DeltaAir From United States of America, joined May 1999, 1094 posts, RR: 0 Posted (13 years 1 month 3 weeks 6 days 4 hours ago) and read 3714 times:
Giving `Em Away?
The incentives Airbus is using to sell its A380 now may backfire later
Beaming proudly, Airbus Industrie sales chief John J. Leahy strolls through a life-size mock-up of the A380 superjumbo jet at company headquarters in Toulouse, France. He lingers in the luxurious first-class cabin with its wood-paneled library and wine bar and lets his voice echo through the cavernous economy cabin, big enough for more than 550 passengers on two decks. Then he fixes his visitor with an intense gaze. ``Isn't this the way you want to fly?'' he asks.
It's an impressive pitch--and it's working. Since July, Leahy has logged 60 orders for the A380, which even can be configured to hold up to 800 passengers. It will be the biggest commercial aircraft ever made. Leahy has made archrival Boeing Co. look like an also-ran as he has signed up industry pacesetters such as Singapore Airlines and Federal Express and lured away Boeing stalwarts such as Qantas Airways. Indeed, Boeing hasn't won a single order for a stretch version of the venerable 747 that it's offering as an alternative to the A380.
A dazzling start, no doubt. But is it a good deal for Airbus? BusinessWeek has learned that the company is giving extraordinarily generous terms to early buyers. It's selling the cargo model of the A380 for as low as $133 million and the passenger model for just over $140 million--about 40% off list prices and less than the going rate of $140 million to $150 million for Boeing's 747. Airbus is accepting down payments as low as $500,000 per plane while giving customers the option of canceling orders 12 months before delivery without customary penalties. Airbus has offered lenient terms to buyers of established models before. But experts say it's unusual to offer them on a new plane.
True, manufacturers always sweeten the pot for first-time buyers of new aircraft, discounting them and throwing in everything from free pilot training to spare parts. And Leahy, a New Yorker who joined Airbus in 1985, is renowned for luring customers. His dealmaking skills helped the European company break into the U.S. market in the 1980s and boost its global market share from 21% to nearly 50% in the past five years. But, says an airline executive who has seen the terms Leahy is offering on the A380, ``I don't know of a deal that has ever been quite this generous.''
These concessions only steepen the already difficult path to profitability for the A380. To meet its break-even targets, Airbus says it expects to deliver 250 superjumbos by 2011. But to offset the deep discounts and raise needed working capital, it will have to demand bigger up-front payments from future customers and charge them close to list prices--$218 million to $235 million, says aerospace analyst Paul H. Nisbet of Newport (R.I.)-based JSA Research. Cost-conscious airlines won't readily agree to pay 40% more than their competitors did, say industry watchers. And Airbus has already plucked hot prospects, such as Singapore, Qantas, and Virgin Atlantic Airways, whose Asia and Pacific routes are well-suited to the mammoth jet.
Airbus isn't the only one at risk. To help finance development costs of at least $10.7 billion, it is counting on $2.5 billion in loans from European governments and $3.1 billion in credits from companies such as Saab, Fokker Aerospace, and Taiwan's AIDC, which are supplying major components of the plane. If Leahy can't keep orders rolling in, or if purchases are canceled or delayed, Airbus could be hard-pressed to meet its loan repayment schedules, analysts say.
NO GAMBLE. Airbus says such grim scenarios are nonsense. ``This is anything but a gamble,'' says CEO Noel Forgeard. Chief Financial Officer Andreas Sperl says Airbus should average a 20% pretax margin on the A380 over the next 20 years, well above the industry average. The company says it can hold down costs because the A380's design is closely related to smaller models and because its factories tend to be more efficient than Boeing's. Airbus seems to be humming along smoothly: Last year, it booked a record $41.3 billion in orders. The European Aeronautics Defence & Space Co., which owns 80% of Airbus, says the planemaker accounted for 60% of its revenues and nearly all its operating profits last year.
Airbus, while acknowledging that it expects A380 orders to fall off this year, predicts the pace will soon pick up because of the plane's efficiency. With maximum seating capacity nearly double the 420 on the biggest 747s flying today--Airbus says the A380 will cost at least 17% less per seat to operate than the 747. That could give carriers a big edge on long-haul routes. Boeing says Airbus has overestimated demand because most air-traffic growth will occur on routes between smaller cities, where huge planes aren't needed. That's why Boeing has opted for a stretch 747, designed to carry up to 520 passengers. Retorts Leahy: ``They're just flailing around looking for something to compete with us.''
