Jet-lagged
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Airbus Needs To Sell Around 500

Fri Apr 29, 2005 9:33 am

From the Economist:
http://www.economist.com/business/displayStory.cfm?story_id=3915112

"Airbus needs to sell around 500 (out of its target sales of 700 over 20 years) to earn a real return on the investment."

Before the break-even number was, what 250? Then 300? Then 320? Now the Economist contends that a 'real return' is higher still. When I think it thru, I get about 400-500 units will be sold. However magnificent the machine may be, if the Economist they have their number right, that could be a challenge for Airbus.
 
kl911
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 9:40 am

Since when does the economist know anything about running a company like Boeing or Airbus? It's a magazine, and they are always wrong...
 
JMJAirways
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 9:43 am

what's the price tag on one A380 ?

And what did the whole project cost ?
I am willing to pay extra for a A346 flight !
 
n844aa
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 9:51 am

Quoting KL911 (Reply 1):
Since when does the economist know anything about running a company like Boeing or Airbus? It's a magazine, and they are always wrong...

The Economist is consistently one of the best-informed publications I read and, more often than not, on-target. Are you disputing their accuracy, or the accuracy of the financial/business press in general?
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sunnyb
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 9:57 am

From: http://news.bbc.co.uk/1/hi/business/4482105.stm

A380 in Figures

- List Price: $285M
- Orders so far: 154 ($44B at list price)
- Orders to break even: 250 ($71B at list price)
 
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 10:10 am

Eek. And odds are that EK - being the largest single order - is paying a price far below list.

So the breakeven is probably more around 265, give or take (best guess).
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Planesmart
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 10:13 am

Best informed? Whose figures do they use? Supplied by Scott Carson?

Airbus has been innovative with aircraft pricing and packaging, and they are equally creative with contractor pricing and payments.

500 could turn out to be correct, but the guess is certainly based on zero data and analysis. S&P would have the best idea after Airbus.

Breakeven also has to have time factored into it. Could be 400 sales in 10yrs or 500 in 15yrs.

Also takes no account of transfer pricing applied to derivatives, as B are so skillfully doing with 787 pricing.
 
JMJAirways
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 10:14 am

I still think they will get more orders and break-even in maximum 5 years...
They will have sold a total of around 300 in 5 years !

Best Regards
I am willing to pay extra for a A346 flight !
 
grantcv
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 10:18 am

The Economist might usually be well informed, but that article isn't quite right. First, I don't think that the A380's sales are obstinately stuck at 154 - two of the orders are very recent and haven't even been finalized as far as I know. And 154 orders at launch isn't bad. I don't recall the 747 having anymore and I seem to remember the 757's orders being a bit "stuck" when it first came out. Claiming the plane will be a failure is getting rather tiresome at this point - it has sold well, it flies, and it is poised to be the "Queen of the Skies" for the next 20 years at least. Does Airbus they need to sell 500 planes to break-even. Well, if anyone knows the truth there, it is not likely to be a reporter at the economist.
 
BlueSky1976
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 10:20 am

Maybe folks at The Economist are already factoring in the development cost of A380-900?? Has anyone thought of that possibility?
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leelaw
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 10:39 am

Breakeven (Cost-Volume-Profit) Analysis is not a very useful technique for evaluating the financial performance of a long-term project. The 500 unit figure is probably derived from a more sophisticated approach like internal rate of return.
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sllevin
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 10:47 am

Quoting Jet-lagged (Thread starter):
"Airbus needs to sell around 500 (out of its target sales of 700 over 20 years) to earn a real return on the investment."

The key phrase here is real return.

That means "the point at which you would have gotten as much of a return as if you had taken the money and invested it in stocks/bonds/real estate/etc."

Steve
 
DfwRevolution
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 10:56 am

Quoting JMJAirways (Reply 7):
I still think they will get more orders and break-even in maximum 5 years...
They will have sold a total of around 300 in 5 years !

However... that is roughly double the number of A380 already ordered. Name me another 150 potential A380 orders from an airline other than EK...

Also, orders don't mean break-even. Deliveries do. No way they will deliver enough to break-even by 2010-2010.
 
BlueSky1976
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 11:01 am

Quoting DfwRevolution (Reply 12):
Name me another 150 potential A380 orders from an airline other than EK...

Optimistic scenario: everyone who already has it on order IF A380 delivers the performance promised by the manufacturer.
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leelaw
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 11:07 am

Quoting Sllevin (Reply 11):
"the point at which you would have gotten as much of a return as if you had taken the money and invested it in stocks/bonds/real estate/etc."

...or alternatively, compared to the rate of return on other successful long-term programs within the organization (e.g. A32X, A300, A332, etc.), the competition (e.g. 744, 777, etc.), and/or other manufacturing industries, etc.
Lex Ancilla Justitiae
 
ac777233lr
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 11:12 am

Quoting N844AA (Reply 3):

The Economist is consistently one of the best-informed publications I read and, more often than not, on-target. Are you disputing their accuracy, or the accuracy of the financial/business press in general?

I completely agree! But they are wrong sometimes, remember they predicted $5 long term oil prices in '97 or '98.

