-aircraft or per-engine levy. These are set at a level to achieve the repayment of RLI with a target rate of interest and within a specified period of time.
http://www.publications.parliament.uk/pa/cm200405/cmselect/cmtrdind/151/151.pdf
“You are moving the goalposts, whilst now suddenly talking about deliveries. I’m talking about firm orders. In the industry, the word “sales” means firm orders.”
I was not careful in my use of the term sales. To me, an aircraft sale is not final until the aircraft is delivered because that is when the manufacturer receives the bulk of the money, and when, I assume, the royalty is actually paid. Firm orders can get cancelled as we have seen on all aircraft programs.
To be honest, I really don’t care what the current set of WTO rulings says. Appeals will go on and on before the ruling is final. I also don’t agree with all of their current findings. In my view start-up capital and taxes are two different things entirely. One cannot build a business on tax breaks alone, like one can with start-up capital.
“The 787, for example, was not launched by relying on just commercial loans.”
And your belief is based on what kind of evidence?
I was not careful in my use of the term sales. To me, an aircraft sale is not final until the aircraft is delivered because that is when the manufacturer receives the bulk of the money, and when, I assume, the royalty is actually paid. Firm orders can get cancelled as we have seen on all aircraft programs.
Mike, it doesn’t matter how you define “aircraft sales”. Just do a Google search using the words sales and Airbus or Boeing.
May I remind you what you said when you entered into the discussion.
Any reasonably informed individual would interpret that as “if the A380 doesn’t get any further orders beyond the current 259 on order (minus a dozen)”, then……
As I’ve already pointed out, 250 units was the original break-even point (i.e. confirmed by former Airbus CEO Noel Foregard).
Even the greatest pessimist would probably conclude that Airbus will, after all, deliver at least 250 A380s.
This exchange started with Tom Bucceri stating that: Airbus only has to pay back the “launch aid,” when the A380 makes a profit. Since the A380 will never make a profit, nothing will be paid back.
Predictably, Jacobin777 followed up by saying: :I would like to see some proof the A380 RLI is being paid back
So, first I debunked Tom’s “contribution”, then I provided evidence that RL, in fact,I is being paid back on a per-aircraft or per-engine levy in response to Jacobin777’s “demands”.
Your original assertion seems to have been based on a misconception. I’ve never stated that the A380 RLI has already been repaid, but rather, that the total number of orders received for the A380 should be roughly identical with the originally estimated break-even number for the programme. Hence, there should be need of specualtion of whether or not Airbus will repay the RLI loans for the A380 programme.
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“To be honest, I really don’t care what the current set of WTO rulings says. Appeals will go on and on before the ruling is final. I also don’t agree with all of their current findings. In my view start-up capital and taxes are two different things entirely. One cannot build a business on tax breaks alone, like one can with start-up Capital”.
With all due respect, it seem to me that you don’t know what you’re talking about.
This is not just like any other fast-food business with a very low, if any, barrier to entry.
The Large Comercial Aircrat (LCA) business has very high Barriers to market entry. Any newcomer will need a massive amount of support and assistance. Presently, only a China has enough capital and sheer clout to potentially support a third player.
A tax-break, on the other hand, is mainly beneficial to the ones who already dominate the industry. It provides for higher margins, driving company stocks higher — and if you’ve got a ridiculously high-paid corporate management and CEO — most of the “benefits” are only enyoyed by a few in the company in addition to investment speculators, and not most of the stakeholders in the company.
http://www.academia.edu/1063739/An_Analysis_of_the_Airbus-Boeing_Dispute_From_the_Perspective_of_the_WTO_Process
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“And your belief is based on what kind of evidence?”
No, not any belief. Facts will do!
