in Business & Finance

IBA asks: what does the future hold for airlines and investors?

Posted 25 February 2019 · Add Comment

As Airbus decides to terminate A380 production, IBA asks what the future holds for airlines and investors.

 

The introduction of the Airbus A380 was a moment that changed the airline industry forever. Designed for long-range hub-to-hub route operations, the aircraft enabled full-service carriers such as Emirates, Etihad and Singapore Airlines to develop and redefine the luxury on-board passenger experience.

From an appraiser and analysts’ perspective, IBA examines how Airbus’ decision to end production of the A380 just twelve years after service entry will impact on its value, and considers what the future might hold for airlines and investors.

According to the aircraft’s order book, the Airbus A380 has struggled to sustain a stable order stream over the past several years says Lewis Leslie, Aviation Analyst at IBA. “This is due to many factors including the fixed and variable costs associated with the aircraft, availability of more efficient twin-engine aircraft, airport infrastructure investment, and over-capacity risk. The price of jet fuel has shown volatility since the aircraft’s entry into service so, coupled with increasing labour and maintenance costs, the cost-per-seat-mile makes it difficult to justify operating the Airbus A380 on many airline route networks. Consequently, there has been an appetite for smaller twin-engine widebody aircraft such as the Airbus A330neo, Airbus A350, Boeing 787 and Boeing 777 families.”

Overall, the total active A380 fleet stands at 232 aircraft - 218 active, 11 parked and 3 stored. Emirates operates the largest number with 109 in its current fleet - 66 aircraft owned and 43 leased. Singapore Airlines has 19 aircraft in its fleet - 16 aircraft owned and 3 leased.  47% of the global fleet are operated by Emirates, and the majority of carriers that operate the Airbus A380 (excluding Hi Fly and the proposed ‘Project Amal’) are full-service flag carriers.

38% of the global fleet of Airbus A380 aircraft are leased to airlines and IBA’s online intelligence platform, IBA.iQ, shows that a significant number of these leases are set to expire between 2023 and 2029. 

David Archer, Senior Analyst at IBA, remarks that this presents questions for lessors and airlines alike. “Do they extend the leases, redeliver and remarket the aircraft, or embark upon a part-out scenario? An aspect to consider in any remarketing situation is the high cost of transition that would be necessary in order to place it into service with an alternative carrier” he says. “Hypothetically, even going from one full-service operator to another, the differentiation in product and BFE (Buyer Furnished Equipment) offered is vast. The transition scenario and cost alone present numerous obstacles to low-cost carrier business models.”

Two engine options are available for the Airbus A380 platform capable of providing 70-80,000lb thrust - the GP7000 designed by the Engine Alliance joint venture between General Electric and Pratt & Whitney and the Trent 900 designed by Rolls-Royce. So with Airbus now ending production and Emirates cancelling a substantial proportion of its order book, the future of these engines is also now in question.

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