Richard Pinkham LONDON

The A380 stole the show last year, as its first orders gave way to still more until the programme was fully launched at the end of 2000. Now Airbus must deliver on its promises and silence the doubters

There have been times over the past few years when it seemed as if Airbus would never launch the A3XX. After a series of false starts and near launches, the champagne corks finally popped at the Farnborough Air Show last July, when representatives from Emirates and Air France announced that they would convert their interest in the aircraft to firm commitments. By the end of the show, the Airbus sales team had fully hit its stride, chalking up 22 commitments for the aircraft, as leasing giant ILFC also climbed on board.

The full industrial launch of the $10.7 billion project was pencilled in for the end of the year, with Airbus needing 50 orders for its board to give the green light. Commitments from Singapore Airlines and Qantas followed in the weeks after Farnborough, and when Virgin Atlantic indicated in mid-December that it would take six of the double-decked aircraft, the magic mark was attained. Developments since then have seen the aircraft lose its interim designation and become the A380, FedEx launch the freighter version and firm orders rise to 66 units.

At the same time, Boeing - which continues to hold that the market for very large aircraft is too small to profitably build a new one - has failed to find a first customer for its proposed 747X Stretch. However, as ever with aircraft launches, Airbus realises it must follow up by delivering a product that provides customers with superior operating economics - most importantly the promise of 17% seat cost savings versus the 747-400. If able to do that, Airbus will go a long way toward easing worries about long-term sales and market size for an aircraft of these dimensions. That would also help ease lingering doubts over residual value. Until then, while it seems certain that the A380 will take off, questions will remain about how far it can soar.

Emirates embodies the spirit which Airbus must be hoping will soon pervade the industry at large. The Dubai-based carrier, which will take five passenger versions and two freighters from 2006, says the super jumbo is the key to its planned future growth. Emirates, which says that it would introduce the A380 today were it available, boasts a growth rate which has it double in size every three years. It has charted a path that would see it maintain that pace over the next 20 years, but cannot do so without overcoming slot limitations in key markets. "We aren't daunted by the A380. We see it as an imperative," says Emirates.

Slot constraints in general are central to the A380 marketing strategy. The need to add seats into key markets where additional frequencies are problematic is highlighted by each of the programme's customers as a key factor behind their orders. All except Air France have focused on London Heathrow as the critical market.

Craig Jenks, principal at the consultancy Airline/Aircraft Projects, estimates that Qantas already dedicates eight of its 24-strong fleet of Boeing 747-400s to connect Australia to London. Other customers too dedicate their largest aircraft to connecting their home markets with Heathrow. And none is likely to find new slots at London's premier airport.

This development is both good and bad news for Airbus. While it is a positive sign that a healthy percentage of its target carriers have lined up behind the project, it also means that, save for British Airways, Cathay Pacific Airways, and the Japanese carriers, the A380 already has been sold to everyone who would conceivably buy it for capacity reasons. Airbus is publicly undaunted, saying that it views any airline currently operating a 747 as a potential customer. It admits that initial sales will be dependent upon slot constraints, but believes that superior passenger facilities and operating economics will quickly place carriers that do not operate an A380 at a distinct competitive disadvantage. Airbus points out that this was a major factor in the success of the 747.

Still, it must be troubling that BA - Heathrow's largest operator - has not only declined to order the A380, but has publicly cast aspersions on its value. BA's general manager for fleet planning, Dick Wyatt, spoke at a conference in Geneva in February and articulated his carrier's non-interest in the aircraft.

Wyatt, arguing a point often made by Boeing, believes that continuing air service market fragmentation makes the purchase of the A380 a high-stakes gamble: "There are very few routes and very few economies that the market will depend on. You only need one or two of those to turn against you and you're stuck with an aircraft that you can't use." Managers at US majors who remember how the Asian financial crisis forced 747-400s onto Atlantic duty in the 1990s probably would agree. For these reasons, BA appears set on sticking with its capacity reduction strategy. Wyatt is firm in this conviction, saying: "If we could have a dozen less 747s than we have and a dozen more 777s, we would like to."

Secondhand sales

Wyatt also points to potential problems with residual values, saying: "We don't believe there will be a market for second-hand sales of A380s. It's going to be a very small market; it's not a plane you can buy and say 'whoops we shouldn't have done that, let's sell them.' We'd be stuck with them." BA's concerns over residual value are not unique.

Doug Kelley, vice-president for asset valuation at the consultancy Avitas sees the issues of the number of carriers operating the aircraft and its ultimate value on the second-hand market as being related: "What worries me about the A380 is how much bigger is the operator base [going to become]. Residual value is dependent upon the operator base and a narrow operator base will affect your liquidity." Mark Hemmann, associate with US lessor Pegasus Aviation, agrees and adds that the ease and cost of converting older A380s for dedicated freighter operations - vital for today's leasing companies - is also an unknown commodity.