It’s worth mentioning that for strategic reasons, the EU (on behalf of Airbus) never involved the Japanese in their case againt the US (Boeing) at the WTO. It looks as if that strategy has payed off now that Japan Air Lines has ordered a significant number of A350s.
http://books.google.com/books?id=B8Eclsp6xtUC&pg=PA102&lpg=PA102&dq=boeing+787+subsidies+government+japan+italy&source=bl&ots=F2iiXhWEnf&sig=TtNoq5ZcV5iHD2upSE-f-Omkd5A&hl=no&sa=X&ei=rCJcUqmCL8HTtAahgYG4Cw&ved=0CFUQ6AEwBA#v=onepage&q=boeing%20787%20subsidies%20government%20japan%20italy&f=false
Addendum
Your original assertion seems to have been based on a misconception. I’ve never stated that the A380 RLI has already been repaid, but rather, that the total number of orders received for the A380 should be roughly identical with the originally estimated break-even number for the programme. Hence, there should be <b<no need for speculation of whether or not Airbus will repay the RLI loans for the A380 programme.
OV-099,
The misconception was caused by the way you answered Tom’s and jacobin777’s comments with the quote from the trade document. The quote seems to intone that all Airbus RLI since 1992 has been paid back. This intonation happens in the following part of the quote.
“Airbus has paid significant amounts of royalties to the Member States which exceed by far the Member States’ investments since 1992. Therefore, this instrument is characterised by“success-sharing” (i.e. extra profit for
the investing government) rather than a certain element of risk inherent in any kind of investment (in the present case insofar as payback is linked to the actual sale of aircraft).”
While Airbus has paid back more than the original amount of the Member States investments since 1992, this does not mean that the Member States have been fully paid back for each individual Airbus program.
This is the point I was making in my original post by using the A380 as an example only. It seems you chose to get a bit bent out of shape by the fact that someone, apparently with as little knowledge as myself according to you, could possibly even suggest anything other than wild commercial success for such a revered program as the A380.
Let me be clear, it was a hypothetical example to illustrate how RLI worked. Why use the A380 as an example you ask (suspecting that I’m bashing the sacred cow)? I used it because it is an AIrbus program first of all, and I was pretty sure the program had not reached break even yet. That’s it. Any motive beyond that is of your own invention.
Business principles are business principles regardless of the size. Saying that a large barrier to entry makes things fundamentally different sounds like an excuse. I don’t think a government is absolutely needed, even in aerospace, although it does make it easier. There are examples of companies today that are making inroads into markets that were previously thought impenetrable without government support. SpaceX comes to mind.
”The misconception was caused by the way you answered Tom’s and jacobin777′s comments with the quote from the trade document. The quote seems to intone that all Airbus RLI since 1992 has been paid back. This intonation happens in the following part of the quote.”
The way I answered with “the quote”?
That specific quote you’re now talking about is the ninth out of 10 quotes provided. Why did you take that 9th quote out of context?
Quotes number 3, 4, 5, 6, 7, 8, 9 follow each other logically one after the other. Why did you have to cherry-pick nr 9?
The 8th quote states that once the actual sales exceed the target, as has happened, investing governments continue to collect “royalties” or “upside” on the additional sales, which will further increase their rate of return.
As SomeoneInToulouse points out down thread, additional royalties are paid per frame beyond the repayment point set by the projected sales target.
How could you possibly conclude from the 9th quote that “all” Airbus RLI has been paid back since 1992.? Of course, it hasn’t.
The A320 programme reached the agreed upon sales target before 17 years had elapsed. Therefore, the RLI for this programmes was repaid in less time than the maximum 17 years from the time of the official project launch. If I were to hazard a guess, the agreed upon sales target for the A340-500 and A340-600 are in the neighbourhood of the actual number of frames sold. After all, this was an aircraft derivative program. However, by next year – or 17 years after the official project launch — Airbus will have to pay the remaining balance on the A345/A346 RLI- loan, it they haven’t done so already. By December 2017, Airbus will have to have repaid the last remaining levies on the A380 RLI-loans. If they produce 30 units per year from next year through 2017, then 240 A380s should have been delivered by December 2017; or in the neighbourhood of the likely sales target. For the A350 programme, the RLI-loans will have to be repaid by 1 December, 2023 – at the latest. Of course, as with the A320 and the original A330/A340 programme, the RLI-loans will all have been repaid a lot sooner than 17 years.
As for the A320 programme,it’s been an engineering money-spinner for the UK :
http://www.independent.co.uk/news/business/bae-returns-on-jet-pass-launch-aid-investment-1267830.html
As of today, the A32x-series has sold almost 10 times as many copies as what was the case back in 1997 when all of the RLI for the A320 programme had been repaid.
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”While Airbus has paid back more than the original amount of the Member States investments since 1992, this does not mean that the Member States have been fully paid back for each individual Airbus program”.
Of course not! Again, this is ludicrous. Who has claimed that Airbus member states have been fully paid back for each individual Airbus programme; presumably including the latest one (A350).
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”This is the point I was making in my original post by using the A380 as an example only. It seems you chose to get a bit bent out of shape by the fact that someone, apparently with as little knowledge as myself according to you, could possibly even suggest anything other than wild commercial success for such a revered program as the A380.”
No, the point you were seemingly making was that Airbus supposedly ”would cease to pay royalties on the A380 program even if the sales target was not met”. Confused about when the member states receive royalties (i.e. after the sales target have been met); you continued by claiming that ”If the agreed upon sales target is indeed not met, then the Member States will not recoup their full expected money (investment plus interest) on the A380 program”, totally oblivious to fact that the 17 year clause ensure that the member states will receive their money plus interest, but not any royalties.
This discussion and thread has obviously nothing to do about whether the A380 program will be a commercial success or not. Nice try though in wanting to change the topic by trying to be sarcastic, however much it’s based on a fallacious reasoning.
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”Let me be clear, it was a hypothetical example to illustrate how RLI worked. Why use the A380 as an example you ask (suspecting that I’m bashing the sacred cow)? I used it because it is an AIrbus program first of all, and I was pretty sure the program had not reached break even yet. That’s it. Any motive beyond that is of your own invention.”
Well, with all due respect, but you still don’t seem to grasp how RLI Works.
As for “sacred cow”; well, that’s certainly a red herring fallacy.
Even an adolescent should be able to figure out that due to the delays and production snafus, the A380 has a long way to go before it will reach the point of break-even (i.e. 400 units plus), that the original break-even point was around 250 units and as such, the A380 can’t possibly have reached break-even yet.
Now, based on a rather cavalier attitude towards the concept of RLI, due apparently to a misconception on how it actually works, you concluded in your seemingly inconspicuous anti-Airbus/EU comment up-thread that:
”The Member States are essentially risk sharing partners that are too big to fail. Must be nice!”
Yes, the member states are obviously too big to fail. However, as you should know by now, that’s inconsequential to whether or not RLI must be repaid.
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”Business principles are business principles regardless of the size. Saying that a large barrier to entry makes things fundamentally different sounds like an excuse. I don’t think a government is absolutely needed, even in aerospace, although it does make it easier. There are examples of companies today that are making inroads into markets that were previously thought impenetrable without government support. SpaceX comes to mind.
It’s not an excuse at all. The Large Commercial Aircraft (LCA) business obviously doesn’t encompass the entire aerospace industry. SpaceX does not currently offer any product in the LCA business.
As for SpaceX, the company was created using technologies entirely subsidized by the US taxpayer. NASA has already given SpaceX hundreds of millions in down payments on future launches, and may award hundreds of millions of more in contracts to SpaceX in the future for shuttling cargo and astronauts to the International Space Station. SpaceX is a company that NASA has funded up front with cash. Also,keep in mind that without having the US government or any other government for that matter as a customer, the only profitable part of the space industry is the commercial satellite communications industry which mainly operate satellites in geosynchronous orbit. Only now, some 11 years after the company was founded, is SpaceX finally ready to launch a commercial satellite into a geostationary transfer orbit (GTO). How, could SpaceX have survived for this long without massive support from the US government?
