Assessing the VLA market

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Introduction
The business model for the Airbus A380 and its future has long been subjects of sharp debate.

Airbus launched the giant airplane in 2000, with a maximum capacity of 850 passengers and a typical airline configuration of 500-555 (though some carriers have fewer than 500). The airplane would compete with the Boeing 747, then holding a monopoly in the Very Large Aircraft (VLA) category. Airbus concluded there was a 20-year market demand of about 1,300 VLAs, of which it expected to sell 650. Boeing already was beginning to move away from the VLA sector with a hub-bypass strategy evolving from the Boeing 777 and Boeing 767 medium-twins.

While many analysts, consultants and Boeing criticized and even ridiculed the decision by Airbus to proceed with the A380, officials have stubbornly clung to the forecast of a demand requiring 1,200-1,300 VLA passenger aircraft each year for the next 20 years. Sales have remained disappointing every year, with net orders of just 318 14 years after program launch. There should have been sales of 910 VLAs by this point to meet the 20 year demand suggested by Airbus in 2000.

Summary

  • Residual values and secondary market worry some.
  • Emirates Airlines, the largest A380 customer, isn’t worried about RVs and resales, plans to store and scrap its aircraft when time comes.
  • Re-engining and/or operating the A380 at much higher capacity is necessary to lower CASM.
  • Boeing 777X threatens A380 despite its own limited market demand.
  • One consultant sees A380 coming into its own in five years.

Discussion
The business case for the A380 remains a question mark. Many believe Airbus made a mistake in pursuing the A380, but how much of this is hindsight? Even as Boeing argues the market has moved away from the Very Large Aircraft—as indeed it has—officials as recently as within the last few weeks continue to say that with a VLA sector forecast of $240bn over the next 20 years and Boeing sees a reason to continue to offer the 747-8, the A380’s competitor. Boeing forecasts a 20-year requirement of 620 aircraft, including VLA Freighters.

If, indeed, there is a reason for the 747-8 (and this is highly doubtful), then there is a reason for the A380, which compared with the passenger 747-8I, has captured about 85% of the market. Airbus and Boeing each figured they would share the market about 50-50.

Boeing sees a VLA market about half the size that Airbus sees. If Boeing is right and Airbus is wrong (and we believe Boeing is closer to being right than Airbus), and assuming Airbus continues to snare 85% of the market (which we believe will increase), then Airbus will sell 510 A380s during the next 20 years on top of the 318 sold to-date. This is well short of the 650 Airbus sees, but nonetheless potentially profitable.

Airbus expects to begin reporting profits on the A380 next year, based on 30 deliveries.

We think either the Airbus or Boeing forecasts are optimistic. But one consultant, who must be considered an outlier, believes Airbus is about five years away from seeing the A380 come into its own.

Michel Merluzeau, a principal of the consulting firm G2 Solutions who is based in Boeing’s back yard in the Seattle suburb of Kirkland (WA), says there is “absolutely” a future for the giant airplane.

“There is a very simple response for that,” he says. “Demographics. The real acceleration of air transport, airport capacity issues, explosion of Asian market, slowness of ATC (Air Traffic Control) development, slowness of airport expansion and construction by all sorts of red tape with people with good intentions but no business brain whatsoever” will converge to make the demand for the A380 accelerate in five years.

Merluzeau admits this sounds very much like the Airbus argument. But he says it is a valid one.

He says that on a recent trip to Shanghai, there were Airbus A330s, Boeing 777s and A380s lined up at the terminal. China, well known for its Air Traffic Management constraints and a pace of airport construction in China and Asia much faster in than Western world is nonetheless running out of capacity.

“Tim Clark (president of Emirates Airlines, the largest A380 customer) is getting a brand new terminal and it is already out of capacity,” Merluzeau notes.

“The A380 and 747 are not selling because the problem has not become acute enough,” he says. The A380 is not selling right now because the operational benefit is not as acute because the slots are still available. Airports are not running at full capacity. You will have infrastructure issues that will drive the size of the aircraft upwards.

