The most eagerly awaited news from this week’s Dubai Air Show was an announcement from Airbus and UAE airline Emirates that the two had agreed on an order for some large number of Airbus A380 superjumbo passenger jets. We’re still waiting, but not so eagerly.
The show, which closed today, saw both Airbus and Boeing Co. (NYSE: BA) each rack up around $50 billion in new deals, some in the form of memoranda of understanding, some in commitments, and some existing deals firmed up into signed contracts.
Boeing announced this morning that it had taken orders and commitments for 296 new commercial jets valued at about $50 billion at list prices. Airbus announced a single deal worth nearly $50 billion: an order for 430 of its single-aisle planes by Indigo Partners, owners or part-owners of four carriers. It was the single largest order ever for new airplanes.
The absent order for new A380s is likely good news for Airbus, given that the company plans to cut production of the plane to just eight per year in 2019 from a long-term average of 11 per year and, at that rate, it loses money on each one. Emirates has outstanding orders for 42 more after taking delivery of its 100th A380 just over a week ago.
Emirates wants to take those remaining 42 planes at a rate that guarantees that Airbus will lose money on each plane and the airline is not willing to bump up the production rate without a guarantee from Airbus that it will keep a production line going for 10 more years.
Industry analyst Richard Aboulafia of Teal Group sums up the problem in an article for Aviation Week:
[G]uaranteeing a production line for 10 years is a difficult demand. To do that, Airbus would need to really believe that the A380 has some kind of future outside Emirates, despite all the trends that clearly indicate the market thinks otherwise. Meanwhile, Airbus will need to continue losing millions of dollars on each A380 it delivers to one customer, which may or may not be willing to go back to 11-per-year acceptance rates.
If Airbus guarantees the line and then finds it too painful to keep going after five years, it will face demands for compensation from Emirates, whose A380 residual values would decline as a result of the line closure. That could easily run into the hundreds of millions of dollars, above and beyond the lawyers’ fees.
If that Airbus’s position sounds like that one between the proverbial rock and a hard place, the outcome in either case is likely to be the same. The end of the line for the A380 — the only question is when. As Aboulafia puts it: “A merciful death with considerable up-front losses or a lingering death with greater losses spaced out over a much longer period of time.”