BTW, last year there was a debate on SpaceX vs. Skylon on this site:
http://leehamnews.wordpress.com/2012/06/05/boeings-space-plane-returns-after-nearly-a-year/#comment-16706
OV-099,
To me the original quote was not clear about what would happen if the sales target was never met. From the following quote it was not clear which took precedence, royalties on a per aircraft basis or the 17 year limit.
“–The levy is set so that, once an agreed sales target is reached, the whole amount should be repaid with a rate of return, i.e. with interest, over a repayment period of 17 years (i.e. 11-12 years from the first delivery).”
Thanks to SomeoneIn Toulouse, the real misconception I had finally got cleared up. I understand now that the sales target really only has an effect on the rate of repayment within the 17 year window. Now that I have a better understanding of how RLI works, I appreciate Airbus’ position more.
I don’t think you have made a good case for why government sponsored loans are needed for the LCA industry aside from the fact that governments have sponsored the require technologies in the past. The argument is a bit circular. The truth is that military applications have always driven almost every sector of the aerospace industry essentially since day one, and the argument can therefore be made that every piece of aerospace technology has been, at one point, at least partially funded by a government. In my view, this does not constitute a subsidy because the government gets what it pays for, at least when things work the way they are intended. The fact that a company can utilize it’s expertise gained by working a government contract on commercial programs is an efficient use of knowledge.
Mike, now that you know how RLI works perhaps in the future you could point out to Tom Bucceri and others, that RLI repayments are not dependent on whether or not an aircraft project is profitable or not. 😉
As for government loans for the LCA industry; it’s not for me to try to convince you. IMO, there’s plenty of evidence to support the reasoning behind why there are only two players in the RLI business. Bombardier is not stupid and is positioning the C-series carefully in the lower end of the spectrum in the single aisle market in order not to compete directly with A and B.
Airbus as a major player doesn’t really need RLI-loans today. They obviously needed RLI during the formative years of the company. They are now part of a duopoly which have split all, or nearly all the market share, and that duopoly will last for at least another 20 years. For example, Airbus has apparently yet to collect any RLI-loans for the A350 from Germany due to the German Government and Airbus being at odds over German work-share in Airbus. In fact, RLI is also viewed by the various governments as a means to preserve stakeholder influence, so it goes both ways. Since RLI loans are deemed legal by the WTO – they only had some issues with the level of interest rates – Airbus will continue to accept RLI-loans in order to share, reduce, or retire risk. Likewise, Boeing will continue to take advantage of generous support not only from US states and the federal government, but also from various foreign ones.
OV-099,
Since RLI needs to be repaid whether or not the program is successful, what is the benefit of RLI? Favorable interest rates? Something about this still smells a bit fishy to me. Boeing does not use RLI even though it is apparently “legal”, so why would Airbus choose to use it if they are not getting some sort of sweet deal? Like you said, there is the downside of the member states having influence in their decisions.
I’m fully aware of the favorable tax situation that US states grant Boeing, but as I’ve maintained repeatedly, one cannot launch a business venture or fund a development program on tax breaks. Taxes breaks will allow a company to lower their prices or pad their profits, but they don’t kick in until after the money transfer between company and customer. As far as I know, Boeing does not borrow money directly from the government. They fund their new programs from revenues from other programs, by selling stock, or by borrowing money from some non-government source.
As for Boeing’s government contracts, those are not “free money” like I’ve heard several people try to claim in this forum. Boeing has to do the work and deliver a defined product with those funds. Yes they make a transparent negotiated profit on those contracts, and yes, they learn things that they can use on other contracts, both defense and civilian, but that is how companies grow.
So, I guess I’m interested in knowing what benefit Airbus gets from RLI that they couldn’t get somewhere else?
