July 18, 2016, © Leeham Co.: It wasn’t the dominating headline out of the Farnborough Air Show that Airbus would have preferred: a dramatic production rate cut for the slow-selling A380 from 20/yr to 12/yr from 2018.
A leak to the Paris newspaper La Tribune last Tuesday evening forced Airbus to announce the rate cut minutes later, ahead of prepping its employee work force. It was also ahead of an investors analyst breakfast meeting the following day in London. The event’s headlines would have been Tuesday’s unexpectedly strong number of Airbus orders after a dismal Monday for Airbus and Boeing. Instead, the rate cut dominated analysts’ thinking ahead of the breakfast.
Airbus stock closed at 52.53 Euros on the Paris stock exchange Tuesday before La Tribune’s story posted at 7pm. The stock was essentially flat the next day upon opening.
A rate cut to 12/yr was inevitable. We predicted it in our annual forecast in January, though we saw the cut to this level coming in 2020, not 2018. (We also then predicted Boeing would trim the 747-8 rate to 6/yr, in 2018, instead of this year.)
Airbus previously cut the rate from 30/yr to 25/yr. Officials still believe that global airport congestion will eventually require the A380—essentially, the market will catch up to the airplane, which they now concede came at least a decade too soon.
This is a matter of debate. Some believe the A380 is already dead; it just hasn’t been buried yet. This is a position I’ve taken on the Boeing 747-8 for some time. Boeing no longer talks about the 747-8I’s future; it’s all about the 747-8F. I remain skeptical about even this model, but in an interview last week with Randy Tinseth, Boeing VP of Marketing, he explains why Boeing still believes in the 747-8F.
Boeing’s development of the 777-9 already threatens the A380. Based on our analysis, seat mile costs are about the same and trip mile costs for the smaller, twin-engined aircraft are better, as you would expect. The potential development of the 777-10, a 450 seat aircraft, would put further pressure on the A380.
If Airbus can bring break-even on the A380 production costs down from 20/yr to 12/yr by 2018—a tall order, to be sure—this can buy time for Airbus to see if the market demand indeed will catch up to the plane. It will also give Airbus time to determine whether adapting the A380 to a re-engined NEO will find a business case.
Airbus has no choice, really, if it wants to stick with the A380 for the long term. The economics of this design, which is already about 20 years old, will be sorely dated by the time the 777-9 enters service in 2020, followed in a few years by the 777-10 if this derivative proceeds.
Airbus also has little choice but to keep the A380 if it’s going to play at the very top end of the market to compete with Boeing. The A350-1000 tops out at about 369 passengers. This is about 35 fewer than the 777-9 and 80 fewer than the 777-10. Airbus knows it can add a 400-seat A350-2000 to its line-up but so far is hesitant. There have been few sales of the 777X since program launch and Airbus isn’t convinced yet the business case for the -2000 is there.
There’s also the not-so-little matter that the -2000 could cannibalize some A380 sales. But better to cannibalize your own product than to cede market share to your competitor.
It’s unclear when Airbus will make a decision on the A350-2000. Boeing hasn’t set a timeline for a decision on the 777-10. There’s a little bit of a Mexican stand-off going on: each is waiting to see what the other will do first.
Airbus, making the correct and necessary decision to cut rates on the A380, is likely to have to be the one to blink first on the issue of the A350-2000 vs the 777-10.
It’s quite the conundrum.