Mounting deferrals of A380s are further undermining Airbus’s efforts to achieve profitability for the program, and could push the financial break-even point for the aircraft past 2020.
Although airlines aren’t singling out the A380 for deferrals—Boeing 777s, 787s and other aircraft types are similarly affected—the postponements spell particular trouble for the economics of the mega-transport. Airbus is in a critical period of ramping up production of the A380 to gain efficiencies and make up for the greatly increased development costs that surged by billions as a result of the two-year delay in the program. If those efforts stall due to sagging demand, it will increase the challenge to reach financial viability for the aircraft.
Airbus has ceased providing a break-even number for the aircraft—following the lead of rival Boeing—but cost increases owing to program delays have effectively meant the aircraft maker would have to sell more than 500 of the aircraft to turn a profit. So far, it has 200 firm orders. The original break-even point was around the 250th unit.
Air France, Qantas and China Southern already have announced they will wait to take deliveries of some of their A380s. More bad news may lie ahead, with several key customers such as the International Lease Finance Corp. (10 firm orders), Thai (6), Korean (10), Malaysian (6) and Kingfisher (5) suffering their own financial problems. Qantas has three A380s in service and will receive its next three on schedule this year, starting in June. But the seventh, due for delivery in December, will not now arrive until October 2010, says an airline representative. The following three will also be delayed, by up to 12 months. China Southern is expected to take its first A380 in 2011 and not in 2010 as previously planned.
ILFC is struggling to secure financing in the aftermath of the near-collapse of its parent, American International Group (AIG). With access to financing still very limited, the lessor is dependent upon funding from AIG and ultimately, the U.S. government. It has 168 aircraft on order, 49 of them due for delivery this year. ILFC also bought 10 A380s, five of which are scheduled for arrival in 2013, three in 2014 and two in 2015. ILFC says that it has a cancellation option for A380s that runs to June 30, 2010, and could lead to a reduction in its orders.
Kingfisher, Thai and Malaysian have all indicated that they could defer orders, although there are no near-term A380 deliveries planned for them—unlike China Southern and Qantas that were supposed to take a total of nine aircraft in 2009 and 2010, and along with Air France’s two deferrals, cause an 11-aircraft gap until the end of 2010.
Korean Air has its own specific problems, as the airline is particularly dependent on the now-collapsed air cargo market and also suffers from the significant devaluation of its currency, the won.
The next round of deliveries should see four more aircraft go to Singapore Airlines and one to Emirates. Last week, rumors in the industry suggested Emirates might hand over some of its next A380s to its neighbor Etihad (which has 10 on firm order). Emirates President Tim Clark says that’s “the usual nonsense.” But the fact that these discussions are going on shows the amount of uncertainty airlines are dealing with these days.
Lufthansa, which is to receive its first aircraft next year—MSN38 is now in final assembly in Toulouse—is still committed to taking its aircraft as planned.
Airbus will likely see some financial restitution from airlines deferring deliveries in the form of penalties and price escalation, but the manufacturer itself has already paid for production delays. Some customers may simply be able to defer at no expense because Airbus violated its contractual obligations first. However, the long-term costs in terms of lost efficiencies are harder to make up. Airbus is in the process this year of ramping up output to two A380s per month, after having been at lower rates as it was trying to fix wiring harness problems that set back the program. The aircraft maker is trying to get to a rate of four A380s per month.
An industry analyst says the problem Airbus now faces is that not only have its development costs gone up, the price per aircraft also is higher. That will delay the program’s likely break-even point. However, he also notes that due to the company’s accounting practices, these increases are not likely to trigger another financial provision at Airbus-parent EADS, which has suffered a series of such charges in the past three years related to A380 and A400M problems.
As customers hold off deliveries, Airbus is bracing to adjust output. But production is not expected to be affected this year. Airbus officials have said they will build the 18 A380s planned for 2009; if airlines want to defer delivery, those aircraft will have to go into storage.
The current crisis also has hurt order intake. Airbus has ambitions to secure 10 orders this year—so far, Korean Air has signed for two additional A380s, and negotiations continue to cement a contract by year-end for two aircraft Air Austral plans to buy. The state of negotations with Grupo Marsans is also unclear. The Spanish travel concern intends to buy four A380s, but the order does not appear in Airbus’s latest order book update.
Campaigns for new aircraft are otherwise scarce. The uphill struggle to break into the Japanese market is further complicated by JAL’s and All Nippon Airways’ current financial problems. Both have postponed decisions on aircraft orders. And other airlines that are ultimately seen as strong candidates to buy the aircraft—including Cathay Pacific, Air India and South African—are almost certain not to commit in the near term.
This year was supposed to largely mark the end of the A380 recovery program, with the last of the so-called “Wave 1” aircraft—those that had to have their wiring installation worked on out of the production sequence—starting final assembly and due for handover early next year. The first of the “Wave 2” aircraft is currently in Hamburg for outfitting, and is due for handover to Qantas this summer.
And let's get one thing straight. There's a big difference between a pilot and an aviator. One is a technician; the other is an artist in love with flight. — E. B. Jeppesen