Cash to help during the expensive and difficult early years of a project. The main advantage AFAICT is that you have a lender who is very willing to wait for the project to get off to a good start before asking for repayment.
But in the long term, if the project’s successful, then it can end up being more expensive than a conventional loan – the UK government more than doubled its return on the initial investments for previous Airbus programmes.
I was expecting someone to point out that, the 17 year “marginally above cost of government borrowing” clause comes from the very US/Europe agreement which the US then backed out of and brought to the WTO. 🙂
To be clear, the WTO ruled that the principle is sound – but the loans had been too “marginal” in their opinion.
SomeoneInToulouse,
Thanks. I had actually come to the conclusion on my own that RLI is actually a bit more expensive in the long term because of the continued royalties. I guess typical lenders do not want to wait until the first frame is sold in order to start getting their money back. This must be a significant advantage in order for Airbus to put up with the influence of the member states and long term royalties.
By the way, do you know when the royalties are paid for a particular frame? Is it when a frame is delivered (when the bulk of the money changes hands), or along the way in proportion to the various customer payments?
@Mike
Sorry, I don’t know the details about the repayment terms – I seem to remember there was usually a fixed component based on date and a per-frame component. In any case, the UK document I linked to suggests the loans are structured on a case-by-case basis within the guidelines set by the EU/US agreement, so terms could vary between projects.
As I said before, this has been discussed in more detail on a.net so maybe you can find something there.
AFAICS, the US system benefits dominant players in markets with extremely high barriers of entry. On the other hand, RLI-type loans and other forms of government support up-front can help a newcomer establish a foothold in these type of markets.
IMJ, the substantial tax-breaks granted to Boeing from the State of Washington for the 787, has helped to prop up Boeing stocks and with the State seemingly getting very little in return (i.e. 787 extensive outsourcing, 787 FAL in SC etc.)
As for Boeing and R&D financing, the Japanese industrial share set at the outset of the 787 program accounted for around 35 percent of the total 787 R&D costs (i.e before the economic impact of the delays were starting to take hold). Those 35 percent apparently included non-repayable grants and other low-interest repayable loans. Same thing with the Italian (i.e. minus non-repayable grants). As for Airbus and RLI, keep in mind that it only accounts for a maximum of 33 percent of the total development costs of a new aircraft model.
The A320’s Delta bought were likely cheaper than the 737’s.
The B737’s Delta bought were likely significantly cheaper than the A321′s.
Even if they were they would nake more money for Airbus than the ancient 737’s.
Ah, so you just got disproven regarding your allegation on A380 launch aid, and swiftly move on to the next target, making some unfounded claims regarding the purchase price of a DL order – and even getting the plane type wrong, as DL ordered A321s, not 737s.
Given the quantities involved (100 737s vs 30 A321), I think DL got themselves a pretty bad deal if they paid more per 737-900ER than they did per A321.
Sorry, typo there: I meant DL ordered A321s, not A320s.
No airline owner has ever claimed publicly to have raped Airbus on price.
But Michael O’Leary has admitted bending Boeing over a barrel for his 737NG order…
I bet the ANA will go the Boeing beyond any doubt. These are political games rather than pure commercial ones. Anyone would like to place a bet?╰(●’◡’●)╮
Can ANA wait for 8 years?
What would fill the key segment between the 787-9 and 777-9X to US and Europe? Short ranged 787-10s? ULR 777-8Xs with hinged wings?
ANA almost certain won’t do the 10 abreast Boeing suggests to boost seatcounts / efficiency.
Say it was your money.. IMO we wait for the inevitable, some are still in shock/ denial.
The A380 is on the table too for ANA. It has been never fallen off.
http://i191.photobucket.com/albums/z160/keesje_pics/ANA380.jpg?t=1181051288
And some people are still in denial about the viability of the A380.
