Another 2 billion could be down the Airbus drain
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Another 2 billion could be down the Airbus drain
Airbus's Guarantee to A340 Buyers Could Cost It $2 Billion
Two years ago, Airbus (EAD:FP) stopped manufacturing its A340 passenger jet, a four-engine widebody suited to flying extra-long routes including Los Angeles to Singapore. While the production line is a memory, there’s one thing that can’t be forgotten: promises the aerospace giant made to many buyers that the jets would hold their value or it would make up the difference. Now, after watching prices of used A340s slide for years, Airbus is scrambling to persuade customers they didn’t buy a white elephant.
At a Dec. 4 meeting in London for airline and aircraft-leasing company representatives, the European planemaker floated a plan to boost the seat count of existing A340s by 8 percent and lower maintenance expenses to improve the plane’s economics—and raise its resale value. Demand for the A340, introduced in 1993, dried up as oil prices soared and aircraft makers introduced more energy-efficient two-engine models capable of flying transoceanic routes that once required four engines. Richard Branson’s Virgin Atlantic Airways, after launching the most recent version of the A340 in 2002 at a splashy London ceremony with supermodel Claudia Schiffer, quietly retired the plane last year.
Deutsche Lufthansa (LHA:GR), which flies 48 A340s—more than any carrier—says the plane’s latest variant uses about 30 percent more fuel per passenger-mile flown than the two newer twin-engine widebodies that it has on order, Boeing’s (BA) 777X and Airbus’s A350. That’s why, after spending an average $120 million for an A340 a few years ago, airlines and leasing companies today are reselling the same plane for about $20 million—“and only that if they’re lucky,” says Phil Seymour, president of IBA Group, a British aviation consulting firm. In September, International Lease Finance (AIG) took a $1.1 billion writedown on its fleet of four-engine planes, which consists mainly of A340s.
More than bruised customer relations are at stake. Airbus sold many A340s with so-called asset value guarantees—basically pledges to compensate buyers if the resale value fell below a specified level. Douglas Harned, an analyst at Bernstein Research, estimates that 40 percent of A340-500s and A340-600s, the newest versions of the plane, are covered by guarantees of $60 million to $70 million—at least three times the current market price. “Cash exposure from the asset value guarantees could be in the $1 billion to $2 billion range,” although Airbus may have insurance to offset some of that, Harned wrote in a Dec. 2 note to clients.
Often Airbus factors compensation payments into transactions in which customers trade in their A340s for newer planes. It arranged the resale of five A340s that Singapore Airlines (SIA:SP) had used on its recently ended nonstops to Los Angeles and Newark, N.J., while offering discounts on the Asian carrier’s order for the new, superefficient A350 widebodies made largely of carbon fiber.
Airbus contends the A340 makes commercial sense for airlines seeking to “grow their long-haul markets” and is “the VIP aircraft of choice” because of its spacious cabin and long-range capability, a company spokesman says. Some carriers, such as Norwegian Air Shuttle (NAS:NO), have leased A340s while awaiting delivery of other planes or as a stopgap while grappling with technical problems on Boeing’s carbon-fiber 787 Dreamliner.
Potential buyers are scarce, though. Emerging-market airlines fly mainly shorter routes where narrowbody planes make more sense, and carriers with longer routes aren’t always able to fill the A340’s almost 350 seats. “There will be times, let’s say during the holiday season, when the economics will work,” IBA’s Seymour says. “But if at other times you’re only filling 50 percent of the aircraft, the fuel burn is so high that you’ll be losing money every time."
Boeing’s four-engine 747 has been losing favor with airlines for the same reasons, and the U.S. aircraft maker has bought back the jumbo jet from customers. Of the 19 older 747s that changed hands in the first seven months of 2013, Boeing took seven, according to data compiled by Ascend Online Fleets. That made it the single biggest buyer of used 747s during the period. It’s an unwelcome expense for Boeing, but at least the 747, which is still in production, has been flying since 1970 and booked more than 1,500 orders before its dotage. Demand for the A340 slowed within a decade of its launch, and only 377 were sold.
Another victim of the A340’s troubles is Rolls-Royce (RR/:LN), which made the engines for the more recent versions of the plane. Engine manufacturers count on long-term maintenance contracts to make up for deep discounts they offer on engine sales for new aircraft. If the planes are resold too quickly or scrapped, Rolls may never get its money back. Now it may ease the terms of long-term maintenance agreements, which could aid secondhand owners. Dominic Horwood, chief commercial officer for civil large engines at Rolls, attended the London A340 pep talk, along with John Leahy, Airbus’s top salesman. That’s evidence, analyst Harned says, that the situation “is being taken very seriously” by both companies.
