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Why the Airbus A380 Will Be a Flop

Posted in Airlines, Civil Aviation, Technology with tags , , , , , , , on May 7, 2008 by webzealot

Okay, let me just set the record straight… I’m not any sort of aviation expert. Not by a long shot. I build websites, tinker with my old car, enjoy my kids, love my wife. I am totally unqualified to make prognostications about the airline industry. I am just a guy that likes to look at airplanes, particularly airliners. To me, there is no machine more impressive that an airliner. I love them, have since I was a kid. I consider myself lucky to live under the flight path of a fairly large and busy airport.

That disclaimer out of the way, the one thing that seems just as plain as the nose on my face is this: The Airbus A380 will go down in history as one of the biggest industrial flops of all time. It is the right airplane, but at the wrong time.

Okay, before all you airliners geeks (and I use that work with respect, as I count myself as one) jump all over me screaming “You’re just a jealous Boeing backer, arrogant American, etc etc” let me just point out I don’t have a dog in this fight. I dig airliners. I don’t care who builds them, or where. What blows me away is seeing all that metal, all that weight, and hearing that huge rumble. It doesn’t matter to me what flag is on the label.

The A380 is an impressive machine. Just the sheer size of it, and those four HUGE engines, pumping out the power. How can you not be in awe of that. And yes, it is bigger than the icon of the jet age, the Boeing 747. So Airbus can lay claim to being the king of the skies.

But is the A380 the result of corporate hubris? Was this Airbus’s way of challenging Boeing to whip it out and compare? Yeah, maybe. They win that contest, but why? And at what price?

All of this started back in the dark ages of the 90’s. Boeing and Airbus were battling it out to see who would sit atop the pile in the world of airline manufacturing. Both companies were looking at the future of the Very Large Aircraft (VLA) segment of the market. Boeing was already well established with the 747, but Airbus felt there was room for growth. With McDonnell-Douglas and Lockheed getting out of the jumbo jet market, Airbus wasn’t going to let Boeing have the VLA segment without a fight. And while they were at it, why not make something even bigger?

Boeing looked at stretching the existing 747-400 into a proposed 500 and 600 series. But, Boeing had trouble generating enough interest to support the additional investment needed. Even after scaling back their plans to develop the more modest 747X, airlines still weren’t nibbling. Boeing analysts decided that the VLA market was shrinking and that even modest revisions of the existing 747 platform would be hard to justify. In 2000, Boeing announced they were shelving further VLA ventures beyond the 747, and instead would shift their focus to the ill-fated Sonic Cruiser and further twin jet development.

However the folks at EADS, the parent of Airbus, seemed to read the tea lives in the exact opposite way. Airbus formally approved the A380 project in late 2000, based on a perceived market need for anywhere from 1200 to 1700 aircraft in the VLA segment. Initially Airbus said they expected to break even at around 270 units. Despite the fact that Boeing couldn’t generate interest with it’s well established plane, Airbus chose to look the other way.

In fairly short order, it began to appear that Boeing may have been right. Sales of the 747 were slowly but surely trailing off. In fact, in 2000, 747 deliveries had dropped to nearly half of what they were just the year before. Of those, only a handful were passenger models. In fact, the last passenger carrying 747s were ordered in 2002. The remainder of the 747 order book was for freighters. Airlines, ceding to passenger demands and economics, were discovering it was better to fly smaller “twin jet” aircraft several times a day on high density routes, rather than a big jumbo just once or twice a day.

Some of the trail off in 747 sales may have been a direct result of Boeing’s announcement to not further develop the aircraft.

It hadn’t always been this way. When the 747 hit the market in early 1970, it opened up affordable air travel to legions of people. Despite the huge plane’s thirst for fuel, the seat-mile costs were extremely favorable. Boeing delivered nearly 100 747s that first year. Through the 70’s and into the 80’s, 747s also criss-crossed the skies of the domestic US, connecting major city pairs.

In the 1980s came airline deregulation, and the economic environment began to change. Fuel prices rose, and as airlines were increasingly free to set their own schedules, many airlines suddenly found themselves operating huge, but half full, airplanes. Mirroring the 747 order book, was the 737… A small, but very economical twin jet. As 747 orders slowed into the 80’s, the 737 order book exploded, as did the new and larger 757. Airlines realized that it made more economical sense to fly three or four 757s on the same routes that might have once been serviced by one or two 747s.

As the 1990s rolled around, the 747 was quickly disappearing from US domestic service. By the time Airbus gave the green light for the A380, only two US airlines were still operating the 747, United and Northwest, and only on long haul international routes. But maybe Airbus didn’t really care about the domestic US market. Maybe they were looking at the global picture.

The thing is, the same economic realities were also at work overseas as well. Airbus had introduced the fuel-efficient A330, a high tech and long range wide body aircraft. Boeing was selling the 777, another fuel frugal twin jet which could still hold roughly three quarters as many passengers as the 747, but with half the number of engines. Now airlines could easily cross the Atlantic or even the Pacific, with smaller but more efficient aircraft.

So why build a big four engine airliner at all? Well, it turns out the one market that could still use a big sized jet, were the cargo carriers. While passenger 747 sales dropped to virtually nothing, sales of 747 freighters continued to be strong. Unlike the fickle passenger business, the cargo haulers have the benefit of being able to fly on more of an as-needed basis, and of being able to charge rates that are realistic. The economics of freight defy the economics of moving people. So maybe, just maybe Airbus could make this big monster work as a freighter. And in fact that was part of the plan.