IMHO the situation is (let’s assume that ANA orders 9X8X10, I tend to 8X and 10 actually):
To the government, the JAL trade is an atitude aimed at more economic cooperation with Europe (of course the A350 fit its demand as well) , however keeping the good relationship with US is also important so it is a good idea to make one airline to make EU sweet and the other to please the America. Secondly it also want to keep the manufacturing work as well as future investment in Japan. Why Boeing outsourcing is to reduce their cost so the Japanese gov is not at complete inferior place in this negotiation.
To the ANA，the most disadvantages are the less suitability of its business, the risk of delay delivery of the 777X and the two or three years later than JAL to get better efficiency new planes. Then the advantages, Boeing likely to give it a very good price as rumors said that will get the bid in any cost. And as I mentioned above, maybe ANA can ask for some preferential policies from the government for the time loss.
Just when is JL going to take delivery of a reasonable number of A-350s?
If the B-787-10 and B-777X stay reasonable close to schedule, NH could start getting them 6-7 years from now (2019 and 2020).
Even if the 777X EIS guesstimate of 2019 holds (any bets on that?) a 2019 delivery to ANA sounds highly optimistic. LH is already in line ahead of ANA …
“Since the A380 will never make a profit, nothing will be paid back.”
“The A320’s Delta bought were likely cheaper then the 737’s.”
Tom, you know so much about Airbus.
This Financial Times piece is one to the worst articles I’ve ever read. It’s disjointed, disorganized, and incoherent.
There hasn’t been a battery fire since the 787 was returned to service after the grounding.
It compares the upgrade of the A320 to the 777, instead of the 737.
It wanders off an a tangent about Heathrow and François Mitterrand. A new airport would lessen the demand for the A380, because Heathrow landing slots are limited, making the use a larger jets necessary.
Where did the $15 billion figure for the A380 program come from? Most estimates are $5 to $10 billion higher.
The Sonic Cruiser was not an SST successor to Concorde.
I can’t believe the FT would publish something this bad.
But Scott said the investment is $15b…(；￣Д￣）
Tom Bucceri: “Where did the $15 billion figure for the A380 program come from? Most estimates are $5 to $10 billion higher.”
You are probably thinking about the B787 costs…
Um. No.
All the added costs of the delays and extra work have pushed the A380 development costs from the original $10.7bn to at least €16bn-€17bn ($23bn-$24bn).
http://www.ft.com/intl/cms/s/0/61878240-7a9c-11dc-9bee-0000779fd2ac.html#axzz2hQe8jQOh
Tom is possibly on the low end, I’ve seen numbers up to U.S. $20 billion for the A380 program(I might have the Bloomberg souce but it was a few years ago). Regardless, its a total financial flop and still draining cash flow.
Regarding development costs – there are no official numbers out there, so everything you’ll find is an estimate anyway. Estimates I could find range from $15bn to $24bn. The latter then usually takes into account the hit Airbus took due to delayed deliveries, etc., which aren’t strictly speaking development costs, but overall programme costs.
It’s of course everybody’s own prerogative which number to use.
As somebody mentioned the 787: Its programme costs are estimated to have topped $32bn in 2011. That number therefore does not account for additional costs incurred due to the the three-month grounding, battery design change and re-certification.
http://seattletimes.com/html/businesstechnology/2016310102_boeing25.html
Hard to fix a number, I seem to remember 16 million Euros, but then the Euro was only 70c, so it was about 10 million US. Today 16 million Euros is about 24 million US. Everyone can claim victory!
Will Boeing win ANA by offering a rock bottom price? I hope so, if only to dispel the myth among some of the more fervent posters that it’s the only way that Airbus can compete! The reality is of course that they both offer very similar products and we shouldn’t be in the least bit surprised that the market is fairly evenly split. The really interesting thing will be to see how well they manage to defend their duopoly against potential from the Chinese and Russians, particularly if they get their act together and collaborate.
Roger, there’s always a reason an OEM didn’t get the deal. Politics, discounts, relations, history to avoid the suggestion they offered the second best product.