By 2008, less than two years after the scheduled delivery of the first A380 to Singapore Airlines, Airbus plans to ramp up production to 50 superjumbos per year and sustain that rate for more than a decade to maintain production efficiency. That means Leahy's sales staff will have to line up dozens more orders when only a handful of planes are in service. The carriers couldn't be happier. ``I'm happy to put Boeing and Airbus into a box and let them thrash it out,'' says Peter Gardner, a vice-president at Cathay Pacific Airways Ltd., which is being wooed by Leahy.
Leahy shows no signs of letting up. To hammer out Federal Express Corp.'s order for 10 planes, he visited FedEx CEO Fred Smith's home last year while Smith was recovering from open-heart surgery. He sealed Virgin's order for five planes in a 1 a.m. phone call with Chairman Richard Branson. Leahy's biggest challenge now is Japan, where Tokyo's Narita Airport should be a prime destination for superjumbo flights.
AD: BOEING. Here Boeing has a daunting advantage. Japanese airlines give 80% of their plane orders to the U.S. company, which has cultivated strong ties by giving contracts to local manufacturers. Dimming Airbus' hopes for an A380 sale in Japan, Boeing recently struck a deal with Mitsubishi Heavy Industries Ltd. to produce the wings for the planned stretch version of the 747. Leahy has beefed up Airbus' sales operation in Tokyo and is scouting for deals with Japanese manufacturers. But he admits those efforts may not pay off quickly.
Boeing has worries of its own. Several years of production bottlenecks cost the company dearly. Boeing executives reckon that Wall Street wouldn't approve of their investing billions to develop their own superjumbo. But if the A380 catches on, Boeing would be hard-pressed to catch up. The 747 can't be stretched further than 520 seats, and designing a new plane would take years. For Boeing and Airbus, the dogfight of the century is only beginning.
Watewate From Canada, joined Nov 2000, 2284 posts, RR: 1
Reply 1, posted (13 years 1 month 3 weeks 6 days 4 hours ago) and read 3319 times:
Wow, $500,000 downpayment? I'm starting to think I can afford one.
A few things...
40% discount sounds a little steep and the terms in which airlines 'supposedly' signed with Airbus would have made airlines look stupid NOT to buy. With the generous cancellation clause and deep discount, carriers have very little to lose in this game.
50 will be produced a year? That sounds quite ambitious. Not that I doubt Airbus' production capability, but like aforementioned, it will take quite an effort on their sales team's part to keep it sprinting along that rate.
It will be a field day when A380 first rolls off the assembly line. Can't wait to see it fly.
Magyar From Hungary, joined Feb 2000, 598 posts, RR: 0
Reply 4, posted (13 years 1 month 3 weeks 6 days ago) and read 3234 times:
Guys, but how do you know how much the plane
really costs to produce? You can put the planes
list price at 1 billion and sell for $250 million and
that is an enormous 75% discount. I heard that a 20-30%
discount is always built in the listprice (both Boeing
and Airbus). What if Airbus can actually produce
an A380 for the price of a B747. Than this 40%
discount is indeed less 5-10%.
Gerardo From Spain, joined May 2000, 3481 posts, RR: 32
Reply 7, posted (13 years 1 month 3 weeks 5 days 22 hours ago) and read 3206 times:
What nobody has mentioned so far - OK, which Airbus basher wants to see the whole truth? - is, that we are talking about launch customers. And that's pretty normal to sell new aircraft at low prices. Even the good one, Boeing, plays the same game. Do you really think, Boeing will sell their B747x at list price? Do you really think, SIA paid the list price for their B777 in 1999?
Come on! Wake up! That's business!
dominguez(dash)online(dot)ch ... Pushing the limits of my equipment
Mriihi From Finland, joined Aug 2000, 54 posts, RR: 0
Reply 8, posted (13 years 1 month 3 weeks 5 days 21 hours ago) and read 3194 times:
Would there be anything to discuss if Boeing was the builder of this great plane? You US guys are about to see a great plane.
What you do not see, is that discounts and actual productioncosts have very little to nothing to do with eachother. Airlines are only interested how much money they have to have to get the plane. You do not go to shoestore and say,-"I want those shoes and I pay 40%!" Its always money you are giving away and you get something back. At this point Airlines have made the calculations that the money for that plane is OK. They can make their routes profitable and that counts for everything. This is not so complicated you make it.
