Heavy Metal - Airbus Vs. Boeing In The Large Aircraft Market

| About: Airbus Group (EADSY)


There have been several new product announcements in the large aircraft market, and they are all important for the financial performance of their creators, Airbus and Boeing.

The big twins have proven themselves, and their belly cargo capacity is an added plus.

There should still be a place for the A380, but the B747-8I is looking increasingly exposed.

Longer-term investors in aircraft manufacturers and airlines should have a good understanding of the main market drivers, the risks involved, and the current and future market position of their respective aircraft.

It may be useful to view this clash of titans from the perspective of the Airbus (OTCPK:EADSY) A380, a high capacity, ultra-long range aircraft intended for use by long-haul, hub-oriented international carriers. For such a large, powerful aircraft, it is also environmentally friendly and is about 50% quieter than a B747-400 on takeoff, while burning 20% less fuel per passenger.

The A380 benefits from a similar cockpit and the same weight saving fly-by-wire technology pioneered in the commercial market on the 150-seat A320 in the 1980s. This allows the flying characteristics to be generated/modified through the software, and has kept the A320/A330/A340 a continually updated "new" family of aircraft since 1988. Until the B777/B787, this was not possible on Boeing (NYSE:BA) aircraft.

With a maximum takeoff weight of 1.268mn pounds, the aircraft has been designed to accommodate future range and capacity increases. This means that the A380-800 is overbuilt really since it has the wing and related structure intended for the longer/heavier A380-900. The stretch would offer about 50 more seats, but Airbus won't commit to this aircraft until current production rates have increased and stabilized, which may not happen.

It seems that any A380neo program would be done as part of the A380-900, since the sales volume for the current version wouldn't support the costs involved… and re-engining an overweight airplane doesn't make a lot of sense. Another possibility is to add 50 - 60 more seats, which most operators could easily do.

The whole thing (and the A330neo?) may be being pushed mainly in the press by Rolls-Royce (OTCPK:RYCEY), who is increasingly the odd man out among the engine manufacturers, and facing steep defense cuts as well. When it is so simple to sell an aircraft x% cheaper (especially as production processes/cost structures improve over time), we would question the relative value of investing cash-flow/shareholders' money in an expensive A380neo program. Flightglobal reports that Emirates is re-competing the engine selection for the 50 new orders, so Rolls still has a chance to get in on the action.

Given the success of the big twins, we wonder if Airbus might not focus instead on a double-decker twin, should such powerful engines become available. Note that it is bumping into limits like this that will eventually motivate the manufacturers to go with the blended-wing-body idea.

Boeing B747-8I

Airbus has used the second-mover advantage and sized the aircraft well, so that the A380 will basically have the VLA (very large aircraft) market mostly to herself. The B747-8 Intercontinental entered service in 2012 and seats about 50 fewer passengers with similar range. Lufthansa (OTCQX:DLAKY) operates both, and uses the B747-8I to serve markets with lower economy class demand since the capacity difference is reflected in the back of the aircraft.

The last B747-400ERF was delivered in late 2009 and the last passenger aircraft was delivered in 2005. The B747-400 is being replaced by the stretched, re-winged B747-8I, which burns 15% less fuel, seats about 50 more passengers, and has 750nm more range. Many orders have been for freighters (since cancelled) or VIP aircraft, so the aircraft is not faring well against the larger A380, which has been impressing operators with its systems and capabilities (and discounts) since entering service with Singapore Airlines (OTCPK:SINGY) in 2007.

The B747-8I is exposed already, since if an airline needs a very large aircraft they may lean towards the A380, and if it's a marginal question, then the B777-300ER or A350 may be a good choice, with the B777X on the way soon enough.

Some airlines who have been B747 operators for decades have instead ordered the A380, due to its payload/range performance, passenger appeal, and efficient use of runway and terminal capacity. Since Boeing is not likely to design and produce a new aircraft in this class, given their ongoing B737 Max, B787, and B777X programs, the A380 market may be "steady Eddy," and gradually expand over the next 10 years as the operating history lengthens, B747-400s are replaced (also by B777s/A350s), range increases are implemented, and airports become more constrained.


Emirates may also be considering an order for the B747-8I, which is equipped with the same fuel-efficient GEnx engines as the B787, if only to put further pricing pressure on Airbus. They have just cancelled 70 A350s, and signed an LOI last year for 150 B777Xs to replace their older B777s in the 2020s.

They are already Boeing's largest customer for the B777, and were obviously unhappy with changes made to the Trent XWB engines on the A350-1000, which reduced commonality. Given the state of the world (and its QE(x) financial system), this may also indicate some changing views about growth in general, and a decision to be prudent until things become a bit more clear.

