17 minutes read

We recently wrote a report covering the backlog of the Airbus A380. One observation from my side was that if Airbus does not secure an order from Emirates the program will ultimately be facing a shutdown.

Some readers deduced from the article that we are seeing no future whatsoever for the Airbus super jumbo. That is not the case. Some readers even went as far as making the discussions unnecessarily personal. While Airbus and Boeing are active in what is a duopolistic market, some readers always have the idea that an article about Boeing or about Airbus is there to feed the Airbus versus Boeing discussion. This is not our reason to write and it likely never will be. We do compare aircraft from certain manufacturers with their counterparts and orders, but it does not mean that every article should be subjected to Airbus versus Boeing rhetoric. Over the past year, we have noticed that discussions often contain personal attacks, distracting remarks or ad hominem comments. That is a trend that has been there for a while and it is a very unsatisfying one, since it shuts down the door for thoughtful discussion and significantly reduces the value of the often fruitful discussions in the comment section. We’d like to keep that interesting discussion in place and therefore ask readers not to engage in discussions that ignore the practice of well-mannered discussion, distract from the actual subject at hand or add ad hominem remarks.

In this report, we want to have a look at what future we think the Airbus A380 has and it is somewhat different from the view that some deduce from my spoken and, somewhat surprisingly, unspoken words.

In mid-2017, we wrote a report about the Airbus A380 and said the following:

Killing a program goes with costs as well, so you need to carefully weigh the pros and cons. If Airbus wants the A380 to survive, they will have to go to a minimum production rate and start working with airlines on a neo.

Minimum production

Afbeeldingsresultaat voor a380 cross ind

The backlog at the start of 2018 for which delivery is likely to occur is 49 units. At current communicated production rate, the backlog stretches roughly 6 years. In 2018, Airbus will deliver 12 superjumbos followed by 8 in 2019. It might cost something, but we think Airbus will be able to reduce production to 6 aircraft per year. Below that level, it is highly unlikely that the supply chain can keep running smoothly. Going lower than 6 aircraft per year also does not make it attractive to airlines to commit to the A380 due to schedule inflexibility.

Rather than killing the program altogether, we think going to a production of 6 aircraft per year would be prudent. An important reason or better said the most important reason to keep a struggling program alive at minimum production is the chance of revival in demand. The difficult thing here is to zoom out and look at what orders or demand we could reasonably expect for aircraft in the seating class of the Airbus A380. It is difficult to assess the prospect for the A380, because various aircraft manufacturers and companies divide the aircraft market differently and the VLA segment is not well-defined.

In its 2017 Current Market Outlook Boeing (BA) has chosen to join the medium and large widebody categories into a single category in its 20-year market outlook. It has completely dropped the VLA (Very Large Aircraft) segment from its forecast. It has been brought up that this might be because the Boeing 777-9 would be a VLA. We partially disagree with this, since Boeing has detailed the interior arrangement for the Boeing 777-9 configuring it with 414 seats in standard two class configuration and 349 seats in standard three class configuration. While it is often said that 400+ seat aircraft are what can be seen as the VLA market, Boeing has defined the large aircraft segment as aircraft that have more than 400 seats in standard three class configuration. Going by Boeing’s definitions the Boeing 777X would not be considered a VLA. The problem of what is a VLA and what is not considered a VLA arises from Boeing and Airbus not being very specific about what classifies as a VLA and Boeing has shifted that definition from a 400+ seat aircraft to a 400+ seat aircraft in standard three class configuration likely to avoid the need having to classify the Boeing 777X approved and unapproved family members as VLA.

By simply dismissing the VLA category as a whole, Boeing is paving the way to present the Boeing 777X and particularly a potential Boeing 777-10X as the best solution for airlines looking for an aircraft carrying more than 400-450 passengers. The most important reasons for erasing the VLA category is that if Boeing sees no demand for its own Boeing 747-8 passenger aircraft, any demand for aircraft it sees in the category would be demand to be filled by Airbus with the A380, since it does not consider its own Boeing 777X a VLA for marketing purposes. The last thing Boeing would want to do is help its competitor forecasting sales. Boeing has therefore chosen to redefine the VLA category and subsequently eliminate the category altogether.