N628AU From United States of America, joined Oct 2000, 337 posts, RR: 0
Reply 9, posted (13 years 1 month 3 weeks 5 days 21 hours ago) and read 3184 times:
It's one thing to sell a bunch of launch customer aircraft at a big discount when there is a market to several hundred, if not thousand. Quite another when you may only sell 200, and 25+% of your market has already been sold a drastically slashed prices. If you thought it was bad with Clinton threatening the E.U., I think Bush will be a whole new ballgame when it comes to protecting U.S. industries.
Mriihi From Finland, joined Aug 2000, 54 posts, RR: 0
Reply 10, posted (13 years 1 month 3 weeks 5 days 20 hours ago) and read 3182 times:
When do people start to understand that Listprice and discount out of listprice does not tell you anything. Absolutely nothing. Listprice is something that someone has written. This is not a new car what we are talking about i.e if you want alloywheels it is +200$. These planes cost hunderds of millions$. The listprice is artificial piece of paper and like in any "bigger" business the buyer tells what he/she wants, and then the manufacturer tells the price it thinks will get the deal done. If these two parts see eye to eye the deal is complete. No one is interested in listprice but the one who wants to make noise about not getting the deal. The biggest fear for US manufacturers is coming true. A380 will fly and Boeing has nothing even closely similar to offer, that is the reason why this 40% discount thing is on the wall right now.
Eg777er From United Kingdom, joined Feb 2000, 1834 posts, RR: 14
Reply 11, posted (13 years 1 month 3 weeks 5 days 19 hours ago) and read 3161 times:
OK, for all the Airbus-bashers on this forum....
FOR HOW MUCH APIECE DID BOEING SELL THE 747-100 TO PAN AMERICAN WORLD AIRWAYS AND BRITISH OVERSEAS AIRLINE CORPORATION, THE LAUNCH CUSTOMERS?
I think you'll find they are quite low figures.
And for god sake, the EU countries give Airbus "refundable launch aid" for new projects. Such as the A320 loan which has been paid off and now the UK, France and Germany EARN MONEY ON EVERY A319/20/21 SOLD!!!!!
Wingman From St. Vincent and the Grenadines, joined May 1999, 2099 posts, RR: 5
Reply 13, posted (13 years 1 month 3 weeks 5 days 14 hours ago) and read 3124 times:
It's telling what the quoted airline exec said, he's NEVER seen any offers quite so generous before. Forget what the "Americans" on the forum are saying, focus instead on what an independent industry expert is saying. Between the airline exec, the author, and Paul Nisbet all three seem to agree that Airbus is making extraordinary offers to sell the 380. Of all the carriers that signed so far, at least 6 of the 7 had already stated a strong preference for the plane, maybe all 7 (not sure about Fedex). Plus, the 380 marketing campaign, brilliant as it is and hats off that that other "ignorant American" Leahy, is at least 3 years ahead of the 747X. Any Airbus fans who think this game is over and Airbus has already "won" are very sadly mistaken. At some point, Airbus will have to jack up the prices or it will simply never turn a dime on this project. Boeing can sell the 747X at lower prices than the 380 if Airbus is not dumping. The investment price alone makes it easy for even a fool to understand. A $4B plane costs LESS than a $12B plane.
FrankyA340 From Canada, joined Nov 2000, 42 posts, RR: 0
Reply 14, posted (13 years 1 month 3 weeks 5 days 13 hours ago) and read 3107 times:
Personally, I could care less whether Airbus is giving discounts, will be financially strapped. I would never buy the stock.
As an aviation enthusiast though, all I care about is being next to the runway when that puppy takes off or lands. The Concorde sure is a white elephant, but I would bet not 1 person on this site cares when staring at its beauty.
Travelin man From United States of America, joined Mar 2000, 3416 posts, RR: 0
Reply 18, posted (13 years 1 month 3 weeks 5 days 11 hours ago) and read 3052 times:
You are ignoring the facts stated in the article: At some point, the deep discounts must stop. And when they do, who will be there to buy this huge plane??? Many of the target customers have bought it ALREADY.
The question is: When does Airbus start charging full price (the price needed to recoup development costs as calculated by the article -- in the $200 million range)????
And WHO will be willing or able to purchase these planes, knowing that many of the most financially viable airlines that CAN, (Singapore, Virgin, Qantas) have already done so?