A boost to the user base would certainly be provided if players in the other targeted market - Tokyo - stepped up with orders. Unfortunately, Airbus has had problems breaking into Japan, which is dominated by Boeing mainstays All Nippon Airways (ANA) and Japan Airlines. Also worrying for the A380 are signs of movement in Japan's capacity constraints and lack of fragmentation of service - phenomena the aircraft was designed to address.

Jenks notes that "there are certain factors working to alleviate rather than exacerbate capacity shortage at Tokyo's Narita Airport." Specifically, a long-sought second runway is due to come on line in May 2002. Jenks observes that, while the new runway will not be able to accommodate widebody aircraft, it could free up space on the main runway currently used for short-haul flying. He also notes that global projections of exponential traffic growth might not apply as much for Japan, which is a mature market facing a declining population.

Asia/Pacific factors

Experts also question whether the fact that Asian populations continue to be relatively concentrated will be sufficient to delay the air market fragmentation in the region that has made Boeing's 767 the primary workhorse across the Atlantic. George Hamlin, senior vice-president with the consultancy Global Aviation Associates, thinks Asia/Pacific fragmentation is going to grow a lot faster than Airbus claims it will and that Tokyo traffic will not grow as comprehensively as projected.

Hamlin points to traffic between Narita and Los Angeles (LAX), which Airbus has predicted will be the first and fourth largest A380 airports in the world. He finds it telling that this market grew by only 1% last year, while traffic between LAX and all of Japan grew by 4-5%. Traffic from LAX to the rest of Asia experienced a hefty 8-9% rate of growth.

Given the range possibilities in the new generation of twin-engined widebodies, Hamlin, who has worked for two airframe manufacturers including Airbus, believes fragmentation across the Pacific will accelerate. He notes a recent scheduling change by ANA, which took a 747-400 off its Tokyo-Chicago flight and replaced it with a 777 - an especially interesting change given the hub-to-hub nature of the flight, as ANA's Star Alliance membership affords it connecting ability at O'Hare. "The difficult thing for the A380 is that the higher yield passenger - who is paying for all this - wants to fly non-stop," Hamlin says,

Managers at US majors agree, saying that even on Transpacific routes smaller is better. One manager states that several carriers currently use the 747 on a lot of routes strictly for range reasons. Such facts, he says, make the planned, extended-range 777-LR the best aircraft moving forward, owing to the ability it will give airline planners to manipulate yields. He says of the A380: "If you're going to use it as a public service, it will be great. If you're looking to manage your yields, you'd do better with a smaller airplane."

Healthy discounts?

Then there is the issue of the A380 launch deals. Healthy discounting for launch customers is nothing new, but some reports suggest Airbus has gone further than most. A recent Business Week article claims that the company is selling the A380 cargo version for $133 million and the passenger version for just over $140 million. The latter figure is approximately 60% of the A380's $230 million list price and less than the average cost Boeing charges for its 747. Moreover, the article alleges that, in its hunger to announce new orders, Airbus is accepting down-payments of as little as $500,000 per aircraft and offering customers the opportunity to cancel their orders 12 months before delivery without penalty. Such terms may explain how and why a dark-horse carrier like Qatar Airways, which ordered two A380s in March, was able to enter the fray.

Noting the aggressive pricing strategy, Phillip Baggaley, of rating agency Standard & Poors, observes that the programme seems to have found commercial success, but remains a "financial question mark".

For its part, Airbus vehemently denies the figures, as well as the notion that the manufacturer is letting customers out of orders so easily and asking for such small deposits. A380 marketing director Robert Lange says that the terms Airbus offered are completely consistent with industry launch-pricing practices and adds that in any case the "the launch phase is over", and future deals will be made on prices closer to the aircraft's sticker price.

True or not - and Global Aviation's Hamlin says that if the quoted numbers are "not true, most of the industry is going to be surprised" - the recent developments hint that the A380's honeymoon period may be over. One observer of the programme's progression says that a post-Farnborough lull was to be expected, but that the combination of the remarks made by BA's Wyatt, the Business Week article, and the credibility eroding Qatar order made for the A380's worst week yet.

Then, too, Boeing could still play a spoiler role. The 747X, or "the X" as it is called in Seattle, has been slow to elicit customer enthusiasm, but, as essentially a derivative of an existing aircraft, is a much more certain bet from a performance perspective and will cost less than half as much as the A380 to develop.

The only major change being made to the design is an enlarged, aerodynamically improved wing, which Boeing claims will allow the new iteration to carry a bigger payload 500-1,500 miles further (depending on the version) at unit costs 3-4% lower than the 747-400. Vice-president and programme manager for the 747X Walt Gillette says the company is in serious discussions with about six potential customers and claims not to be frightened by Airbus' recent success in generating orders, even while Boeing's scorecard remains blank. "They went directly to the strongest part of their market - the airlines that fly the most congested hub-to-hub routes." Gillette figures the current tally matches up well with Boeing's market forecast for very large aircraft of about 250 aircraft of this size - both freighter and passenger versions - over the next 20 years. In the end he says, the market will decide which company's version is better.

The only certainty is that last year's launch celebrations are a distant memory and that the real tests lie ahead.

Source: Airline Business