Jetting Off

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We’re as fond as flying as the next guy. Really. That wonderful experience that allows you to get from A to B and back again in the twinkle of an eye. We’ve flown around in pretty much everything and can recall, as a young ‘un, a particularly lovely flight to Alderney many summers ago. As we touched down on the grass strip, we skidded on the morning dew and eventually the prop plane drew to a stop near the shed that served as the terminal. Pure Biggles.

Of course, most of us prefer something a bit bigger to a put-put plane that can take ten passengers. How about five to eight hundred or more?

Yep. That’s the Airbus A380’s capacity. Somewhere between 50 and 80 of those put-put’s that got us to the Channel Islands.

With its flight bar, jacuzzi, bedroom, and cinema seem a lot more comfortable than the light bucket seats on the Britten-Norman prop to Alderney.

OK, we may have exaggerated with the jacuzzi bit—but you get the idea. According to some, it’s the best way to fly. But we stick with the way Biggles liked to get around with the airstream in our face and bumping around as we cruise along hopping over the hedges. But we understand why people might prefer a bit of luxury when going from A to B. After all, why not?

Then we read this in the Independent:

IS THIS THE END OF THE AIRBUS A380?


What?

Ah, yes, the super-duper superjumbo built by Airbus, the A380 looks possibly set for the chopping block:

On the last day of 2018, Airbus made a state-of-the-market announcement. It was headlined: “Airbus achieves new commercial aircraft delivery record in 2018”. In a coincidental nod to its rival’s biggest aircraft, the European planemaker said: “Net orders total 747.” But the biggest Airbus aircraft, the A380, may not live up even to the much-reduced potential of 87 outstanding orders. Last year only a dozen “SuperJumbo” planes were delivered. Building these monsters at a rate of one a month might sound a reasonable pace – until you compare it with the other Airbus jets.

Out of 747 aircraft delivered by the aviation and space group just 12 were those superjumbo A380s.

How can this be?

Now, we need to go back in time, way back in time, as Johnny Walker* would say. No, not to that golden era of music, the 1970s. You should hear Tim wax lyrical about this, really. He knows his stuff, Tim. Not just the economics bit, but the music bit, too. We’re talking 1980s here.

It’s about that dismal science stuff, too, namely the Airbus-Boeing duopoly in commercial aircraft. And you thought this was all about celebrating aviation history, didn’t you? Alas, if it were so.

Back in the 1980s there was one very big commercial airline manufacturer. No, not Airbus—Boeing. In the 1970s Boeing had brought out the 747. When we first saw one of these beauts, one must be honest here, one’s jaw sort of dropped a bit. Wow! Big and beautiful.

Boeing were first with these wide-bodied jets and pretty much cornered the market. They grew huge on the back of it. They benefited from one of those first-mover advantage thingies that Tim is always keen to get readers to know about. He’s normally the first to point out how stupid, ignorant and misguided some decision-maker is on matters economic.

First movers often gain all the advantages from being, well, first into that market. Once they’d had that jaw dropping moment, chief executive officers (CEOs) of airlines wanted 747s as their new toy for getting customers from that point A to that point B and back again. In big numbers. That’s jumbos and passengers, by the way.

Now, seeing how well Boeing were doing with their jumbo, Airbus’ CEO must have had size envy. We can do bigger, that sort of thing.

Fast forward a few years. Passenger traffic is growing. Airports aren’t. Just think London here. How many years have the government dithered on deciding to add new capacity? If you thought watching a rock be worn away by water would take an eternity, that’s a short time compared to decisions about expanding Heathrow’s capacity.

Well, Tim will tell you that if you have said capacity problem, you need to get more productive. He writes about these things—we don’t comment on productivity.

Ergo, we have commercial airline manufacturers facing a little commercial difficulty. We should perhaps rephrase that, we’re talking Boeing and Airbus—nobody seriously wanted to fly around in anything else. Can you imagine anyone wishing to go anywhere in one of those Ilyusin jobs back then? Or something even more obscure? We’re talking 80s and 90s here. No. Neither can we. We’ve lived by refusing such rides.

Now in response to airport capacity problems both manufacturers contemplated upsizing their products. Boeing simply “stretched” their 747 a bit, and a bit more. Airbus not having a jumbo built one.

But bigger loomed. This is where yours truly got interested. Remember 747s and Airbus its A330 and A340 range. Jumbos. Direct competitors to Boeing’s A747. In their backyard. Picking up orders, that is. American Airlines bought some. You can’t get more in your backyard than that, can you?

You’ve got a competitor out there breathing down your neck. And everyone is talking about how Heathrow is running out of capacity. The productivity response is to get bigger. Try for that first mover advantage again, no?

Airbus is Boeing’s strategic competitor. It’s a duopoly. Unless we blinked, we haven’t seen any other jaw dropping aircraft out there by other manufacturers. If you think we’re wrong on this, please comment. We love it when readers tell us we’re wrong. No. We really do.

But back to the challenge. The cost of a superjumbo is huge. A quick check on what Airbus has spent developing the A380 tell us it’s over $25bn. Yes, that’s $25bn. That’s not a mistake. Big bucks.

Now back to where we were. Late 80s and now early 90s. Bigger aircraft could be the solution to those capacity problems. Airbus and Boeing are rivals. There’s a global demand out there for aircraft and, possibly, for a superdupojumbo. But you’ve got to spend and spend to put one in the air (think that $25bn—keep it in your mind). You get your dosh back by selling lots of them. Now if both Boeing and Airbus develop the aircraft, they’ll both lose money. It’s a strategic standoff. It fits neatly into that class of economic problems we call game theory.