I am not an Airbus basher. They make good planes. I do have an Economics/Finance background, though, and it seems like the A380 will barely break even, if it breaks even at all. Of course, this should not matter to aviation enthusiasts. But to business people, it might. (and to European taxpayers who may have to eat the development costs a la the Concorde).
WN boy From , joined Dec 1969, posts, RR:
Reply 22, posted (13 years 1 month 3 weeks 5 days 9 hours ago) and read 3037 times:
I am so tired of the constant European argument that Boeing's defense contracts amount to governmental subsidies. The people espousing this view are either ignorant or intellectually dishonest. Either way, it is just plain wrong.
Boeing, in order to get a defense contract, must compete on the open market against Lockheed Martin, Ratheon, Bell Helicopter, and others. This is what it is presently doing in the "fly-off" for the Joint Strike Fighter with Lockheed. The Department of Defense purchases whichever is the best plane for the best price. (If they didn't, can you imagine the congressional hearings.) This costs Boeing an enormous sum in research and development, an amount that it is not assurred of recouping as the DoD could opt for the Lockheed model or scrap the program altogether. Even if the government does purchase the JSF from Boeing, Boeing's prices do not accord that much profit because of the bidding process against Lockheed during the test phase. In essence, when it signs a defense contract with Boeing, the government gets something for a good price.
By way of contrast, when it provides its "loans" to Airbus, European governments do not receive anything. Moreover, they are not assurred of repayment. It is these "loans," which if defaulted upon are nothing more than governmental subsidies, that permit Airbus to develop this ridiculous aircraft for which there is no demand just so that the EU can stand up and say, "see, we make the biggest airplane." (And, yes, we all know that is what this is really about)
For the record, Airbus is free to enter the defense aircraft industry. I am certain that there would be less bitching on this side of the pond if Airbus received government money in exchange for military aircraft rather than in exchange for nothing as is presently the case. Indeed, if the military contracts business is half as lucrative as Airbus alleges, one would certainly expect that they would have long ago followed Boeing's lead and developed fighters, transports, and bombers for European air forces. The fact that Airbus does not take this action, opting instead merely to collect its "loans," speaks volumes about the validity of their "government contract as subsidy" argument.
RIX From United States of America, joined Aug 2000, 1785 posts, RR: 1
Reply 23, posted (13 years 1 month 3 weeks 5 days 9 hours ago) and read 3006 times:
I absolutely don't care whether Airbus sells something with discount or not, gets subsidies or not. I'm happy to see SST landing here at JFK (hope it comes back) and, being an American taxpayer, I'll be happy if Boeing gets a subsidy to develop something REALLY new (not another five-decker 5,000 seater). BUT: stop this "Boeing military contracts" stupidity. Boeing gets money for a product, not a gift! As I once said here, my software company sometimes gets government (both state and federal) orders. Of course, they pay for our work. Of course, we then use technologies and experience obtained in government projects for our work for private customers. Does it mean we get government subsidies? WN_boy is right: the people espousing this view are either ignorant or intellectually dishonest.
HeavyCapt From United States of America, joined Jan 2001, 62 posts, RR: 0
Reply 24, posted (13 years 1 month 3 weeks 5 days 9 hours ago) and read 3009 times:
In order to avoid being "branded" and pulled into a war of words about one versus the other....I have no opinion about either except to say that I love to fly.
That being said. There are some interesting parallels here. I would suggest to all to burn up their modems and dig on the web to find out about the L1011. I think you will find some interesting info vis a vis what happened to their price after lowering it initially to overcome engine fears that the launch customers had. Bear in mind that at the time those launch customers were some of the finest carriers (read most well managed) of their pre deregulation/privitization era. Also look at the overall selling price over the life of the production run after the initial discounts. Finally look at what the L1011 did to Lockheed in terms of commercial transport production.
I am not implying that this would happen to Airbus (Not at all so please don't infer so) All that I am saying is that this set of circumstances has occurred before in this industry with less than hoped for results. Please take a look at the story before weighing in with an opinion as to whether or not Airbus will be successful. All of that being said, I believe that if there is a chance to avoid those pitfalls then Airbus and it's aggressive Marketing are most likely the ones to pull such a feat off
I hope that I have not disturbed anyone too greatly. It's just that this has evoked such emotional responses and I thought it would be interesting to point out a remarkably similar set of circumstances so that the posts may perhaps return to a more business like approach to the subject
: Well said WN boy. Let me add something else to this 'defense contract subsidy to Boeing' argument that Boeing bashers here on the forum love to throw