Feb. 16, 2018, © Leeham Co.: It’s been a long struggle and there isn’t a re-engining any time soon, but John Leahy still firmly believes in the market viability of the Airbus A380.
Leahy, who retired last month as COO-Customers, continues to support the transition to Eric Schulz, EVP, Chief of Sales, Marketing & Contracts. One of Leahy’s last deals was to firm up an A380 MOU for 20 orders and 16 options for Emirates Airline.
In his final retirement interview with LNC, Leahy didn’t waver from the messaging Airbus used since the launch of the A380 program in 2000: passenger traffic doubles every 15 years, no new airports and few new runways are being added in Europe, the US or Asia outside of China and the need for the A380 remains.
Leahy concedes the program was probably launched five years too soon for demand. The program should have been launched in 2005, he says in hindsight. It was also ill-timed and unlucky.
Production problems delayed entry into service from 2005 to 2007. By this time, the Great Recession of 2008 was just around the corner, stifling demand.
Leahy dismissed the development of the Boeing 777-300ER (EIS, 2004), the 787 (program launch, December 2003), the A350 (program launch 2005) and the long-range A330 (evolving, but after 2006) as factors inhibiting A380 sales.
He also dismissed the more recent development of the long-range Boeing 737 MAX and Airbus’ own A320neo, which now can serve routes up to 4,000nm.
It all comes back to the demand doubling every 15 years and congestion at airports like London Heathrow, Paris Charles de Gaulle, New York JFK and Tokyo Narita. These are origin-and-destination markets in addition to be connecting hubs, he says, which remain unaffected by the market fragmentation offered by the big twin-aisle, twin-engine and re-engined single-aisle airplanes.
“There’s a limit as to how many people we can push through these airports,” he says. “It’s obvious we’re going to need larger aircraft.”
“The market is more than twice as big,” Leahy counters when asked about the increasing market fragmentation brought about by all these new aircraft. “More people are flying, RPKs (revenue passenger kilometers) are increasing and I don’t see any new airports being built….
“Pushing more people through these airports isn’t going to work. You have to use bigger aircraft,” he says.
Leahy concedes that there are more “interior”-to-“interior” city services between the US and Europe or Europe and Asia, but continues to argue the large cities are, in themselves, origin-and-destination points.
“It’s just a matter of time that we will need a bigger airplane,” he says.
The A380 will be back in the market in a strong way, Leahy insists.
“The deal with Emirates gave us that base of a minimum of six aircraft a year for the next 10 years that allows us to sell two here, three there, five over there, on top of that, being able to keep the airplane in production for those next 10 years,” Leahy says.
The base production of six airplanes a year that the Emirates deal provides presents its own challenge: whether Airbus can make money at this rate. So far, Airbus is playing catch-up on costs-to-production reduction.
Leahy says that unlike Boeing on the 787, Airbus doesn’t have deferred production costs for the A380. All development costs were written off as incurred, he says, so only recurring and overhead costs must be brought down to either achieve break-even or report a profit.
However, European subsidies to launch the A380 were found to be illegal by the World Trade Organization. The EU appealed the finding; a decision on the appeal is due within months. If the appeal is denied, Airbus could be required to repay hundreds of millions of dollars or more in launch aid or face tariffs.
Leahy said he is the wrong person to ask about this prospect but nevertheless expressed confidence the EU will prevail.
The track record suggests this confidence may be overstated.
Airbus has been roundly criticized for launching the A380 program. Reflecting on the launch in 2000, Leahy remains to this day angry with the engine manufacturers.
“If there was a strategic mistake, it was we were blindsided when they brought out the 787, with the composite fuselage and the engine technology. That’s part of the problem with the 380,” he says.
“We brought out and launched the 380 in 2000. We’re out there with the 380 and GE and Pratt & Whitney and Rolls-Royce are assuring us there is nothing on the horizon. This is best level of engine technology you can get.”
The engine OEMs assured Airbus, Leahy said, that the A380 engines would be state of the art for the next 10 years.
“Then, within three years, these guys are there with Boeing with the 787 with game-changing engine technology and 10% lower fuel burn than the last generation engines,” Leahy says.
“You stand around and say, these guys knew what they had. They were working on it. They knew it was a big step. They kept their mouths shut and even intentionally misled us with the 380 technology, because why wouldn’t you have just wait two or three years with the 380 to get the new generation engines if you thought there was a new generation engine on the horizon?
“They wanted to sell their own generation engines. None of our engineers knew it. None of our product development people were aware of it. That was a real strategic mistake. I’d love to have an A380 now with 10% lower fuel burn.
“Put this on the record: I’m still upset that the engine guys in the year 2000 said there was nothing on the horizon.”
Despite his complaint and despite urging by the largest A380 customer, Emirates, to re-engine the airplane, Leahy says it’s not going to happen.
‘At this point, what we want is a functional, highly reliable airplane, 99% dispatch reliability or better, putting more seats in—most of the interiors flying today on the A380 are not optimal. They were thinking things through in the early 21st Century. Interiors have progressed substantially since then,” he says. “That’s where you’re going to see the major economic improvements. We don’t see a re-engining right now or on the horizon.”