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.
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.