Airbus: Mixed News in A380 Order

British Airways' 12 new A380s will replace Boeing 747s, but Airbus still won't be close to breaking even on its megaplane

It's the best news in a long time for beleaguered Airbus—so why aren't investors happier? On Sept. 27, British Airways (BAY.L) ordered 12 of the aircraft maker's A380 superjumbos, the first time in more than two years that Airbus has picked up a new customer for the double-decker megaplane. But shares in Airbus parent European Aeronautic Defence & Space (EAD.PA) fell as much as 4% after the announcement, although they regained most of the lost ground later in the day.

At first blush, the European planemaker looks to have scored a major blow against archrival Boeing (BA). True, British Airways also ordered 24 of Boeing's sleek new 787 Dreamliners, as part of a deal worth $8.2 billion at list prices, but British Airways has one of the world's biggest fleets of Boeing 747s, and now it will replace at least some of them with A380s rather than an updated 747 model that Boeing is offering.

Airbus Chief Executive Thomas Enders called the decision "a breakthrough." And British Airways CEO Willie Walsh echoed a key Airbus sales pitch for the A380 by noting that the big plane would be a boon at crowded airports such as London Heathrow. "The A380 will be used to provide more capacity for key high-density markets and maximize use of scarce Heathrow slots," Walsh said in a statement.

A Drop in the Bucket

Yet the deal, coming less than three weeks before Singapore Airlines (SIAL.SI) is scheduled to put the first A380 into service Oct. 15, also underscores the long odds Airbus faces in making the plane a commercial success. In seven years, Airbus has logged only 177 orders for the big plane, out of 420 it says will be needed to break even after a two-year production delay slashed billions from the bottom line (BusinessWeek, 1/17/07).

Against that backdrop, BA's order for 12 planes "is not even a drop in the ocean," says Doug McVitie, an independent aerospace analyst based in Dinan, France.

BA says it will use the A380 to boost capacity on a relatively limited number of routes between crowded airports such as London, Hong Kong, and Singapore. But it's likely to stick with smaller planes on most of the heavily traveled North Atlantic routes that are its most important business, says Richard Aboulafia, an analyst with the Fairfax (Va.) Teal Group. The A380, which can seat more than 555 passengers, is too big for most of those routes, he says. "This only reinforces the image that it is a niche plane."

As its fleet of 57 Boeing 747s is retired from service, analysts say BA is likely to replace many of them either with an updated Boeing 747, which seats up to 460, or with the smaller 787 Dreamliner, or a rival Airbus plane, the A350. The A350 has struggled to find customers but got a boost at this summer's Paris Air Show (BusinessWeek, 6/18/07). BA has confirmed that it is studying all three planes for future purchases.

Handing Out Discounts

Airbus watchers also fret about the A380's heavy dependence on Emirates, which accounts for 55 of the current 177 orders. No North American carrier has ordered the plane, and among other major customers—including Singapore, Qantas Airways (QAN.AX), Lufthansa (LHAG.DE), and Air France (AKH)—none has ordered more than 20.

Still another worry is that Airbus has handed out overly generous discounts to win A380 orders. BA, while acknowledging that it had received a discount, declined to elaborate. Airbus has said repeatedly that none of its A380 sales have been priced below cost. Even assuming that's true, it might still be more than a decade before the megaplane could turn a profit.

Investors already have suffered a white-knuckle ride as EADS shares have plunged more than 40% since early 2006. Small wonder then that this latest A380 order isn't enough to persuade them to unbuckle their seatbelts and whoop for joy.

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