The bottom line: Airbus could be on the hook for as much as $2 billion to compensate owners whose A340 widebodies have lost value.
Airbus's A340 Resale Value Guarantee Could Cost Billions - Businessweek
Two years ago, Airbus (EAD:FP) stopped manufacturing its A340 passenger jet, a four-engine widebody suited to flying extra-long routes including Los Angeles to Singapore. While the production line is a memory, there’s one thing that can’t be forgotten: promises the aerospace giant made to many buyers that the jets would hold their value or it would make up the difference. Now, after watching prices of used A340s slide for years, Airbus is scrambling to persuade customers they didn’t buy a white elephant.
At a Dec. 4 meeting in London for airline and aircraft-leasing company representatives, the European planemaker floated a plan to boost the seat count of existing A340s by 8 percent and lower maintenance expenses to improve the plane’s economics—and raise its resale value. Demand for the A340, introduced in 1993, dried up as oil prices soared and aircraft makers introduced more energy-efficient two-engine models capable of flying transoceanic routes that once required four engines. Richard Branson’s Virgin Atlantic Airways, after launching the most recent version of the A340 in 2002 at a splashy London ceremony with supermodel Claudia Schiffer, quietly retired the plane last year.
Deutsche Lufthansa (LHA:GR), which flies 48 A340s—more than any carrier—says the plane’s latest variant uses about 30 percent more fuel per passenger-mile flown than the two newer twin-engine widebodies that it has on order, Boeing’s (BA) 777X and Airbus’s A350. That’s why, after spending an average $120 million for an A340 a few years ago, airlines and leasing companies today are reselling the same plane for about $20 million—“and only that if they’re lucky,” says Phil Seymour, president of IBA Group, a British aviation consulting firm. In September, International Lease Finance (AIG) took a $1.1 billion writedown on its fleet of four-engine planes, which consists mainly of A340s.
More than bruised customer relations are at stake. Airbus sold many A340s with so-called asset value guarantees—basically pledges to compensate buyers if the resale value fell below a specified level. Douglas Harned, an analyst at Bernstein Research, estimates that 40 percent of A340-500s and A340-600s, the newest versions of the plane, are covered by guarantees of $60 million to $70 million—at least three times the current market price. “Cash exposure from the asset value guarantees could be in the $1 billion to $2 billion range,” although Airbus may have insurance to offset some of that, Harned wrote in a Dec. 2 note to clients.
Often Airbus factors compensation payments into transactions in which customers trade in their A340s for newer planes. It arranged the resale of five A340s that Singapore Airlines (SIA:SP) had used on its recently ended nonstops to Los Angeles and Newark, N.J., while offering discounts on the Asian carrier’s order for the new, superefficient A350 widebodies made largely of carbon fiber.
Airbus contends the A340 makes commercial sense for airlines seeking to “grow their long-haul markets” and is “the VIP aircraft of choice” because of its spacious cabin and long-range capability, a company spokesman says. Some carriers, such as Norwegian Air Shuttle (NAS:NO), have leased A340s while awaiting delivery of other planes or as a stopgap while grappling with technical problems on Boeing’s carbon-fiber 787 Dreamliner.
Potential buyers are scarce, though. Emerging-market airlines fly mainly shorter routes where narrowbody planes make more sense, and carriers with longer routes aren’t always able to fill the A340’s almost 350 seats. “There will be times, let’s say during the holiday season, when the economics will work,” IBA’s Seymour says. “But if at other times you’re only filling 50 percent of the aircraft, the fuel burn is so high that you’ll be losing money every time."
Boeing’s four-engine 747 has been losing favor with airlines for the same reasons, and the U.S. aircraft maker has bought back the jumbo jet from customers. Of the 19 older 747s that changed hands in the first seven months of 2013, Boeing took seven, according to data compiled by Ascend Online Fleets. That made it the single biggest buyer of used 747s during the period. It’s an unwelcome expense for Boeing, but at least the 747, which is still in production, has been flying since 1970 and booked more than 1,500 orders before its dotage. Demand for the A340 slowed within a decade of its launch, and only 377 were sold.
Another victim of the A340’s troubles is Rolls-Royce (RR/:LN), which made the engines for the more recent versions of the plane. Engine manufacturers count on long-term maintenance contracts to make up for deep discounts they offer on engine sales for new aircraft. If the planes are resold too quickly or scrapped, Rolls may never get its money back. Now it may ease the terms of long-term maintenance agreements, which could aid secondhand owners. Dominic Horwood, chief commercial officer for civil large engines at Rolls, attended the London A340 pep talk, along with John Leahy, Airbus’s top salesman. That’s evidence, analyst Harned says, that the situation “is being taken very seriously” by both companies.
