On the surface, the 75% slump in oil prices since July 2014 has enabled Airbus Group SE to improve the relative competitiveness of its A380 superjumbo, while postponing the service entry date of an upgrade including equipping the people-mover with a next-generation engine to as late as 2024 or 2025.
Yet, the broader implications of the oil price collapse go far beyond, prompting changes in the air travel demand mix, which tilt the balance in favour of price-sensitive leisure travellers as carriers slash airfares to grab a bigger market share and stimulate further growth. At the same time, the upcoming influx of belly cargo capacity brought on by the deliveries of Boeing 787, 777X and the Airbus A350, means the current cargo doldrum symbolises a paradigm shift that is unlikely to reverse course.
This analysis examines the effects of these cost and demand driver changes, and whether their confluence could spur new A380 sales, should these favourable trends be sustained.
Attractive seat economics when filled
The superjumbo received a crucial shot in the arm in December last year when Japan’s All Nippon Airways (ANA) ordered 3 new-built examples in return of the favour Airbus did when the French plane-maker, a major creditor of the bankrupt Skymark Airlines, had supported ANA’s turnaround bid at the last minute and scuppered Delta Air Lines’s effort to acquire a roughly 20% stake in the beleaguered carrier, in spite of ANA’s public dismissal of the notion.
Immediate focus is placed on ANA’s plan to deploy the A380 on the Tokyo Narita-Honolulu route from 2018 onwards, where the Star Alliance carrier lags its arch-rival Japan Airlines (JAL) in seat share at 19% against the latter’s 35%, with an over 90% load factor achieved in the overall Tokyo-Hawaii market. JAL operates 4 times daily on the route, deploying the 312-seat 2-class Boeing 777-200ERs on a flight, the 199-seat 2-class 767-300ERs “Sky Suite 767” (SS6) on two flights and the remaining flight on a 186-seat 2-class 787-8 Dreamliner. ANA, on the other hand, flies twice-daily using the Air Japan 214-seat 767-300ERs. As the figures show, the 428 daily seats operated by ANA on the route is half that of JAL’s 896 seats and two daily A380 flights in a configuration of around 500 seats would enable ANA to take the lead back easily.
The A380 is particularly well-suited on the route given its seat economics, providing room for the carrier to cope with any competitive response from JAL, on which it used to fly the 2-class 447-seat Boeing 747-400 configured with 55 Business and 392 Economy seats. On the other hand, as Tokyo Haneda has a daytime operational ban on the superjumbo between 0600 and 2300, the A380 will have little impact on the Tokyo Haneda-Honolulu route, where both JAL and ANA fly once daily using the 2-class 777-200ER and 767-300ER, respectively.
Most importantly, while the A380’s unique characteristic of having a superb seat economics when filled is nothing new, as International Airlines Group (NYSE:IAG) chief executive Willie Walsh remarked, “its unit costs, if you can fill the plane, are very attractive”; little research has been done to illustrate the point and to its critics, the superjumbo’s inflexibility and the adverse impact of a yield dilution in an effort to fill the superjumbo up.
In a modelled ANA operation more representative of its normal network deployment, the lucrative Tokyo Narita-Los Angeles route is being looked at, where 4-class offerings with a premium economy product are featured prominently. ANA flies a daily flight using the 4-class 264-seat 777-300ER revamped with 10-abreast economy seats, alongside its joint venture (JV) partner United Airlines’s 252-seat 787-9 daily flight. JAL and its partner American Airlines (AA) operate a daily 777-300ER flight in a 244-seat 4-class and 310-seat 3-class configurations, respectively. The ANA/United and JAL/American alliances divide up the route pretty evenly at 35.61% and 38.23% seat shares, respectively, with the remainder held by Singapore Airlines’s daily 4-class 379-seat A380 flight featuring an all-Business upper deck.
On the return sector with 56 knots en-route headwind, a fully-laden A380 in a hypothetical 4-class 509-seat configuration – 8 First Class, 78 Business, 52 Premium Economy and 371 Economy seats and 8 tonnes of belly cargo can have a 16.80% lower block fuel burn per seat of 3.4327 litres (L) of fuel per passenger per 100 kilometres (km), compared to the 4.1257L used by ANA’s 4-class 10-abreast 777-300ER. This per-seat fuel efficiency stems from the A380 supplying 92.20% more capacity or available seat kilometres (ASKs), but only using 59.91% more trip fuel at 137.75 tonnes against the 777-300ER’s 86.14t. The A380’s faster long-range cruise (LRC) speed at Mach 0.85, albeit in reality it is often considerably higher, leads to 18 minutes shorter block time and a cruise fuel burn of only 71.20% higher at 111.36t versus the 777-300ER’s 65.05t.
