ANALYSIS: Is the A380 super jumbo at a cross-roads?

ANALYSIS: Is the A380 super jumbo at a cross-roads?
Since it entered commercial service in October 2007, the Airbus A380-800 has brought a long-lost sense of glamour back to travel.
Published: 17 June 2017 - 12:19 a.m.
By: ASC Staff

Since it entered commercial service in October 2007, the Airbus A380-800 has brought a long-lost sense of glamour back to travel.

Its three-room suites feature private showers and buttery leather armchairs, and in-flight lounges sport bartenders mixing bespoke cocktails.

A broad staircase reminiscent of a 1920s ocean liner links the two decks. Some airlines even made promises of kitting out their new superjumbos with casinos and gyms–although none have actually done so.

Incontestably, the superjumbo draws interest. But will it draw more airlines? And considering the white-hot market for next-generation large twinjets like the Airbus A350-1000 which affords much better economics, is there a future for the A380–including the notional re-engined A380neo and stretched A380-900?

That’s the million dollar question. So far, financially speaking, the aircraft has been a gamble of grand proportions, and carriers are finding it tough to fill in turbulent economic times.

Even before the A380 first lifted off the runway, with 50,000 onlookers at France’s Toulouse-Blagnac Airport on April 27, 2005, there were questions about the A380’s viability.

The bottom line remains fragile: Singapore Airlines has opted not to extend the lease for its first early-build Airbus A380 after only 10 years of flying it.

Malaysian Airlines too has not been able to draw enough traffic to fill the half-dozen A380s it had bought, putting light on something long dreaded in the industry: the lack of a second hand market for the very large aircraft (VLA)–despite attempts to make them more commercially viable such as incorporating 700 seats, dedicated to transporting Muslim travellers on the annual Hajj pilgrimage to Mecca, into a cabin that once set new standards of spaciousness.

On top of that, leading legacy carriers are not considering more orders, even if they are not reducing their initial orders.

An initial flood of interest from airlines has turned into a slow drip, and Airbus is leaning heavily on one customer, Emirates, for sales–the Dubai-based carrier has almost 50 percent of firm orders for the aircraft.

No US carrier has bought one, and Japanese airlines, among the biggest cheerleaders for huge planes, have taken just a handful. Iran Air’s order for the superjumbo grabbed attention last year, even if it most probably represented Iran’s determination to compete economically.

In the end, even that order eventually excluded the A380s from the list.

Airbus has delivered 198 A380s with only 121 in its order book to be built over the next five years. This comes despite its earlier credible proposal for the VLA market that predicted airlines would buy 1,200 superjumbo over two decades. And as airlines shift away from VLA, many of those orders appear destined for delays.

Certified by regulators to carry up to 856 passengers in a single class layout–although the average is closer to 550–the superjumbo was the European aerospace group’s multibillion-dollar bet on the future of air travel.

Airbus concedes its timing was off with the A380, which lists for $433 million but almost always sells at a discount. The financial crisis hit just as production was picking up in 2008, and soaring oil prices made airlines reluctant to buy the four-engine behemoth.

Perhaps Airbus’ biggest success to date with its plane was largely sucking the life out of ‘The Queen of the Skies’, Boeing’s own superjumbo and its last ‘-8’ update.

IAG’s chief executive has expressed an interest in acquiring “five to six” second-hand A380s, possibly for Iberia Airlines, giving hope to the as-of-yet untested secondary market for the aircraft type. However, uncertainty over a secondary market and residual values is now emerging.

Malaysia Airlines had been looking for months to sell/lease its six surplus superjumbos before deciding to accommodate 700 people in a single class, the densest configuration of any superjumbo, toward a fleet dedicated to transporting Muslim travelers on the annual Hajj pilgrimage to Mecca. Malaysia Air CEO Peter Bellew’s decision not to sell his six planes suggests there might be no secondary market for the aircraft.

The first aircraft delivered to Singapore Airlines, a tier one airline often seen as a trend maker in the industry, will also be returned to the lessor and re-marketed in 2016 and 2017. This is adding to the uncertainty around whether a secondary market for the A380 will exist or not.

A decade after it first took to the skies with the promise of revolutionising commercial aviation, the Airbus A380 has so far failed to deliver and from a shareholder value perspective, as quarterly results are subject to increasing scrutiny, speculation continues to mount over whether Airbus Group can continue to produce it.

Since the initial A3XX feasibility study in 1993, the manufacturer has continuously faced ‘a decision over the near to midterm on the future of the A380’. Despite customers willing to pay a premium, or a cabin layout with almost unlimited potential, the A380 has not been a game changer. Especially with the recent twinjets set to bypass many of the traditional airline hubs with ultra-long non-stop flights.

One option could be to discontinue the product to anticipate the global needs of a better-connected and more sustainable world, to lead the air transport in the year 2050 and beyond. On many occasions, Airbus group has acknowledged it will never recoup the $32 billion it spent on development.

A looming concern is when Airbus will reduce monthly production in 2018 from the current 2.5 per month to one. Axing the A380 outright is hard to do, 10 years is perhaps too short a time to determine its fate.

