MIAMI — All Nippon Airways (ANA) is reportedly planning to order three Airbus A380s, according to various reports from Japanese media. Neither Airbus nor ANA have made any official announcement or confirmed the veracity of the reports, which state that the deal is part of a larger strategic vision for ANA which is scheduled to be announced in the coming weeks.

Growing out of the Battle over Skymark

Last August, ANA won creditor backing on its plan to lead a turnaround of troubled Japanese budget carrier Skymark Airlines, defeating a proposal from Delta Air Lines. ANA, which offered to buy 16.5 percent stake in Skymark, won a majority of votes from the creditors, and ANA was granted access to Skymark’s 36 landing slots at Tokyo Haneda Airport.

While ANA won roughly 2/3 of the overall votes from Skymark’s 170 creditors, it certainly would not have won the overall battle against the Delta-led plan had it not been for the support of Airbus, who was Skymark’s second largest creditor. Airbus’ financial interest in Skymark stemmed primarily from an order for six Airbus A380s that Skymark placed back in 2011 in a fit of exuberant expansionism, representing Airbus’ first major victory in the Japanese market in decades. But as Skymark’s finances deteriorated, it found itself unable to make payments for the delivery of these aircraft.

Skymark Airlines’ first A380 takes off from Toulouse to Hamburg on its first flight. (Credits: Airbus)
Skymark Airlines’ first A380 takes off from Toulouse to Hamburg on its first flight. (Credits: Airbus)

By 2014, Airbus had given up on Skymark ever taking delivery and cancelled the order, demanding a $710 million cancellation fee from Skymark. This demand triggered Skymark’s bankruptcy filing, and more importantly, it left Airbus with two white-tail A380s that now lacked customers for. This left Airbus as a creditor of Skymark, and gave it a significant voice in the decision between Delta and ANA.

For ANA, the benefits of the Skymark deal are clear. Even with its hub at Tokyo Narita diminished, Delta is the third largest competitor on the long haul routes from Japan after ANA and Japan Airlines. Allowing Delta access to Skymark’s Haneda slots, even indirectly, would ratchet up competitive pressure on ANA, which enjoys a relatively cozy position at Haneda with the main share of long-distance slots thanks to its close ties to the current Japanese government. Even beyond their competitive position vis-à-vis with Delta, the slots at Haneda are almost as coveted and valued as those at London Heathrow or New York’s La Guardia.

At a conservative valuation of $15 million per slot pair (half of that of an average Heathrow slot pair), the 36 slot pairs would be worth $540 million; at a more realistic valuation of $20 million, the total value would be $720 million. Between the raw value of the slot pairs and the added benefits of reduced competition, it was a no brainer for ANA to accept pretty much any deal that would win Airbus’ support, at least within reason.

Initial A380 destinations include Hawaii

The initial news reports indicated that ANA plans to deploy the A380 on its flights to Hawaii. This makes sense for several reasons:

  • The Japan – Hawaii market is huge (mostly driven by Japanese tourists) at more than three million passengers (roundtrip) annually. Add in demand from ANA’s Asian markets served at Narita, and there will be plenty of traffic to draw upon: important in filling the A380.
  • Hawaii-Japan is also primarily a leisure market, and thus is very price sensitive. The A380 has the lowest Cost per Available Seat Mile (CASM) of any airplane on the market, particularly if ANA was able to get customary discounts, and at the current fuel prices, it would enable ANA to remain competitive in this price-sensitive market.
  • ANA’s current service to Hawaii consists of two daily Boeing 767s from Narita and one from Haneda. The two flights to Honolulu depart from Narita an hour apart (20:35 and 21:35) while the return flights depart an hour and a half apart (10:30 and 12:00). In a leisure market such as Honolulu, frequency matters very little, so it makes a lot of sense to combine these two flights into a single A380 departure. The 767s are configured with 200-215 seats (for 400-430 total seats). Assuming a 550-600 seat configuration for ANA’s A380s, the carrier will be able to offer 120-200 additional seats (added revenue potential) at a lower CASM and still having the same trip costs as the two daily 767s.

However, one daily flight to Honolulu isn’t enough to satiate a fleet of three aircraft, and two daily flights would be overkill. Because of this, it makes sense for ANA to also consolidate service to a couple of Asian destinations.

Bangkok, in particular, is a feasible A380 destination as it is a leisure-driven market such as Honolulu, and also it has two daily departures from Narita that leave within 55 minutes of each other (17:20 and 18:15). Both return flights are actually spaced further apart, as one is a red-eye that arrives to Narita at 8:25 local, while the other is a morning departure that arrives to Tokyo at 15:05. Given that eastbound connectivity in the US begins at 11:00, the red-eye would likely be retained though the morning departure without affecting rotations.

Singapore is another strong candidate with a similar service profile at Narita. The two Singapore departures are 1:15 apart (16:50 and 18:05) while the return flights are once again a red-eye and a morning departure. Depending on how dependent the Singapore flight is on US/Canada connections, ANA can keep either the morning flight or the red-eye.