The near-term A380 market is obviously based on the Emirates order for a total of 140 aircraft (48 delivered). In the initial phase of an aircraft program, pricing will favor the buyer, especially for a niche aircraft like the A380, which is so important to the image of Airbus. These orders were also possibly a useful defensive maneuver against other hub airlines who may decide that they need A380s and will now find delivery slots that much harder to come by.

Emirates has created a unique business model based on low staffing/borrowing costs, high utilization on long haul routes using efficient aircraft, open skies bilaterals, aggressive expansion, excellent relations with local aviation authorities, and Dubai's location between Europe and Asia. They are getting much attention in competitors' boardrooms and provoking counter-moves or even partnerships around the globe. They now lead the world with a network seat capacity of over 6mn, compared to less than 1mn in 2002.

If they continue to perform as they have done, then even more follow-on A380 orders are possible. Due to the nature of their network through Dubai, they are not able to increase frequencies to much more than once daily, so they have a built-in need to order larger aircraft types as traffic grows.

British Airways (OTCPK:ICAGY) has increased their long-haul capacity by about 30% over the last decade, and they have ordered 12 A380s. Cathay Pacific (OTCPK:CPCAY), China Airlines, All Nippon (OTCPK:ALNPY), JAL, Delta (NYSE:DAL) and United (NYSE:UAL) are/were all B747 operators who might eventually order A380s. Airlines are wait-and-see fleet planners, and since high profile companies like Singapore, Lufthansa, Qantas, Air France/KLM (OTCPK:AFLYY) and Emirates are happy so far with their A380 experience, this should help expand the operator base.

The Future

Rising Asian middle class income and trade with the U.S. and Europe is fueling growth in business and leisure traffic at the main hubs. The Europe-Asia market is the most important one for the A380, and deliveries of B787s/A350s will open up longer range point-to-point traffic into the hubs and stimulate further growth. This can be expected to continue until economic growth in China and the rest of the region begins to level out, which may not be for 20 years or more.

Boeing's twin-engine B777-300ER has benefited the most from traffic growth, higher fuel prices and the demise of the B747-400, due to its low operating costs. With a 10-abreast economy cabin, it can also come close to the capacity of the B747-400, which lowers the seat-mile costs even further. This aircraft has had the best value retention of any widebody, but this may be changing as Boeing has launched a longer range, re-engined update known as the B777X, with a potential market entry in 2020.

This program is intended to counter the A350-1000 (2017), which will be a serious competitor to the B777-300ER, and the A380 also, since it will offer 350 3-class seats, and 8,400nm in range. Since these are new airplanes, delays are likely, although the programs will benefit from the famously hard lessons learned during A380/B787 production.

The airline business will always be a cost-per-seat mile game, and fuel burn has become the biggest contributor. This free fuel hedge is the basis for the success of the twins, and even with its much larger number of (3 class) seats, the A380 only equals the B777-300ER in fuel burn per seat mile, due to its 4 engines and much higher structural/operating weight. Recent events in Iraq will further increase pressure on older types and the need to operate the most fuel-efficient aircraft possible.

Airbus initially estimated that A380 breakeven was 270 sales, and then 420, but they haven't updated this number lately. As a function of production costs, plus wing rib "fix-it" costs, discounted pricing and the euro/dollar exchange rate ($1.18 at first, $1.35-$1.38 lately), this is probably not their favorite subject. Taking costs out of the production process will be complicated by the interiors ordered by some customers, and the component transportation/work split between France, Germany, Spain and the U.K., which has clearly not been set up with cost reduction in mind.

Such a large and capable aircraft would make an excellent freighter, but ILFC, FedEx (NYSE:FDX) and UPS (NYSE:UPS) have cancelled their orders and the new-build freighter program has been delayed. The overall downturn in the air cargo market is not helping demand for large freighters, and the belly capacity of the big twins will continue to have a huge effect. Passenger airlines are focusing more on this business, which is just more icing on their cake, and we wonder if the freighter market will ever be the same. The belly capacity of a B777-300ER is almost twice that of a B747-400, and the marginal cost of providing this service is small relative to running a dedicated air cargo operation.

If the sales market for the A380 does not develop as hoped, Airbus will have the option of leasing them out themselves as they and Boeing have done for other types. Since the A380 program is sometimes viewed as a European make-work project, this is likely just a matter of time. Lessors and airlines may not like the residual value risk, but a large international airline can probably be persuaded to operate A380s at an attractive monthly lease rate.

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