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Bloomberg has a very interesting article on the emerging second hand market for A380s.

While there was some buzz about aircraft that Emirates was going to offload in 2016 and replace with newer models, the five A380s coming off lease at Singapore are actually a lot more interesting.

The airline has to consider the trade off between of refurbishing these aircraft and extend the leases, or returning them to the lessor.   The economic factors involved are complicated, but one thing is very clear: with respect to the A380s, its a buyers market. The last new order for an A380 came in 2014, and there are a number of A380s in the Airbus production system that are or could soon be looking for homes based on order cancellations.

Singapore is reported to be paying $1.7m per plane per month, which looks like a very decent deal. Should it decide to return the aircraft, there would be a $25m fee each to bring the five A380s into “full life” condition.  Singapore has world class MRO facilities. The airline faces a $125m per plane refurbishment fee if they keep them in service.

The owners of the five A380s understand the lack of market strength.  They have to face reality. But when push comes to shove they would likely rather have Singapore keep the aircraft, because theirs is a check that can be cashed and will clear every month. However, the airline is looking at a buyers market.  Amedeo has 20 A380s looking for homes.  Airbus wants to keep the production going and wants new orders.

As launch customer Singapore will want to keep A380s in its fleet.  But there are several possible sellers to consider, with different economic propositions.   Acquiring new aircraft means a maintenance holiday.  It means lighter aircraft than those being retired.  There are a host of advantages in getting new metal.  And the kicker is the airline won’t pay that much more.  The $428 retail price is, in our view, still going to be probably 50% discounted which brings us to about $214m.  A new aircraft could be offered at very compelling prices.

Of course, Airbus also has keen interest in the program because it wants to move on to the A380neo.  So keeping launch customer Singapore on board becomes crucial.  We expect the airline to make no decision until the last minute, because it can afford to do so.  The current owners want the aircraft back in service and Singapore offers them the best bet to accomplish that – but it would likely come with a lease rate reduction to offset that $125m per aircraft refurbishment cost.  Meanwhile Amedeo and Airbus want to get new A380s in service.  In a buyers market, Singapore will play off used against new to negotiate the best possible deal.

The only potential eventuality that upsets this powerful position for Singapore is if the existing lessors can find another airline, like Turkish or Saudi Arabia, to take all five A380s.  But that would likely generate less revenue and more transition expense than if Singapore were to renew the lease, and the lessors know it.

The Bottom Line:

There is little happening in the A380 marketplace, and no new orders are likely until Airbus decides whether to launch the neo model.  With the potential availability of used A380s in the marketplace, it will be harder for Airbus to sell the existing model, particularly when Emirates also replaces a portion of its existing fleet with aircraft on order.  Will the used market force Airbus into an A380neo to differentiate the product?  We believe they will have to, to remain competitive with 10 year old models coming off of lease, or the A380 order drought will continue for the foreseeable future.

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