The fact that the Very Large Aircraft segment has slow is not in doubt. Sales have been at lower levels than either Airbus or Boeing predicted. Today, they are nowhere near the number that Airbus predicted, and even lower than the number Boeing predicted, which is about half of Airbus forecast.

Last week the future of the was highlighted when Airbus’ CFO, Harald Wilhelm, stated that he thought Airbus might have to discontinue the A380 program in 2018. While his was one voice at the annual investor day, other voices were much more supportive of A380. Obviously John Leahy, Airbus COO Customers, does not share Mr. Wilhelm’s views.   However the media jumped on his words because they were the most headline worthy. That was all it took for shares in Airbus to take a dive.

Mr. Harald’s words to delegates were that Airbus would break even on the A380 through 2018 “if we would do something on the product, or even if we would discontinue the product”. So his words were perhaps liberally misinterpreted. With a poor earnings forecast, Airbus stock price has taken a tumble, with the A380 comments contributing to the negative momentum. As we can see this afternoon, the share price continues to look soft.

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The day after Mr. Wilhelm’s remark, Airbus CEO Fabrice Bregier tried to down the negative interpretation: “We will one day launch a 380neo, we will one day launch a stretch. This is so obvious there is extra potential. We will get more customers.”   There is little doubt Mr Bregier’s hand was forced. This situation is not too different from when Boeing realized they had all but lost the American Airlines order for single aisle planes, and overnight decided to offer the 737MAX. These things happen.

Even as Airbus tries to clear up the communications mess, the issue has highlighted the one crucial issue regarding the future of the A380. Airbus does not have full control of the program. While it might have the ability to curtail it, the costs would be too high in terms of other business, and it wouldn’t make sense until all orders are delivered. The largest A380 customer is Emirates and the airline’s CEO reacted with predictable agitation to the news of the possibility of the A380 program being discontinued.

Mr. Clark is quoted as saying: “The A380 is a passenger magnet. We operate five a day from Dubai to London Heathrow and they are 95% full. Airlines are too conservative and have not put the right interiors into their A380s. Some of the interiors are a disgrace and used 1970s thinking. We put all our premium seats on the upper deck and economy on the main deck, but others have mixed them which is inefficient. Our competitors laughed at us when we put showers and a lounge in the A380. But passengers love the showers and the lounge. The A380 is a great aircraft. If airlines don’t believe they can fill an A380 then their business model is wrong. Their marketing is all wrong.”

This is not a voice in the wilderness. Emirates operates 55 A380s now and has another 85 more on order. It would not be an over statement to say Emirates growth depends on the A380. Take a look at the company’s results – this is not a customer to trifle with.

Recall that earlier this year Emirates cancelled an order for 70 A350s. That order was announced on the Airbus Innovation Days, with industry media in attendance. It was a most unpleasant experience for Airbus. Emirates is about to reconsider the in 2015. Airbus would in no way deliberately offend Emirates.

Mr. Bregier’s talk of the A380neo should not be seen purely as an overnight damage control exercise. Airbus has been working on the A380neo idea for some time. Note that in the linked story, Emirates states that it is ready to order 70 more A380s if a neo is available. Given the reaction from GE and P&W to the A380neo concept so far, it would seem its Rolls-Royce’s deal to lose. But the decision from the makers of the GP engine does not mean the A380 or the VLA segment is ready to be discontinued. GE is very busy with other programs, as is Pratt & Whitney, and their direct competition on the A320neo family makes them partners on the GP7200, but fierce competitors elsewhere.

Growth in traffic continues to back the need for a VLA. Airbus’ on offering the A380 was predictable according to game theory and driven by realities at the time of its development. The timing was not optimal, but Airbus really had no choice. The largest VLA customer continues to believe in the segment. It also continues to believe in the A380. But in reality, the A380 was likely ten years ahead of its time.

Boeing “bet the company” on its 747, and it took a while for the program’s sales to get going. The following chart shows the first fourteen years of the 747 and A380 program order volume. As we can see A380 orders track closely, but just below, what Boeing experienced with the 747 after introduction.

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If we look at the orders placed since 2001, the A380 has a strong lead over the 747-400 and 747-8i. Some will say the chart “proves” the world no longer wants VLAs. It might be more accurate, perhaps, to say the world may need fewer VLAs. But currently, among airlines that want a VLA, the A380 is the clear choice over the 747.

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New competition is coming to this segment from the two-engined 777-9, which is has about the same capacity as the 747-8. The 777-9 already has 243 orders, of which 47% are from Emirates.  The dynamics of the market are changing, and Airbus  needs to respond with an upgraded A380neo.

The Bottom Line

Airbus had a public relations disaster last week, with conflicting messages to the investment community and customers regarding the A380. But the fallout is quite clear. Emirates reaction to the news from last week likely accelerated Airbus’ A380neo plans – they clearly want an enhanced and possibly stretched aircraft. Airbus needs to re-engine the A380 and stretch it to regain the lead in seat-mile economics, a key metric for operators, and will now expedite its A380neo plans.

This is good news for Rolls Royce, which has an engine ready to propose, but not as good news for Engine Alliance, which would need to dramatically enhance the GP7200.

Our estimates show that a re-engined A380neo would regain the lead in seat-mile costs over the anticipated economics of the 777-9 with a 10-12% improvement in . A stretch of the aircraft to accommodate additional passengers would only enhance that lead.

We believe the A380 was a decade before its time, and that the of engine technology to today’s standards will reinvigorate the program as congestion at major airports makes multiple wide-body frequencies more difficult. London Heathrow has the most A380 frequencies and operators today, and we expect that to continue as airport constraints restrict additional frequencies over the next decade.

With the right enhancements, the A380 could come into it’s own in the very large aircraft niche. The question now is how soon Airbus will pull the trigger and launch the A380-800neo and A380-900neo. We believe it needs to be available to compete with the 777-9X in the 2020 time frame.

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