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Nov 162017
 

The 100th A380 delivered to Emirates Airline, on 3 November 2018. The airline currently has another 42 on order.

By all accounts, the A380 is a lovely plane to fly in.  It is quiet, comfortable, spacious, and flies smoothly.  With three jetways, boarding and deplaning is reasonably quick and efficient, and most airlines operating the plane have fitted their planes out well with inflight entertainment systems.

Indeed, not only is it a lovely plane, but airlines operating the A380 have noticed their passengers seek out A380 flights in preference to other airplanes.

But, just because passengers prefer the A380 is a very weak reason for airlines to choose it.  Not only have very few airlines chosen to buy the A380, but even fewer of the airlines that have bought the A380 are choosing to buy more of them, and some of the airlines who have ordered the plane are backpedaling and clearly have no intention of ever honoring their purchase commitments.  Airbus of course can’t really sue such airlines, because it hopes to be able to swap A380 commitments for balancing orders for other planes it offers, and taking an airline to court is seldom a good way to win its future business (something Boeing should have thought about before filing its complaint against Delta/Bombardier, perhaps).

The Emirates Order That Wasn’t

There had been controlled leaks suggesting that Emirates was about to order another large quantity of A380s at this week’s Dubai Airshow.  Instead, to everyone’s astonishment, Emirates got the show off to a big start by announcing a new large order of planes, but instead of a new order of A380s, it announced an order for 40 787 planes from Boeing.  This marked the final outcome of an earlier order Emirates had with Airbus for 70 A350s, which Emirates cancelled three years ago and was reviewing and renegotiating with both Airbus and Boeing.

As for the A380 order, at first we were told that ‘negotiations were ongoing and expected to be concluded at any time’, but then it became apparent that, no, there’d be no new order for A380s, making the outcome a double loss for Airbus – the 787 being chosen instead of the A350, and no A380s ordered.

The decision to order 40 787s, three years after cancelling the order for 70 A350s, was also surprising in the sense of the lower number of planes being ordered, but perhaps not so surprising when one observes that Emirates has not been enjoying the same seemingly effortless and endless expansion that has marked most of its past history.

Back to the A380.  Emirates reportedly may have been willing to order at least 30 additional A380s, and possibly as many as 50.  At the reduced rate of eight planes a year, this would have been at least a four-year extension of production for the A380 program, and with both Airbus and Emirates feeling that the plane needs time for the market to catch up with its capabilities, four more years on ‘life support’ would be very valuable.

It turned out that the deal-breaker point was Emirates were requiring Airbus to guarantee the A380 would remain in production for at least ten more years.  On the face of it, this should have been a very easy ask by Emirates.  Just the previous week, Airbus CEO Tom Enders was quoted as saying he expects ‘the A380 to be in production for at least another decade’ and indeed, with the current 42 A380s still on order for Emirates and another 38 ordered by them now, that would equate to ten years production without needing any other customers or orders at all.  Add to that possibly a few of the other A380 orders currently on the books actually proving to be ‘real’, and who knows what other airline orders possibly coming in too, and with a new Emirates order, it would seem the next decade would be assured.

But apparently, Airbus was unwilling to give this guarantee to Emirates, and so the deal foundered, with a Catch-22.  Without the Emirates order, the plane’s future is definitely in doubt; but with the Emirates order, its future for the next decade seems almost assured.  Why this couldn’t have been positively resolved is a mystery, even more so because – as detailed further down, with plane replacements, it seems EK would singlehandedly continue ordering sufficient A380s every year to keep the plane in production indefinitely.

Before we get to that, why is the ongoing longevity of the A380 program so important to Emirates?  An even harder question – why won’t Emirates itself guarantee the program’s viability?

The importance is maybe not because EK wants to be able to continue to buy more, whenever it wishes.  It would be reasonable to speculate that the importance is actually attached to the opposite end of each plane’s life – Emirates wants to be able to sell the planes on as it rotates them out of its fleet, at a reasonable price.  The resale value of a current model airplane is generally much higher than the resale value of an obsolete out-of-production plane, just like is the case for cars.

The Resale Value and Annual Depreciation Cost of an A380

Whether leased or owned outright, the numbers pan out very similarly – a higher resale value means either less depreciation cost for owned planes, or less monthly lease cost from a lessor who does the same factoring in of whatever likely resale value the plane will have as part of setting their lease rates as does Emirates itself.

