Two Aircraft, Two Failures

| About: The Boeing (BA)

Summary

Role for the Boeing 747-8I as a passenger jet is played out.

Boeing 747 overall is a success.

The Airbus A380 business case could still develop.

Boeing (NYSE:BA) and Airbus (OTCPK:EADSF) are always marketing their product as the best fit for airlines. One battle, however, seems to be a battle of the losers. In this article I will zoom in on the Boeing 747-8 and the Airbus A380, their prospects and business cases.

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Boeing 747-8

The business case for the Boeing 747-8 is not a hard one to explain. With the -8 Boeing wanted to continue on the success of the Boeing 747-400 of which the jet maker delivered 694 units. While the last delivery took place in November 2009, the Boeing 747-400 is not disappearing as fast as many think. In the coming 3-5 years a lot of the 747-400s in operation will be phased out, but there still are at least about 200 passenger versions of the -400 flying around and at the time of writing there even are 123 -400s airborne.

Boeing wanted to make use of the installed base and assumed that a significant number of customers that operated the -400 would also order the -8. Reality shows otherwise. The typical 3-class seating for the Boeing 747-400 provided in Boeing's airport planning manual is 400 seats and 467 for the -8. So the -8 should increase revenue potential and its aerodynamics and propulsive efficiency were the main drivers of cost reductions. The -8 is not a one-to-one replacement of the -400, but aimed to close the gap between the -400 and the Airbus A380. Boeing deemed the A380 too big and thought they had a sweet spot with a 467-seat aircraft.

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An industry-wide trend was the change from 3-class configuration to 2-class configuration, where some airlines introduced premium economy. Additionally, more and more airlines started equipping their Boeing 777 with an extra seat in each row. These two things made the Boeing 777 a fit replacement of the Boeing 747-400.

The -8 was placed between the Airbus A380 and the Boeing 777, but in order for airlines to be able to offer the luxury they can offer on the Airbus A380 the seat count had to be reduced. This rendered the Boeing 747-8I inefficient when it comes to cost. To put it very simple, the Boeing 747-8I has been put in a spot for which there is little to no demand.

So the passenger version of the -8 was put in a low-demand spot on the market and the installed base of the Boeing 747-400 has been replaced more and more by the Boeing 777-300ER and the Airbus A350-1000.

The freighter variant is a unique aircraft, but the market is still recovering from the economic crisis. Growth has been slower than anticipated, which affects the demand for aircraft such as the Boeing 747-8F.

So the Boeing 747-8 is not a bad aircraft itself, but there is a disjoint between the capabilities of the airframe and the airline's wishes. Additionally, the second market the 747-8 has been rolled out is one with very little bright prospect at this point.

Airbus A380

Whereas Boeing trusted on replacement of the installed base, Airbus had to craft a product and business case from scratch since it did not have an installed base.

The business case for the Airbus A380 centers on airport congestion and the rise of mega airports around the world. When launching the Airbus A380, the European jet maker believed airports would increasingly cope with airport congestion. Instead of spending billions in expansion of airports, Airbus thought the solution would lie in increasing the size of the airframe. This way more passengers are transported per gate slot or departure. Although plausible, we are seeing that airports have invested in airport infrastructure and in China and the Gulf region new mega airports have been built to allow airlines to grow even further. So the Airbus A380 only makes sense for some of the mega aviation cities, such as London Heathrow and airports that are constrained by the landscape such as Chep Lak Kok Aiport (Hong Kong) and Seoul Incheon Airport.

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The Airbus A380 was intended to transport a lot of passengers at a time and needlessly connects with the requirements of a hub-spoke network. This is where Airbus made a mistake, since there was a clear shift from hub-spoke operations to point-to-point network for which aircraft such as the Boeing 787 and Airbus A350 are better suitable.

The Airbus A380 can carry up to 544 passengers in a 4-class configuration, but instead of utilizing the high revenue potential airlines have utilized the available cabin space to implement a new luxury standard in air travel.

Without going into details on fuel burn figures, the Airbus A380 (just like the Boeing 747-8I) is being used far below its optimum point. This means higher per seat costs and next to that airlines are facing the challenge of filling the airplane. The aircraft currently only makes sense for a few customers.

Conclusion

I think both airplane concepts, so far, have flopped. The Airbus A380 is a big aircraft and the entire concept of mega aviation cities around the world has not developed. This of course is still possible, and that is also why I think it is wise to keep production alive. At some point, if the case develops, Airbus could redevelop the wings and attach fuel efficient engine to the airframe. For now, from timing of the airframe to production management and costs, Airbus did a bad job.

Boeing followed a concept that is bad for its time and expected it to be a better answer to the market, which is against better judgment. While I expect the Airbus A380 to have somewhat of a future, the success of the Boeing 747-8F hinges on a very slow cargo market. With the launch of the Boeing 777X and a possible Boeing 777-10X being added to the product line up, the Boeing 747 has had its best time.

If each of these aircraft programs were to be discontinued, I am quite certain that it would hurt Airbus share prices more than Boeing's. The reason for this is that the investment and forecast for the market that Airbus made for the A380 is far bigger than what Boeing spent and forecasted for the Boeing 747-8. Additionally, discontinuing would open up some opportunities for the Boeing 777X.

Despite these 2 aircraft are facing rough times, with the Airbus A350 and the Boeing 787 both jet makers are well positioned.

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Disclosure: I am/we are long BA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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