Shoot The Dog
Air France, China Southern Airlines, Kingfisher, Lufthansa, Qantas, Thai Airways, Virgin Atlantic - with the prospect that both bellwethers Singapore Airlines and Emirates could also join in the “fun” - of A380 deferrals. Thus far in 2009, we have yet to see any A380 deliveries while Airbus still sticks to its planned number of 18 for the year.
The question is how long will we have to wait before Airbus announces another adjustment to its planned production rate of its flagship A380?
My view is that it doesn’t really matter since Airbus is only putting off the inevitable and will have to shoot the dog before long. (For those who don’t “get” Brit humour, that does NOT mean scrapping the program).
“Even before the current economic crisis, the A380 was clearly over-sized and over-sold. Today, exactly 18 months since the first aircraft was handed over late to Singapore Airlines and with customers practically falling over themselves to defer, Airbus has still only built and delivered a total of 13 A380s, none of them in 2009. In the first 18 months of the Boeing 747 programme, Boeing delivered 135 of the type — 40 years ago,” says Arran Aerospace’s MD, Doug McVitie.
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As the pressure on yields continues to erode profit margins, any cut in A380 production is unlikely to be met with other customers stepping in to take possible vacant slots, as would be the case with the 787 given its inherent broader market appeal. For instance, on its daily schedules, Singapore Airlines’ A380 fleet is averaging* a 66% load factor - while numbers for yields is as rare as hens teeth at the Asian carrier, one senior source at the airline confirms that the figures “aren’t much different from what British Airways recently reported.”
British Airways reported a slump in premium traffic of 13% for March 2009 - since September 2008, BA has seen premium traffic decline by an average of some 12.5% - it recorded the biggest fall in premium traffic in over six months in February 2009 when traffic declined by 20.2%. If BA’s figures are representative of any broader market for premium travel, then the omens for Singapore Airlines cannot be any better, no matter which way you slice it.
Singapore Airlines itself announced woeful figures for March 2009.
However, as my colleague Howard Wheeldon and I conferred, he explains that Airbus may just force carriers to take unwanted/unneeded deliveries and could potentially stave off further deferrals and possibly even cancellations.
“As far as I am aware the intention remains to produce eighteen aircraft this year (this was adjusted downwards from twenty one aircraft that had been planned until last May.) Since then the company have said nothing on the subject. My own view is that they will not let production slip below the planned 18 aircraft this year for the simple reason that most are either built or well into the final construction phase and that they need the loot! I am of course making the assumption that they are actually able to manage that level of production given the problems with the already delivered Emirates aircraft. However, given the weakened state of the airline industry customer, I find it inconceivable that they could be planning to increase the level much beyond twenty five aircraft in 2010. What is pretty certain is that achieving the previously planned progressive rate of 40 aircraft a year would be financial suicide even if it could be managed!
As far as I am aware the order book for A380 still stands at (circa) 200 aircraft and break-even (my view) may be close to 600 aircraft. Production delays will adversely affect the potential for break even as will the ongoing problems that Emirates has suffered. That Air France and Lufthansa have pushed back deliveries is hardly surprising given market conditions and outlook. How many others will do the same is anyone’s guess. Having sold these aircraft at discounts possibly as much as 50% to list, one assumes that Airbus will demand its pound of flesh on any request for delayed deliveries. Thus I suspect that there may not be that many more cancellations this year,” says Wheeldon.
While the air travel market faces the real prospect of the death of the premium passenger market, the reality is that some airlines may yet take the unprecedented step of actually doing away with First Class altogether. Where premium economy has become the new business class and low cost carriers capture the low yield market away from full service airlines, the business case for filling the A380 becomes more and more dismal - particularly at a time when the largest customer for the A380, Emirates is itself poised to announce a major deferral of its widebody airplanes it currently has on order.
104 comments April 15th, 2009
