ANALYSIS: Can Airbus and R-R kick-start A340 revival?

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Airbus, Rolls-Royce and CFM International spent a day in London last week seeking to convince the market that the A340 represents a good investment, despite its operating economics being buffeted by high fuel prices.

The event was kicked off by none other than Airbus’s top salesman John Leahy and attended by over 100 delegates, who included bankers, financiers, lessors, appraisers and brokers.

Production of the four-engined widebody ended in 2012 after 377 deliveries, including 246 CFM International CFM56-powered A340-200/300s and 131 Rolls-Royce Trent 500-powered -500/600s. 358 aircraft remain in operation, according to Flighglobal’s Ascend Online database.

While the meeting’s agenda covered all variants, much of the focus was on the largest model, the A340-600, of which there are 97 in existence.

The fundamental problem Airbus and owners face with the A340-600 is highlighted by its value performance, compared with the 777-300ER.

“To use direct benchmarks, a 10-year-old A340-600 has a current market value of $40.5 million, which equates to 36% of its $112 million original new value, whereas a 777-300ER of a similar age is worth $83.5 million which is 73% of the $114.6 million value when new,” says Rob Morris, head of advisory at Flightglobal’s consultancy arm Ascend.

“On the ‘standard’ 25-year-to-15% depreciation policy typically used by operating lessors, a 10-year old aircraft should be at 66% of its original value. I guess this sets the issue completely in context.”

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High operating costs of the four-engined 359-seater (two-class), exacerbated by the spike in fuel prices in recent years, has impacted the attractiveness of the A340-600 (and its ultra-long-range sister, the -500) to operators and investors. Airbus openly admits that the A340-600 has inferior operating economics to the 777-300ER, to the tune of 12% higher fuel burn per trip on a 4,000nm (7,400km) sector (assuming each is fitted with 475 seats). Boeing puts the deficit much greater, claiming that the 777-300ER burns 34% less fuel than the A340-600, on a per-seat basis.

To mitigate against the fuel burn deficit, R-R has developed an “EP+" improvement package for the Trent 500, which it says can save an airline up to $200,000 of fuel per aircraft per year. However observers believe that the A340-500/600’s appeal can also be hampered by R-R’s Total Care engine support programme, which has come in for criticism from the lessors and financiers as it has implications for residual values.

Airbus and R-R talked up the A340-600 by unveiling plans for a high-density seating configuration and undertaking to address criticism of high engine maintenance costs. Airbus aims to have a new exit limit of 475 passengers approved within 10-12 months, which will deliver a claimed 7% improvement in cash operating costs. R-R has pledged to adapt its Total Care programme to bring the cost per engine flight hour of four Trent 500s to the same or less than that of two older Trent 800s or General Electric GE90s (engines that power rival Boeing 777s). It describes the initiative as “flexible Rolls-Royce services – priced to fly”.

During the presentation, Airbus cited a number of “opportunities” for the A340, which included: “cost efficient capacity available short-term; replacement of other aging aircraft; interim lift before the A350 XWB; charter/niche operators with high capacity requirements; long-haul start-ups; and VIP and governments”.

But the jury is still out as to whether enough has been done to convince everyone that the aircraft is worth a second look. According to industry sources, there has not yet been a sufficient level of detail to enable a full assessment of the undertakings by Airbus and its partners to boost the A340’s market appeal. “Reputations die hard,” says one source.

Observers point out that R-R’s “four for the price of two” promise has been heard before, but Airbus is adamant that it is serious this time: “That is where Rolls is very happy that they will be proven, not on their words, but on their actions,” says Andreas Hermann, vice president of freighters and A340 asset management at Airbus.

With its 475-seat A340-600, Airbus sees a market to replace high-density Boeing 747-400s operated by charter operators, and also has the 777-300ER in its sights. Airbus claims that when fuel burn, ownership costs and other factors (such as maintenance cost and commonality benefits) are considered, the A340-600’s “contribution to profit” is $557,000 per month greater than the 747-400 and $433,000 better than the 777-300ER (see table).

“One thing is what the market could do and another is what it chooses to,” says Ascend aviation analyst Maximo Gainza. “The A340-600 may work beautifully in the high-density configuration being certificated next year, but realistically how broad is the appeal? Can this really herald a recovery in values and market perception, or is it too little, too late?”

Airline operators are Airbus’s main focus as it seeks homes for five A340-600s it is remarketing. However VIP customers are targeted for four ex-Singapore Airlines A340-500s on its books.

According to Ascend Online, 15 of the 34 A340-500s delivered are currently parked. The variant’s image took a bit of a knock recently when president Tim Clark revealed that Emirates was beginning to withdraw its 10 aircraft parting out its first.

“When we bought the -500, it was the only aeroplane that could fly nonstop to the west coast of the USA or the east coast of Australia,” says Clark. “Unfortunately for Airbus, nobody foresaw fuel doing what it did.”

Airbus is offering an “ACJ340” corporate jet version of the -500 which it says has “availability as early as 2015”. A propose configuration features three VIP rooms and 98 passenger seats.

According to Airbus, there are currently 25 A340s available for sale or lease. Airbus is remarketing 16 of these, including seven -300s, four -500s and five -600s. “For quite a few of these we have a solution to be announced sometime soon,” Hermann says.