“Demographics, ATM, all these elements will contribute to sustain A380. When A380neo becomes a reality, it will continue. When Airbus does the A380neo, 11 abreast [in coach], it gets new engines, new this, new that, the value of the 380 will increase compared with the current and future twins.”

Emirates’ Clark has been pushing Airbus to reengine the A380 for at least a year. In response to our question at the World Routes Conference in Chicago, Clark predicted Airbus will make a decision on this in six months. John Leahy, chief operating officer-customers for Airbus, told us this is probably too soon to expect an answer. Merluzeau believes the A380neo will emerge possibly in the next 12 months, and that an entry-into-service in 2021-22 “is not unreasonable.”

“Airbus is risk adverse right now because nobody is buying it,” Clark told us in Chicago. Engine maker Rolls-Royce is developing new engines and is anxious to put them on the A380, Clark said.

Clark’s Emirates has in service and on order 140 of the 318 A380s ordered so far. This high customer concentration, and Emirates’ policy of rotating its fleet every 12-15 years, gives pause to many in the industry about the secondary market and residual value for the huge airplane. Reconfiguration and transition costs for the aircraft, even if a secondary operator can be found, are estimated easily in the $30m-$50m range for a complete cabin makeover, a figure that scares lessors (of which there are several special purpose companies) and lenders alike.

Clark is unconcerned. His view, shaped by the Emirates policy of 12-15 year lives for the A380, Boeing 777 and other aircraft in its fleet, is a real eye-opener to an industry where assumed lives are 25-30 years.

Clark told us that Emirates will simply park these 12-15 year old A380s in the desert.

“The A380, its future life, its RV is something everybody is challenging us on. When Emirates is done with it in 12-15 years, we’ll put them in the desert. We’ll cut them up,” he told us. “For me, we buy those airplanes for the life that’s prescribed for them in the business model. Once that’s over, it’s over, so we have no worries about getting rid of them. You have to worry about them if you are a lessor, they may have concerns. I think Emirates will run these out in 15 years and then do what they will have to be done.”

G2’s Merluzeau predicts that the next three to four years will be a little slow for A380 sales and then will pick up. “This is a 30 year program. We’re at nine years since EIS,” he says.

If there is a future for the A380 in five years, does Merluzeau see a future for the 747-8? He does, “with very limited output, mostly in the freight market. It’s a pretty unique capability for freight,” he says. “I always thought it was a 200 aircraft market. We’re getting close to that number. It definitely will shut down by 2024.” Boeing has net sales of 118 747-8s through September.

Many expect Boeing to announce a production rate cut this year for the 747-8, from 1.5/mo to 1/mo, effective in 2016. Once an order is placed to replace two 747-200s used by the President of the United States for Air Force One and four 747-200-based E4Bs, considered likely in 2017, at that point Boeing is expected to announce program termination, some believe.

25 Comments on “Assessing the VLA market

  1. Emirates got many A380 at low prices. They further have access to relatively cheap finance. Combined, and given the relatively high utilization and load factors of Emirates, the business might work. Such business model doesn’t work for other airlines.
    For the airframes the prospect of service life decreasing to 15 years instead of 20-25 years is an opportunity. By the way, Lufthansa just celebrated the 25th birthday of its first A320. D-AIPA went into service 16th of October 1989, flown 60000 hours in 48000 cycles.

  2. Any views on how the Emirates A350 cancellation and proposed new negotiations fit in the political arena for the sought for A380-Neo?

  3. I fly long distance to toronto aleast once a year..always try to book a seat on EK cuz its the only airline that flies a380 there…I hv never been able to get a seat yet..its always full…people love to fly a380…thats the thing that airbus needs to tap into…stick to 10 abreast seating…in these days of elbow/ recline wars…increamental aerodymic improvemnts…maintaining the comfort…marketing to travelers…teaching the airlines how use it most effectively is the only way this wonderful aircraft can survive..re engining alone wont cut it…this is the toughest segment…i m sure airbus regrets entering it…but now they need to make the best of it

  4. I think the 777-9 is a real competitor for the A380 if we ignore the A380 is 40% larger, assume capacity is less important than other factors weighing in.

