Another 2 billion could be down the Airbus drain

[JammedStab]

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 (http://www.businessweek.com/articles/2013-12-02/airbus-to-customers-your-200-million-plane-is-not-a-lemon)

[GlueBall]

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. :{

[Perrin]

Roll up now and get your 787's at least you will get one unlike the airbus 340.:mad:

[denachtenmai]

Roll up now and get your 787's at least you will get one unlike the airbus 340.

And if you're lucky you will get one that won't catch fire :E

[DaveReidUK]

The bottom line: Airbus could be on the hook for as much as $2 billion to compensate owners whose A340 widebodies have lost value.In other words, the arrangement is working exactly as intended. Residual value guarantees are hardly new in the industry.

Or is there some suggestion that Airbus forgot or omitted to show this as a contingent liability on their balance sheet ?

[TopBunk]

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?

[172driver]

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.

Didn't SIA fly their ultra-LH in a 'Premium Eco / Biz' config only?

[awblain]

Isn't the A340 production line just the A330 production line, and so it's still much as it was, or were the larger -500 and -600 put together at a different location?

[LLuCCiFeR]

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! :) ;)

[lakerman]

Do not know where you get your info from but Virgin, at this moment in time, are still operating 17 A340. 4 -300's and 13 - 600's

[awblain]

Do Virgin have much choice but to use them?
They own them, and they can't sell them for very much?

[crewmeal]

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?

[hec7or]

I'm sure you remember CRJ200s were selling like hot cakes in the late 90s, and now I can't remember seeing one for ages.

[Cyrano]

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. :{

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.

[Admiral346]

OK, 377 units at 120 Million $ each comes to:

45.994 Million Dollars.

That should do, compensating for the value loss...

[Mac the Knife]

"......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]

[Kakpipe Cosmonaut]

The Boeing Company (BA) news: Boeing struggling to sell $1.1B of early 787s, Bloomberg reports - Seeking Alpha (http://m.seekingalpha.com/news/1589713)
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.

[GlueBall]

At one time TG had operated three A345s; one was a polar route: BKK-JFK in excess of 17 hours. Econ/Premium Econ/Business/First. :zzz:

[Fly3]

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.

[parabellum]

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.

[glofish]

Would be intersting, if not revealing, to know what value these specialists predict for the other surviving 4-engined dinosaur, and what premium insurances ask for to insure their value. After all BA cancelled some orders and QF is quietly looking to get rid of some.

[andrasz]

To be fair on the 340, it was designed in the late eighties when 90/120 min ETOPS was in force, and the twins did not yet rule. AB well realized the superior economics of the twin, but also was aware of the need for a long range aircraft on routes beyond the maximum range of twins (at that time) and on some routes where even 180 min ETOPS requires a long diversion. Rather smartly they designed an airframe that could be fitted with 2 or 4 engines, the first became the 330, the latter the 340, then leaned back to see how the 2 vs. 4 battle ends. Twins clearly won, and now the 330 is their principal cash cow - they can easily afford some losses on late delivery 340s, as the two programmes are really one, and with development costs I presume long since recovered, they are making very comfortable margins on currently sold airframes. Parts and assembly are typically ~50% of the cost of a new aircraft, the rest is allocated R&D.

[andrasz]

Is there a market for a non-stop, premium service?

At the right price, there is a market for pretty much anything. The question is always whether a product can be delivered at the cost the market is willing to pay.

The problem with ULH non-stops from an airline perspective is that it usually also competes with the one-stop service offered by the same airline. If you strip the premium traffic (or a large part of it) from the one-stop services (as naturally premium traffic will prefer the non stop service, all things being equal), the one-stop service will cease to make money. If on the other hand the non-stop service is sold at a significant premium, demand will drop considerably. In reality the non-stop service only offers a 1.5-2h advantage, which in comparison to the total trip time is not very much, and needs to be weighed against the required premium. There are very few ULH city-pair markets where there is sufficient demand for such a non-stop service. If SQ could not make SIN-EWR work (I have no insight into the route exonomics, but I'm sure it was axed for the above reasons), what would ?

[The Ancient Geek]

How does the seat/mile cost of running an A340 compare with the 744, I suspect that the A340 is probably a tad cheaper but it is probably a close call.

[andrasz]

The 340-600 is supposedly 8-10% cheaper on a cost/ASK basis, the other variants I presume would be more expensive due to the lower number of seats. However there are several factors that can fudge these figures, like actual seat config, stage length, actual airport charges, etc. Eg. if a 744 is fully owned and already fully depreciated, then it may make sense to absorb the higher direct operating cost in exchange for zero ownership cost rather than replacing it with something that may be marginally more economical to operate, but will require cash out to own. Aircraft replacement decisions are seldom as easy and straight forward as what is presented in the glossy A or B sales brochures.

[SMT Member]

Would be intersting, if not revealing, to know what value these specialists predict for the other surviving 4-engined dinosaur, and what premium insurances ask for to insure their value. After all BA cancelled some orders and QF is quietly looking to get rid of some.

The other 4-engined dinosaur. Hmm, that would be the 747-8I one assumes? It's doing pretty poorly, utterly rotten in fact, and is only being kept alive by orders for the -8F. Which, incidentally, are also drying up.

Of course, you are probably alluding to the A380. BA have not cancelled any orders, but they have deferred deliveries. QF is a basket case, and is presently looking at shedding 5000 jobs. If they can't make the A380 work across the Pacific, I'd suggest that speaks more of QF's ability to run a business than the aircraft.

[glofish]

Sorry, forgot the Binosaurus, to me it was basically never alive.
The Aerosaurus is and if QF can't make it profitable it's probably due to the lack of subsidy from the European taxpayer .....

But you did not answer my question though.

