Commentary: An Airbus A380neo Makes No Sense


Commentary by Hamlin, President of Hamlin Transportation Consulting

I enjoyed Kevin Michaels’s well-done “Up Front” column in the Jan. 12 issue on why an Airbus A380neo will probably happen. The cynic in me says there is a good chance that what he is predicting will occur. However, European/Airbus company politics aside, a re-engined and updated A380 makes little sense, and from an economic standpoint, probably no sense at all.

Airbus has indicated recently that it has not yet reached manufacturing breakeven on the A380. That, combined with an extended development period and costly re-work of a number of the early aircraft, indicates it will probably be impossible to achieve a positive net present value (NPV) on the program, particularly given the paucity of sales. NPV is sensitive to economic results relatively early in the program.

Spending $2.5 billion in additional development costs only adds to the problem. Yes, Emirates might take as many as 100 more aircraft, which is a lot of revenue (at least at list price), but the economics do not work. Even for a very large aircraft, a development program for only 100 units probably will not be a winner. Additional sales, in theory, could bring the program closer to an overall breakeven, but each additional delivery will be burdened by $25 million if there are only 100 delivered, even before accounting for interest on the additional development cost.

There also is the issue of marketplace disruption vis-a-vis Emirates being the only likely NEO customer. The European carriers, in particular Air France-KLM and Lufthansa, are probably close to apoplectic at the possibility of an A380neo. While it would certainly be nice for some set of consumers to benefit from the low fares that might be offered by Emirates’ acquisition of an additional 100 A380s, it is not clear that this is desirable from an industry ROIC (return on investment capital) basis. Another bout of overcapacity will hardly enhance airline industry economics. This also could come back to haunt Airbus if some of the carriers supporting the successful A320 program (Emirates does not operate single-aisle aircraft) turned to Boeing instead of the airframer that was aiding and abetting their long-haul distress.

Regarding Emirates CEO Tim Clark’s “look to the long-term” for the program’s salvation, and the reference to the 45-year run of the Boeing 747, there is essentially no validity to that comparison. First delivery of the 747 was in 1969, when the total fleet of jets worldwide was 3,487, according to data in The Airline Monitor. A380 deliveries commenced in 2007, when the global jet fleet was 20,577, almost six times as many as in 1969. By 1978, there were 339 747s in the active fleet. This is greater than the total number of orders (317 as of Feb. 4) on the books for the A380, which exists in a much larger overall market. In more succinct terms, the A380 has not been a resounding marketplace success.

Michaels says “canceling the A380 after just a decade of production would be a political catastrophe, not only for Airbus but also for Europe.” Another commercial aircraft manufacturer has faced this situation in recent times—Boeing, with the 717, which it inherited from McDonnell Douglas. Production ended in 2006 after 156 had been produced. Like the A380, one airline comprised the majority of the customer base—AirTran Airways acquired 88.

Notwithstanding the potential for “orphan” status that existed when Southwest Airlines chose not to keep the 717 after acquiring AirTran, Delta Air Lines, one of the world’s largest carriers, is in the process of adding the former AirTran 717s to its fleet. Apparently, the termination of a commercial aircraft program “before its time” does not always prove fatal for the participants.

Lost in the discussion of politics is the issue of throwing good money after bad. While the A380neo’s development might cost “only” $2.5 billion, wouldn’t that money be better spent enhancing another successful program, or contributing to a potential new program that might eventually produce a positive NPV?

The airline industry as a whole can ill afford another dose of politics and pride, no matter how heartfelt. I hope the new, and business-oriented Airbus will prevail over the old Airbus, but that’s hardly a foregone conclusion.

More… http://aviationweek.com/commercial-aviation/viewpoint-airbus-a380neo-makes-no-sense

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