What we do have, however, is Boeing’s sales forecast from 2016. In that year it forecast 430 deliveries over a 20-year timeframe.

Airbus forecast demand for 1,184 very large passenger aircraft, where it defines the VLA segment as aircraft with 450+ seats. This should have provided some clarity, were it not that Bob Lange, Airbus Senior Vice President, Head of Marketing and Product Strategy, would have stated that any aircraft delivered with a seat count of 400 and higher is considered a VLA category delivery. So a single class Airbus A330 delivered with over 400 seats counts as a VLA to Airbus and that is odd to say the least. Given that Airbus in their data uses 450+ seats and internally seems to be using 400+ seat counts with no proper definition, there are more questions than answers regarding the Airbus forecast. One thing that can be deduced is that the VLA deliveries of 1,184 aircraft in the view of Airbus are not all forecast deliveries for the Airbus A380. While the Airbus forecast should shine some light on the expected deliveries for the Airbus A380, it does not do such thing due to a lack in consistency and we are honestly not buying the story of how Airbus categorizes deliveries.

A third forecast comes from the Japan Aircraft Development Corporation, which forecasts demand for 627 400+ seat aircraft. A problem with the JADC forecast seems to be that it has categorized the 777-9 as a 400-499 seat aircraft in three class configuration, while typical three class configuration according to preliminary data made available by Boeing puts the standard three class configuration at 349 passengers. Given that Boeing does not expect anything from the Boeing 747 passenger variant, all of the forecast demand should be filled by the Airbus A380 in the absence of alternatives.

There are 3 market forecasts, but they are hard to compare because companies use different methodologies to categorize aircraft. Airbus has interpreted the VLA market most freely, while Boeing and JADC have set their expected deliveries for the VLA market between 430 and 627 deliveries. Slashing the Airbus number by half, we get to 592 units. It is no secret that Boeing has not been particularly upbeat about the VLA segment so naturally its forecast is lower than that of Airbus. However, the Airbus number divided by two and the JADC figure are in agreement. From an Aircraft Value News article, we obtained the following graph:

chart 1

You might wonder what is the point in checking a forecast from 10 years ago. It is quite simple, we can look at the forecast deliveries and actual deliveries in the first 10 years. Forecast demand stood at 520 units versus 207 deliveries that actually took place for the A380 and 41 Boeing 747-8I aircraft. From these figures it seems that Airbus was off by 52% on their forecast. That is where it becomes interesting, because if we reduce the 1,184 by 52% forecast in 2017, we get to roughly 560 deliveries. Using the figure forecast in 2007 for the 20 year period, we get to 610 deliveries. So the rough correction that I applied earlier by dividing whatever Airbus forecasts by two puts the forecast close to 600+ units forecast by JADC, while forecasts versus actual deliveries suggest a figure of roughly 560 units.

Concluding, on the bearish side we have Boeing with roughly 430 deliveries forecast, in between with a corrected figure we have Airbus with 560 units and on the high end we have JADC with roughly 620-630 units. You can pick whatever forecast you deem fitting, but it pretty much boils down to 430-650 units if we remove all corrective talks of how the market is categorized. That might be the disappointing part of the story. Airbus and Boeing both forecast demand or at least present their findings, but while their activity overlaps to a major extent they seem to present the market outlooks in a way to fit their product line instead of matching the product line up with forecast demand. Boeing is dismissing the VLA category because it fits the story for the 777X, while Airbus joins far too many deliveries into a single category that isn’t well-defined.

Niche market or not?

Afbeeldingsresultaat voor a380 etihad

With Airbus forecasting 1,400+ units in the VLA segment, there seemed to be a bright future for the superjumbo. Many have zeroed potential sales for the Boeing passenger jumbo jet, which would leave a lot of aircraft to be delivered by the A380 program.

Going back to reality, we work with the 400-650 units to be delivered eliminating freighter sales from the prospect and partly eliminating the vague approach to the VLA makret. This suggests average annual production of 20 to 30-32 aircraft per year. I think it is no coincidence that production of the A380 went as high as 30 units. What this tells us is that Airbus did at one point have the customers to deliver the aircraft to and its production was aligned for the long term as demand more or less suggested.

