How Airbus was wrong-footed in its A380 bet

February 19, 2019 13:30
A file picture shows the A380 aircraft taking off on its maiden flight from Toulouse, France on April 27, 2005. Airbus has announced that will stop making the double-decker plane due to insufficient orders. Photo: Bloomberg

Airbus announced that it would stop making the double-deck A380 superjumbo jet in 2021, after having poured in billions into research and production of the world's largest passenger airliner.

Initially, Airbus took on the superjumbo jet development project with rival Boeing, as both companies foresaw explosive demand for high-capacity long-haul flights.

They wanted to develop a bigger commercial airplane, compared with mainstream jumbo jets such as A340 and the Boeing 747 which then had seats of only around 200.

However, Boeing decided to quit from the ambitious program in 1994, while Airbus continued to plough ahead.

Airbus believed the demand for hub to hub routes would explode, as it would be more economical for airlines to ferry more passengers at a time through major “hub” airports such as Shanghai or New York, for transiting to the final destinations.

To do this, Airbus thought it's more cost-efficient to use superjumbo jets for hub-to-hub routes while smaller airlines are used for point-to-point routes.

Boeing was however not as bullish on the demand for such huge aircrafts. Airbus forecast A380 would receive orders for over 1,000 units in the first decade, while Boeing only predicted 400 orders.

Boeing went on to develop its own 787 Dreamliner, which can carry 300 passengers.

Boeing was proven right. Since its debut in 2005, the double-deck A380 only received 317 orders. By contrast, Boeing has already secured over 1,400 orders for its 787 Dreamliner since its launch in 2009.

Several factors came together to boost the popularity of point-to-point travel over the hub-to hub alternative that was predicted by Airbus.

Basically, as long as it is affordable enough, people prefer more direct flights for the convenience. Also, stimulus plan from governments worldwide post global financial crisis have brought an infrastructure build-out boom, especially in China. Numerous second and third-tier Chinese cities built their own airports, making it a lot easier to travel point to point.

Meanwhile, travelling costs have been contained as the emergence of shale gas and other new energy have put a cap on fuel price over last decade.

Blossoming of budget airlines and flight booking sites also did not help the Airbus superjumbo.

Take China market as an example, its international flight passenger number surged to 610 million last year from around 200 million in 1990.

However, many second and third-tier Chinese cities already have their own international airports, which enable local passengers to take direct point-to-point routes, instead of going to hubs like Shanghai or Hong Kong.

Airbus is estimated to have spent over US$10 billion in R&D and production costs related to A380. With the decision to abandon production, major customers could also suffer to some extent.

Emirates, as the world’s largest operator of A380, ha bought 162 A380. Singapore Airlines and Qantas Airways have ordered 24 and 20 A380 respectively.

Airbus’ decision means there will hardly be any secondary market for A380, and maintenance will be a challenge too.

German asset manager Dr. Peters was forced to dissemble two ex-Singapore Airlines Airbus A380s to sell them as parts. Other A380 customers may need to make impairment provisions too.

This article appeared in the Hong Kong Economic Journal on Feb 18

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist