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Airbus enjoys more A380 success in 2011, but some challenges too - Very Large Aircraft update 1

25-Mar-2011

Airbus' Very Large Aircraft (VLA) offering, the A380, has had a turbulent few months, coming back from a damaging engine blowout and gaining, and losing, some key customers in important markets, as we review in the first of a two-part series on VLA programmes.

There has been a flurry of activity in recent months surrounding the A380. The model hit the headlines in Nov-2010 when a Qantas A380 suffered a mid-air engine blowout shortly after departing Singapore Changi Airport. Naturally, the incident was widely covered by media and, with praise ultimately flowing from Qantas on the performance of the A380 in such conditions, the incident may actually have been a boon to the aircraft’s reputation. Rolls-Royce meanwhile has recently gained a contract to supply engines to Asiana’s A380 fleet, taking the tally of Trent 900 engine to power A380 purchases to 10 out of 15 airlines.

Airbus added two more A380 customers in the first two months of 2011 - a welcome diversification of the customer base for Airbus. Both customers are also based in the strategically important East Asian market, where Boeing has traditionally held the upper hand. Skymark Airlines, a little-known Japanese carrier, announced an order for four A380s, which was soon followed by an order for six from Korea’s Asiana.

Asiana, a member of the Star Alliance, was facing direct competition from an imminent A380 operator and SkyTeam member, Korean Air. Both carriers compete in the high-growth East Asian market, have operations at slot-congested airports and operate ageing B747s. Asiana’s A380s will be delivered from Apr-2014, according to Ascend.

All A380 customers come from a widebody/747 background, but Japan’s Skymark Airlines, a Japanese carrier with no international network and a fleet of ageing narrow-bodies, is the exception. Skymark represents an entirely different customer profile, but a customer type just as important for Airbus and the A380 programme’s future.

Skymark has aggressive expansion plans to compete with the two major widebody operators in Japan, a market in which Airbus has historically suffered very weak market penetration. Skymark plans to initially configure its A380s in a low-density, business/premium seat configuration with a full service offering. Airbus will be hoping the Skymark order will provide the impetus required to get ANA and JAL looking seriously at the aircraft. The two Japanese heavyweights have come under pressure from A380 operators in their home market. And with Korean Air the next new customer on Airbus’ delivery list, the pressure is set to increase.

See related report: Airbus A380 rewrites the mass market rules. Airbus now marketing seriously low cost aircraft

ILFC drops the A380

On the other hand, Airbus lamented the loss of ILFC's order, reported in Mar-2011, for ten A380s. The overall transaction with ILFC was largely positive for Airbus, as the lessor placed an order to 100 A320neo-family aircraft, but it was a negative for the A380 programme.

ILFC was the A380’s only customer from the aircraft leasing industry, a sector of the market that is expected to be increasingly important in aircraft markets going forward. ILFC’s cancellation, however, reflected the particular aircraft attributes sought by leasing companies rather than issues with the performance of the A380. CEO Henri Courpron stated ILFC cancelled the order due to “uncertainty about the secondary market for the aircraft”. ILFC had orders for a first lease of its A380s, according to a Bloomberg report, but “no visibility” on leases for a 10-12 year period, a standard lease period for widebody aircraft.

The cancellation ended a long period of uncertainty surrounding the order following ILFC’s deferral of its A380 order in 2010. In many senses, an order from an aircraft lessor was an outlier. Lessors tend to favour aircraft types that have achieved strong market acceptance, a wide customer base, both in terms of geography and operating model, with a clear secondary market, and a high degree of standardisation. Accordingly, the B737NG and the A320-200 comprise the vast majority of the world’s leased fleet. The A380 falls short in many of these areas, particularly in terms of having a wide customer base and more prominently, standardisation between operators.

A main reason behind airlines ordering the A380 (and a factor in its delayed deliveries) is the differentiation (ie customisation) airlines are seeking to provide on-board, which has seen a range of innovations unique to each operator. Indeed, some A380s differ from other A380s in the same fleet. Such a degree of customisation between operators would have greatly slowed turnaround times between lessees.