Operating each of these three flights daily, it would provide a good utilization of the aircraft close to 14 hours per day, but it would also leave ANA with little slack in the fleet. An alternative is to opt to operate 13-17 weekly roundtrips: daily to Honolulu and 3-5 weekly to each of Bangkok and Singapore. Right now, each city has one daily Boeing 787-8 flight and one daily Boeing 777 (-200ER and -300ER respectively) flight, taking up ~1.5 of each aircraft type.

The 1.5 787s could instead be deployed to operate 2-4 weekly as double daily flights to each of Singapore and Bangkok (technically, this would eat up 2 787s at a time, but the 1.5 comes from the fact that the aircraft would be rotated with other 787s flying to other destinations at Narita). This would still free up the 777s for further expansion while allowing for slack in the A380 fleet as well.

A precursor for a larger fleet?

The initial order of three aircraft is an odd size for fleet, given that the current smallest A380 fleet is China Southern Airlines, with five aircraft. There is certainly a chance that ANA is using these first three A380s as a test bed, and plans to expand its fleet with another 3-7 aircraft, becoming a solid customer for the A380 once it sees the benefits.

Looking at ANA’s current schedule, the main options for consolidation of multiple daily flights come at hubs of and in conjunction with trans-Pacific joint venture (JV) partner United Airlines. The two daily flights from Houston (one each on United and ANA on 777-200ERs) have disparate departure times from Narita (10:50 and 17:00 for ANA and United respectively), but do depart Houston almost simultaneously (10:15 and 10:40 – ANA/United in that order).

An ANA Boeing 777-300ER taxies out of Houston's George Bush Intercontinental Airport. (Credits: Roberto Leiro)
An ANA Boeing 777-300ER at Houston’s George Bush Intercontinental Airport. (Credits: Roberto Leiro)

A symmetrical opportunity arises in Chicago, where ANA operates double daily 777-300ERs alongside a daily United Boeing 747-400. ANA and United have Narita departures 45 minutes apart (17:10 and 17:55). The return journey is disparate though, with two departures (10:45 and 12:15) necessitating impossible turns or several hours on the ground and a third departure at 16:15. The same applies in Washington Dulles (11:00/16:40 from Narita and 11:10/12:20 from Dulles).

Los Angeles (17:05/17:50 from Narita and 11:05/11:30 from Los Angeles) and San Francisco (17:10 and 18:20 from Narita and 11:10/11:10 from San Francisco are better opportunities and large enough destinations for origin and destination traffic (O&D) traffic to Japan and Asia to justify the larger gauge. So these two are likely to be the first destinations to go A380 on long haul flights if ANA goes in that direction.

A major benefit of the A380 would be to restore ANA and Narita’s competitiveness as a trans-Pacific connecting hub. In the recent years, Seoul, Taipei, and even Shanghai/Beijing have overtaken Narita as a connecting complex for North/South America due to the lower cost base in those countries. But an A380 would allow ANA (and by extension its JV partner United) to compete on an equal CASM footing, resuscitating some of Narita’s original hegemony.

However, there is a major weakness in this line of thinkingthe reports of Hawaii as an initial destination. All of the US markets mentioned, and for that matter Singapore as well, are business travel markets with a substantial demand for a true international first class. And Tokyo is one of few cities worldwide with a genuine international first class demand. Hawaii, on the other hand, is a leisure market where a first class cabin makes no sense. Given this, a large A380 fleet at ANA would necessitate either a sub-optimal aircraft for the Hawaiian route or a costly sub-fleet of leisure-configured aircraft.

Airbus (and Amedeo) breathe a sigh of relief

For Airbus, the victory here is clear. In one fell swoop, it has gotten something in return for its position as a creditor in Skymark, has won a new customer for the A380 and some positive PR momentum after nothing but bad news in 2015, besides managing to unload three (presumably) white-tail A380s that have already been built and are sitting on the tarmac in Toulouse (two for Skymark and one for Russia’s Transaero).

Moreover, Airbus has to be optimistic that ANA may develop into a solid A380 customer, as every financially secure airline with a suitable home market (British Airways, Singapore Airlines, Emirates, Korean Air, Asiana, Qantas, Lufthansa, and even Air France) has found them to be a useful tool for serving key medium and long haul markets.

By extension, ANA’s newfound status as an A380 customer could also be a boon for leasor Amedeo, who has not found a single customer for the 20 A380s it has on order. Given the small sub-fleet and likelihood of a top up order as discussed above, ANA could be a home for some of those A380s on leases, solving one of Airbus’ major woes.

A less likely, but still possible option, is for ANA to acquire additional A380s from the used market. Thai Airways and Malaysia Airlines each operate six A380s apiece with Rolls Royce engines (ANA’s planes will also reportedly sport the Rolls-Royce Trent 900s) and are reportedly shopping their aircraft on the market. These aircraft are relatively young and would allow ANA to acquire a fleet of 10-15 aircraft overall for a price of $1.3-1.8 billion, a relative bargain for an aircraft with the size and revenue potential of the A380.