The end of the road for the A380?
A look at why the business case for the A380 has gone wrong
Airbus launched the A3XX aircraft (which would become the A380) in 1997 based on winning 650 orders over the next twenty years. It claimed to be in consultation with 20 leading airlines about their requirements for a new double-decker aircraft. Nineteen years on, the A380 has won just 319 orders from 18 airlines. So where has it all gone so wrong for what is Airbus’ flagship aircraft? In addition, with the announcement last week at the Farnborough Air Show that the production rate has been cut to twelve per year, what does the future hold for the programme?
In 1993, Boeing and Airbus did a joint feasibility study of a Very Large Aircraft (VLA), aiming to form a partnership to share the limited market. Two years later the study was abandoned, because Boeing did not believe that it could recoup the projected development cost. Airbus and Boeing had opposing views on how air travel would evolve. Boeing believed in the ‘point to point’ method of flying – where lots of smaller aircraft fly passengers directly between their destinations. Airbus however thought that capacity constraints at larger airports would lead to a ‘hub and spoke’ system, which consolidated traffic into larger planes between a few major airports, with connecting flights then taking passengers to their final destination. Airbus’ Global Market Forecast from 2000 predicted that 1235 VLAs would be delivered between 2000 – 2019 (see chart below). In reality much of that capacity has been provided by more fuel efficient twin aisle aircraft, particularly with the introduction of the Boeing 787 and the A350XWB.
Airbus Global Market Forecast 2000
The key idea behind the business case for the A380 was that air traffic was doubling every fifteen year and key airports were getting overcrowded. Numerous hub airports, including London Heathrow, New York JFK, Chicago and Frankfurt, are at or near their capacity limits. Logic therefore dictates that if these hubs cannot accommodate any more additional flights then airlines would need bigger planes to meet rising demand.
There have been two major flaws in the business case. Firstly, capacity has not become constrained quickly enough in the aviation mega cities. As a result, there are currently only a few routes where the A380 makes real sense – British Airways’ Los Angeles to London Heathrow flight is one example. The flying time of eleven hours constrains take off and departure slots, so frequency of flight is not valued in the way that it is for New York JFK to London Heathrow. The larger aircraft therefore equates to a higher yield for the airline. With IATA forecasting passenger traffic to grow at an average rate of ~4% for the next two decades, capacity at hubs will inevitably become more constrained, but the A380 may be just too far ahead of its time.
Secondly, whilst passengers undoubtedly love the A380 (hence Airbus’ new website which enables you to search for flights on the A380) and will pay a small premium to fly on it, as a general rule, passengers are not willing to pay a premium for space. Airlines have discovered that whilst passengers prefer to have more space, adding more seats to their airplanes to increase yield has not induced any long term drop in passenger numbers. This means the A380 struggles to compete with smaller aircraft. Whilst airlines could copy Emirates who has recently fitted some of its A380s in a denser two-class cabin configuration with more than 600 hundred seats (Airbus markets the A380 with a standard configuration holding 525 passengers in three classes), there are limited routes that can handle that much capacity.
So where does this leave the programme now and in the future? Airbus reached break even in 2015 at a production rate of 27 aircraft per year, but the rate has now been lowered to twelve per year from 2018. Management now claims it can achieve break even at 20 A380 deliveries a year in 2017, and will continue to work hard to reduce costs further. Nevertheless, the programme is likely to continue to be a drag on profitability for Airbus into the next decade. Airbus management has presented a fairly confused picture about the programme. At the 2015 Global Investor Forum, Airbus Group CFO Harold Wilhelm raised the prospect of discontinuing the A380 but then the next day Fabrice Bregier, Airbus CEO said there would almost certainly be a stretch A380 and possibly an A380neo (new engine option). The market seemed to think the neo was a question of when rather than if. At Farnborough last week the tone of Bregier’s commentary had changed. He told Flight Global the A380 “will find its way”.
An A380 stretch or neo now looks increasingly unlikely, although with Airbus one can never say never, and a neo would likely be a far easier business case, theoretically requiring little development cost except the engine manufacturers R&D. With an extremely limited market for second hand A380s, the next chapter in the aircraft’s story may well be the challenge that airlines have in getting rid of them despite the attractions of a significantly lower capital cost.
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