Airbus cited the the same low seat-mile costs that originally made the 747 such a hit back in the 70s. Sure, it would use a lot of fuel, but it can hold so many people that it will easily make sense, right?

So now, seven years since the go ahead for the A380 was given, what does the future hold? Boeing has since announced the newest version of the 747, called the 747-8. Boeing still believes the future of the 747 is as a cargo hauler, although a few passenger models of the 747-8 have been ordered. More significantly is the explosion in the twin jet market. Demand for the Airbus A330 remains as strong as ever, and the new A350 will build on the inherent efficiency of the twin jet. Likewise, the world awaits the much delayed delivery of the first Boeing 787 Dreamliner, as new versions of the 777 continue to set new records in range and efficiency.

Also in the intervening years, fuel prices have climbed and climbed some more. Airlines around the world have struggled. Belt tightening is a matter of survival.

In 2007, Airbus put a hold on the A380 Freighter after delivery delays caused FedEx to cancel its order. Airbus chose instead to focus on the passenger version of the plane. As of this writing, there are 192 firm orders for the A380. Airbus has since moved the break-even point to 420 units, and then recently to another higher but undisclosed number. In order to meet its projected sales target of 1200 planes in 20 years, Airbus needs to sell an average of 60 planes per year. In the eight years the plane has been available for sale, Airbus has averaged 24 per year. Thus far in 2008, it has sold only three. Add to that the fact that Airbus is compensating airlines for late deliveries (nearly two years behind schedule) and the effective “real” numbers are even lower.

Dubai-based Emirates has ordered 58, but it is rumored that Airbus is essentially giving them five of the planes for free in an effort to keep the order on the books. Interestingly enough, the cash rich Emirates, and other middle-eastern airlines like it, don’t have the same economic concerns. Their oil rich clientèle tend to not shop for price, so an inefficient airplane isn’t as big a problem. Excess fuel costs can be easily passed on.

All told, at the current pace, Airbus will build fewer than 500 A380s in the plane’s 20 year life cycle, a very bleak prospect. But, that’s only if things stay as they are. If anything, the outlook is only going to get worse.

Here’s where my “I’m no expert” analysis kicks in. Sure, the seat-mile costs of the A380 might be terrific, but only if it’s full. You can put as many as 823 passengers on this colossus, although the more practical number is 525 in a three class configuration. So if you fill the plane, terrific! You have no worries. But what if you DON’T? With a barrel of oil at around $120, a gallon of Jet-A now costs somewhere around $5.40 per gallon. That means filling up an A380 can cost over $400,000. Granted, these planes will always carry only the amount of fuel needed, but it demonstrates a point: This plane is VERY EXPENSIVE to fly, and likely only to get more expensive. So can you really get 525 butts in the seats each and every time?

Maybe you can, but your exposure to loss is high. If your A380 is only 90% full, that hurts you a lot more than if you are flying the route with an A330 that’s only 90% full. Or even better, fly TWO 95% full A330s giving your customers the choice of two different departure times. Seems pretty simple. It’s about the same number of people, but in more economical aircraft and with more scheduling freedom. Even in initial costs, an A330 costs less than half the cost of a single A380. But everyone knows the real cost of an airliner isn’t the initial price, but in the fuel it will use over its lifetime. And the A380 is going to use A LOT.

If we were comparing airliners to cars, the A380 is an SUV. It holds a lot of people, and if you are splitting gas money seven ways when you go to the beach, an SUV makes sense. But around town, that SUV will bleed you dry. You and your spouse could commute together in your SUV, or you could drive two Toyota Corollas more economically and you could both come and go to and from work as you please. A simplistic example perhaps, but it illustrates a point. In today’s energy thirsty world, smaller is better.

A number of years ago I made a posting on a popular aviation website message board that I thought when the dust had settled, Airbus would end up only producing 100 or fewer A380s. Needless to say, I was resoundingly badgered by folks claiming the number would likely be at least 1000 and more likely 2000 plus. I readily admit my posting was more for sensationalist purposes, but as of the middle 2008 my prediction doesn’t look to be all that far off.

Now news is coming out that Airbus may delay the delivery all but five of the Emirates A380 order, as well as four to be delivered for Etihad. Emirates has made rumblings about cutting back or canceling their order before, but most likely just to get Airbus to dance a bit. But this time might be different. Emirates is now saying it is taking a serious look at the only A380 competitor, the Boeing 747-8 Intercontinental. If Emirates cancels, or even trims their order, the impact for Airbus could be catastrophic. With these additional delays, many airlines will be taking delivery of an airplane that is no longer on the cutting age of technology and fuel efficiency. Will other airlines start to reconsider their orders? I suspect they will.

Meanwhile, development of the A350 lags as Airbus continues to pour resources into its behemoth. The A350 is the direct competitor to the high tech 787, and promises to be a very popular plane. Popular that is if Airbus can actually deliver it.

So Airbus may be on the brink. Do you continue to pour resources into a plane with a very dubious future, or cut your losses and focus on high efficiency twin jets? Boeing seems to have made the correct call on the subject, while Airbus may have very well mortgaged its future. Either way, the magnificent A380 seems destined for the dustbin of aviation history.

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