    That works in CASM like apples to oranges picture only only. In reality capacity-range in relation to markets is #1. Replacing a 550 seater with a 375 seater cuts capacity, revenues, marketshare, increases cost per unit. In Asian growth markets, because that were VLA’s fly.

    Airbus now has 19 customers for the A380 (1 or 2 will probably be added soon). 143 delivered and a backlog of 5 years. The passengers remain willing to pay extra for A380 seats and load factors among major operators remain highest among their fleet.

    As you mentioned, many analysts, consultants and Boeing criticized and even ridiculed the decision by Airbus to proceed with the A380. The future was PtoP, the A380 was to large, still born, the airports weren’t ready and the passengers wouldn’t notice.

    Reviewing the situation in 2014, we can conclude many analysts, consultants and Boeing were wrong, they predicted the situation incorrectly for whatever reasons. Now they are stuck in that documented denial. Merging the dwingling 747-8 with the A380 in analyses and stating on average (“VLA”) they are weak.

    The 787-10, 747-8i and 777-9X aren’t aimed at long haul Point to Point.

    http://www.outdoorphoto.co.za/gallery/data/524/A380_747_W.jpg

    • The 777-9 isn’t really a competitor to the A380 but it will cause future prospective VLA buyers to pause and rethink. The 40% increase over the 779 is all it is because the A380 does not carry cargo as goo as the other WB twins ie the 779. Figure operators who fly VLA configurations of 375 – 400 could basically transition to the 779 with the added benefit of making more revenue on cargo and saving money on fuel with two engines vs four.

      Passengers do in fact seek the A380 to fly on because its quiet, spacious, has a bar yada yada but does the crowd who pays more money to fly on the A380 on purpose outweigh the crowd who fly’s the A380, regardless of what it is, because it is available and by default has more seats available because there are more seats available due to it being a double decker? Everyone loved to fly the 747 when it was introduced. You could smoke, it had bars yada yada. Then after a while the it was normal to see them everywhere, as you do with the A380, especially in EK colors. I can assure that people will seek out a better price than to pay more to fly on something that is new, shiny, quieter with more pace.

      As much as Boeing, analysts, consultants and soccer moms were wrong about the A380, some were right, including the author of the very blog we’re in. The VLA market as it is right now will be just okay but the future of the market will transition to larger twins (nothing beyond the size of the 779) and the next version of it will be a all composite plane ala 787 just with better tech toys.

      • “The VLA market as it is right now will be just okay but the future of the market will transition to larger twins (nothing beyond the size of the 779) and the next version of it will be a all composite plane ala 787 just with better tech toys.”

        You know, this worshipping at the altar of the triple seven is getting ever more ridiculous***. As the number of capacity-constrained airports is increasing every year. while the industry seems to be doubling in size every 15 years, or so, yet there will not be a demand for “big twins” bigger than the 777-9X? IMJ, by 2030 the technology will be there for a “big twin” that might be even bigger than the current A388. Thus, believing that somehow the 777-9X will be the ultimate “big twin” is, IMJ, nothing but ludicrous.

        ***The following piece written by Guy Norris for the October, 1995 issue of IEEE Spectrum may just have helped start this seeming enormous reverence for the triple seven by the Boeing afficionados: 😉

        Airline travelers, eager to get their first glimpse of this new superjet, will be forgiven if they think it looks ”like any other airliner.” It has no distinctive hump like the 747, no notable tail engine like the DC- 10, and no droop snoop like the Concorde. So what makes the 777 truly one of the most remarkable industrial achievements of the 1990s, and maybe even the century?

