This article is taken from Aviation week and Space Technology July 18-31, 2016.On Dec. 19, 2000, Jean-Luc Lagardere, co-chairman of the newly formed EADS, stood in front of a big crowd in Toulouse where he and his German colleague Manfred Bischoff had just announced the launch of the biggest commercial aircraft everthe A380. We will achieve superior profitability, Lagardere confidently predicted. And Bischoff said with equal certainty: There is a sufficient market for the aircraft that would transform air transport much like the Boeing 747 did in the 1970s.At this years Farnborough Airshow, Airbus CEO Fabrice Bregier had the rather unpleasant task of amending these statements. The A380 is still decades away from recovering its development costs, in a best-case scenario. But whether it will reach that point became even more doubtful when Bregier conceded thatat least for nowthe market is not nearly as big as the founders of EADS had hoped. EADS was later renamed Airbus Group.Because of the slow pace of orders for the A380, Airbus is severely curtailing production. The manufacturer is currently producing 2.5 aircraft per month. It turned out only 27 aircraft in 2015. The output will go down to 20 in 2017, and just one aircraft per month in 2018. Airbuss $20 billion-plus bet at the turn of the century that it was going to break Boeings monopoly in the very large aircraft market is about to go terribly wrong. That decision is rapidly turning into a prime example of market misjudgment and bad timing.Instead of being the first aircraft in a new era of air travel, the A380 is now increasingly perceived as the last of an old era when big was beautiful.In some respects, the A380 is the victim of Airbuss own success. Back in the old days, lower unit costs were mainly achievable by making aircraft larger. But since the introduction of the A380, major efficiency gains have been realized by engine manufacturers that enable airlines to operate smaller wide bodies such as the A350 and Boeing 787 at unit costs similar to those of the A380. Emirates Airline President Tim Clark says even the 777-300ER comes near the A380 in terms of cost per seat mile.But if there is no need to operate large aircraft to drive down costs, why take the risk of having more seats that one must sell on any given flight'Bregier, of course, thinks differently. He believes that general air traffic growth and constraints at key airports will require airlines to up gauge aircraft size regardless of the cost argument. The trend is with us, he said.The problem is that the argument may make sense in theory, but too few airlines are following it in reality. By ramping down A380 production, Airbus is giving the theory another 2-3 years to come to fruition while applying a tourniquet to the flow of red ink on the program. If orders still do not come in by then, the question will no longer be about how many aircraft are produced, but when production will end.More and more, observers are convinced that discontinuing the program is unavoidable. The rate cut looks like the beginning of the end, Teal Group analyst Richard Aboulafia says. I cannot imagine any market or technology changes that would cause sales to recover. The best they can do is to find a face-saving way to terminate the program.Airbus has firm orders for 319 A380s, 193 of which had been delivered by the end of June. The backlog is 126, of which 61 are for Emirates Airline and can be considered a safe bet. However, the picture shifts when it comes to the remaining 65 aircraft. In fact, orders for around 40 aircraft look shaky. The backlog still includes orders for 20 aircraft from lessor Amedeo, which has not yet placed the aircraft with any operators; 10 aircraft originally planned for Hong Kong Airlines (and now listed for an undisclosed customer); six for Virgin Atlantic; and three for now-defunct Transaero. It appears to be highly unlikely that Hong Kong and Virgin will take delivery of their aircraft. A further two aircraft are listed for Air France, but the carrier has already made clear it does not intend to accept them.Most of the existing big operators such as Lufthansa, British Airways and Qatar Airways say they will not take more than their original orders.What is more, a preliminary commitment from Iran Air for 12 A380s announced in January does not appear to be turning into a firm deal.Bregier remains confident, at least officially. Airbus plans to keep A380 output at low levels for a few years before we can ramp back up again, he said at the Farnborough Airshow. He insisted that he sees big upside potential in the program in spite of the announced scaling back.Bregier sees two reasons why production could be boosted again at some point. He argues that Emirates will eventually have to replace its existing fleet, which will grow to 142 aircraft in the next few years. After all, Clark has often made clear that the carrier would want to replace the aircraft with the A380 again, ideally with an A380neo, and that an order for up to 200 aircraft is possible.But the fact that the A380neo proposal has been shelved for several years is further evidence that Airbuss confidence in sales prospects for its flagship aircraft is dwindling.Projecting such optimism for 25 years later is a further indicator of Airbuss misjudgment.The much more short-term challenge is to keep program costs under control. Bregier says Airbus knows it can profitably build 20 A380s in 2017, down from the current level of 27. He indirectly concedes going to 12 will not be profitable: I dont say we will break even at 12. On the other hand, he emphasizes that the losses incurred at that low production rate will not be material for Airbus.However dramatic the A380 crisis may look, it is unique. The rest of the industry (and the Airbus portfolio) are nowhere near crisis mode.Source: AW&ST July 18-31, 2016.
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