Last year, sales of the Airbus (OTC:EADSY) A380 and its closest rival, the Boeing 747-8, disappointed. But to kick off 2015, there are a couple of positive signs for Airbus' superjumbo. Are these developments enough to turn the A380 around?
To make the Airbus A380 program successful, the company needs a boost in aircraft orders. Last year, the plane received no orders from passenger airlines, and the Boeing 747-8 received no net orders at all.
However, 2015 appears to be starting off better for the A380. Turkish Airlines is reported to be discussing an order for 10 Airbus A380 aircraft, putting the order list price at around $4 billion. For a plane with a slow sales pace, this order would be a much-needed boost.
But while the Turkish Airlines order is a positive sign, 10 aircraft aren't enough to turn an airliner program around. A more encouraging note for the A380 comes from a recent announcement from Emirates.
According to Bloomberg, Emirates announced that it will order another 100 A380 aircraft if Airbus equips the plane with new engines. The Middle Eastern airline is already a major A380 customer, having placed orders for 140 aircraft and taken delivery of 57 planes.
The future of the program
Late last year, the future of the A380 was thrown into doubt by comments suggesting that the plane would be breakeven through 2018 even if it were discontinued. But a note from Airbus last week denied that the A380 was on the chopping block and said no senior executive was looking at axing the A380.
Although the company doesn't seem to be on the brink of shuttering the program, its success will depend on how much Airbus chooses to invest in the A380. With limited resources, the company will have to decide whether to further invest in the A380 or to focus on other projects.
Right now, the biggest question surrounding the A380 is whether Airbus will update it with a new engine option to create an Airbus A380neo. While the move could help boost sales, development costs could be around 2 billion euros, based on analysis from Yan Derocles of Oddo Securities.
The 100-plane potential order from Emirates increases the chance that Airbus will upgrade the aircraft. The order would have a list price of around $43 billion, helping to quickly cover costs surrounding the new engine upgrade.
Furthermore, an A380neo would also be better positioned for future orders, boosting the chances that the program will survive for the long term.
One of the biggest negatives about the Airbus A380 and the Boeing 747-8 is fuel consumption. In fact, high fuel costs have been a major driver behind the increase in sales of other large fuel-efficient aircraft such as the Boeing 777 and Airbus A350.
Although it may seem as if the current drop in oil prices should turn jumbo and superjumbo jet sales around, airlines are likely to remain hesitant. So far, airlines have continued to operate as if fuel prices haven't fallen. Capacity levels have remained disciplined, fares have held fairly steady, and some fuel hedges remain in place.
Airlines don't seem to be willing to bet that fuel prices will remain low forever, and with aircraft being long-term investments, current fuel prices are unlikely to make major changes to sales of jumbo and superjumbo jets.
However, an engine upgrade to make the A380 more fuel-efficient could make a difference. It would make the A380 more competitive with other aircraft, potentially boosting sales from airlines that have held back because of the superjumbo's fuel usage.
From this perspective, the Emirates comment is strongly bullish for the A380 program, as it boosts the chance that the superjumbo will receive an engine upgrade.
This year has already seen two major pieces of news for the Airbus A380: reports of an order from Turkish Airlines and the encouragement of an A380neo from Emirates. The sales outlook for the current A380 hasn't significantly changed, but the future of the program may get a boost if Airbus announces the development of an A380neo.
Investors should pay attention to whether Airbus chooses to invest more into the A380 program by giving the go-ahead for new engines.