Gadfly

Airbus Is Playing Chicken With Emirates

Both the manufacturer and Emirates have reason to keep the A380 program aloft.
From
Photographer: Jasper Juinen

Employees on their way out are often tempted to be frank about long-standing corporate problems or to settle scores. Airbus chief salesman John Leahy, who's retiring this year, delivered a humdinger on Monday, saying that unless Emirates bought more A380 superjumbos, Airbus would have "no choice but to shut down the program".

His intervention looks less like negotiation and more like corporate emotional blackmail, and Emirates has every right to be furious. Yet Leahy's no fool. He knows the Dubai-based carrier has backed itself into a corner on the A380 and has just as much to lose from the program's termination. 

Doubtless Leahy's still smarting from November's Dubai airshow, when Emirates failed to place an order for another 36 A380s, and purchased some Boeing 787s instead. Still, threatening to shut down the program is a risky gambit as it might become a self-fulfilling prophesy.

Dwindling Giant

Airbus has struggled to find new buyers for the A380, causing the backlog to shrink

Source: Deutsche Bank, Gadfly calculations

If they weren't worried enough already, other airlines will infer from Leahy's statement that the program really is on the critical list, so why place an order? Neither will his statement help second-hand values of the aircraft, an important consideration for potential lessors and airlines. 

Besides his retirement, there are other reasons for Leahy's nonchalance. While Airbus has chucked many billions of euros at the A380 over two decades, that's now sunk cost. The company hinted on Monday that—in theory—it could live with cutting production to six aircraft a year 1 . At that rate, the plane would amount to about 1.5 billion euros of annual sales, according to my rough calculation 2 , or less than 2 percent of estimated 2020 revenue.

If it shut the program altogether, the Airbus share price might even increase. Its balance sheet includes about 7 billion euros ($8.6 billion) of refundable government advances related to the A380 and A350. Deutsche Bank analysts think about 45 percent of that obligation could be written off if the A380 was put out of its misery.

By contrast, Emirates, which already has about 100 A380s—far more than anyone else—has designed its Dubai hub strategy around the superjumbo. It spent $3.3 billion on a special concourse for the aircraft.

Emirates marketing goes big on the A380 because passengers tend to like the roomy twin-deck interior. The airline's boss Tim Clark has often seemed like the 550-seat plane's one public champion. He extols its ability to ease the squeeze at congested airports such as Heathrow, while pushing Airbus to invest in an upgrade (so far fruitlessly).

Of course, in reality Airbus doesn't want to shut down A380 production any more than Emirates. It's an emblem of European industrial cooperation. Ditching it would be a huge symbolic defeat, which is why desperate executives are even willing to hand China a production role.

Moreoever, both companies still believe there's a future here. "It's inconceivable that air traffic can keep compounding at the current rate without the A380 eventually finding a bigger market," says Sandy Morris at Jefferies, adding that it might even be worth losing a couple of hundred million euros a year on it in the meantime.

Leahy's intervention is really about who foots the bill to keep the A380 program alive. Expect the high-stakes blinking contest to continue.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Airbus said this was the minimum needed to run an "industrially-efficient production line"

  2. I've halved the A380's list price to account for the fact that airlines don't pay it.  

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