Emirates deal means it’s not quite the end of the line for the A380, but can IAG get a price that’s right for it to provide a further timely boost?

Feb 08, 2018

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The commitment last month from Emirates Airline to acquire an additional 36 A380s would have been welcomed with some relief at the Airbus facilities across the world and once confirmed will safeguard the aircraft programme for another half a decade. Maybe the manufacturers comments about closing production influenced the United Arab Emirates (UAE) carrier, the dominant operator of the type, to firm up its intent, maybe Airbus moved the pricing point in an aircraft programme where every jet of the line is allegedly eating into their own profits.

British Airways Aircraft

What is for sure is that this US$16 billion deal for 20 aircraft plus 16 options supports a maximum of three and a half years of production and potentially up to six years if options are exercised. And this will give Airbus a little more time to find a solution for the programme. Some say the aircraft has come to market 20 years too late. In a cyclical industry like aviation maybe it is 20 years too early, but with limited new orders and an increasing number of airframes arriving in the second-hand market after ten years of passenger service, it is a difficult situation for the manufacturer.

While many airlines may be reluctant to commit to a fleet of A380s with only a small network of routes that can sustain the aircraft, it is clear that the aircraft can work successfully and very profitably if deployed correctly by airlines. It clearly supports Emirates’ hub-and-spoke model out of Dubai, while the likes of Qantas and Singapore Airlines still see a future for the aircraft within their operations.

Another example is British Airways, with Willie Walsh, CEO of parent company, International Airlines Group (IAG), known to be a big supporter of the aircraft and one of the few existing operators to show interest in adding additional aircraft to its fleet. He has spoken publicly on a number of occasions about adding to the existing BA fleet of 12 aircraft and even to use the aircraft on other IAG airline routes. “We like the aircraft,” he has said. “It works extremely well on parts of our BA network. I could also see a couple flying with Iberia and even one with Aer Lingus.”

IAG has previously expressed an interest in acquiring up to seven second-hand A380s. “If the price was right we would look to add more,” confirmed Walsh. “Airbus offer great aircraft, but not necessarily at great prices,” he added, highlighting that price remains the big issue in any ambitions to grow its fleet.

Looking at RDC’s unique data we can study BA’s current deployment of the A380 and understand how it fits within its network strategy. This winter, the airline is operating its 12 aircraft on flights from its London Heathrow hub to Hong Kong, Johannesburg, Los Angeles, Miami, San Francisco and Singapore - it has also used the aircraft on routes to Washington (from summer 2014 to summer 2017) and Vancouver (summer 2016 and summer 2017).

Source: RDC’s Apex platform, Schedules module

apex schedules graph 1

A closer look at the Route Performance module of Apex for the London Heathrow – Singapore Changi route shows that BA needs to carry just over 280,000 passengers (at an average 82% load) to support a daily A380 flight, that is 39% more than using one of its older Boeing 747-400s and a significant 58% more than deploying one of its twin-engined 777-300ERs in the same market. However, the A380 does offer a lower estimated breakeven price point at US$718, circa -10% lower than the 747-400 and circa -7% below the 777-300ER.

Source: RDC’s Apex platform, Route Performance module

second schedules graph

This highlights an important insight into the route selection process for the A380. It is not necessarily as simple as Airbus’ marketing collateral that one A380 rotation can replace two flights on a smaller aircraft. The demand needs to be strong to support the additional scale of the Super Jumbo, and lower seat mile costs will not be enough to guarantee profitability. This helps explain just why Mr Walsh is so adamant that the purchase cost price needs to be right for the A380 work within the IAG operation.

When we look at BA’s transatlantic route network using the Fare Analysis module of Apex we see that BA’s three current US A380 routes (Los Angeles, Miami and San Francisco) are delivering much lower air fares on average than those served by other equipment. Washington, a former A380 route, is also just below the weighted average curve. This will likely be directly linked to the actual deployment of the A380 and the need for BA to sell more seats than versus other types, achieved mainly through fare discounting.

Source: RDC’s Apex platform, Fare Analysis module

fares graph 1

However, while BA’s transatlantic A380 routes may be open to discounting, the aircraft is helping to deliver profitability. The Profitability Module of Apex highlights that Los Angeles is among the top five and San Francisco and Boston among the top ten most profitable US routes for BA out of London Heathrow over the past year. But, interestingly when you look at this network by profit margin none of the A380 markets make it into the top 8, a legacy of the higher costs and lower fares that the A380 can generate.

Source: RDC’s Apex platform, Profitability module

profit 1

profit 2

It is clear that the A380 works best on very dense routes, and in the example of BA they need to be flown on routes delivering strong profitability in order to sustain the lower fares and reduced margins. In a world where airlines are becoming increasingly risk averse and, in many cases, happy to deploy smaller more efficient equipment and maximise occupancy, it becomes much harder to justify the addition of such large airliners.

While, Airbus says it “highly confident” it will announce at least one more order for the A380 in 2018. The question is will it be IAG?

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Author: Richard Maslen