Thorn In The A380’s Side - The 747-8
October 1st, 2007
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.
Sphere: Related ContentEntry Filed under: 787 First Flight, 787 Orders, 787 Premiere, 787 Rollout, Aeroplane, Aerospace, Air Transport, Air Travel, Airbus, Airbus A318, Airbus A319, Airbus A320, Airbus A321, Airbus A350, Airbus A380, Airlines, Airplane, Airplane Order, Airplanes, Airport, Boeing, Boeing 747-8, Boeing 777, Boeing 787, Boeing 787 Order, Boeing 787 Premiere, Boeing 787 Rollout, Boeing Orders, Dreamliner, Dreamliner First Flight, Dubai Air Show 2007, Dubai Airshow, Fleet Replacement, FleetBuzz.com, Jet Travel, Low Cost Airlines, Low Cost Carriers, Paris Air Show, Travel
15 Comments Add your own
1. LGB787 | October 1st, 2007 at 4:45 am
For Leahy, who gets paid regardless, what’s it to him if he sells the 380 for a responsible price or at a loss? He gets a check either way, and probably a ‘golden parachute’, even if he’s fired (which is doubtful).
This airplane has *always* been about pride….to build a plane bigger than the 747 whether anyone needed/wanted it or not.
2. James Baloun | October 1st, 2007 at 7:21 am
Airbus is stuck with what they have in the A380. The dye is cast and the results will be known as it begins to earn its keep carrying passengers. There is only so much you can do to fix a plane after production starts (except for the 777 which is the gift that keeps giving). The A350 is still a work in progress and an opportunity to bear-down and get it right.
Time blue! (Got to reset their stance in the batters box). Bottom of the ninth, down by 734, and Airbus only has to now hit a home-run. The crowd is waiting. Heres the pitch and….
3. Falcon | October 1st, 2007 at 11:31 am
As usual you compare apples to oranges:
“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.”
4. Jacobin777 | October 1st, 2007 at 1:43 pm
Given the cost acquisitions/economics of the carriers which have purchased them (SQ, EK, ect.), the A380 will do well for them…but the question is will it do well for Airbus/EADS? Given how much the plane has cost Airbus so far, and given the ever-decaying time-value of money, I don’t think Airbus will ever even remotely break even on the project….it will be one large financial loss to them.
Boeing has north of 10% profit margins…Gallois HIMSELF stated they want to get to the “mid single digits” in a few years…to me that says they are “dumping planes to sell”…otherwise there is no reason they can’t get back to the mid-single digits even my next year….as there would be no more A380 penalty payments and basically no A350v.1 prices for customers who want the A350xwb (aside from ILFC probably)….
Meanwhile, Boeing will do just fine on the B748 program..it will return a nice ROI..and while it would be nice to see some B748I sold, as long as the frames are sold, bills and employees are paid and the shareholders get a good ROI…who the ‘ell cares?
5. Aurora | October 1st, 2007 at 2:35 pm
WRT the A380s break-even potential, or even future profitability, perhaps these are secondary considerations for EADS?
6. Nick Ranieri | October 1st, 2007 at 3:48 pm
They are following the old phrase. We loose money on everyone we sell, but we will make it up in volume.
7. Christopher Dye | October 1st, 2007 at 4:59 pm
Does it really matter whether Airbus reaches its so-called break-even point with the A380, what ever it turns out to be? Haven’t they already written off all of the 380’s high development and penalty costs, so that they make something on each one delivered and each new order so long as the price exceeds the actual cost of production? Isn’t the main point that very shortly AB will convert the 380 from a money pit to a revenue generator, even if that revenue is not they would have wanted? Any accountants out there?
8. BD_US_EUROPE | October 1st, 2007 at 7:58 pm
I am quite appalled by the overall tone of these responses. Why is it that every single news about a new airline decisions gets boiled down to US vs Euro crap???
As a French guy living in California for more than 10 years I feel this is such a worthless and empty chatter.
I travel a lot (more than 400K miles a year) and have the chance to mostly travel business or first class. To me, seeing the great product innovations from both Boeing and Airbus rejoices me. The world needs more than a single successful aircraft maker. Both of these companies have had good, great and horrible times. Their products nonetheless (including the Concorde) have made all of us travel better, safer and overall more enjoyable (or should I say less displeasuarble!)
I look forward to flying on both the Dreamliner and the A380. I am already rejoicing at the idea of a quieter, better atmosphere, and a more spacious ride over the Atlantic. So congrats to both manufacturers and hopefully you both will continue to compete and as a result deliver outstanding new products to the market.
Long live the A380, the Dreamliner, the 747-8, the A350XWB and other aircrafts to come!!!!
9. Aurora | October 1st, 2007 at 10:36 pm
Christopher, I don’t know whether or not they’ve written off their costs, but there is the issue of the repayable launch aid (RLI).
10. ~*aims*~ | October 1st, 2007 at 11:13 pm
Thank you for another excellent read and thoughtful analysis Boeing777. As usual you have brought up interesting and legitimate issues.
With the A380 promoted as Airbus Industrie’s ‘flagship’, I wonder how the company can ever discontinue the program as your colleague mentioned…along with being a corporate embarassment, it seems as though Airbus truly believes in the eventual success of the superjumbo once other airlines observe the aircraft in operation. First flight with Singapore Airlines soon, perhaps only time will tell.
11. JayinKitsap | October 1st, 2007 at 11:18 pm
Although I so wanted the 748I to be selected by BA, I am sure that there is a price difference between the 380 and the 748 where the 380 makes a lot of sense. BA is a customer that Airbus had to have with the A380. Will they order more - it is anybody’s guess.
The 748 is a very sharp thorn, it will make any order for 10 or more be very competitive with much lower margins. However, Airbus needs to garner around 30 orders per year to get near 400 produced within a decade. That is almost 3 orders the size of BA each year. I wish them luck.
12. rhapsody | October 1st, 2007 at 11:21 pm
A gentleman by the name of Ron Woodard could give Airbus a lot of guidance on selling airplanes to retain market share or selling airplanes at the cost to produce them or sell at whatever price is necessary to win a competiton. He was fired for doing so. Is it possible the same fate will eventually do in the current herd of Airbus/EADS executives?
13. hartley streeter | October 2nd, 2007 at 2:20 am
The real killer of the old 747-400 and A380 is the 777. With two 777’s you can fly at different times of the day and to an alternate airport. Instead of one hopefully packed A380 one a day to a gigantic crowded hub.
14. salary of BA | October 6th, 2007 at 4:06 am
BA have no need for an aircraft fleet sized between the B777-300 and the A380, let alone one whose basic design concepts are in the 1960s, so it does seem the end of the B747-8 is closer.
15. Martin | October 16th, 2007 at 11:35 am
Every sold A380 is good for the balance not
bad. The money it costs to build one more is
less than the price Airbus gets for it
(after the production runs normally).
The loss on the programme comes not from the
production costs but from RD-costs that are
already spent.
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