News this week about Singapore Airlines not renewing lease on its first A380 has caused a flutter.  The considered opinion is that this is another piece of bad news for the Airbus program.  The Wall Street Journal has this view: “But it is another symbolic hit for double-deck aircraft, for which Airbus has struggled to find customers after investing about $15 billion to develop.”

news that is also offloading its A380s is seen as bad news. But we believe this is not to be a reflection on aircraft, but more a case of the airline not having the traffic and ability to exploit the A380.  Back in 2003, Malaysia was pressed for a quid quo pro to allow its seafood products to have unrestricted access to EU.  While there were no direct links to an A380 order, that certainly helped with negotiations. Even back then this A380 order was seen as overkill for MAS.  Perhaps people have forgotten this.

Readers know we have been more upbeat about A380 than other analysts.  Our view on the news is, perhaps, therefore contrarian.

Here is why:

  • The earliest A380s all suffer from custom wiring and were overweight. The rocky start to the A380 program may have been forgotten. It was quite ugly, and a number of the early deliveries are virtually custom aircraft.
    • Ergo, it makes sense for Singapore to offload these earlier and less efficient models. In Airline Business (July-August 2015) Goh Choong Phong, CEO of Singapore Airlines, said the airline is expecting five more A380s from 2017.  The airline seems to have A380 replacement plans, with the newer models significantly lighter and more fuel efficient.  The CEO does appear concerned with Trent 900 fuel burn – the pressure is on on Rolls-Royce.
  • Other cancellations:
    • The news is no surprise; the airline should never have bought such a large aircraft.
    • Kingfisher’s order was hubris over logic. Same story at Transaero. Virgin Atlantic’s order was also questionable.
    • Air Austral’s order was hardly credible. As was Skymark’s order.
    • Air France canceling the last two A380s on order reflect financial weakness at the airline rather than an A380 problem.
  • Even so, isn’t market weakness is still making the market for the A380 difficult?
    • Perhaps, but these cancellations are not all gloom and doom.
    • The switch of the Skymark aircraft to ANA was a boost to the program. It is probable that once ANA has the aircraft in service, they might order more. The A380 is an aircraft only the biggest airlines can successfully deploy.
    • The aircraft finding homes elsewhere (Turkish is said to be interested) will move the A380 from the hand of a weak airline to the hand of a strong airline. There is no doubt Turkish can exploit the A380’s capabilities better than Malaysian.
    • The Singapore aircraft are possibly the most interesting. Its owner Doric is talking up the potential – “…some negotiations at an advanced stage”.  The bad news there is only one aircraft; but likely with four more coming.  The good news is that Doric will take a haircut on the aircraft to put it back into service.  This haircut will offset the cost of a cabin refurbishment.  More good news – if you were to take a pre-owned aircraft from any airline, Singapore would be among the top three.  The aircraft will be in good condition mechanically because Singapore takes good care of its fleet.
      • If Doric does get all five back, it will have a good number to re-market. There is talk of Chinese airlines being interested.  This is plausible.  But there are other airlines too. IAG’s is on record saying he is looking for pre-owned A380s. The fact the Singapore aircraft have Rolls-Royce power is convenient as so do those of British Airways. IAG will almost certainly be able to take all five, configure them as needed (replacing 744s?) and deploy them out of slot restricted Heathrow.  This will make BA’s competitive position even stronger out of London. Doric gets rentals again and the haircut is digestible over another ten years.
      • Doric is not dependent on IAG. There are other airlines that will almost certainly give these aircraft a good look.  While only IAG looks reasonable in the EU, outside of the EU there are a number of potential candidates.

The Bottom Line:
The emergence of pre-owned A380s could be excellent news for Airbus.  Moving aircraft from weaker customers to stronger customers is a good thing.  The A380s are not going to the scrap yard.  Airbus was able to re-market the two A380 orphans parked in Toulouse to Emirates.  Everything can be sold at the right price. The question is where will that price point is.

Yes, the market for VLAs is tough.  But the market for 777-300ERs is tough too.  Airlines are bottom fishers.  If the price is right these A380s, even the initial overweight ones, will be put back to work.

Please follow and like us:
Pin Share
%d bloggers like this: