Bloomberg News

Airbus Pushes Higher-Density A380 to Counter Luxury Image

July 25, 2013

Airbus Said to Win A380 Order Worth $4 Billion From Doric Asset

Airbus SAS A330 and A380 logos sit on tailfins of model aircrafts displayed prior to the opening of the Paris Air Show on June 16, 2013. Photographer: Chris Ratcliffe/Bloomberg

Airbus SAS (EAD) is pushing airlines to view its A380 superjumbo as a high-density workhorse rather than a luxury flagship as it targets orders from mass-market carriers in countries such as China, Japan and Indonesia.

The European planemaker has begun pitching the double-decker as carrying 558 people, 33 more than the average stated for the past six years, and could add a further 30 berths by introducing 11-abreast seating in coach class. It’s also exploring ways of making the setup more responsive to seasonal variations in traffic.

“We’re working to optimize the aircraft, and that means giving airlines some ideas to move the capacity up,” Keith Stonestreet, the A380’s marketing director, said in an interview from Toulouse, France, where the jet is built.

Most early buyers splashed out on space and comfort, pigeonholing the jet as a high-end option and thwarting Airbus’s original vision for hundreds of A380s flying between major hubs. Top European carriers British Airways (IAG) and Air France (AF) have ordered only a dozen planes apiece while stocking up on smaller wide-bodies for point-to-point flying, and likely customers including PT Garuda Indonesia (GIAA) have yet to sign up.

Airbus is asking prospective buyers to consider adding an extra seat per row on the A380’s main deck in coach class, as well as other denser layouts that would cut unit costs and lift margins, Stonestreet said. Such configurations could work best on intra-Asian routes, trips between the Middle East and Indian subcontinent and on flights serving the Islamic Hajj pilgrimage.

‘Patchy’

“The backlog for these planes is short and patchy,” said Nick Cunningham, an analyst at Agency Partners in London. “It’s a big enough market to stay in business, but to do that they have to hunt for other niches like super-high-density versions.”

Among the nine carriers flying A380s, just one, Deutsche Lufthansa AG (LHA), offers a capacity matching the 525-seat average stated by Airbus on its website for a three-class layout. A single future operator, Air Austral, which serves the Indian Ocean holiday island of Reunion, has specified a single-class design in its order for two A380s seating 840. The plane is certified for a maximum passenger count of 853.

Airlines have instead favored layouts that highlight the roominess of a plane measuring 238 feet (73 meters) long and 21 1/2 feet wide on its main deck.

Walk-In Shop

Korean Air Lines Co. (003490) provides the lowest-density seating, with its superjumbos carrying only 407 people. Some 13 berths were sacrificed to make room for a walk-in duty-free shop.

Even Emirates, the biggest international carrier and the No. 1 A380 buyer with 35 in its fleet and 55 more on order, has capped capacity at 517 seats for jets plying medium-haul routes, up from 489 seats for the first, longer-range planes ordered.

Singapore Airlines Ltd. (SIA), the first A380 operator in 2007, has 409 seats in some planes and 471 in others, with British Airways, Qantas Airways Ltd. and Malaysian Airline System Bhd. (MAS) also opting for layouts accommodating fewer than 500 people.

While that decision has created a buzz around the A380, with carriers reporting that passengers will change their travel plans just to sample the superjumbo experience, it has limited perceptions of the jet, and in turn curbed sales.

Since marketing began in 2000, the Airbus flagship has won 262 orders, which should have been enough to make the plane profitable given a break-even point initially estimated at 250 sales based on development expenses of about 12 billion euros.

Order Gap

Following program delays and compensation payments, those costs jumped to more than 18 billion euros, making it unlikely that the company will ever show a profit on the model.

Airbus is instead focused on breaking even in terms of per-aircraft production costs by 2015, which requires about 30 A380s to be built annually, versus an initial target of 45.

Even that figure will prove tough to sustain, with 25 A380s due to be handed over this year and delivery slots still open for 2015 following orders for just four aircraft in 2012. The pace has picked up this year, though agreements with leasing company Doric for 20 planes and Lufthansa for two still need to be signed.

Airbus provides two-thirds of sales and often a similar share of earnings to owner European Aeronautic, Defence & Space Co. The parent company reports earnings on July 31.

While the four-engine A380 and Boeing Co. (BA:US)’s 747-8, a stretch of the 40-year-old jumbo, are both struggling to match original sales forecasts, so-called “big twin” models, with two turbines, are racking up hundreds of commitments.

Cannibalization

Airbus’s long-range A350, set for first delivery in late 2014, has won 678 orders, with production due to reach 10 planes a month by 2018. The largest variant, the A350-1000, can seat 350 people -- just 57 fewer than Korean Air’s superjumbos -- giving it the potential to cannibalize A380 sales.

Boeing’s 787 Dreamliner, developed as an alternative to the superjumbo after the company concluded that future demand would favor a smaller wide-body suited to point-to-point flights, rather than hub-based networks, has accrued 930 orders.

While the order agreement with Doric -- to which Airbus has granted exclusive A380 leasing rights -- may tease out operators intimidated by the capital costs of a $403 million plane, Hans Weber of Tecop International said there’s little likelihood of a surge in interest from prospective high-density operators.

Route ‘Dilemma’

“I see no indication that demand on certain routes is getting bigger or that there are more routes coming up that look likely to fill such a plane,” said the consultant. “It’s a real dilemma.”

At Emirates, plans for a two-class, 604-seat version of the A380 have been dropped, and President Tim Clark says the Dubai-based carrier won’t be taking Airbus up on an 11-abreast layout in coach, even though the aircraft would offer “stupendous” seat-mile costs.

“For carriers that have very dense markets and maybe restricted on access slots, it will be a fantastic plane,” Clark said in an interview. “Our economy offering on the A380 is so popular we didn’t really want to tamper with it.”

To contact the reporter on this story: Andrea Rothman in Toulouse at aerothman@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net


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