The A380 superjumbo is one of Airbus' (EADSY -4.02%) most magnificent and prestigious pieces of work. Launched in 2007, the A380 aimed to take on Boeing's (BA 1.51%) 747 jumbo jet, which ruled the skies at the time. Airbus was so confident about the aircraft's potential that it boldly asserted, "It takes an A380 to compete with an A380." However, seven years later, with fuel prices soaring and plenty of fuel-efficient planes on offer, demand for the iconic A380 is falling. Let's look at the aircraft's glorious journey so far, and gauge what lies in store for this once-upon-a-time avant-garde flying machine.
Airbus A380 on ground, Source: Airbus.
A380 stole 747's thunder
In the 1960s, air travel was expensive and airlines were demanding an airplane that could make it cheaper. Foreseeing a market opportunity, Boeing delivered the world's first wide-body jet, the 747, nicknamed Queen of the Skies. The aircraft could accommodate more passengers, and owing to the economies of scale, cost per seat came down and brought air travel within the grasp of the majority.
Boeing achieved unprecedented success with the 747, which attracted Airbus. The European company officially launched the A380 program in June 1994, and after many delays and changes, delivered the first plane to Singapore Airlines in October 2007.
Until A380, Boeing 747 was the largest plane ever built, but Airbus stole Boeing's thunder by building the world's first double-decker passenger aircraft, and the world's largest airliner. The 550-seat A380 was 50% bigger than the 747 and offered 6,000 square feet space, including both decks. Airlines could operate a single A380 flight instead of multiple flights using other models, which saved fuel costs massively and lowered cost per seat. The aircraft was also more modern and fuel efficient than the 747.
The A380 lost out on a huge number of orders by entering service almost three and a half decades after the 747, but it gained a lot of traction in a short span of time, and its popularity surpassed that of the 747. According to Bloomberg data, 119 A380s were delivered from 2007 to 2013, compared with 102 747s.
Airbus A380 and Boeing 747 deliveries. Source: Bloomberg. Chart by author.
What's making A380 burn?
Airbus expected the A380 to become its flagship offering, contributing strongly to its performance, but the aircraft did not entirely meet those expectations. The plane hit the market at a time when the global economy was going through a rough spot, and airlines weren't keen on spending big bucks on fuel-guzzling four-engine models. In better times, the A380 could have grabbed many more orders than it actually did.
Since then, technology has changed a lot. Today, airlines don't need to depend on A380s for long-distance flights, which can now be handled by smaller two-engine powered models. The superjumbo can still make cash for the airlines if it gets a full booking. But if that doesn't happen, the unutilized capacity results in increased cost per seat. So, the demand for the A380 is shrinking. Even while being sold at up to half-price sales have not picked up. Airbus has reduced its production from 30 to 25 units this year. The company wants A380 to break even in 2015, but any further production cuts could make that target difficult to achieve.
Airbus not ready to give up
Airbus strongly believes there is a huge market waiting for the aircraft, and that the company will benefit greatly with time. According to John Leahy, Airbus chief operating officer, the industry today is 67% bigger in terms of revenue-passenger kilometers than it was 10 years ago, and the industry doubles in size every 15 years.
Airbus has coined the term "Aviation Mega-cities" for cities that handle more than 10,000 long-haul passengers every day. Of the 850 cities worldwide that facilitate long-haul flights, only 42 meet the criteria currently. However, this count is expected to skyrocket to 89 by 2023, while daily long-haul traffic passengers (including to, from, and via Mega-cities) will grow from 0.8 million in 2012 to 2.2 million. Leahy strongly believes that demand for A380 will be driven by these Mega-cities, which will account for 99% of all international air traffic.
Source: Airbus (link opens a pdf).
Airbus expects similar trends for the A380 freighter as freight traffic is expected to grow at a CAGR of 4.8% over the next 20 years. According to the company's Future Payloads Freight Forecast 2013-2032, global freighter fleet will expand from 1,645 units in 2013 to 2,905 units by 2032, fueled by increase in worldwide trade. There will be a requirement of more than 870 units -- midsize and large freighters combined. Replacement of the aging fleet will also drive demand.
Source: Airbus (link opens a pdf).
To capitalize on these opportunities, Airbus is thinking of reengineering the A380 and produce what is being referred to as the A380neo (new engine option). Airbus' biggest customer, Emirates, has already expressed interest in buying 60 to 80 A380s once the aircraft maker upgrades the engines on the beast, reduces weight, and improves aerodynamics.
Foolish takeaway
The A380 is going through a rough patch at the moment, but this doesn't mean the end of the road. Airbus is optimistic about the future of the aircraft, which is why it is also thinking of a modified A380. Once the world economy bounces back, and passenger and freight traffic improves, the A380 jumbo could get a new lease on life.