Don’t know about the -1000XWB yet (but with the current sales pace, its gaining some credibility) but as you know, I’ve been stating for years the A359XWB is going to be a great plane and there is nothing Boeing has to counter it at this point in time.
Which rather counteracts the idea that Boeing’s offering is ‘second to none’. 🙂
Andreas that would be too much for Richard A. to admit though…
I do not see how acknowledging that Boeing is at a disadvantage in one segment of the overall widebody market contradicts a statement that Boeing’s widebody lineup is second to none. Nor do I see calling Boeing’s widebody line up ‘second to none’ as a particularly pro-Boeing statement, since second to none only asserts equality with Airbus, and if Boeing and Airbus are on equal footing in the widebody market, then Boeing is in serious trouble, because they are not on equal footing in the narrowbody market and everybody knows it.
Since any discussion in this forum eventually includes a negative statement about the 787 from an Airbus fan, I thought I would include a positive one.
Here is a short excerpt from an article about the delivery flight of Jetstar’s first 787-8:
“There’s a Jetstar A330 following us home to Melbourne today,” 787 pilot Jeremy Schmidt announced from the cockpit before the 10-hour haul.
“We (the Dreamliner) will take 10 hours and 20 minutes to complete the journey while the A330 will take 10 hours and 50 minutes, we will use 15 per cent less fuel, and we have 25 more seats on board.
“Anyone that says (the Dreamliner) isn’t a game-changing aircraft just needs to look at the statistics.”
http://www.news.com.au/travel/travel-advice/a-tale-of-two-planes-how-the-dreamliner-compares-to-the-a330/story-fn6yjmoc-1226735597087
“
“Here is a short excerpt from an article about the delivery flight of Jetstar’s first 787-8: “There’s a Jetstar A330 following us home to Melbourne today,” 787 pilot Jeremy Schmidt announced from the cockpit before the 10-hour haul.”
The back-up?
Do you not see the link above?
http://www.news.com.au/travel/travel-advice/a-tale-of-two-planes-how-the-dreamliner-compares-to-the-a330/story-fn6yjmoc-1226735597087
Mike, I did. Did you notice you notice the A330 was packed and the 787 empty apart from a few staffers?
Would that influence performance on this trip?
They don’t lie, just leave out stuff..
No I did not. What is your back-up for your assertion?
In the article it says the 787 has 24 more sests and tells us there were just a few staffers in the back. The A330 was full of tourist.
We can see from the article that the A330 is intended for QANTAS mainline in the future, not Jetstar. The Jetstar A330 would look like this:
http://www.airbus.com/presscentre/pressreleases/press-release-detail/detail/cebu-pacific-takes-delivery-of-its-first-a330-300/
30% more pax on 15% more fuel.
keesje,
The article says nothing about how many Qantas and Jetstar staffers were on the flight. But hey, whatever makes you feel better.
I have a good friend who is in AA management, and was on a recent AA delivery flight. Even though the flight was not the first delivery of it’s type, the plane was full of AA employees. It’s not without precedent that this type of first delivery media event would involve having more than “just a few” staffers on board.
Okay, that is about weak. The pilot was clearly saying that it would burn 15% less gas with 24 more passengers than the A330, and fly the route faster. This has nothing to do with “how many passengers he had on board at the time of the damn delivery flight.” Stop trying to be diffuse. You know damn well what he was talking about.
But hey, whatever you can do to boost Airbus
Mike
“Since any discussion in this forum eventually includes a negative statement about the 787 from an Airbus fan, I thought I would include a positive one.”
Substitute 787 with an A380 + Airbus with Boeing and I look forward to you posting a link with a nice ‘feel good factor’ article 🙂 🙂
@Keesje, it was a delivery flight, of course they bring staffers with them. I have been to quite a few delivery ceremonies and let me tell you an airline can bring quite an entourage!
