The market for Very Large Aircraft (“VLA”) is very small niche. We believe this market, for aircraft with more than 400 seats, will continue to be stagnant for four-engine aircraft, and will begin to grow again once the 407- seat Boeing 777-9 enters into production.The incumbent aircraft in this sector, A380 and 747-8, are struggling to gain customers, and have shrinking backlogs as deliveries continue. The outlook for these aircraft has dimmed, and we believe sales will fall well short of manufacturer projections.
The classic argument in favor of VLA aircraft (>400 seats) is that in congested markets, a VLA makes most sense when one has limited slots. Heathrow is the poster child for this argument, as are others such as Haneda in Tokyo. But this argument has not been holding true, as growth in wide-body twins remains much stronger than for the new jumbos.
Heathrow believes the number of A380s using the airport will triple to 30 by 2020 as BA takes delivery of its A380s. But 12 out of 1,288 average daily movements isn’t high penetration today. The airport is congested, already at approximately 98% of its capacity, and as a leading global hub they should be a major VLA user. With such a small user base today, adding one or two A380 or 747-8 customers can provide impressive growth percentages in operations without requiring a large number of aircraft.
In a recent interview Doric Aircraft Leasing CEO Mark Lapidus discussed the recent deal to acquire 20 A380s: “400-plus seat routes are growing very fast…Whether you listen to Boeing, whose global market forecast predicts 910 very large aircraft by 2032, or Airbus, with 1,710 VLAs, the A380 is going to be a success, and with only 30 produced in a good year, in short supply.” Mr. Lapidus goes on to say “The point-to-point versus hub debate is the wrong issue,” he says. “The real question is which routes are the 400-plus seat routes. There are more than 220 such routes today and they will grow to more than 400 by the end of this decade – that is in just seven years.” The question is whether you serve a 400-seat route with one 400-seat frequency, or two 200 seat frequencies?
If 30 A380s produced per year is a good year, then 600 produced over 20 years is a maximum and well short of Airbus forecasts. Boeing has only sold 40 747-8Is. If you subtract the Emirates order volume from the A380 totals, it has not been very successful, and unlikely to change its stripes seven years after entry into service.
Airbus remains bullish on their A380 program and shared this view: “The market drivers for the A380 remain unchanged, and will be exacerbated as we enter a period of sustained growth following five years of recession. In 20 years there will be 92 mega-cities. These cities are not just where hubs are located, but rapidly expanding centres of business, industry and population that literally billions of people want to fly between.“ But the market drivers for A380 haven’t driven very many sales, and the outlook for further A380 orders this year is limited.
Boeing is more sanguine about the prospects of the VLA segment and shared this view: “The large airplane market segment is indeed slow right now – and this has been felt in demand for both the 747 and A380.”
Our view is that new technology twins, offering comparable seat-mile economics and lower aircraft mile costs, enable the airlines to be more profitable on most routes. Airlines don’t want to fly empty seats, and most airlines today would rather “right-size” aircraft to a market than take a risk with empty seats. Every year has a weak winter season and every week has a Tuesday with lower traffic.
By “right-sizing” aircraft, airlines ensure profitable load factors on a more consistent basis using smaller aircraft, even if they occasionally need to turn away passengers. This risk mitigation, combined with seat-mile costs for smaller aircraft being competitive with the jumbos, has resulted in a preference for non-VLA aircraft.
Airbus, the manufacturer of the biggest VLA in terms of capacity, points out that traffic doubles every fifteen years. But not all that traffic growth will be fed through hubs. We are already seeing effective use of 787s to move traffic across the Pacific between smaller markets without direct service. Route dispersion, flying non-stop to smaller destinations rather than hubs, has been a trend for many years, and the 787 and A350 are ideal for those markets.
Moreover, while VLA sales slowed due to the current economic climate and high fuel prices, the market for long-range twin-engine aircraft has been robust. Airbus and Boeing have both seen strong sales for their long-range twins. Aircraft order decisions are driven by economics, and airlines appear reluctant to take the risk on VLA aircraft unless they are assured of filling them in very high traffic markets. Competition for premium class business travel is emerging from London City airport to New York using even smaller aircraft to “pick-off” high yield traffic.
Airline earnings on long-haul flights depend on premium traffic, and configure similarly sized premium class cabins across various aircraft configuration. Lufthansa is an interesting example with its 747-8s, running only 372 seats, technically not a VLA over 400 seats by definition, to maximize its business class seating configuration for high yield markets. But most airlines are optimizing their aircraft choices to fit the majority, rather than a few, markets, and are reluctant to add the expense of a new fleet type to offer additional capacity in just a few markets.
The following table shows net orders for wide-body aircraft from 2000-present. It is notable that VLAs are a small percentage of what the market has ordered, despite the congestion projections for key airports. Boeing says that congestion has little to do with the demand for large aircraft, contradicting Airbus’ view. In Boeing’s view airlines choose aircraft based on economics and mission performance. Focus on economics has led to some up-sizing of aircraft, as seen with 50-seat RJs being replaced by larger RJs. But at the high capacity end of the market, we’ve seen carriers downsizing from 747-400s, replacing them with smaller 777s. While carriers like British Airways are buying only a few A380, they are acquiring a large number of A350s and 787s. United is not replacing its 747s with VLAs, nor is Delta. The current trend is that airlines that formerly operated Boeing 747s are unlikely to replace those with four-engine VLAs on a one for one basis.
In our view, the VLA market is likely to remain stagnant for some time. There will be exceptions – Emirates, for example, and its deployment of A380s to secondary markets. Airlines that have ordered VLAs to date are going to focus on thick routes where economies of scale work in concert with slot congestion.
We don’t project more than 30 A380s built per year and even fewer 747-8 passenger sales. With equivalent or better seat-mile economics coming from new large twins, including A350-1000 and 777-9, the old rule of thumb that the largest aircraft have the lowest seat-mile costs might no longer hold true. This is true in the narrow-body range with the Bombardier CSeries against larger A319 and 737-700, and will be true for the next generation of wide-body twins, A350 and 777-X, against today’s four engine VLAs. The day of the four-engine airliner is waning, and we might not see a new four engine aircraft after the A380 and 747 cease production. Today’s offerings in the VLA range are becoming less economically attractive when compared with the next generation of twins.
If Airbus is to meet its sales goals for the A380, it may require either a stretch or re-engining (or both) to regain the lead it once held in seat-mile economics. The incremental improvements since entry into service have been positive, but will not be enough to overcome the comparable seat-mile and lower aircraft mile economics of A350, 787, and 777-X.
We believe that the VLA market, which is smaller than industry analysts projected when A380 and 747-8 were introduced, and will continue to shrink, as route dispersion and the “right-sizing” of aircraft to routes continues to drive airline fleet decision-making. Of course, there will be routes well suited to the A380 and 747-8, but many of these have already been developed, and congestion has not yet reached the point to force increases in gauge at most airports. As a result, we believe A380 and 747-8 will both find tough sledding in the market, as they compete for a narrow market niche that appears to be shrinking.
Our Insight: The four-engine airliner segment is moribund, if not dead. Long live the new king – the wide-body twin. Perhaps the forecasts for growth in the VLA market will be met by the 777-9, which at just over 400 seats will meet the technical, if not the spirit, of the definition of a VLA. We believe this model will outsell A380 and 747-8I combined by perhaps an 8-1 margin over the next two decades.