The following is part of an AW&ST article that I subscribe to. AW&ST is highly regarded in the Aviation world.
Airbus’ A380 Dilemma: Kill It Or Keep Bleeding?
Airbus still believes a large Emirates order can rescue the A380, but long-term success is doubtful
Nov 17, 2017
Jens Flottau | Aviation Week & Space Technology
Be there at 12:15, they were told. Sheikh Ahmad bin Saeed Al Makhtoum, the chairman of Emirates, would walk in and sit down for a few words and contract signatures. Sheikh Mohammed bin Rashid Al Makhtoum, prime minister and vice president of the United Arab Emirates, would be in the front row, lending the event more gravitas. The
Airbus team looked forward to it as a welcome end to months of intense negotiations and a ray of hope for its embattled
A380 program.
But when the Airbus staff arrived at the Dubai Airshow conference room, they found their counterparts from
Boeing, who had been given the same instructions. It was an awkward situation, but the mood was good, the usual jokes were exchanged, and pictures were taken of an event to be remembered.
Finally, after nearly an hour, Ahmad walked in and sat down—with Boeing Commercial Aircraft President and CEO Kevin McAllister. They signed a surprise order for 40
Boeing 787-10s and took a few questions. Then, suddenly, the sheikh was gone. It was only then that it dawned on many in the room that there would be no A380 order.
And so what was expected to be a spotlighted agreement between long-time business partners turned into an unprecedented public humiliation. Airbus executives canceled all subsequent planned public appearances at the air show, except for the announcement of the
big Indigo Partners A320neo family order later in the week. No interviews were allowed. And an event that is typically a display of confidence became the stage for disaster, a public rift between Airbus and one of its most important customers that has overshadowed what little hope was left for the A380 program.
Emirates itself had raised the expectation that it would sign another A380 order at the show. A week earlier, the two parties had celebrated the delivery of the 100th aircraft to the airline with a big party in Hamburg, and Ahmad had said he was hopeful a further A380 deal would come through. About 40 more aircraft were rumored to be under discussion, but that was considered a possible understatement because Emirates was involved. Now, after the clash and the parallel loss of a big
A350 campaign, does Airbus have a path back to promise for the programs?
Some argue that it would be better for both Airbus and Emirates not to look for such a path. But this would mean ending the A380 program after delivery of the remaining aircraft to Emirates and any other customers with existing orders that still want the aircraft. And it would force Emirates to rethink its fleet plans and focus on the next-biggest modern widebody available, the
Boeing 777-9, which it has ordered in large quantities. Of course, Boeing would be happy to sell it more.
A number of factors support the argument on the Airbus side. All of the company’s own A380 research and development money has been spent. And as long as the program is unprofitable, Airbus does not have to pay back the repayable launch investment (RLI) it received from the governments of its home countries: Germany, France, the UK and Spain. That would be a nice problem to have, but it is far off: Airbus loses money on every A380 it builds because production costs are higher than the sales revenue, and that will remain the case for many years, even if Emirates and Airbus come to an agreement for a follow-on order.
Emirates unexpectedly walked away from an anticipated Airbus A380 order at the Dubai Airshow. Credit: Dubai Airports
An Emirates order for more A380s would secure production at very low—and therefore unprofitable—production rates. The program’s losses are only growing with each aircraft delivered, and the program relies on a single customer.
Emirates is just emerging from a tough period in which almost unprecedented weakness in its core markets coupled with a fall in yields pushed profits into a steep fall. In the first half of its current 2017-18 fiscal year, the airline reversed the profitability trend again by limiting its capacity expansion to 2%, a historic low. It also parked 12 older Boeing 777s to reduce its exposure. Emirates could address its problems by operating a fleet of at most 142 A380s (taking into account retirements) and transitioning to the 777-9 as the backbone of its hub. With the 777-9, the airline would have more than 100 fewer seats to fill on every flight compared to the A380, it could better control yields and fly to destinations that are out of the question for a 517-seat aircraft.
However, Airbus is not ready to pull the plug on the A380. This is partly because it still has to build at least 42 more for Emirates between now and 2022, and there is an official backlog of 100 aircraft. The larger hurdle is a psychological one: Airbus would have to admit that the giant project has been a giant mistake. Instead, the manufacturer maintains that it just needs to hang in there until demand increases as world air traffic grows.
Airbus is not acknowledging that the more A380s it sells to Emirates, the harder it becomes for others to buy them because so much traffic is already sucked into the Dubai hub. In the past, Airbus was glad to sell as many A380s as possible to Emirates. But in hindsight and with a broader market view, that may not have been so clever. All indications are that it is too late for other airlines to order more A380s.
Meanwhile,
Emirates Airline President Tim Clark says reducing average aircraft size is not a possiblity. “If you start compressing, the hub implodes,” he says. Instead, he asserts that using a large and growing fleet of A380s “creates huge flows across the network.”
While both Airbus and Emirates hope they can still pull off a deal, in spite of ruffled feathers and hurt egos contractual issues must be solved, too. “The undertakings Airbus will have to make is that the line will continue for 10-15 years and that a further commitment [by Emirates] would not be at risk,” Clark says. The government of Dubai needs absolute certainty that Airbus will continue building the A380 for that time frame before it commits to a further order.
“The ownership [of Emirates] is well aware of the dearth of orders,” Clark says. Airbus wants Emirates to take delivery of aircraft across the entire time line of guaranteed production years. Depending on the size of Emirates’ order, that would leave Airbus with open production slots each year over an extended period of time. Nonetheless, Clark argues that the current Emirates order makes sure “the program is sustained until the middle of the next decade anyway.”
Emirates has 100 A380s in operation and 42 more on firm order. Clark did not say how many additional aircraft the airline may buy. Some reports suggest the number could be around 40.
Airbus’ total A380 backlog now stands at 100 aircraft, but most of the non-Emirates orders are no longer expected to materialize. It is reducing output to 12 aircraft a year in 2018 and eight in 2019 and wants to keep production at seven or eight aircraft per year for several years, until demand for the type from other airlines could pick up and the rate could be increased. Airbus has made a profit on a recurring-cost basis at a rate of 15 aircraft per year and is trying to drive breakeven down further. But it concedes that production will be unprofitable at a rate of eight or fewer aircraft per year.