        To keep the 777 order book full for the next few decades, Boeing is busy developing two new versions of the big twin. The short-body 777- 100 will be the longest range airliner ever (15 800 km with 265 passengers). And the stretched 550-passenger 777-300, introduced at the 1995 Paris Air Show in June, will be the longest airliner, 3 meters longer than the Boeing 747, whose older versions the 777 will replace. Even with the huge job of developing not just one but three versions of the 777 complete, Boeing is busy developing
        two new versions of the big twin. The short-body 777- 100 will be the longest range airliner ever (15 800 km with 265 passengers). And the stretched 550-passenger 777-300, introduced at the 1995
        Paris Air Show in June, will be the longest airliner, 3 meters longer than the Boeing 747, whose older versions the 777 will replace. Even with the huge job of developing not just one but three versions of the 777 complete, Boeing’s twinjet will no doubt remain one of the world’s top industrial megaprojects for decades to come.

      • Rotate …. ROTATE!!!

        “but does the crowd who pays more money to fly on the A380”

        Check out the EK fares from NZ – I have not had to pay more money to fly on the A380.

        In fact a short time a friend flying to AKL – BNE found the EK 380 Economy fare cheaper than the ANZ fare and EK included meals which ANZ did not. Better, Quieter, bigger seats and meals for less money, needless to say which airline he will be flying in future.

  5. Where the the A320 and 737 markets have divided into economy and ULCC sub-economy product, I would say the twin aisles still have yet to rationally divide into these subcategories. The 787 at 9 across, the 777 at 10, and the A380 at 11, I believe are basically a sub-economy product. For long haul, what will the percentage be between the two products? Probably about half and half. The 777x will eventually have two roughly equal size cabins of 9 and 10. The A380 will have a similar set-up with 10 and 11, and the 787 with 8 and 9.

    I predict there will be two economy products on the 787, 777x, and A380, 17″ seats at 30″ pitch, and 18.5″ seats at 34″ pitch.

    • Actually, I guess all three aircraft have room for 19″ seats, not 18.5″. But my point being, is that if the A380 seating becomes more standard with the 777x and 787, then it is comparing apples to apples and it looks better.

      • The 777-9X is not competitive with the A350-1000 at 9 abreast, while any re-engined, stretched derivative of the A380-800 at 10 abreast will be more than competitive with the 777-9X.

    • If the A380 can do 11 abreast at 18 inch wide that is clearly superior to a 777 at 10 abreast. Not the same.

      The 777-9 has sold to airlines that already have 10 abreast or probably won’t have it on their new aircraft. For them the 777-9 is a 2.7m/ 5-7% larger replacement of the 777W. Not the game changer Boeing is (succesfully) telling the market it is.

      Boeings 407 seats on the 777-9 is like the 469 seats on the 747-8i. Helpful for the CASM comparisons slides of Randy, but not a realistic expection of what airlines will specify. For the 777-9 seatcount, just add 18-30 seats on todays 777w seatcounts and you have the picture. E.g 280 seats for the ANA 777-9. If you want better, then stick to 407, officially.

      • The widths are A380 – 252″, 777x – 235″, 777 – 231″. For the A380, an extra 15″ seat and a 2″ armrest over the 777x, or a 19″ seat and a 2″ armrest over the 777.

  6. Is there any reason why Airbus shouldn’t make the 11 abreast modification,but stick with 10 seats.This would be even more comfortable!I don’t think anyone fancies being in the middle of 5 seats.Its stick or twist time for Airbus,scrap the program,or do it properly and go for the 900.Right sized wing ,enough cargo space, etc.On its own in clear blue water,luxury travel,low seat mile costs.Otherwise they have got to build an even bigger 777,and I’m not sure if they are quite ready for that.

  7. Given most 777 operators are currently using 10-abreast economy seating on their existing 777 models, including long-range 200LRs and 300ERs over very long distance routes, I believe the proposed 11-abreast economy seating for the A380 will be a done deal for all operators. That, along with a possible NEO, will increase the operating economics of the airplane.

    There will never be a stretch of the A380. There is no need for it.

