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2018 marks the termination of the first A380 leases (MSN 003 delivered in October 2007), likely causing used aircraft to enter the market. A key question, particularly for a group of German investors who underwrote early A380 leases, is what their values will be. We have heard from one bank that these investors might need to be ready to take a haircut on asset value. There is little question that the A380 offers profit potential for high density routes, particularly those which have multiple daily wide-body flights between congested hubs by consolidating flights. But the A380 needs to compete economically with other aircraft, including the Boeing 777-300ER. How do these airplanes stack up, and what is the point of economic indifference at which you would select either aircraft, given their prices? The 777-300ER has a more established history and track record. While Delta recently paid under $10 million for an older 777-200, the market for the larger and more efficient -300ER model is more robust. A new 777-300ER lists for $339.6 million. We believe Boeing could be offering discounts of 60%, bringing the capital cost to $136 million for a new delivery. In the used market, a 2007 vintage 777-300ER currently sells for about $84.5 million, according to Collateral Verifications, an appraisal firm. A used A380, according to Collateral Verifications, vintage 2007, current has a fair market value of about $122 million. We have two data points to work with. But airlines do their own analysis, based on their needs, seating configuration, routes and traffic, to determine what the price needs to be. Because the market for a used A380 is unknown, since there have been no transactions, and the market for the 777-300ER is more robust, we examine the economics for a typical airline operation and derive an imputed value for a used A380 based on an economic comparison. Comparative Economics When it comes to economics, a key variable is fuel price. With current refinery prices at $1.15, according to Platts and "into the plane" prices below $1.50, labor has once again overtaken fuel as the largest cost input for airlines. Today, fuel prices are low (see our story on oil prices last week here) and even if it rises by 25%, prices remain well below historic highs. This, of course, skews the results when comparing new aircraft with old, as the dollar impact from fuel savings isn’t as great as it once was. Which is likely to be a real benefit for used A380s. So let’s compare the economics of a 10 year old A380 with a 10 year old 777-300ER, and see what the difference might be in a typical long-haul four class operation. The key assumption to begin with is seating. Singapore Airlines flies both the A380 and 777-300ER in three and four class configurations, making it easy to compare “apples to apples” service standards. Their configurations are as follows: Four Class: A380 12+60+36+333 = 441 777-300ER 4+48+28+184 = 264 Three Class: A380 12+60+0+399=471 777-300ER 8+42+0+228=278 We make an assumption that the market will support two 777 flights or one A380 flight daily, with no difference in fares on the route. Let’s also assume today’s fuel price of $1.50 per gallon for this analysis. Using standard conditions, the economics should work out as follows for 4,000 and 6,000 nautical mile routes. Fuel Costs The A380 will burn about 31,500 gallons for a 4,000NM mission, and 55,250 gallons for a 6,000NM mission in 4 class configuration. Fuel cost per mission, at $1.50 per gallon, will be approximately $47,250 and $82,875 respectively. A 777-300ER will burn about 20,650 gallons for a 4,000NM mission and 32,750 gallons for a 6,000NM mission - translating to $30,975 and $49,125 respectively for each mission length. Labor Costs We computed labor costs based on the number of flight crews needed per operation, and for longer-haul flights, additional crews for rest, based on distance. Using an average pilot cost for international long-haul of $450,000 annually for a crew of two pilots and calculating the number of crews required by mission length, we computed the average hourly pilot labor cost for each aircraft. To that, we added flight attendants based on the seating capacity, and calculated crew costs for an A380 of $14,960 and for a 777-300ER about $13200 for a 4,000NM mission in three class configuration, and slightly less with one fewer flight attendant in a four class configuration. Maintenance Costs Our estimates of maintenance costs are based on data we’ve gathered from manufacturers and airlines, and show airframe and engine maintenance, on an mission basis, show that on average, maintenance costs will be about $19,525 for an A380 and $12,315 for a 777-300ER for a 4,000NM mission, and approximately $24,995 and $16,900 for a 6,000NM mission, respectively. Landing and Navigation Fees We estimated landing and navigation fees using a typical mid-point landing fee ($4.50 per 1000 lbs) and navigation rates based on Eurocontrol rates and our own formulae. These result is that fees are expected to be about $11,250 for an A380 and $8.650 for a 777-300ER for a 4,000NM mission, and $14.525 and $11,275, respectively, for a 6,000NM mission. The following table summarizes estimated mission costs for each aircraft for 4,000NM and 6,000NM missions in a Singapore Airlines four class configuration, with fuel costs at $1.50 per gallon. Imputing a Price for a used A380 We now have comparative trip costs for each aircraft, and using appraiser reports to estimate the value of a used 777-300ER. We assumed an airline will utilize an A380 to replace two 777-300ERs on a route. There are a number of routes between major hubs where multiple frequencies occur within two hours of each other, offering an opportunity for two aircraft to be replaced by one A380 without changing a flight time more than one hour in either direction. Assuming this, the following scenario would ensure for a 4,000NM mission with one A380 replacing two B777-300ERs: One A380 replacing two 777-300ERs on a route is clearly more efficient, on a cost per passenger basis. If we accept the current lease rates for a 2007 vintage 777-300ER at $850,000 per month, then to achieve equivalent costs, a used A380 should lease for $2,174,000 per month, implying a value of about $210 million per aircraft. But that doesn’t appear to be the case in the market, as estimated lease rates for a 2007 A380 are at estimated at $1m per month, while fair market values are estimated at $122 million. It would seem that if that is true, in today’s market, used A380s may be a bargain, if an airline has routes with the frequencies and traffic to support it. And most network carriers have several routes like this which are adequate to support a sub-fleet of A380s. The A380 makes sense in consolidating two frequencies with smaller aircraft into one, or perhaps three into two (like British Airways between LHR and LAX), as the cost reduction is substantial. With labor costs once again overtaking fuel costs in a low fuel cost environment, a used A380 may be the economic bargain of 2016.

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