Attracting new customers in new pricing environment the new frontier

There are 43 A380s in service today, with five airlines, operating on 28 routes to 20 destinations. Over time, Airbus expects the A380 to operate on short-haul, high-density sectors in Asia. Airbus has noted that LCCs now account for 20% of worldwide seating capacity, and believes there is considerable upside in this market.

Current A380 routes and expected 2011 launches

As the A380 programme continues to mature and the global economy gets back into growth mode, Airbus announced in Jan-2011 that it increased the list price of the A380 by 8.4% to around USD350 million. The price adjustment reflected "the type’s outstanding revenue-generating performance now being demonstrated in airline service", Airbus claimed.

Next A380 customers and current network plans

Korean Air is next in line and expects to take delivery of its first A380 in Jun-2011, with its second arriving in Jul-2011 and another two by 2012. Korean’s A380s, which will feature a duty free shop and a bar, will first operate from Seoul to Tokyo Narita and Hong Kong, followed by Bangkok, New York and Los Angeles and New York.

China Southern will become the seventh customer when it takes delivery of its first A380 in Aug-2011. It has not yet announced any network plans.

Lufthansa launched Frankfurt-New York JFK service on 01-Mar-2011 and will launch daily Frankfurt-San Francisco service on 10-May-2011. The German flag carrier is considering additional US destinations for the A380, including Miami, Washington Dulles and Chicago O’Hare.

Air France has confirmed plans to operate A380 equipment once daily on Paris CDG-Montreal service from 09-May-2011 and on Paris-Washington Dulles service from 06-Jun-2011. Air France will operate its A380s to five destinations from Paris CDG: New York JFK, Johannesburg, Tokyo, Montreal and Washington. Air France has three cabin classes on its 538-seats A380s, including 9 in La Première on the main deck, 80 in Affaires on the upper deck and 449 in Voyageur divided between the two decks. Starting in summer 2011, the A380s will gradually be equipped with the Premium Voyageur cabin, located between the business and economy cabins, with a cabin configuration of nine seats in first, 80 in business, 38 in Premium Voyageur and 389 in economy.

Qantas’ A380s have been under the spotlight in recent months following an engine blow-out shortly after departing Singapore Changi on 04-Nov-2011. The airline announced in Mar-2011 that repair work on the aircraft, which has been at Singapore Changi since the incident, had commenced with the cost estimated at AUD150 million. A spokesperson said the airline has been “working closely with Airbus on repairs.” The airline stated damage to the A380 will be covered by insurance and contractual arrangements with the engine maker, Rolls-Royce. Currently, Qantas operates A380s on select services from Sydney and Melbourne to Los Angeles, and from Sydney and Melbourne to London Heathrow via Singapore.

Emirates is the largest current operator and the largest customer for the type, with 15 in service and a staggering 75 still to come. The airline operates its A380s to Bangkok, Hong Kong, Beijing, Seoul, Sydney, Auckland, Jeddah, Paris CDG, London Heathrow, Manchester, New York JFK and Toronto.

RBS analysts, in a recent report titled “What would you do with 90 A380s?” validated Emirates’ A380 strategy, which has been the subject of much speculation in terms of how the airline will finance the giant order and find enough routes large enough to serve and airports capable of accommodating the aircraft. RBS expects the airline to add 25 new A380 destinations, taking its total number to 37. RBS expects Emirates to have taken delivery of all 90 A380s by 2020, in additions to 67 B777s and 70 A350s. Looking at the medium-term, RBS expects the Dubai-based airline to have a 60-strong A380 fleet by 2015 and a schedule weighted towards trunk routes to Australia, Europe, the US, China and Japan. By 2020, RBS expects the airline’s route network to be “weighted rather more towards Africa, with a buildout of service in North America and Latin America, provincial India and China, as well as Eastern Europe.”

Singapore Airlines, the launch customer, has 11 A380s in service, five of which are leased from Doric Asset Finance. The airline’s A380 operations have come under the spotlight following the Qantas incident, as SIA also reported issues with the Trent 900s. Singapore Airlines announced plans to inspect the wiring on its A380s following an electrical fault on a Hong Kong-Singapore service at the end of Jan-2011. The airline discovered five cases of oil leaks in its Trent 900s, but insisted the leaks were minor and did not pose any safety issues.

Singapore Airlines currently operates A380 services from Singapore to London Heathrow, Hong Kong, Tokyo Narita, Melbourne, Sydney, London Heathrow, Paris CDG, Zurich. The operates daily fifth freedom Tokyo Narita-Los Angeles services and had planned to replace the current 375-seat B747-400 with 471-seat A380 equipment from 27-Mar-2011. The airline announced it would delay the launch of A380 services to Los Angeles via Japan “until further notice” due to weak demand for travel to Japan following the recent earthquake, tsunami and nuclear threat.

Where to next for the A380?

The 2007 entry into service of the A380 was ill timed: it coincided with a deep financial crisis in many major air travel markets, with many developed economies still trying to find their way out of the slump today. Demand for air travel, particularly in premium cabins and the air cargo segment, plummeted, and many in the industry questioned whether the industry really needed such an aircraft, amid speculation of permanent structural change in the industry as a result of the crisis and a noticeable trend towards twin-engined widebodies and flat A380 and B747-8I sales. But global traffic, particularly in the premium cabin, returned much quicker than expected in 2010 and the fortunes might have turned for the two VLAs, with three new customers in as many months in 2011 (Air China has ordered B747-8Is).

Airbus believes the A380 will continue to be an attractive option for network carriers as the demand for air travel continues to grow on the back on global economic growth, liberalisation and wealth creation. “Mega-cities”, those that offer to/from RPKs in excess of 5 billion p/a or 10,000 daily long-haul passengers, according to Airbus, will drive demand for A380 equipment. Nine cities currently meet this criteria and the European airframer expects this figure to increase to 27 by 2029. Unsurprisingly, this growth will be driven by Asia.

Destinations with more than 10,000 daily long-haul passengers

Airbus will be targeting carriers in the high-growth East Asian region, particularly the major players on the Chinese mainland and major airlines in Hong Kong and Taiwan, who will be able to leverage the strong growth in nearby China. China Southern is to date the only A380 customer from the Chinese mainland, with five on firm order.

Another Airbus target, Air China, recently became the third customer for the Boeing 747-8I, in a major win for the US manufacturer. HNA Group, parent of China’s fourth-largest airline Hainan Airlines, stated at the Asian Aerospace International Expo and Congree in Mar-2011, it was in talks with both Boeing and Airbus, while China Eastern will also be courted by Airbus and Boeing for a VLA decision.

The speculation came as the Chinese government was calling for the purchase of more widebody aircraft to help ease air traffic congestion. With China’s first A380 to arrive in China Southern livery in Guangzhou in Aug-2011, John Leahy will be hoping his familiar “it takes an A380 to compete with an A380” holds true in China, and more orders will flow in this key market.

Cathay Pacific, a well-capitalised network carrier based in a high-growth region and long time B747 operator, has been targeted as an A380 customer. CEO-designate John Slosar has stated the airline has looked at the type to replace smaller aircraft and ease airport congestion, but he maintains Cathay is “pleased” with its current fleet strategy. Cathay has recently topped up its order for A330-300s, B777-300ERs and placed an order for 30 A350-900s, which will replace the carrier’s ageing A340s and B747s by 2020.

To date, Cathay has not been able to make the numbers work for the A380. According to Mr Slosar, "we focus on the schedules, to make sure we have convenient flights during the day. We try to pick the airplanes which will allow us to have the right schedules in the right markets."

Airbus expects the advantages of its VLA to become increasingly obvious as the number of A380s in the global fleet continues to grow and potential customers come into direct competition with the A380. This includes the US, a market where VLA activity is almost non-existent but a market where Qantas, Lufthansa, Air France and Emirates operate their A380s and where Korean Air and Singapore Airlines will soon operate theirs. Delta and United, which operate 14 and 24 B747s respectively, are the two US airlines targeted most by Airbus. These two airlines will come under increasing pressure if advantages such as higher loads, yield premiums and lower unit costs accrue to A380 operators, as Airbus claims.

Next in this series: the B747-8


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