    • If have the impression Boeing has been using statements most 777 customers have been taken 10 abreast (for the last few years). 10 Abreast EK and AF have been relatively large takers, to conclude most 777s are now 10 abreast, is not something any one claims, but only suggests (succesfully). To convince the industry 10 abreast is perfectly ok for the 777, even smart, what the airlines want. Not what is required to make this heavy more efficient, per seat..

    • “There will never be a stretch of the A380. There is no need for it.”

      Never is a long time and stating with absolute certainty that there’s no need for a stretch seems IMJ to be no more than wishful thinking.

      Absolute certainty is a privilege of uneducated minds — and fanatics.
      Cassius Jackson Keyser.

  8. Boeing in 45 years with the 747 of a very different market (you wanted the range and the spec of 3 or more, you needed 4 engines)

    Boeing sold around 2000 747s with zero competition. 45 years………..

    Airbus sold 318 in 14 (more or less have not looked at how solid those all are)

    Is there a place of the A380, yes, can you make money on it, no, because you are no going to put a new engine on it, more bucks spent, delaying any break even point (and production never got to where it was supposed to either) . Soon will have to slow down.

    And you are not going to wait for the best engine (GTF) you are going with the interim one.

    If you look at history, it says the rate of need is the same and the 20 years is a moving time line, i.e. its always 20 years away from success.

    Emirates says they will scrap their. How many do they have on lease that the leaser can’t afford to scrap?

    How cheap does Airbus have to sell them to Emirates to allow them to scrap the ones they own.

    And where does that leave Amadeus (or whoever they morphed into with their 20 that have not firmed up) trying to compete for new when there will be at least some used?

    • Emirates made a conditional statement. After 12 or 15 years the Emirates’ A380s paid for themselves. In case there will be no second market Emirates could afford it to just scrap them. To sell them would just be the cream on top of the cake. I expect some Asian carriers to use them as an A380R.

      Do you have some internal Airbus papers confirming your other comments?

      “[…] delaying any break even point […]”
      The A380 in combination with the 777 and the smaller 787 and A350/A330NEO break the neck of the 747 right behind the hump. The A380 was and is also PR. The A380 is a show of force for Airbus. The A380 enforced the 747-8I just like the A350 the 777-5I – aah – 777-X. Btw, when will the break even point for the 787 be reached? After the first reengine or after the second one?

      – “[…] you are going with the interim one [engine].”
      The A380 just has to keep pace with the 777-X so the next engine will not be available before 2020. So I expect the A380NEO to have Rolls-Royce Advanced engines.

      — Question to the specialists: is the RR Ultra “just” an Advanced engine with an heat exchanger? So that the Ultra may fit on every wing where an Advanced already hangs around? —

      • The RR advance can been seen as an evolutionairy engine I think. The Ultra is a new design, including a 15:1 BPR, intermediate turb driven gearbox and variable pitch fan. That variable pitch fan is the most exciting part I guess. E.g thrust reverse on the fan, where is the air for the hot section coming from, stall, FOD etc..

    • E.g. BA now has 57 747-400s and 12 A380s on order. They for fore see a growth of a few percent per year. LHR is constrained and they operate low density 4 class aircraft, e.g. 300 seats on a 777-300ER. So their A350-1000s will probably have the same.

      I think is is unlikely BA will replace all their 747-400 with A380s. Including market growth, maybe just 35-40 in the next 10 years for their Asian and US Hub-Hub operations. So doubling their order/options.

      http://img.planespotters.net/photo/439000/original/G-XLEB-British-Airways-Airbus-A380-800_PlanespottersNet_439429.jpg
      (BA A380 at HKG, Photo: Chenhaoyang)

  9. “AT 85% LOAD A380 IS MORE ECONOMICAL THAN 777-300ER”..said Tim Clark recently. EK 777s are mostly 10 abreast.
    A380 is very ecnomical.
    reason for slow sales is somewhere else!

  10. Pingback: Is Emirates in trouble? - Leeham News and Comment

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