The demise of the ‘Uber Plane’

In June 2019 this column asked “Who killed the A380?”. By then it was obvious that Airbus’s flagship was not a sales success, and its eventual demise was only a matter of time. However this writer predicted that the aircraft would probably fly on for ‘at least 15 years’.

As Warren Buffett famously said, ‘Forecasts tell us more of the forecaster than of the future.’ Very true in this case; my intimacy with, and affection for, the A380 obviously colored my judgement. Then again, who could foresee what destruction a microorganism could cause to our society and economic system?

Why would an airline choose the A380

A380 operators worldwide fall into several categories. The major buyers of the aircraft are the world’s ‘super connectors’ such as Emirates and Singapore Airlines, with their huge hub airports. Some aspirants to this business model such as Qatar Airways, Etihad Airways and Korean Air have also acquired the giant aircraft.

Airlines with congested home airports, for example British Airways, Qantas, Air France and Lufthansa, had a convincing business case for the A380. The third category comprises what would be called ‘wannabes’: airlines without a persuasive need for the capacity but didn’t want to be left out of the ‘club’.

Source: Airbus Orders & Deliveries data, as of 31 December 2019.

The fallout from the pandemic

COVID-19 has changed the world and probably killed off the giant airplane too. At the moment there isn’t a single A380 flying anywhere. A solitary aircraft, belonging to China Southern, recently completed a number of flights, but that appears to have been the only one in use.

Air France, the fourth airline to introduce the A380, has confirmed that it will permanently retire its entire fleet of ten aircraft. Lufthansa (14 A380s) and British Airways (12) have placed most of their examples of the type in long-term storage in France (see image above). Lufthansa has permanently retired six of its A380s, along with five Boeing 747s and seven Airbus A340s. In fact, the demise of all four-engine airliner types seems inevitable.

Etihad and Qatar have grounded their A380 fleets and do not appear to intend operating the type anytime soon.

Both Singapore Airlines and Qantas, early users of the double-deck ‘super-jumbo’, have undertaken large-scale refurbishing of the interiors of their older A380s. In such instances, a bill of over USD 20 million per aircraft would not be excessive. Whether this will compel them to keep operating those aircraft post-COVID remains to be seen, but for now those fleets are grounded too.

Emirates is the outlier

The Gulf giant, Emirates, is going to be the hardest-hit A380 operator. Dubai’s congested airport was the reason why Emirates’s huge fleet of A380s worked so well pre-COVID. The giant machines would fly in from the farthest parts of the world with four connecting ‘waves’ of arrivals and departures allowing multiple daily flights to many major cities. In the context of mass-tourism Emirates showed that the A380 filled an undeniable niche.

With its luxurious premium cabins garnering a loyal following in more affluent markets, plus a huge network of economy passengers from less wealthy customer segments filling the ‘lower deck’, the two-tier product was a perfect fit.

Post-COVID it is hard to say when this sort of traffic will resume. The economic concerns apart, the patchwork nature of travel restrictions may make it very hard to fill the 500-odd seats in an A380 on a daily basis. Emirates entire A380 fleet is currently grounded in Dubai and the airline’s President Sir Tim Clark has flatly stated, “….the A380 is dead” in a recent interview. But has also gone on record that the airline expects to operate the aircraft again.

Other recent reports indicate that Emirates wants to cancel the order for eight A380s being assembled in Toulouse. The penalty for this is rumored to be USD 70 million each – putting other cancellations in context.

What’s the cost of a permanent grounding?

The actual delivery cost of an individual aircraft is a closely guarded secret. However, it is safe to say that most A380s cost considerably in excess of USD 200 million each. Some of the smaller operators have probably paid close to USD 300 million per airplane as they would not be able to negotiate discounts for volume.

Most airlines have the aircraft on an operating lease, meaning it is a fixed-term contract with the asset owned by the lessor; or a finance lease, whereby a financial institution funds the purchase of the aircraft.

The world’s four major leasing companies (AerCap, ALC, Avolon and GECAS) do not own any A380s – they had no confidence in the aircraft. This has proved to be a wise decision.

Smaller lessors who own significant numbers of earlier deliveries are likely to take a substantial capital hit as the aircraft are retired. With no secondary market (not a single pre-owned A380 has been successfully placed) and a limited need for spare parts, even the salvage value of the giant is greatly diminished.

Generally speaking, aircraft engines are worth more than the airframe. But used A380 power plants, particularly of Engine Alliance manufacture, have almost no demand. Even the Rolls-Royce Trent 900 has little value as other versions of this engine (the Trent 700 on the Airbus A330; and 800 on the Boeing 777) are also reaching the end of their life cycles.

It is likely that owners of the world’s A380 fleets will have to bear a very expensive write-down of their assets, which in a world on the brink of a Depression, is a sobering thought.