PPRuNe Forums - Implications Of A United Airlines A380 Superjumbo Order

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This article is taken from a stock information web site and if this is true will be a game changer for United.

Implications Of A United Airlines A380 Superjumbo Order - United Continental Holdings, Inc (NYSE:UAL) | Seeking Alpha

Jun. 2, 2015 2:41 AM ET | 46 comments | About: United Continental Holdings, Inc (UAL),
Disclosure: The author is long UAL. (More...)

Summary

United is reportedly in intermediate stages of ordering the world's largest passenger aircraft, the A380.
Investors are likely to be concerned over capacity growth with such an aircraft, given recent concerns over capacity growth.
Overall, I see the aircraft as a net positive for United, with many benefits.

There has been a rumor that has come from reliable sources at United Airlines (NYSE:UAL) that states the company is in intermediate stages in ordering the Airbus A380 - the world's largest passenger aircraft. Airbus (OTCPKADSY) is reportedly going to be giving United two A380 aircraft on a trial basis that were originally destined for the now bankrupt Skymark Airlines of Japan.
(click to enlarge)http://static.cdn-seekingalpha.com/u...owth-Picks.jpg
Fig. 1: A rendering of an A380 in United Airlines livery
This is very exciting news for United. However, it will likely cause a lot of concern on Wall Street once the news becomes more widespread. The A380 has more seats than any other aircraft flying right now, and can carry up to 850 passengers on two full decks, compared to the typical 737 that carries around 160. With all the recent focus on airlines growing capacity, this order may have come at a bad time. I have done extensive analysis, however, and believe the order will be a net positive for United and can have minimal impact on its capacity. I go into more details on this below.
Concerns

First off, I will go into all the concerns people have had with the A380 and how these apply to United Airlines. The A380 has had trouble selling in the United States, and to-date, no US airline has purchased any. This is mainly due to the fact that US airlines operate hubs out of many cities, United has hubs at Newark, Chicago, Houston, San Francisco, Denver, Washington, Tokyo and Guam. The A380 works better for airlines that consolidate all their passenger traffic through one large hub, simply due to the aircraft's large size. The one hub in the United States that may be able to support such a large aircraft is San Francisco. United operates a large hub to Asia at San Francisco using the largest aircraft in its fleet, the 747, extensively there. Despite the USA-Asia market growing rapidly, United had originally planned to retire these 747 aircraft in a few years and replace them with aircraft that were actually smaller. The company had originally believed that it could increase its frequency to Asia instead of the aircraft size. This sounds good in theory, and business travelers and high-value travelers actually prefer more frequency. However, this is easier said than done. United has, for a while stated, it will operate a second daily flight to Shanghai from San Francisco, but it has had to delay this multiple times, as the company has been unable to secure take-off and landing slots in Shanghai airport at good times. This is only going to get harder over time, as Chinese airports cannot expand any further, and more and more slots are picked up by other airlines. The A380 would allow United to actually grow its seats in the fast-growing USA-Asia market instead of reducing their number, while not needing to rely on trying to secure additional landing slots, which has already proved much more difficult than was originally anticipated. The one lingering concern is how United will fill such a large aircraft in the off season. It remains to be seen if the company could successfully move these aircraft to other routes in the off season, and what these routes would be, or if it could still earn enough due to low breakeven costs by keeping them the same routes during the off season. I am sure these are all scenarios being closely examined by United as we speak.
San Francisco

33% of San Francisco's population is Asian, and this is predicted to rise in the coming years, with Asians expected to become the largest ethnic group in the city in the coming years. This bodes well for United and its Asian routes from San Francisco. The A380 does not work for many US airlines, since their international hub flights generally rely on connecting traffic to be filled, and in order to fill the A380, airlines generally have to sell fares on these feeder flights at a lower price to stimulate demand. This dilutes fares and causes lower RASM - exactly what Wall Street has been concerned about. San Francisco, however, can provide a large amount of traffic to Asia that is O/D (originating at San Francisco and destined for Asia) simply due to its large population, and the company may not need to discount many feeder routes to fill up the aircraft.
World-Class Product