However, at the same time with exception of 2-3 years since service entry Airbus delivered more aircraft than it added to the order book. So, Airbus was basically eating through its backlog hoping for sales to pick up. That is one of the mistakes Airbus made, but you can’t really blame them for it since judging from the long term demand figure, production seemed to be aligned really well… not to mention that Boeing made the same mistake on the Boeing 747-8 program betting on revival of order inflow from the cargo market. That demand revival came years after Boeing started announcing production rate decreases in quick succession.

Throttling back production is never a popular decision, but what would be even worse for any manufacturer is throttling back too late resulting in a product program facing shutdown, despite the fact that demand could still materialize.

If you look at the forecasts for the VLA market, you wouldn’t call the market a niche. However, if we look at the demand forecast for the coming 20 years, the VLA market covers less than 5% of all deliveries. So the VLA market without doubt is a niche. A niche market, however, does not mean that a product is a failure. It means that execution on the program has to be correct with little to no margin for error. That is where it becomes difficult for Airbus, since they have been off with the timing of demand materializing and have aligned production more with forecast demand than with actual orders.

Business case

The problem Airbus is facing is that the business case for the Airbus A380 hinges on the numbers of airports experiencing congestion. With growing demand for air travel, Airbus bet that bigger aircraft would be needed replacing multiple flights per day. It is often said that the Airbus A380 might fail due to a shift towards point-to-point networks instead of the hub-spoke system. This is only part of the story and I don’t even consider that shift the primary reason for the slow sales. The other part consists of several other reasons that make it harder for Airbus to find customers for the A380.

One of those reasons is that travelers want flexibility, so airlines are preferring a frequency approach instead of hauling as many passengers to their destination in A380s replacing multiple Boeing 777 flights.

Another reason is that some airports are working on expanding their capacity reducing the immediate need for medium wide body aircraft being replaced by very large wide body aircraft. Some governments go even a step further by building completely new airports that will have unprecedented capacities when fully expanded. A few examples of new and potential developments are the airports of Istanbul (Istanbul New Airport), Sidney (Second Sydney Airport), Dubai (Al Maktoum International Airport). So instead of airlines spending money on bigger aircraft, money is being spent on bigger airports with tomorrow’s growth in mind.

Figure 1: Aviation mega cities prediction

All factors combined do not only reduce the need for the A380, but it also shifts the need for the A380 by some years and that is the biggest problem. Airbus has forecast the number of aviation mega cities to grow to 95 in the coming 20 years up from 93 last year. Roughly a quarter of these cities are the biggest aviation cities. Most of the mega cities will be added by 2026. That is in a decade from now. What remains unclear is how demand for the A380 scales with the increase in number of Aviation Mega Cities and Airbus has not made this forecast of Aviation Mega Cities an integral part of its 2017 market outlook presentation.

Simply scaling the growth in mega cities would put the Airbus A380 ‘forecast’ deliveries at 520 units. The problem for the A380 is and always has been the timing; Most of the aviation cities will rise by 2021-2026 and it remains to be seen how that affects demand for the Airbus A380.

On top of that comes the efficiency of the aircraft compared to smaller more efficiency wide body aircraft.

Timeline and Technology

The Airbus A380 for passenger experience likely is a superior aircraft. Shifting towards a frequency model has put pressure on demand for the aircraft. When looking at the timeline, another problem is the development timeline. Although the program has been plagued with delays, Airbus didn’t take an extremely long time to go from program launch to first flight at first sight. You could, however, say that it did take a long time, since the program was under study 6 years before the launch. If much of those early study results have been incorporated in the design, which I deem likely, then the A380 is based on relatively old technology. The main problem has been that its economics are not as good as that of the Boeing 777-300ER, which has been an incredibly efficient stretch and potential stretches of the Boeing 777X and the Airbus A350 and the Boeing 777-9 are expected to deliver superior cost efficiency to airlines. With its technology from 2000 and earlier, the A380 unfortunately falls short of today’s less risky and smaller alternatives. So, the timing of the A380 has been unfavorable from a technology insertion point of view. Another thing that negatively impacts the A380 by design is the fact that its wings are big enough to carry a stretched variant. If Airbus would have chosen to size the wing more towards what the Airbus A380-800 requires it could have saved roughly 1% of the empty weight of the aircraft, which is significant. That likely has been a decision to keep the production costs lower, but it is a penalty on the performance profile of the super jumbo.

