It turned out to be an unhappy Valentine’s Day for the Airbus A380 and her admirers, as Airbus announced the scrapping of the A380 programme, with the last deliveries scheduled for 2021.
It’s hardly a shock, however, after the fleet’s first retirement last year and with two of them already being parted out. The economics of operating these fantastic beasts just never really made sense, however game-changing the concept (or indeed the passenger experience).
Where the A380 has, sadly, failed is the seemingly unavoidable requirement for them to be operated at close to 100 per cent of their 550-passenger capacity. There just aren’t enough routes with this level of consistent demand and on less dense routes, they are not economically viable. Qantas cancelled orders, Air France is giving back the keys and Virgin Atlantic never went through with its order. But the death knell was sounded by Emirates, when it cancelled its last order, despite owning half the fleet.
In comparison, aircraft such as Boeing’s Dreamliner, the 787, have proved much more viable and adaptable. Even Airbus has recognised this and has been promoting its A350, and Emirates is looking at orders for A330 and A350 aircraft.
So what does this mean for aviation finance? Well, cancelling the programme will inevitably impact existing investors – in both the metal and in the debt. Initial investors saw it as a ‘dead cert’, with robust expectations of strong residual values. Instead, the first aircraft are being parted out, and buyers for these spares won’t be found quickly (and while there is some commonality of parts with other Airbus aircraft, the discontinuation of the programme will self-evidently diminish the requirement for spares, and thus the viability and desirability of part-outs).
The struggles with the first deals in this space have largely hit German investors, but, ultimately, pain will be felt across the market. This, of course, may have reverberations in investor confidence in the wider world of aviation, but problems always provide opportunities for well-informed and well-advised parties. Anyone thinking about investing in aviation, in any aircraft type or model, has to consider a few fundamentals that are equally applicable to any aviation investment:
- which airline is operating ‘your’ aircraft, and
- which airline could operate it?
We are all familiar with the issues of recent years: Monarch and Air Berlin being high profile examples. Even RyanAir posted losses. Get the wrong credit today, and you could be caught up in any distress suffered by the operator, whether as a result of it operating the wrong aircraft or the wrong routes; unstable oil prices across the industry, or poor hedging decisions by that airline; issues unique to the airline, or macro issues that affect everyone unequally.
Getting the equipment right is equally important. This is where the problems with the A380 become most apparent. Generally, markets with more aircraft of a particular type are more desirable, because a buoyant secondary market is key to residual value certainty and investor confidence (and appetite).
On balance, our expectation is that the discontinuation of the A380 should be good news for investors in A350s and 787s, for example. The long-term fundamentals that we commented on in our new year thought piece (link to article) before conference week in Dublin also remain as true today as they have for the last few years, with or without the A380.
So although Valentine’s Day this year may not be a particularly happy one for the A380, the enduring love affair will continue for now at least, with predictions that some of the existing fleet will still be operating in 20 years’ time.
Image source: http://www.globalnewspointer.net/future-robust-aircraft-demand-in-civil-aviation-market-till-2031-case-study-latin-america/