Thorn In The A380’s Side - The 747-8

Prior to the 2007 Paris Air Show, Louis Gallois spoke to the Wall Street Journal and said:

“I don’t think that our target is to sell more airplanes than Boeing. Our target is to be the best company, not the biggest, and I think that is a change from the past. ”

2007 will also turn out to be a year and the third year in a row, when Boeing may secure over 1,000 firm orders. Airbus too will possibly enjoy a year of quadruple figure sales.
After securing its first new customer for the Airbus A380-800 last week after almost 3 years without one, much of the press has speculated that discounts of upto 50% were thrown at British Airways to entice and snare their business.

Having been on sale for almost a decade and even a few years even before its December 2000 launch as the A3XX, the A380 has endured the perpetual pain with a thorn in it’s side. A thorn that doesn’t go away and a thorn whose crown the A380 seeks to replace. The 747.

Image copyrighted and owned by BOEING777 and FleetBuzz.com

We can argue all day long about the pro’s, con’s, merits or otherwise of the 747, but the fact of the matter is, in less than 2 years since the launch of the 747-8 family, the type has crushed the A380F to death and all but destroyed margins on the $18bn A380, whose costs have spiralled and show no sign of being under control.

Only a month before the air show in Le Bourget, Airbus for the second time revised the breakeven target for the A380, only this time, it did not and has not made public what that estimate is.

Financial analysts must be shuddering at the recent Bloomberg reports that this conventionally built airplane, undone by reams of wiring problems, without a shred of technological advancement costs so much in a market segment which for the last quarter of a century has been shrinking and continues down that path.

Equally, the stop-start chameleon A350 fares no better, and in most regards, is worse. At $16bn, over a half decade late with no technological advancement over the Boeing 787, breakeven has already been earmarked at over 700 units.

With only Lufthansa as the major customer thus far for the 747-8 Intercontinental (and a handful of VIP orders), the airplane is a fraction of the cost of the A380, and need not worry about sales as long as its sistership, the 747-8F continues to sell.

Image courtesy of Boeingmedia.com

I bring in an excellent array of points from my colleague Robert Luedeman.

We’ve often opined that the B747I program was akin to Kaiser Wilhelm’s fleet-not important enough to dominate, but certainly enough to tie up huge resources, annoy the hell out of Airbus, and slurp up some loose orders here and there. Had the B747-8I not been available, it’s likely that Lufthansa would have ordered 20 more A380s than they did.

If you’re a contrarian thinker as we here are at times, that 747-8I order might have done Airbus some good because it was 20 money losers they didn’t have to build, likewise the orders that Fedex and UPS cancelled.

Following this line, the BA order puts the A380 back in the crapper for EADS because that’s 12 more money losers they have to build before the life support for this turd of a program is discontinued.

Read Robert’s article by clicking here. Pay particular attention to the comments of Kevin Roundhill here.

As Robert points out, this “fleet in being” is having a direct impact on Airbus and the A380 itself.

Essentially, one need not confront one’s rival head on, nor match strength for strength, but force one’s opponent to devote resources to meet the threat. In this case Airbus must devote financial resources, via heavy discounting, to sell their big airplane. Whereas before they had a de-facto monopoly situation, there is now competition which erodes future cash flow and profit margins - all of which pushes breakeven out farther into the realms of the unknown.

By no means is the 747-8I designed to replace or substitute the A380, but it does put pressure on Airbus to sell a bigger airplane with more unusable floor space than airlines need. There isn’t a single A380 customer that is making use of the much vaunted floor space of the jet - most have plans for less than 500 seats.

Quite a hefty airplane to lug less than 500 passengers to very few airports, while Corsair routinely flies 747-400’s with over 560 passengers aboard with virtually no complaints.

In its desire to supplant (or usurp) the Boeing 747’s position as the biggest airplane in the world, Airbus has landed itself with an equally bigger bill.

Image courtesy of EADS.com

A380 launch customer Emirates is privately upset at the discounting given to British Airways. In a desperate attempt to instil interest in this quagmire, one has to ask just when does Airbus intend to stop giving out preferential discounts to an airplane that may never breakeven.

Didn’t Gallois say the target is not to outsell his US rival? The EU appetite for grabbing market share at any price seems to take precedence with a mix of disregard to profitability. Should we then be at all surprised to see Airbus claiming that it is suddenly disadvantaged by Boeing’s “aggressive” pricing last week?

Perhaps Gallois should look through the Airbus order history book to see how much easyJet secured the Airbus A319’s for? Or when Jean Pierson decided to go “The Full Monty” to win the US Airways A32X deal in the 1990’s?

Of particular interest in this saga is how little reference Airbus makes to the 747-8 damaging its ability to sell the A380 for something most people refer to as profit.

Naturally, one would not expect them to publicly state this, but privately, whether the 747-8I sells or not, the very fact it is there on offer for customers as its sibling the 747-8F continues to sell very well, that mere presence diminishes the A380 business case and makes the -8I even more appealing.

For Airbus and the A380, the 747-8 is indeed a thorny issue.

15 comments October 1st, 2007