The planes have a list price, currently, of $435 million.  We guess that Emirates is buying them for perhaps $250 million, and some of the first planes it took delivery of were probably much less expensive.

But does the resale value actually matter?  The curious thing is that EK earlier said that when its A380s become sufficiently old as to dispose of, they might just scrap them.  Emirates like to keep a reasonably new fleet with an average plane age of about six years which means selling the planes typically somewhere after six years and before about 12 years.  With their oldest A380s having been delivered almost ten years ago, it is getting close to the point where they’ll be starting to think of disposals.

Most airplanes have an economic life of 20 years, maybe even longer.  The statement by Emirates, back in 2014, that they might simply scrap their A380s, seemed surprising at the time, and if this is indeed their plan, why do they care about resale values at all?

In theory, it seems that a 12-year-old A380 has astonishing little resale value – somewhere between $30 million and $80 million depending on where in the major overhaul cycle it is and how much reconfiguration to the cabin a new airline owner would need to do.

But theory is theory.  What of the real world?  A380 owning airlines have been conspicuously avoiding finding out.  Malaysian Airlines came close to selling its A380s, and for a while it was thought Singapore Airlines would sell its oldest A380s, but neither airline did so, and it is still a couple of years before we can expect to see if Emirates really will scrap their oldest A380s or not.

On the face of it, a used A380 would seem to have extraordinary appeal to a bargain-hungry airline – an airline such as Delta, for example, famous for seeking out old used planes and buying them cheaply.  Why spend the best part of $300 million on a plane and see its value drop down to maybe $60 million 12 years later – ie, an annual depreciation cost of $20 million, when you could buy an older version of the same plane for maybe $100 million now, and sell it for maybe $16 million in another 12 years time – an annual depreciation cost of only $7 million a year – a saving of more than $1 million every month the plane is owned.

But that too is theoretical. The only two things that seem reasonably realistic are that if Emirates truly is going to scrap its A380s rather than sell them on, why does it care what the resale value may be?  Alternative, if it does buy another 40 or so A380s and plans to keep a fleet of about that size (assuming little further growth which would be astonishing), that means a total fleet of about 180 planes.

The possibility of scrapping older A380s is not unique only to Emirates.  Singapore Airlines retired its first ever A380 in June 2017 after ten years of service.  A second A380 has now also been retired, and two more are expected to follow soon.  The first plane has been returned to the leasing company in Germany, the second is sitting in Singapore, and while the lessor says it is confident it will find new homes for the four planes, it is also considering selling them for spare parts.

Emirates Might Need 15 New A380 Planes Every Year Just to Replace Older Ones Being Retired

Now – think of this :  With 180 planes that have been steadily delivered over 15 years or so, and a planned retirement of planes after 12 – 14 years, that means EK will need as many as 15 new planes every year just to replace old planes being retired.  Airbus can keep its production line open for as few as 8 planes a year, and would be ecstatic at the thought of ongoing annual replacement orders of 15 planes, allowing the production line to stay open indefinitely.

So, what is the problem between Airbus and Emirates and the inability to, between them, come up with a deal guaranteeing the plane will stay in production for ten more years?  Emirates could singlehandedly guarantee this simply by its renewal orders.

Is it possible there is some other factor that is not being disclosed?

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  2 Responses to “A380 Caught in a Catch-22”

  1. Hopefully Boeing does not really end the B747-8i. If Airbus does end sales of the A380, then there maybe new life and sales of the real jumbojet:) A little updating, maybe bring the passenger series to the same length of the freighter series, tweaked engines, and she might see a longer life!

  2. Hi, Walter

    I’ll be sorry to see all the 747 series planes go, especially the 747SP, which was my favorite.

    I think the 747-8i (passenger version) and 747-8f (freighter) are of identical dimensions, so not sure what you mean about changing lengths – see

    https://en.wikipedia.org/wiki/Boeing_747-8

    There is another problem with the 747-8i. It only holds about 40 more passengers than a 777. And the proposed 777-10X would actually hold 40 passengers more than a 747-8i. So it is getting squeezed, at both ends, by Boeing, let alone by Airbus too.

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