Bank leak questions jumbo bid

By Geoffrey Thomas

http://www.thewest.com.au/20001115/business/tw-business-home-sto10723.html

A QANTAS board meeting tomorrow to decide on an order for up to 18 A3XX mega jumbos worth $7.98 billion is being held against the backdrop of a leading bank casting doubts on the viability of the jumbo program - the biggest financial undertaking ever by European industry.

A Credit Suisse First Boston (CFSB) confidential report, obtained by The West Australian from sources in Europe, questions whether consortium Airbus Industrie will sell enough A3XXs to make a profit. It also raises concerns about the discounts being offered and the overall business case.

Qantas is expected to order up to 18 A3XXs after arch-rival Singapore Airlines bought 25 last month.

CSFB considers it likely that Airbus will achieve the 50 to 60 orders required to allow production to start but says the question really is: what airlines will be in the second wave of aircraft buyers to maintain production schedules after the initial sales?

"Airbus"20-year A3XX sales forecast appears to be quite aggressive," says the report.

John Leahy, Airbus vice-president of commercial operations, concedes there will be an order gap after launch as the launch discounts are discontinued.

But CSFB questions how big that gap will be and who else will buy the giant jet. British Airways and United Airlines have already said no to the A3XX and only United Airlines and Northwest Airlines in the United States operate the 400-seat 747-400s.

Giants such as American, Delta and Continental have all bought big fleets of 300-seat 777s, preferring to offer non-stop high frequency service. Another major target airline, Hong Kong-based Cathay Pacific, said last month it would not order the A3XX or 747X Stretch until next year at the earliest.

Japan Airlines, the world's biggest 747 operator, has turned its back on the new European aircraft. Italy's Alitalia has announced it will swap five 747s on order for 12 777s.

The CSFB report says the market over 20 years for aircraft of 400 seats and above is estimated to be between 1000 and 1500 aircraft, with the Airbus business case based on selling 768 A3XXs.

Boeing's 747-400 seats up to 426 and its 747X Stretch offering will seat 522. The Stretch will cost $8 billion to bring into production and will be lighter, faster and cheaper to buy and operate than the A3XX, says the report.

CSFB has no problem with Airbus selling 250 A3XXs, which are identified as being needed for major routes such as Tokyo to London or Sydney-Los Angeles, but says the business case for the rest is too speculative. One key route, Tokyo to Los Angeles, has only grown at 0.9 per cent since 1990 and the actual size of aircraft on the route has reduced from 395 to 351 seats.

"The current A3XX business case assumptions appear to be extremely optimistic," says the report.

Airbus counters the arguments, saying that the A3XX will bring fares down and thus encourage more people to fly.

But British Airways is finding that it is better to invest in smaller aircraft that are cheaper to buy and target high-yield passengers. BA has swapped a number of 747 orders for the smaller 777s.

Development costs of the A3XX are put at $20 billion and CSFB has major concerns with the cash flow for the project.

Discount pricing is another concern for CSFB. The catalogue price is set at $423 million against $362 million for the 747. Though launch customers obtained discounts of 30 per cent, Airbus believes it obtained better prices than budgeted for, says the CSFB report.

However, CSFB says that Airbus"business case for a $335 billion market for 768 aircraft suggests a price needed of $435 million per aircraft. "This does not work," the report warns.

Other analysts cite Boeing's near brush with bankruptcy when building the 747, despite there being no competition to the aircraft.