[SMT Member]

You may think the A380 is done and dusted, real airlines may have other plans though. I've no idea what the insurance premiums or resale guarantees are like, and unless someone's got an inside line to the CFO of an airline, and is willing to spill the beans*, I am unlikely ever to.

*Also known as signing your own termination

That QF aren't profitable is hardly the fault of, what, 8? aircraft. QF is a mismanaged relic of the past, thinking it still has god-given right to lay claim not only to the domestic Australian market, but also to at least 50% of the kangaroo route. Their current episode with Jetstar Hong Kong is an excellent case in point - what well managed airline would setup a division clearly ruled out of Sydney, thinking they could fool the Chinese into thinking it was under HK control, and then set about ordering loads of aircraft?

Alan Joyce is one of the biggest failures in the modern airline world, and would have been so regardless of which aircraft he did, or didn't, order.

[Bidule]

Still more than 800 CRJ-100 and -200 in operation! Not so bad. A lot of types never had so many aircraft built!

[Eclectic]

There is a near immediate customer for around 40 twin aisle aircraft: Ryanair plans long-haul services - Telegraph (http://www.telegraph.co.uk/travel/travelnews/10131636/Ryanair-plans-long-haul-services.html)

[DaveReidUK]

"Near immediate" - love it! :O

[wingview]

The A340 had already one problem from the beginning, they couldn't be conversed to a F unlike the 744. With the poor freighter market the 744 also lost it's value and many are in the desert or scrapped already. But with them, also the MD11's are stored/scrapped everywhere. F or not.

[xray one]

The 600 has a huge capacity for cargo, up to 30T plus 310 pax (depending on config), the trouble is the cargo market is fickle and soft at present. When oil was under $50 a barrel it was a good all round aircraft.

But with ETOPs at 180 and due to increase, 2 engines will always be king, even if the fuel price comes down (which is forecast).

[172driver]

Out of curiosity - are there actually any routes left that require a quad? IOW, no ETOPS twin possible? The only ones I can think of would perhaps be South Africa - Oz and Oz/NZ - Argentina.

[tdracer]

According to Boeing, the 777-200LR can fly between any city pair in the world.

With 330 minute ETOPs, I understand there are a few south polar routes where the routing of a twin might not be optimal, the capability is there.

[Tomspur]

Let me ask a layman like question.

What happens to the old retired airframes? I see a lot of reference made to them being placed in a desert somewhere. Would it not make more sense to cut them up, and melt the raw materials? Is it a cost thing?
If all the workds 747's were to be scrapped, would that not take up a lot of space?

Thanks :)

[DaveReidUK]

What happens to the old retired airframes? I see a lot of reference made to them being placed in a desert somewhere. Would it not make more sense to cut them up, and melt the raw materials? Is it a cost thing?Aircraft are normally only parked in the desert while their fate is being decided, which will in a minority of cases will be a subsequent return to service, but more usually eventual scrapping/recycling.

There are several dozen companies around the world who specialise in dismantling aircraft that have reached the end of their lives.

Here's an example: Aircraft salvage, recovery and disposal services - Air Salvage International (http://www.airsalvage.co.uk/)

[Ka8 Flyer]

If it's a similar airframe, couldn't a A340 be converted into an A330?
Center gear, obviously two engines, what else?

[BRE]

Does anyone understand the economics of why LH favored/favors four holers?

Their A340s outnumber their A333 almost 3:1. In the first half of the 2000s, they kept adding A343s (including ex-Sabena aircraft), in the second half, they added plenty of new A346s (not to mention the B744, B748I and A380).

I understand the A346 taking up a size/range niche between the A333 and the B744 and not wanting to go B777 in order not to add another type.

But why did they keep adding A343 for a long time which have no size advantage over the A333 and probably had no range / ETOPS advantage at the time either? Many routes were and are being served by A343s that can be easily served by A333s, and type commonality would not have been a consideration.

[SMT Member]

BRE

There are two reasons why LH preferred the A340 to the A330. The first, and biggest, is that the A330 Airbus will sell you today is far removed from the aircraft available around the year 2000. Considerable performance improvements, paired with ever increasing MTOW figures, has enabled the A330 of today to perform routes the A330 of 2000 vintage couldn't. Secondly, the senior air heads at Lufty has had a historic dislike of crossing oceans with anything less than 3 engines. That was one of the reasons they nixed the 777 and went for the A340 instead. But even the wrinkly old LH skippers eventually found that further resistance would be futile, and now LH have joined the group that are crossing oceans on 2 donks.

[BRE]

Thanks for explaining. I always suspected there was a good deal of stubbornness involved.

And it still feels funny to take a A343 to the East Coast and return from SEA in a A333.

[Espada III]

One bizarre route for LH (and Swiss for that matter) on four engines is Europe to Tel Aviv. LH have stopped now, but for many years it has a B744 and A346 every day on that route. The aircraft were full, but the fuel tanks must have had less than a 1/3 full at take off. Every other European airline is now single aisle and several US carriers are now on two donks.

[Peter47]

Espada

With Swiss it could be that they have A340s that would otherwise be lying idle during the day - many of their long distance routes (SIN, BKK, HKG, JND, GRU) leave late at night and arrive early morning. They are replacing some 340s with 777s - I would have thought that for commonality issues it would have been better to wait a couple of years for 350s but maybe they couldn't get early delivery slots, or Boeing offered a good deal, or something else.

BA operate a 747 to Moscow but that's because there is a market for the long haul product. I don't know if that is true for LX to TLV - there must be a lot of transfer traffic.

Cathay were renown for - profitably - "misusing" long haul aircraft on regional routes and still operate 747s from HKG - TPE which is under two hours, although their 747s are rapidly being retired.

I've heard it said that senior staff at VS were against purchasing A340-600s bit that SRB wanted four engines for long haul.