As mentioned earlier, the rise of aviation mega cities will pick up around 2021-2026 and likely closer to 2026. This doesn’t mean that the A380 is immediately required in those years, it could take some years after that before demand for the A380 picks up.

Figure 2: Airbus backlog development at current announced production rates

What can be seen from Figure 2 is that at current planned production rate, the A380 program will run out of backlog before most of the aviation mega cities start rising and cutting production to 6 aircraft per year will only delay the A380 from running out of backlog by 1 year.

Airbus expects demand for the super jumbo to pick up by 2020, but its story of revival once again hinges on the congested airports. Nowhere is included what fuel efficient alternatives do to the appeal of the Airbus A380. I could easily see that shifting. What Airbus also doesn’t tell is that its projected uptick by 2020 is related to aircraft coming off lease including aircraft operated by Emirates, the biggest customer of the type. So, the expected uptick does not necessarily mean that Airbus will find a new operator of the super jumbo to validate the business case. Not all carriers are planning on replacing existing A380s by other A380s.

Update: Minutes after this article has been published, Frabrice Brégier, COO of Airbus, mentioned during a livestream that the 2020 revival will be driven by replacement.

From Emirates it can be expected that they are aiming to replace their A380 fleet, but the orders the carrier has with Airbus could already be used to replace the first 30 or so aircraft which would shift the an actual revival of order inflow by another 4 years.

We think, that revival is closer to 2025 than it is to 2020 and that makes the timeline extremely challenging, because even the biggest customer for the Airbus A380 is pretty well covered until 2024 and also expects to take delivery of the Boeing 777X and Boeing 787 by 2025.

Negotiations, Emirates and the A380

Afbeeldingsresultaat voor Emirates_A380_Airshow

So the schedule is tight for the A380 and it doesn’t fit nicely, but I also have to be fair and point out that it is in Emirates’ best interest to keep the A380 alive and its move to demand a production guarantee for another 10-15 years can be considered somewhat odd at first.

Emirates has ordered 142 aircraft. At the time of writing, 101 are in service and 41 aircraft are yet to be delivered. The fleet when fully delivered will be a mix of aircraft with turbofans from 2 manufacturers: Rolls Royce and Engine Alliance. I could imagine that Emirates would be interested to have an A380 fleet powered by either Rolls Royce or Engine Alliance. So, at some point either 60 or 41 orders will be required to replace aircraft with a certain propulsion system. That already gives 5 to 7.5 years of backlog and a rumored order of 35 aircraft would also do a lot of good things for the A380 backlog. So, much of the production guarantee Emirates is looking for, it can already provide it by itself. The remaining 5-10 years it the problem.

Emirates knows when it can absorb more aircraft and it also knows that Dubai International Airport is hitting capacity limits, the Airbus A380 was designed to allow for capacity growth at congested airport like Dubai International Airport. At the same time, the A380 does not fit on every route so there is need for smaller aircraft such as the Boeing 777X and the Boeing 787 at the expense of the carriers ability to grow further with the super jumbo. The reason why Emirates wants to have the production guarantee from Airbus until 2028-2033 is because the airline plans on moving to its Al Maktoum hub around those years and it will have the capacity to deal with 200 aircraft the size of the A380 at a time on the new hub.

Airlines moving hubs can be a big operational endeavour, so it is unlikely that going from day 1 Emirates will be utilizing the full capacity of the airport. It will gradually grow into it. It will obviously assess how Al Maktoum International Airport is performing as its new hub and it has to look where it can expand and whether demand is there to deploy the Airbus A380. So there are some question marks in Emirates’ expansion as well and it demands the production guarantee from Airbus not to secure the near term future of the project, but the long term future of the project to carry its expansion with the A380. Emirates currently is not willing to take the risk to commit to the aircraft only to find out it doesn’t need the aircraft at a later stage and it is likely expecting from Airbus that it finds another airline to validate the business case for the A380 by placing an order.

Cementing the future

Emirates at this point has more faith in the program than Airbus itself and while Airbus does sound upbeat about a 2020 revival, production plans and rumors about Airbus shutting down the program altogether give a whole different impression.