Besides having to admit to failure on the program, Airbus would need to write off factories across Europe and redeploy thousands of workers.

Airlines and lessors would see the resale value of their A380s plummet, and the plane’s demise would leave airports worldwide questioning the wisdom of facilities constructed to accommodate it.

But if the group is still convinced that the cycle will turn ‘one day’, then only remaining option is to invest further in an even more larger version, capable of supporting a larger payload through newer, more efficient engines, and redesigned wings.

The A380-900neo will not just be nice to have but a necessity considering growing populations, demographic profiles, and all aspects of the environment.

But would it be money well spent? As the industry leader, Airbus Group will have to pave the way.

The A380 could prove to be a key learning curve to be ready for the next generation of aircraft. In other words, the legacy of the A380 and what is inspires in the future is a real measure of how profitable it is for the entire industry.

Details of firm orders

There are 319 firm orders by 17 customers for the passenger version of the Airbus A380-800, of which 196 have been delivered to 13 of those customers as of 31.

October 2016. There is backlog uncertainty for over a third of the 121 on order with speculation over whether Virgin Atlantic will take delivery of its A380s.

Qantas’ CEO has also reiterated in a recent interview that Qantas doesn’t need the remaining eight A380s on order, and following Transaero’s cessation of operations, one of its four orders was cancelled in the fourth quarter of 2015 with the remaining three now listed under an entity named ‘Air Accord’.

Even Iran Air’s letter of intent for 12 aircraft as part of a large Airbus deal announced in January 2016, failed to materialize an order for A380s.

Amedeo (rebranded from Doric), set up as an A380 operating lessor with an order for 20 confirmed aircraft in February 2014, have also yet to announce any lessees so far and deliveries have moved further out, with slots taken by others.

Air traffic doubles every 15 years says Richard Carcaillet, while runways and airports don’t. “So mechanically you need larger aircraft to carry the increasing number of passengers.”

Carcaillet, a 25 year aviation veteran, was part of the team involved in creating the concept for the A380 and argues that the A380 that took over from the Boeing 747 which enjoyed a monopoly in the segment that Airbus’ superjumbo caters to.

“We now have 90 percent of that market, and more operators than the Boeing 747-8. The role it played in completing the offering is monumental, and the A380 has been doing very well,” he says.

Other than a “small but significant order” to ANA in Japan, Carcaillet acknowledges that the A380 has indeed not sold recently. “But large fleets start small.” As evidence he points to Emirates. “They started with just a few planes, and are now our largest A380 customer.”

Emirates has been pushing for the A380 neo, which would be more cost efficient to fly given the prevailing low-yield market the aviation industry finds itself in.

However, Carcaillet says the A380 flying today is much more efficient to fly than the one that entered service a little under a decade ago.

“This is a cyclical industry,” he says. “It’s an aircraft that isn’t decided lightly, considerations were taken when deciding to build it, just like how the airlines decided they needed it in their fleets. And our medium to long term forecast remains encouraging.”

Carcaillet goes on to explain that the Airbus plans to unveil cabin optimisations to the A380 to further help operators with the yield delivered per flight on the A380.

Recent reports suggest that Airbus might do away with the grand staircase that has been a hallmark of the oboard experience.

“The media has been latching on to some considerations we are taking, but we cannot confirm those reports. What we will say is that we are in discussions with our customers and will be making optimisations that we will demonstrate at the Hamburg interiors expo in April.”

That Airbus invested $32 billion in the development of the A380 is a figure that is “far exaggerated”, says Carcaillet. “It’s much lower than that. But what is more important to understand is that aside from the tooling and set-up costs of development, we are now breaking even and making a small margin on each A380 we build.”

The current depression in the aviation industry has prompted Airbus to cut production from 27 aircraft 12 per year from 2018, a decision which according to Carcaillet is simple to explain.

“We don’t want to build any aircraft we haven’t yet sold,” he says. “White tails, as they are called in the industry, are very costly to keep, and it is very difficult to market aircraft on the ramp.”

Carcaillet remains optimistic about the market picking up. “I believe there is an interesting proposition for high density aircraft, especially for low cost operators looking to invest in long haul routes.

He points to the recent demand by Malaysian airlines for packing 700 seats onboard an A380 to cater to the Hajj and Umrah traffic to Saudi Arabia as evidence that there is a demand emerging for the aircraft in the segment.

“Malaysian Airlines in their restructuring has opted for six new secondary aircraft with 700 seating configurations. And as the secondary market emerges, airlines will feel confident about re-ordering the aircraft.”

The secondary market hasn’t yet emerged because the A380s haven’t come off their first lines of service he says.

“Many airlines still have years left on their financing contracts after which some like Singapore Airlines will return their aircraft for new ones. Once that happens, a secondary market will emerge and we will be able to offer very attractive rates for those aircraft to make it as simple a proposition as possible.”

“We’re looking at 25 to 30 years of productions of the A380,” says Carcaillet. “Without naming names, we can say demand for the A380 experience remains healthy.”

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