I did not envision being able to say this about United Airlines, but in recent months, I have sensed a big shift occurring at the company - with a focus on winning when it comes to its operations, and winning over high-value customers. United lost many customers during its merger with Continental Airlines, and this may be a chance to win them back as it upgrades its product at Newark, with 777-300 aircraft announced recently, A380s at San Francisco and 787/A350 aircraft throughout the rest of its network, as well as airport renovations.
The A380 is the perfect palate for United to be able to offer a world-class product. Emirates offers showers and a bar on board, while Air France offers an art gallery, Korean Air offers duty-free shops, a bar and lounge and Singapore Airlines offers fully enclosed suites with double beds. It is the aircraft with space for the most amenities, and United can certainly make itself stand out.
(click to enlarge)http://static.cdn-seekingalpha.com/u...owth-Picks.jpg
(Fig. 2: Bar and Lounge on the Emirates A380)
Capacity

United has been the most disciplined US airline when it comes to adding capacity, and has grown its capacity slower than US GDP growth for the past 8 years, which shows remarkable discipline. I do not expect this to change whatsoever if an A380 order does come to light. The airline will likely reduce its order of A350 aircraft from Airbus at least 1 to 1 in exchange for ordering the A380. While this is still adding seats, United will likely cut planned growth in other markets. Adding the A380 to routes between the US and Asia is not like dumping them on a mature market, and it is worth noting the market grows at a rate of 4.9% per year. United has shown very good discipline over the years, and I expect that if these aircraft do end up on any other routes that do not involve Asia, it will be carefully planned and that the company will be able to avoid much dilution in ticket prices and RASM decreases.
It is worth noting that the A380 actually has around 20% lower operating costs than the 747 currently used, while having 40% more seats, so if airlines can fill these extra seats, they stand to earn more money. The A380 also has more appeal to customers over existing aircraft, and the CEO of Emirates has mentioned that as the company introduces the A380 on routes, it sees higher passenger demand. The A380 would allow United to stand out and excel above many competitors on routes to Asia from the USA, and would allow the company to likely see higher yields on its premium seats and very strong profits if it can fill the plane.
(click to enlarge)http://static.cdn-seekingalpha.com/u...owth-Picks.jpg
(Fig. 3: A380 vs. 747-400 fuel costs)
Opportunistic

Overall, if this rumor comes to light, it will be very opportunistic for United. It is quite surprising, as it sounds like something Delta Air Lines (NYSE:DAL) - not United - would usually do, and I believe it signals a shift in company management's attitude. They will receive remarkably low prices on these aircraft, and due to their higher end on the bargaining table, will likely receive very favourable conditions, likely with the ability to easily dump the aircraft if they do not work out. It should be a win-win for United and Airbus, allowing Airbus to offload some new aircraft that are sitting in storage waiting for a new owner, while also securing a much-needed new customer for the A380, and freeing up some A350 slots that are in higher demand. United will receive a world-class aircraft at rock-bottom prices with favorable terms, which will give it an edge when marketing its product, and will allow it to sell more seats for a lower cost in the fast-growing USA-Asia market. Airbus, in the past, gave A300 aircraft to Eastern Airlines almost for free, in order to crack into the USA market with its aircraft. It also gave very favourable conditions to United in the past to sell its A319/A320 aircraft - an aircraft United now operates almost 100 of.
Summary

I believe the A380 would be a great fit at United in small numbers, and based on the recent opportunistic 777-300 order, I see it more likely now than ever. The A380 will give United more seats in a fast-growing market, while also at a lower operating cost allow the company to have a product that stands out above its competitors, command higher yields - and likely with favorable conditions from the aircraft manufacturer, Airbus. I believe United can do well giving the A380 a shot, while also remaining disciplined with capacity, as its track record has shown. I believe if this order comes to light, we will hear about it during the Paris air show at the end of this month. I see United Airlines as a strong buy, as outlined in my analysis of the company here, and see a potential price target as high as $191. I believe that this current rumor and recent strategy changes at United show a change in management's attitude, now willing to think out of the box in order to excel above their competitors. This makes me more confident in United's management than I have been in the past - something that previously held me back from investing in the company.
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