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Now open to all readers (Fe. 15, 2015)

By Bjorn Fehrm

Introduction

Jan 14 2015: In our deep analysis of the Airbus A380, we concluded that there is nothing wrong with the basic economics of the giant airplane. In fact, with today’s fuel prices, the aircraft’s Direct Operating Costs (DOC) are 20% below its alternatives in the market.  Yet the aircraft is experiencing its worst sales drought since its launch, despite adding a leasing alternative during 2014 and efforts by Airbus.

To understand why and what Airbus plans to do about it we arranged for an exclusive interview with Airbus Chief Operating Officer-Customers, John Leahy, at the sidelines of Airbus annual press conference.

Summary

• Our assessment of A380’s cost of operation
• Operating airlines experience with the A380
• Airbus sales strategy to date and changes going forward

Discussion

A380 costs of operation

We quickly agreed that while our numbers were not exactly the same as Airbus, the overall economics of the A380 are convincing. At industry average load factors, the aircraft has the lowest per seat Direct and Cash Operating Costs (DOC, COC) of any aircraft flying today. On a more elementary level, our analysis shows a fuel consumption per seat similar to a Boeing 777-300ER; Airbus has this a bit lower. But it would be a matter of seating densities, we agreed, where Leeham’s assumptions might be a bit different to Airbus.

We also agreed that cash operating costs analysis shows that four engines are not more expensive to operate than two. We could even agree that the aircraft was selling at a very good price, basically close to cost, which influenced the Direct Operating Costs positively.

“Yes, I can agree the aircraft as sold today is a bargain,” Leahy said. “It is natural when sales are slow”.

But then he says, “The real clue is that load factors for an A380 is not the usual 75%-80%. The aircraft is a passenger magnet. Wherever it gets deployed, it reaches load factors approaching 90% and the airline increases its market share on the destination.  Airlines that actually operate the A380 are more than happy with its performance.”

So where is the problem then?

“The problem lies in convincing the revenue side of airlines that they can operate an aircraft the size of the A380 and be successful with it,” explains Leahy. “It is like Mark Lapidus, CEO of Amedeo, explained in [Leeham News’] interview, the revenue side of the airline together with its marketing are risk averse. In, for example, the US market, these departments have been successful with capacity reduction rather than expansion and they don’t necessarily want to take a personal risk by standing behind something they have not seen anyone of their home market peers having done successfully”.

“I guess we have underestimated the problem,” Leahy said. “We should probably have done more to change prevailing sentiments, but we see a chance to do that in the coming years. Airlines will be able to test the A380 at a much lower risk level.”

A380 at reduced risk

“In  a few years’ time, the first A380s from Singapore and Emirates will come off their lease [2017 for first aircraft from Singapore]. These will be 10 year old aircraft which are at their half life,” says Leahy. He then explains how this changes things.

“We will work with Amedeo to remarket these aircraft to the airlines that have been interested but not wanting to take the risk of a new aircraft,” said Leahy. “After refurbishment, the airlines can operate these A380 at the lease cost of a 777-300ER. It will be a very good opportunity for a number of airlines that have not yet put the A380 in their network, to experience the passenger attraction it has and that they can earn money with it and gain market share.”

Leahy said this is the major change he sees in the sales situation for A380 before airport congestion will solve the problem once and for all. He also admits that Airbus has to increase its efforts in correcting common misconceptions in the market. We said we believe this has to be a year of increased focus on A380; the other Airbus programs are in good shape and are selling well, but the A380 is not. “We have to do more, this is clear,” said Leahy.

Remarketed A380, at what price?

We have in preparing this article checked on present lease rates for the A380 using appraiser Collateral Verifications (CV) “Turbine Aircraft Guide”.  CV puts leasing costs for a new A380 at $2m per month. This compares with current leasing payments of Emirates’ 2008-delivered A380 and these were around $1.7m per month during 2014.

A seven year old A380 would have a monthly lease of around $1m, according to CV, which is the rate of a five year old 777-300ER according to the guide. A new Boeing 777-300ER would be leasing for $1.35m, so a 10 year old A380 would be below that, probably at around 75% of the lease rate of a new 777-300ER (CV’s guide does not go beyond 2007, the EIS year of the A380, so we estimated the figure). At a normalized passenger capacity which is 40% higher, it will be interesting to watch the effect of used A380 coming into the market come 2017.