Dubai Airshow

Teal Group Analyst Aboulafia Has Misgivings About the A380

 - November 15, 2013, 10:00 AM

Richard Aboulafia, vice president of analysis at the Teal Group of Fairfax, Virginia, wonders whether Emirates has bitten off more than it can chew with the A380. The lack of operating lessors is an indication of a weak-to-nonexistent secondary market. And Emirates’ insistence on low average fleet age–a year ago, its strategy officials were aiming for under six years–means that the airline could have to start offloading its earliest A380 components in the fleet as soon as next year.

“They might retire them after 12 years in service. It raises one question: who takes responsibility for marketing the plane? There is no secondary market. What do you do with a retired A380? It might not even be 12 years [given Emirates’ current average fleet age target of under six years]. Who takes responsibility for used industry behemoths? It is very unlikely they will have a fleet of 90 A380s at any given moment.

“I am not so sure there’s much of a market for this plane. There is very little data for the in-service specific aircraft type. There are a couple of issues: One, there is absolutely no operating lessor that ordered this plane. It is not suitable for cargo conversion. Everyone involved has said that this is a long-range plane, restricted to long-haul carriers who don’t care about operating new aircraft; that’s a small number.

“The market is intra-Asia, Africa, Europe and transatlantic. The A380 makes sense only for very long ranges, to premium carriers that want a new jet. The only [secondhand market] fit is Delta in the U.S., which has shown no interest.

“Their percentage of transit passengers is way, way up. It’s not O&D [origin and destination] traffic. They have recognized the problem by targeting 20 million tourists in Dubai by 2020. Can you do that? What can you really do to grow? Baseball has a history of ‘Build it and they will come.’ History has proved that doesn’t always work.

“On the point-to-point travel that passes by these hubs: I’m not stopping in Dubai. I am London-to-‘take-your-pick,’ say. Perth. In terms of economics, a lot of gas weighs a lot. What of the next generation of long-range planes? What if the A350 or the 777X are really good at this? What if they are really good at doing 8,000 nautical miles. The advantage of stopping gets eroded.

“Three things could derail the Gulf carriers,” believes Aboulafia, “Trade action–there’s no hope of that at all. Political instability? Probably not, but you never know. [And] the advent of more economic very long-range aircraft…?”

He zeroes in on Doric Asset Management, the lessor responsible for most of the A380 leases to Emirates. Doric’s website claims to have 36 aircraft out to lessees, 14 of them A380-800s to Emirates. “They don't have much experience in this industry. There is a risk, not necessarily from Emirates, that everything could go horribly wrong. What do you do after they come off lease? There is no reason these planes shouldn't last 25 years like any other widebody. This is wide open here. They could survive as Hajj carriers. [But] your residual value is the same as the 747-400!”

Aboulafia puts the A380’s list price at $330 million. Straight-line depreciation would put the aircraft’s value at $250 million after six years and $172 million after 12 years. If Emirates were to retire all its A380s after six years, this would leave Doric with a rolling $3.5 billion of metal looking for a home. That would leave another 21 current in-fleet planes to be retired and accounted for, he said.