When Airbus Group CFO Harald Wilhelm formally opened the company’s global investor forum last week, he politely mentioned that he had very much looked forward to the event, which he viewed as a “highlight of the year.” But hours later, the highlight had turned into a disaster that will be hard to forget.
The event gave a surprisingly deep insight into the various views about the future of the Airbus A380, and may serve as a showcase for other companies about how communication can go very wrong. At the end of Day One of the two day-event, Airbus Group shares were down 15%—the largest decline in six years. They had not recovered by the end of the week, eliminating more than €4 billion ($5 billion) in shareholder value, even though Airbus Commercial CEO Fabrice Bregier tried to correct Wilhelm by saying that Airbus will build an A380neo.
The Airbus nightmare began when Qatar Airways announced on Facebook that it will not take its first A350 as planned on Dec. 13. While no serious technical issues have been discovered and the delay is likely to be limited to only a few days (the aircraft is now due for delivery Dec. 22), the timing and lack of further information were a major factor in raising investor suspicion. But it was Wilhelm who ignited a debate about the A380 that dominated the European business press for several days, and revealed that not everybody in Airbus’s management agrees on the future of the program.
Wilhelm told the forum that the A380 program will remain at breakeven during the 2015-17 period and—at least close to it—in 2018 on the recurring-cost level, even if Airbus decided to discontinue the model. He therefore became the first senior Airbus executive to publicly raise the possibility that the largest civil aircraft in airline service may not be built much longer. Wilhelm did not say it will be canceled, nor did he indicate a decision about it is imminent. But his statement at least implied that Airbus will either invest further and build an A380neo, or terminate the program, sooner rather than later.
The prospect of Airbus not continuing its most prestigious aircraft only a decade after its original entry into service has been unthinkable for most, in spite of the current order drought that has not seen the manufacturer add a single A380 order during 2014. But it is testimony to a market segment that appears to have been overestimated in the enthusiasm of the late 1990s, when European aerospace executives sought to pursue Boeing even harder by offering a complete range of models, including a very large jet. Airbus is understood to have spent well in excess of €20 billion on A380 development and is not expected to recover its investment for several decades, even if the program is continued and demand picks up strongly.
A380 production is sold out for the next three years. For Airbus to deliver the entire A380 backlog, production would have to run well beyond 2018, albeit at reduced rates which would present an additional profitability challenge and give investors reason for concern. The program is currently running at a rate of 30 aircraft per year.
Airbus has 318 firm orders for the aircraft, and 147 A380s have been delivered. Emirates is by far the most important customer, with orders for 140. The airline has taken 55 A380s and 85 more are to come.
A day after Wilhelm’s statement, Bregier told a different story about the A380. “We will get additional customers,” he said. “We are fully booked for the next three years, where is the problem?” Bregier went as far as saying that Airbus “will one day launch an A380neo and we will one day launch an A380 stretch.” He asked investors to not be “impatient.”
He was, of course, supported by Airbus’s chief operating officer for customers, John Leahy, who pointed out that Airbus is engaged in four sales campaigns with existing customers. Leahy was in Dubai earlier this month to discuss the A380neo idea with Emirates President Tim Clark, the one executive in the airline industry pushing the idea the hardest.
Leahy is convinced that with global air travel continuing to grow, the A380 market “has to grow by definition,” although it is “not a gigantic market.”
Clark was likely as shocked by Wilhelm’s statement as Bregier. “I’m not particularly happy, as you can imagine,” he told Reuters, saying he had protested to Airbus. Clark reiterated that Emirates would eventually replace all of its current A380s—and the 85 yet to be delivered from its order book—with A380neos if Airbus decides to build the aircraft.
Clark admitted that his comments would not help residual values of the current aircraft. But that is also true for Bregier’s commitment to an A380neo at some stage. Which airline will commit to the current version of the aircraft now, given the assumption that Airbus will probably launch a much-improved variant soon?
Many in the industry have serious doubts that there is a compelling business case for an A380neo, including some executives at Airbus. Wilhelm’s comments indicate senior management on the group level is driven much more by profitability over product innovations than in the past. CEO Tom Enders has been the driving force behind turning the company more toward what it calls “incremental innovation”: building derivatives of existing aircraft rather than all-new platforms. That strategy has been proven by the launch of the A320neo and A330neo. But even the approach of investing less money into improved versions of current aircraft may not be enough to justify the added investment of reengining the A380.
Both General Electric and Pratt & Whitney have told Airbus they are not interested in providing an engine, leaving that opportunity to Rolls-Royce. Ironically, one of the main risks from Airbus’s perspective could be that Emirates is too successful with its A380 operations. That would mean many of the aircraft that Airbus once thought would be operated by Lufthansa, British Airways or Cathay Pacific Airways may well already have landed in Dubai, with many more to come.
In fact, many airlines appear to have opted for smaller long-haul aircraft instead. British Airways, for example, has decided to replace part of its 747-400 fleet with A350s. That is another self-induced risk: Aircraft such as the A350 or Boeing 787 come so close in unit costs to the A380 that many operators have less incentive to the buy bigger aircraft, because that also means 150 more seats have to be filled on each flight, presumably at insufficient fare levels.
The overall size of the market for the A380 is still the big unknown, and even Airbus has reduced its forecast significantly. In 2007, the year the A380 entered service with its first operator, Singapore Airlines, the manufacturer projected sales in the size category of close to 1,700 units. Seven years later, it has reduced that forecast by 25%.
Airbus, of course, is not the only one to suffer from this uncertainty. Boeing has always been extremely conservative when it comes to the prospects for the largest passenger airliners and consequently did not develop an all-new aircraft in response to the A380, although it did introduce the 747-8. But as it turns out, Boeing’s own planning may also have been too optimistic for the latest version of its most famous aircraft.
Boeing will reduce the production rate for the 747-8 by two aircraft per year starting next September, amid continuing concerns over the slower-than-expected recovery of international air cargo traffic, the aircraft’s principal market.
Boeing says it is “making this minor adjustment because the near-term recovery in the cargo market has not been as robust as expected. We continue to believe in the long-term strength of the freighter market, and the 747-8 is uniquely positioned to capture this demand.” The aircraft is currently being produced at the rate of 1.5 per month but without fresh orders, and with just 13 freighters and 26 passenger versions in the firm backlog, this leaves less than three years of production at the current rate.
Starting in 2015, the newly reduced rate of 1.3 747-8s per month from 1.5 will see output fall to around 16 aircraft per year, and follows two earlier rate cuts made in 2013. Despite these low levels, the 747 has been through worse periods historically, such as in 2010 when no aircraft were delivered during the transition from the 747-400 to the 747-8. Another lean period was 2004-09 when and average of slightly more than 13 aircraft per year were delivered.