Covid Digs Deeper Hole for Airbus A380

 - May 26, 2020, 4:00 AM
A China Southern A380 takes off from Amsterdam Schiphol Airport in August 2019. The airline remains the only carrier to operate A380s in scheduled service during the Covid-19 crisis. (Photo: Flickr: Creative Commons (BY) by verchmarco)

This story is part of AIN's continuing coverage of the impact of the coronavirus on aviation.

Airbus plans to wrap up production of the A380 "by 2021," heralding the beginning of the end of a sort for the superjumbo. The increasingly undesirable economics of the big quadjet, which entered service for the first time with Singapore Airlines in October 2007, had already begun to force it out of favor with its biggest operators, most notably the carrier that flies roughly half the world fleet—Dubai’s Emirates. Airbus announced its plans to cease production by 2021 after Emirates dropped orders for 39 of the airplanes and effectively replaced them with 40 A330-900s and 30 A350-900s. Now, as the Covid-19 crisis effectively cut international flying by 95 percent within a matter of a couple of months, most of the world’s biggest commercial aircraft sit grounded.

To many, including Airbus itself and passengers who favored the airplane for its interior space and low noise levels, the accelerated demise of the A380 has come as a bitter disappointment. Despite its passenger appeal, though, many believe the concept proved a miscalculation on the part of the manufacturer, which argued that the speed at which passenger traffic continued to accelerate portended a severe shortage of capacity at the world’s hub airports, requiring bigger aircraft. To some, the argument still applies, prompting Airbus’s former head of sales, John Leahy, to opine that the airplane arrived too early, that its concept and subsequent development came ahead of its time. Others argue that the idea contained fatal flaws from the start, that its four-engine design would always present a cost disadvantage, and the idea that airlines wouldn’t have a choice but to adhere to the hub-and-spoke network model would prove inaccurate.

One of those critics, Teal Group vice president of analysis, Richard Aboulafia, sees a particularly bleak future for the aircraft.

“The factors that made the A380 a really bad idea as a program are now going into overdrive and making it an even worse idea from a fleet standpoint,” he told AIN. “There’s no secondary market, and none of the primary users want to keep this thing. And the Emirates comments imply a disastrous wave of retirements.”

In fact, days after Emirates’ president Tim Clark told local UAE media “the A380 is over,” Air France-KLM announced it would retire its fleet of Airbus A380s, ending any uncertainty over its superjumbos’ return to service following the Covid-19 crisis. Initially scheduled by the end of 2022, the airline's accelerated retirement of the A380 fleet fits with a fleet simplification strategy announced last November, Air France-KLM said.

Air France owns or finance leases five of the Airbus A380 aircraft in its fleet, while four remain on operating lease. The group estimates the move will require a write-down of €500 million ($547 million), which it plans to book in the second quarter of this year. With Air France-KLM’s move and Lufthansa’s recent decision to advance retirement of six A380s—slated for sale to Airbus—from 2022 to this year, Europe’s A380 fleet will shrink by nearly half by the end of the year.

Apart from some specialized operations, such as the recent around-the-world humanitarian mission flown by Malta’s Hi Fly, China Southern remains the only airline flying the A380 in regularly scheduled service. It now flies three out of its fleet of five, while two remain grounded.

Analysts almost uniformly see grim prospects for the future of the A380, its valuations, and its lease rates following the Covid-19 crisis. Kroll Bond Rating Agency head of aviation, transportation, and commercial finance Marjan Riggi, for one, reported a “notable” drop in values once the very first leases on such aircraft expired after 12 or 14 years.

“The reason was that the first lessees chose to return the aircraft rather than sign another lease coupled with the fact that the lessors of those aircraft found it very difficult to release them, which was why some of those aircraft were parted out. So it wasn’t surprising that at lease end, those values were probably close to part-out value,” said Riggi. “That’s a very good reason an aircraft program will have to end. Technically, an aircraft has a 25-year life so if it becomes very difficult to release it after 12 or 14 years, that’s not a good situation. We have seen that even before the crisis a few flag carriers were already doing away with A380s—but the virus has really put the nail in their coffin.”  

Riggi noted that the A380 aircraft leased for quite high rates at its onset, and even today, for aircraft of the age of many A380s, lease encumbered values remain high relative to the actual values of the airplanes. Of course, once an airplane becomes “naked,” or no longer attached to a lease due to its expiration, it’s value will decrease given an owner will have to find customers with whom to place them. “As time passes and aircraft age and reach the end of their life—as in ready to be parted out, lease-encumbered values and naked values are going to converge,” said Riggi.

Meanwhile, for those who opt to still fly the A380 following the Covid crisis, generating load factors above the airplane’s average break-even of about 80 percent will prove still more of a challenge than ever. Even Emirates, as the world’s biggest A380 operator, will need to drastically adjust.

“The Emirates model is a little different from the other large carriers because of its global hub-and-spoke model with Dubai as its main hub. For example, they haul people from New York to Dubai and then on to Asia,” noted Riggi. “The A380 made sense because it could carry many passengers on such long flights, a lot of people would do it because it’s just nice to be on an Emirates flight. But when all the airlines started competing on price, these kinds of things such as great on-board service just became luxuries that a lot of people didn’t want to pay for perhaps. And not everyone wants to connect in Dubai because it takes time.”