Image Courtesy of Airbus

MIAMI – The Airbus A380 program may soon be facing a critical challenge in the form of declining aftermarket valuations for the 600+ seat superjumbo aircraft.

Four Airbus A380s, owned by German asset management company Dr. Peters Group, are scheduled to be returned between October 2017 and June 2018 by Singapore Airlines at the expiration of 10-year lease deals.

For an aircraft with a normal aftermarket and anything resembling robust demand, this would usually trigger acquisition by another airline, whether through a lease or an outright purchase. The problem is that the A380 is anything but a normal aircraft. According to a report from Bloomberg’s Richard Weiss:

The double-deckers could be “parted out” to recover engines and other spares worth at least $100 million per plane, according to German fund manager Dr. Peters.

The A380 has a real aftermarket problem

It’s hard to overstate how unusual and problematic this situation is for Airbus. While breaking the frames up for parts might make economic sense for Dr. Peters in the current market environment, if the A380 was an aircraft with healthy airline demand, that wouldn’t be a sensible decision.

According to Weiss’ report, Dr. Peters is targeting a few different customers for the four A380s, offering options ranging from purchases to shorter two to four-year leases.

At the same time, talks are continuing with six potential operators of the jets, including an Asian low-cost airline that would fly them in a 700-seat single-class layout, Chief Executive Officer Anselm Gehling said in an interview. Prospective users also include carriers in the U.S., which has so far eschewed the model, and Europe, where British Airways owner IAG SA is continuing to evaluate deploying used A380s at airlines within the group, he said.

Unfortunately for Dr. Peters, other than British Airways, none of those are viable prospects. We can say with certainty that no major U.S. airline has designs on operating the A380 in the current market environment of Wall Street capacity constraints.

They have certainly done their due diligence on the model, but the acquisition price would probably have to be half of the ~$100 million that Dr. Peters would get for an acquisition by, say, United, even to begin to make economic sense.

Beyond that, a sub-fleet of four aircraft is functionally useless as it is too small to generate meaningful economies of scale without another aircraft with commonality.

The notion of an Asian low-cost carrier operating the A380 with close to 700 seats is probably more realistic – as there are a few routes in the region that can sustain A380 volumes like Kuala Lumpur – Singapore, Tokyo – Beijing, Bangkok – Hong Kong, and so-forth.

The problem is that all of these markets are heavily fragmented and short haul, which means that a carrier like AirAsia would have to sacrifice frequency on a route like Bangkok – Singapore to actually fill an A380. As travelers have proven time and time again in short-haul markets, lack of frequency is functionally a kiss of death.

The one semi-realistic option presented is selling to British Airways. Both British Airways and Singapore Airlines operate the A380 with the Rolls-Royce Trent 900, which maintains commonality in an acquisition.

And British Airways is the rare carrier with a hub (London Heathrow) that is restricted and large enough for the A380 to make a modicum of sense. The problem is that British Airways is still uncertain about whether it wants to operate used A380s (or used widebodies, more broadly) and that will naturally limit British Airways’ interest in these frames.

The next A380s to be scrapped won’t be worth $100 million

So it at the very least is eminently possible that these four A380s will be scrapped. For Airbus, this is a nightmare scenario. While the first set of A380s that are scrapped may yield as much as $100 million due to the current rarity of parts, the next set of frames to be scrapped will probably yield less than 60% of that number.

By the time 10-15 A380s have been scrapped, the parts value will dip below the amount required to make a 10-year lessor (or an airline customer selling the aircraft) back their money.

The other big loser here is Emirates (and in turn potentially Airbus). If the aftermarket for its A380 fleet is so soft that an asset management firm cannot place four measly frames with a new customer, Emirates has no prayer of moving on from the 30+ A380s it would need to in order to take full delivery of its more than 40 outstanding A380 orders.

A way to think about this using back of the envelope math is that Emirates paid maybe $180-200 million per A380 and in its economic models would need to sell each A380 for about $60 million to come out ahead.

But if Dr. Peters isn’t able to generate that kind of economic value on four frames, then all of a sudden it may make more economic sense for Emirates to fly its A380s for close to 20 years (fully depreciating existing aircraft) and defer or cancel the replacement orders that it currently has.

Even the parts avenue isn’t that realistic as Emirates would likely be the customer for most of the parts in the first place!

An Emirates cancellation or deferral would be catastrophic for the A380. As we have outlined at regular increments in this column, the A380 is a fundamentally flawed airplane that simply doesn’t make economic sense for more than six or seven airlines worldwide (Emirates, British Airways, Singapore Airlines, Korean Air, Cathay Pacific, and Lufthansa).

This latest ignominy and signal of a soft aftermarket does nothing to change that conclusion.