At least a A330 has been turned round after 2 hours because 6 ‘jhon’s failed to flush as it did on jal flight last week out of Moscow.
sorry forgot to put the ‘NOT’ in last post.
I’m quite sure one can find plenty of examples where A330’s had to turn around because of some issue or another.
On another blog people said the general line in analyses Airbus only can/could score in Japan because of Boeings failings shows a deep pre-occupation and denial.
Myself I’ve often wondered if Executives / Stakes holders really believed the PR that flooded the media during the last 5-6 years via semi independent analysts, “sources close to the deal” etc. The 467 seat 748 beating the only slightly larger A380, the MAX bein at least as good as the NEO and guaranteeing market parity, the 777X becoming a VLA adding 60 seats in 2.7m, the A330 is dead, the A350-1000 is undefined, risky; we have time..
Randy writing this stuff to please the supportive home team, stockholders etc. OK, understandable. Another thing is Boeing executive teams telling each other this, really believing the airlines will go with it and basing strategy/budgets on it.. Are there enough hardnosed commercial techies in there, paid to not go with the flow/ next quaterly results & related bonusses?
John Leahy isn’t to be believed all the time, either.
Ha, at least he isn’t to be believed all the time by some.
I figured the A350 and 747-8 would be a good combo because of a similar width seat for a similar product in coach, plus enough size capacity difference to make sense. Maybe LH will order more 747 if the 777x doesn’t pan out.
“There are about 25 flights a day from Heathrow to New York, for example. These could be disrupted by a low-cost carrier such as Ryanair or Norwegian Air Shuttle flying 787s or A350s from Gatwick or Stansted, drawing passengers from Heathrow. “
If this is such a threat, why has it not yet happened? Can Norwegian fly out of London to New York?
Interestingly enough, the author is talking about a major hub city to major hub city connection here. How many long term possibilities are there for
successful point to point connections?
Plane Talking reported on some comments by Tom Enders. The heart of the content? The A380-800 is only the first member of a family and the A350-1000 need not necessarily be the largest of the A350 family.
Richard Aboulafia thinks ANA will order A350s.
“For ANA, relying on Boeing for 777Xs means running the risk that JAL, their direct competitor, will get A350s as 777 replacements years before ANA does,” he says. “Therefore, an A350 order is likely.”
http://www.aviationweek.com/Article.aspx?id=/article-xml/AW_10_14_2013_p32-625005.xml&p=1
At this point, I’d take whatever Aboulafia says to mean the opposite of what will happen. So Congrats to Boeing on the ANA 777X order lol
Exactly, Richard needs to make Boeing seem as winning an order from Airbus although the ANA order is Boeing’s to lose.
Still he is way more impartial than Vero V.
With regard to RLI, nearly everyone seems to be missing the point (even OV with all the long quotes didn’t highlight the important bit):
The base RLI is ALWAYS paid back REGARDLESS OF SALES, BREAK-EVEN, ETC. (these just set the repayment timeline)
On top that, the ADDITIONAL ROYALTY is paid per frame BEYOND the repayment point set by the projected sales target.
In other words, sales target met = repayment on a per-frame basis; sales target not met = oops, big lump repayment of the shortfall by the OEM; sales target exceeded = governments reap a bonus per airframe!
“sales target not met = oops, big lump repayment of the shortfall by the OEM”
I would honestly be very interested in seeing some sort of back-up for this. The document that OV-099 quotes does not say this at all, and I would like to be aware of how things really work with regard to RLI.
“Direct support to be repaid within 17 years at a rate of return at least marginally above the cost of Government borrowing”
From http://webarchive.nationalarchives.gov.uk/+/http://www.dti.gov.uk/aerospace/launch-investment.htm
Astuteman on Airliners.net has tried to explain it multiple times, and backed it up with sources, so if you want to trawl the archives there you should find details.
Yes, there you have it, black on white! 🙂
SomeoneIn Toulouse,
I appreciate your respectful answer to an honest question. Thank you!