Airbus has recently turned to China, which is a market where Airbus has sold just 5 aircraft but likely expected much more. How Airbus has counted on China as one of the countries where the super jumbo would flourish becomes clear from the jet maker dubbing the super jumbo the ‘A380’, because the ‘8’ is considered a lucky number in parts of Asia including China, Japan and Korea.

Turning to China with the A380 would attract Chinese orders, but it could also result in lower costs if parts of production or completion is moved to China. Additionally, this could be one of the last things the current leadership can do to cement the future of the super jumbo. If a partnership in China is established, it would be more difficult for the next Airbus leadership to kill the program. Approaching China with a partnership proposal would not necessarily mean that there will be interest from airlines. Currently China’s network works more with point-to-point operations instead of hub operations.

For Airbus a Chinese order would be a double win as it adds additional orders for the type, potentially a new customer and it will give Emirates more confidence about the program.

A380: The Solution For Future Traffic Growth

The paragraph title is how John Leahy has presented the Airbus A380 in a presentation during the Paris Air show and that itself shows how much the A380 hinges on growth and in particular future growth. The A380 is today’s aircraft with yesterday’s technology solving tomorrow’s problem. That itself is not a problem, but it makes it harder to compete in terms of efficiency while today’s backlog poses challenges.

Some of my readers have gotten the idea that I think there is no future for the Airbus A380. That, however, is not my view. The Airbus A380 program potentially being shutdown comes from Airbus recently mentioning via sourcesthat the program’s future is uncertain if it fails to secure an order from Emirates and I simply explained why Emirates did put additional requirements in place.

We think that with the news that Airbus might be shutting down the program if an order remains absent, there is one positive. Airlines and jet makers never discuss pricing of aircraft in the media, but to force deals they will not shy away from using the media. It is likely that this news comes at a moment when negotiation are going through a rough stage. From that it can be deduced that neither party has walked away from the negotiation table and talks are still ongoing. We looked at the potential for the Airbus A380 and concluded that it roughly was half of what Airbus had in its forecast (forecasting remains a marketing tool and art). So, although a niche market there is demand. The problem for the A380 program is that in the short term the program has not been aligned with demand for too long. This in combination with airlines not placing follow up orders has reduced the backlog of the program, while some airlines and lessors are not planning or unlikely to ever take delivery of their ordered aircraft.

Airbus pulling the plug of the program is not likely in our view. It would be a negative surprise to any operator of the A380. We think that Airbus bringing up a potential shutdown is there to put pressure on Emirates to finalize an order. So, to some extent that is a good sign.

Emirates is invested in the A380, it successfully operates over 100 aircraft. If the program were to shutdown in the next 10 or so years, the 140+ aircraft with a market value of less than $35B at base market values and less than $15B after a first lease term would see its value decline significantly. It would make it very unappealing for Emirates to buy the aircraft now and use the aircraft as the backbone of its fleet. For lessors there would be little to no reason to provide attractive lease terms for the A380. So, Emirates really has something to lose here since shutting down the program would mess up the company’s fleet strategy and make it harder to attractively lease and finance the aircraft.

As discussed earlier, the production guarantee is there to keep the possibility open for Emirates to use the full potential of its new hub from 2025-2030 onwards with the Airbus A380. Another reason is that the production guarantee requires Airbus to put effort securing orders from other customers. Emirates likely also knows that if more airlines back the aircraft, their investment and the A380 as backbone of their fleet strategy is safe but it would also increase Airbus’ willingness to look into improving the A380 aircraft, which could use a make over.

On its way to secure more orders for the A380 in Asia and particularly China, Airbus has now set the first step by trying to either bring benefits on the A320 and/or A330 to facilities in China or even bring some of the A380 work to China. Finding a customer in China, which is expected to become the biggest aviation market by 2022 would be a huge backing.

So, there is a potential for the program and I do not expect Airbus to axe the program at this point. They might be looking to cut production even more, which would be a more than reasonable thing to do. What holds for the program is that 1 order from Emirates is needed and preferably an additional one from a Chinese customer. So it is not all negative for the A380, but we should still be very aware that the success of the program continues to hinge on 1 maybe 2 airlines and time has traditionally not been the biggest friend of this engineering marvel. All factors included, the A380 program remains a complex puzzle that Airbus has to deal with carefully, basically what you would expect from a niche market.