Pivotal year for A380

Discussion

A broad decline in demand for all wide-body aircraft adds to the A380’s woes. Sales of the Airbus A330 and A350 and Boeing 777 Classic, 777X and 787 are off from recent peaks. Deferrals, model swaps and cancellations are, while not common, increasingly frequent.

For Airbus, sales and even technical upgrades for the A380 stalled because demand collapsed. The future of the airplane is more dependent on Emirates Airline, which itself is now under pressure and deferring orders.

Airbus acknowledges it must win new orders this year if it is to avoid a further production rate cut in 2019. The current rate is being lowered to 1/mo, effective next year. Officials declined to say what rate options they are considering for 2019, but emphasized they want to maintain a break-even for the program at whatever the reduced rate becomes.

Skyline Quality

The quality of the customer backlog, or skyline quality, is now very weak. LNC uses its judgement to rate skyline quality based on several factors: financial strength, region risk, customer statements and other factors.

For Airbus, the skyline quality rests with Emirates, the largest user of the A380 and the customer with the most orders by far.

With recent changes to Emirates in its own financial position and recent moves to defer deliveries, not only of the A380 but also of the huge Boeing 777X order, LNC moved the EK backlog from Green to Yellow. It’s very likely that EK will take the 47 aircraft on order, but we expect deferrals may be in the cards.

The recent regional chaos, isolating Qatar Airways, adds to the uncertainty.

Qantas Airways and Qatar Airways already indicated they don’t want more A380s. Virgin Atlantic Airways continually defers the aircraft; the order is as good as canceled—it’s just a matter of time.

The *Undisclosed are understood to be Hong Kong Airlines—this order is unlikely to be delivered.

Amedeo continues to defer its orders. There is no indication the lessor is prepared to accept delivery any time in the near term.

Only Singapore Airlines and ANA are considered by LNC as firm, “green” deals.

Future rests with Emirates

Emirates likes to flip its fleet at 12-15 years and it still has growth ambitions. The current backlog can accommodate most, but not all retirements. Growth orders largely depend on the capacity at its hub in Dubai. The current Dubai airport is maxed out. EK needs the new airport for have the space for incremental A380s.

No order activity from EK is expected at the Paris Air Show next week. Focus shifts to the Dubai Air Show Nov. 12-16. Without an order then, a 2019 production rate reduction is certain.

Improving the A380

Airbus has no intention of proceeding with an A380neo any time soon. Officials said in the past that they wouldn’t do so with only one customer (Emirates). Obtaining other significant orders is unlikely in this environment.

Without the prospect of a neo, Airbus does have a plan for winglets for the A380 that would reduce fuel consumption by 2 ½% to 4%, but even this is contingent on a new EK order.

Meantime, Airbus figured out how to add 80 seats to the airplane with modifications to the configuration.

Lowering seat mile costs

The cabin changes Airbus proposes, coupled with the prospect of a new, 15 ft high winglet, and fuel at today’s prices give it a 10% cash operating cost advantage over the 777X going down to 5% at fuel at $4/gal, based on LNC’s modeling.

Direct operating cost is an additional 5% better for the A380 as Airbus has written off all A380 costs and only charges production cost. Boeing must charge heavily for 777X to pay for development and needed profits.

Market demand

Airbus, at its media days last week, continues to forecast a 20-year need for 1,400 Very Large Aircraft.  Boeing—at its media days the week before last—removed passenger VLAs from its 20-year forecast, reverting to only freighters and VIP airplanes. This forecast will be released June 20 during the Air Show.

The development of the 777-9, with 414 seats in a typical configuration, should fall into the low end of the VLA sector (defined as 400 seats and above), but Boeing places the 777-9 at the high end of the large twin-engine, twin-aisle sector.

A prospective development of the 777-10, a 450-seat concept, so far has done nowhere in the market. However, a recent order by Singapore Airlines allows for substitution of aircraft not yet developed by Boeing, a clause interpreted by most as aimed at the 777-10.

Airbus doesn’t have an airplane in the 400-seat sector. It considered launching a stretched A350, the -2000, to compete with the 777-9, but hasn’t done so.

This raises the question of what the true demand over the next 20 years is for the VLA sector. Most disbelieve the Airbus forecast.

 

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