PILARSKI SAYS… The A380 balance sheet and the future of the programme
The A380 balance sheet and the future of the programme
A secondary market could finally help the aircraft achieve its potential
We have just celebrated the 10th anniversary of the first flight of the A380. This event encouraged a lot of discussions related to the viability of the aircraft, its future, the need to re-engine and/or to stretch, and so on. Interestingly, these heated discussions are even part of family squabbles between different Airbus executives expressing sometimes contradictory opinions regarding the aircraft’s future. At this sensitive time of the programme, which is at a crossroads of decisions as to whether to cancel, harvest, invest more, redo the existing design with denser seating, reengine or a myriad of other options, it may be convenient to assess the A380. Let us consider the successes, failures and speculate about the future of the aircraft. The programme was officially launched in 2000. It was an event I had predicted in The Handbook of Airline Strategy, calling the programme by its then name, the A3XX. My rationale at that time had little to do with the market demand for such a product or its technological prowess. It dealt mainly with the strategic consideration of Airbus in its competition with Boeing, and I believed that the launch decision was inevitable. My prediction won me a nice model from a senior Airbus executive, who did not believe his own management would follow through with the launch. The programme had modest success in orders but was initially not managed well and was substantially delayed with early specimens being of sub-standard quality. Essentially, the aircraft utilized existing technology extended to a much larger size. Boeing’s launch of the 787, a strategic mistake in my view, introduced much newer and more expensive technology, which hurt the A380 by pointing out the old-technology aspects of the programme. The 787 hurt Boeing even more but that is a different article. The A380 was, and is, liked by passengers but the lack of a cargo version plus the obvious need for a future stretch limited its appeal. Its backlog has not increased since 2007. It became the glamorous crown jewel within the fleets of airlines which could accommodate shower facilities and private suites but it did not appeal to the less sophisticated airlines wanting to squeeze as much profit from an aircraft as possible. The major reason for the A380’s failure in being an overwhelming success is the lack of a secondary market. By this I mean two things. The first is the quality of its customers. The fact that the A380 is the largest and fanciest aircraft produced means, by definition, it has to be expensive. Small airlines cannot afford the purchase, hence the customer list is a who’s who of the world’s most influential airlines. This also means that the launch and premier airlines all paid phenomenally low prices. On a regular programme there are the big, prestigious, large order and launch airlines which pay a below-average price. The manufacturer compensates by charging the smaller latecomers above-average prices. The problem with the A380 is that almost everybody so far is an above-average size and prestige customer paying below-average target prices. For the programme to become profitable some above-average prices have to be paid, but so far we do not see the cadre of such secondary airlines. Now, if we add to this the fact that all those spectacular price purchases were financed at higher levels, it may be very difficult to find second purchasers of the aircraft. The top airlines want to find a secondary user for the A380. This is difficult to achieve because there is not a large number of airlines interested in equipment of such size. Reconfiguration costs are very high and the early purchasers which enjoyed very favourable pricing still expect depreciation, not starting from the point they paid but from the point they financed the aircraft. Right now the programme is in an interesting spot. There are a few units that need to be remarketed because of factors having little to do with the A380. Airbus, realizing the importance of such a campaign, has recently put together a high-level team to enable such movement of aircraft. If this task is successful, a secondary market will be established, and the future of the A380 may indeed be more upbeat than most analysts give it credit for today. With a secondary market in existence, a re-engined and eventually stretched A380 may finally achieve the role Airbus envisioned it to have in aviation.