The bottom line: Airbus could be on the hook for as much as $2 billion to compensate owners whose A340 widebodies have lost value.
Airbus's A340 Resale Value Guarantee Could Cost Billions - Businessweek
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It's not all about degraded operating cost efficiency; it's about passengers' aversion of 17 hours non-stop sectors, especially when seated in economy class. After about 12 hours' flight time in a crowded econ class, passengers start bouncing off the walls. 
The bottom line: Airbus could be on the hook for as much as $2 billion to compensate owners whose A340 widebodies have lost value.
Or is there some suggestion that Airbus forgot or omitted to show this as a contingent liability on their balance sheet ?
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How much have Boeing thrown down the pan with the 748i and freighter developments?
How much did the 787 grounding and late delivery cost them?
How much did the 787 grounding and late delivery cost them?
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It's not all about degraded operating cost efficiency; it's about passengers' aversion of 17 hours non-stop sectors, especially when seated in economy class. After about 12 hours' flight time in a crowded econ class, passengers start bouncing off the walls.
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Perhaps Boeing can buy up a few A340's (like they did with those ex-SIA jets) from those unfortunate Airbus clients in order to jack up the A340's resale value!
It's a win-win solution!
It's a win-win solution!
I see another A v B fight looming. So what's the answer to ensuring frames of the future hold their value and not be bitten by this 340? Will be be saying the same thing in 20 years time about the A380?
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In fairness only a few of the A340s (the -500s) were designed for those ultra-long sectors, and even fewer were actually operated on such long sectors. The rest (-300/-600) are just "normal" long-range aircraft, albeit with very unfavourable economics. So it is virtually all about degraded operating cost efficiency.
Plastic PPRuNer
"......it's about passengers' aversion of 17 hours non-stop sectors, especially when seated in economy class. After about 12 hours' flight time in a crowded econ class, passengers start bouncing off the walls."
Dead right. It is a miserable experience only to be undertaken if absolutely unavoidable.
[The TSA just put the cap on it]
Dead right. It is a miserable experience only to be undertaken if absolutely unavoidable.
[The TSA just put the cap on it]
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The Boeing Company (BA) news: Boeing struggling to sell $1.1B of early 787s, Bloomberg reports - Seeking Alpha
Boeing have their own problems as well.
Boeing struggling to sell $1.1B of early 787s, Bloomberg reports
FEB 25, 2014BA
Boeing (BA -1.1%) is struggling to find buyers for 11 of its earliest 787 Dreamliners valued at $1.1B after two airlines dropped orders for models from the jet’s troubled beginnings, according to a Bloomberg report.
The Dreamliner ran more than three years late while Boeing worked out kinks with the carbon-fiber materials, on-board systems and a manufacturing process that relied more heavily on suppliers; the company is said to be starting upgrades on the early 787s, the last ones to be fixed, as it steps up sales efforts.
Barring a global aerospace slump, analysts say Boeing should be able to place the reworked 787s with bargain-hunting airlines seeking twin-aisle jets to fly shorter, densely traveled routes, particularly in Asia.
Boeing have their own problems as well.
Boeing struggling to sell $1.1B of early 787s, Bloomberg reports
FEB 25, 2014BA
Boeing (BA -1.1%) is struggling to find buyers for 11 of its earliest 787 Dreamliners valued at $1.1B after two airlines dropped orders for models from the jet’s troubled beginnings, according to a Bloomberg report.
The Dreamliner ran more than three years late while Boeing worked out kinks with the carbon-fiber materials, on-board systems and a manufacturing process that relied more heavily on suppliers; the company is said to be starting upgrades on the early 787s, the last ones to be fixed, as it steps up sales efforts.
Barring a global aerospace slump, analysts say Boeing should be able to place the reworked 787s with bargain-hunting airlines seeking twin-aisle jets to fly shorter, densely traveled routes, particularly in Asia.
AFAIK Singapore Airlines'e five A340-500's were the only ones built with the extra centre fuel tank allowing it do fly SIN-EWR. Having travelled on this route many times I can assure you that the passengers in general were very happy with the 100 business class layout. I certainly was, even after 19 hours.
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Residual value guarantees are hardly new in the industry.
Exactly!!! Airbus will have been very remiss if they haven't insured out the residual value of these aircraft, residual value is insured out in layers, the lower layers being the most expensive. Bit of an underwriting nightmare, trying to assess the value of an aircraft ten years down the track, but there are specialist insurers and re-insurers who do it, most sought after by leasing companies. If Airbus have been circumspect and paid their premiums it will only cost them any difference they haven't insured.