As the 777-300ER is much smaller and hence easier to fill up, any realistic aircraft evaluation comparing the two should take into account a correspondingly lower load factor assumption for the A380. In doing so, the sensitivity of the A380 to load factor could be discerned from a per-seat block fuel burn perspective. A load factor equal to 83% would yield a per-seat block fuel burn of 4.136L per passenger per 100km, and any lower figure would tilt the balance in favour of the “Big Twin”.
Reduced emphasis on fuel saving helps A380 business case
Admittedly, the actual make-or-break load factor figure could be somewhat lower, since the A380’s luxurious cabin outfit, such as Etihad Airways’s US$32,000 “The Residence” complete with a butler and a dedicated shower facility that is proving more popular than originally anticipated, as well as Qatar Airways’s “revolutionary” New Business Class currently under development, will have a positive accretive effect on yields.
Nevertheless, Boeing (NYSE:BA) and its proponents are likely to point to the 83% figure on per-seat fuel burn as a reflection on the inflexibility of the A380, whose use is limited to trunk routes where frequencies do not have an outsized importance in an expansive global network, as IAG chief executive Willie Walsh alluded to. As unit cost increases when the A380 is not fully filled, as fewer passengers share the fixed costs such as capital costs, the US$1.4 million 3C base check conducted every 6 years and the 22 flight attendants versus just 16 on the 777-300ER, the break-even load factor (BELF = Cost per ASK/yield) would inevitably rise faster than the higher yield could compensate for.
In addition, Boeing often touts the cargo-hauling capability of the 777-300ER and that of its successor, the 777-9. At 5,200ft³, the -300ER’s revenue cargo volume out of a 7,120ft³ total cargo volume means it is able to carry 23 tonnes of belly cargo even after fully loading passengers’ luggage. This is in stark contrast to the A380’s total cargo volume of 5,875ft³ and a revenue cargo volume of 2,995ft³, enabling it to only ferry 8 tonnes of belly cargo. In fact, on a per payload-tonne basis, the 777-300ER burns 2,148.28L of fuel, a whopping 24.94% more efficient than the A380’s 2,861.98L per payload-tonne, underlining the -300ER’s mini-freighter credentials.
Yet, the changing dynamics of the marketplace are beginning to work in the A380’s favour, and new sales could be spurred should they prove to be a longer-term phenomenon.
First and foremost, the low oil price means the route profitability is not as susceptible to the former’s fluctuation as it used to be. Where Airbus found in 2012 that a 1% change in oil price will impact a route’s profitability by 2%, today’s Singapore jet kerosene price of just US$37.54 per barrel, down from around US$135 per barrel in July 2012, yields a sensitivity figure of just 0.56%. This means the premium airlines place on the 777-9, which promises a further 20% reduction in block fuel burn per seat compared to a 777-300ER and a 15% lower cash operating cost (COC), and in natural extension to the A380 given their identical unit costs at present, is drastically reduced.
Indeed, it deserves to be asked whether the airline industry is facing a new normal with sustained low oil price for an extended period of time, or “lower for longer”. Not least there is a 1.8 million barrels per day surplus going into the stockpile, compounded by Iran’s 0.5 million barrels per day production capacity joining the international oil market last week, there are signs that Saudi Arabia’s strategy of driving high-cost shale producers out of business is faltering. According to the consultancy Wood MacKenzie, the cash cost of US’s shale oil is at US$15 per barrel and even at a price of US$30 per barrel, only 6% of production worldwide fails to cover its average variable costs and faces shutdown. Moreover, the US shale oil industry has been becoming more productive, with a well in the Bakken region originally producing 200 barrels a day in 2011 now producing close to 700 barrels a day, reckons ANZ commodity strategist Victor Thianpiriya.
[graphiq id=”682ee4cNKC1″ title=”Airbus A380-800 Overview” width=”600″ height=”478″ url=”https://w.graphiq.com/w/682ee4cNKC1″ link=”http://planes.axlegeeks.com/l/242/Airbus-A380-800″ link_text=”Airbus A380-800 Overview | AxleGeeks”]
Continues at…. Is The Airbus A380 Coming Of Age?