It goes like this: Boeing makes money if they build the aircraft and Airbus doesn’t. Airbus makes the dosh if Boeing doesn’t build it. No one loses or gains anything from not building it, but both lose money if they commit to building it. A classic. We mean classic game theory. The stuff taught at business schools. That sort of story. There’s even a Harvard Business School case about it.

Cue. Lots of conflict between the two manufacturers. The outcome? Well, we know the outcome. Boeing chickened out saying their research indicated there wasn’t enough demand to build the superjumbo. They went for zero, then, rather than lose a pile of dosh from developing something for a fringe market driven by capacity constraints.

Cue. Elation at Airbus. The slavering of the mouth at Airbus from winning. They’ve got first mover advantage! Let’s size up.

At the time, everyone said that Boeing had chickened out and were going to suffer going forward from not having a full product range up to the superjumbo size. (Boeing don’t do put-puts, of course, their smallest fly-around is the 737—80 plus passengers and their largest is the 777 at 550. And the plane that started it all? They built the last 747 in 2017. Not bad for an airliner that started in 1970—47 years in production. Think of the dosh they’ve made from that! First mover advantage, eh!)

We weren’t so sure about Airbus’ decision at the time. Size is good in some circumstances but really a superjumbo? We’ve already got a big ‘un, not like that put-put plane we took to the Channel Islands. Why go bigger yet?

But it was full steam ahead at Airbus with the superjumbo. No pause for thought to consider why Boeing didn’t go to the wire on being the first mover. Sorry, they did move first—to say no thanks, didn’t they?

Well back to Airbus and its A380. Late, problems, you name it. It finally arrived to suitable drooling, jaw-dropping acclaim. We have to say it’s big. Not just big, but big-big. Elephant sized big at the airport. White elephant-sized, alas.

Gaze on those numbers again. One a month delivered. They’ve got 331 firm orders. New ones just ain’t arriving. Just to put this in perspective, the 777, the plane Boeing developed instead of their upsizing the 747 to superjumbo class has sold over 1,700 units. And every one sold, too, takes away from airlines’ appetite for the superjumbo.

To add to Airbus’ woes, it looks as if current users aren’t too enamoured of their plane. Sure, it has a role. Those 300 plus out there say there’s a market. In spite of its size.

Its problem is its size, stupid. You’ve got to rebuild the boarding system at an airport to take full advantage of the plane. Without it, can you imagine how long it takes to get all those passengers onto and then off the aircraft? Yep. It seriously slows things up. And it apparently—remember this is a 1990s design—isn’t as efficient as newer planes—like the 787, or others in the Airbus range. If you don’t fill it up, you’re burning money flying it. As a result, it only pays for itself on certain routes. And fewer flights, too (remember those slots) so less time and destination choices for customers. All-in-all, perhaps not such a good idea. Once-loved values, which often indicate the marginal economic benefit of use aren’t great. To the extent there’s no market out there.

Oops!

Back in the 1990s, Boeing read the runes and didn’t go ahead. So perhaps they weren’t as stupid as many thought back then. Now we don’t think that the CEO of Boeing back in the 1990s was as smart as Magnus Carlsen** is but we sure do know he listened to his market research team. Perhaps they suckered Airbus into going ahead with the A380 knowing it would tank? That would have been kind of strategically brilliant. Get them to commit a little cash—that $25bn, remember—to a white elephant.

We’re not sure what Airbus gets for delivering an A380. The list price is $445m. Yep, nearly half a billion dollars. Just to compare, the list price of Boeing’s 777-300Er is $330m, a 737 is about $90m. You get 5 of those 737 workhorses for each A380 behemoths.

Let’s do the maths, something us dismal scientists like to do on a cold night when stuck in our pit trying to figure out why people have done what they did and whether they were being entirely rational about it.

For Q1-Q3 2018, Airbus had an operating profit before financial result and taxation of about 7 percent. At a generous—since we know that Airbus is discounting on the list price–$445m selling price per aircraft, we can assume that those 331 sales produced a contribution to that $25bn of $10.3bn. Again, as Tim would say, ballpark figures. But you get the idea. They’d need to sell the same again and a bit more—say 1,000 units in total to payback that development money.

Doesn’t look like they’re going to do it, does it?

There’s a moral here when you get into a fight. If your enemy backs off suddenly, ask yourself why and don’t just celebrate as the Trojans did at Troy when the Greeks left – with a nice farewell present to boot.

Who said economics wasn’t fun?

 

*Johnny Walker is a DJ on Radio 2 and does “Sounds of the Seventies” every week. We’re a fan.

**In case you haven’t heard of Magnus, he’s current the world’s best chess player.

 

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thammond
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thammond

Having worked at an airline during the time when A380s versus 787 and 777 replacements were being considered, it is obvious that Airbus’ analysis was seriously wrong. The A380 needs very thick routes that are also long and have a fair bit of premium traffic – so for example pretty much the only BA route that made senses is London-LA, because BA could reduce the frequency from 3 to 2 a day. New York does not work even though it is busy because it is too short and the premium passengers like frequency. The alternative is to fill it up… Read more »

Tony Carden
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Tony Carden

thammond, You’re absolutely spot on with your comment. What interested me was the game theory element of strategic competition. I was trying to hint that Boeing suckered in Airbus into building the superjumbo by doing the research, trumpeting the plane’s attractions and so forth so that they’d get distracted while Boeing brought in their point-to-point plane, the 777, if I remember correctly. One thing I didn’t put in the piece is that while the A380 is a great fly, airlines can’t get passengers to pay a premium. It’s that substitution problem. I guess travelers aren’t all that fussed what aircraft… Read more »

Jonathan Harston
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Jonathan Harston

Pah, I fly Lockheed McDonnell every time. 🙂