As noted above the article is referring Airbus' need to sell 500 aircraft to make a reasonable profit on their investment. Simply breaking even by selling 250-300 380s would be a failure. To be considered a success Airbus must make a good profit, needing to sell at least 500.
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AC320
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 11:27 am

Also remember the article is talking about the aircraft sales required during the next 20 years....I don't think anyone ever said the A380 was a short term project.
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Gemuser
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 12:00 pm

Well DfwRevolution, as well as the 150 odd orders there are 60 options, plus the rumored extra 45 from EK, that only leaves another 45 orders to reach 300 and I think China alone could easily take that many.

Of course the question "will all the options be exercised?" is unanswerable at the moment and the extra EK order is speculation, the options are at least a fact, the only extra fact in this question at the moment.

Will the options be exercised? Lets take a look at QF, the only A380 customer I know enough about to even speculate about. QF have publicly announced that the A380 will be used SYD/MEL-LAX and SYD/MEL-LHR, with MEL-LAX being first. At ONE flight a day that is 10 aircraft, out of 12 ordered. QF currently have 37 weekly flight to LAX and 28 to LHR (when SYD-AND OLD: Hong Kong - Kai Tak International (HKG / VHHH) (closed), China - Hong Kong">HKG-LHR goes daily). If they all were A380 that's 4 daily to LHR = 12 aircraft, call LAX 6 daily, that's another 12 aircraft giving 24 or 2 more than current orders + options.

Of course this has A LOT of speculation in it, but it does define some parameters. QF will need between 10 and 24 aircraft to serve just SYD/MEL-LAX/LHR, with all A380s. This does not allow for other possible routes. I think a SIN and/or BKK turn around is possible, a service to India is another and of course SYD/MEL-DFW hangs there as a very tempting treat, if in reality the aircraft can carry an economical payload DFW-SYD. QF would LOVE to get non stop access to AAs major hub at DFW, but it MUST be non stop.

What is true for QF is, of course, not necessarily true for the other airlines that have ordered it, but if QF likely needs about double its current order AND EK may double its current order can SQ, MH & TG to name three be far behind?

In summary, a doubling of current A380 orders does not appear unreasonable from current customers and there ARE other potential customers out there, as speculated on this board from time to time. All assuming the aircraft meets or exceeds it performance targets.


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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 12:02 pm

Quoting AC320 (Reply 16):
Also remember the article is talking about the aircraft sales required during the next 20 years....I don't think anyone ever said the A380 was a short term project.

The A380's should each last approximately 20 years, and I think that most of the orders are in. If new airlines want to add the A380 after a few years, they will likely be able to pick them up on the used market. Emirates should have some available for sale a few years after they take their first delivery! I admit, I like the A380, but I doubt there is much of a business case for it.

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DfwRevolution
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 12:15 pm

Quoting Gemuser (Reply 17):
Well DfwRevolution, as well as the 150 odd orders there are 60 options, plus the rumored extra 45 from EK, that only leaves another 45 orders to reach 300 and I think China alone could easily take that many.

China has taken a grand total of five A380-800 to be delivered in time for the 2008 Olympics. Does that sound like legitimate demand for a large airplane, or showing-off when the world is looking at China? I don't see how another 40 A380 from the Chinese airlines seems reasonable at all....

Assuming all options are converted and EK places a follow-on order you are looking at an airplane with approx. 1/3 of its backlog in the hands of a single airline who by any estimate is already speculative growth. Maybe China should just wait and pick-up some EK birds real cheap...
 
ScottB
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 12:24 pm

Quoting PlaneSmart (Reply 6):
Best informed? Whose figures do they use? Supplied by Scott Carson?

Ah yes, I see -- The Economist is now an American propaganda rag used to slander Airbus and all things European, right?  Yeah sure

What the article is getting at (and as Sllevin explains) is that having the A380 project only reach break-even or be slightly profitable means that it was a failure as an investment -- if Airbus operated like most publicly traded companies. You have to consider the opportunity cost of the capital investment made in the program; i.e. if Airbus had invested 10 billion euros in some other project or even in financial instruments, would they have achieved a better rate of return? Could they have invested in other ways relevant to their business that would have given them better margins? If the answer to that question is "yes," the A380 is a failure in terms of return on investment.

It's along the lines of IBM choosing to sell its personal systems group to Lenovo. That was a profitable business for IBM -- that division made $162 million in profit last year on $13.0 billion in revenues. The problem is that the operating margin for their personal systems group was only 1.25% percent -- a real dog compared to the the company's margin of 12.5% as a whole. Without that underperformer, the company's margin would have been 14.1%, and that's why they're selling it to Lenovo. They feel they can invest in other areas which will yield a better return.

I don't think that anyone with half a brain doubted Airbus's ability to design and construct the A380 (nor would they doubt that Boeing could if they chose to embark on a similar project). My feeling has been since the A380 was launched that the prospects were murky at best for the A380 investment being worthwhile. There certainly is not room in the global market for two A380-sized aircraft, given the somewhat lukewarm orders since launch, so it would have been irresponsible for Boeing to have developed its own VLA.
 
NAV20
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 12:34 pm

Most, if not all, of the initial 150-odd orders were placed in 2000 at a price in the region of $US150M. per unit. This is confirmed by this press story about Qantas from the time:-

"The airline received deep discounts for being an early buyer of Airbus' all-new superjumbo jetliner. The list price is $220 million, but industry experts say the European plane maker has been selling them for as low as $150 million per jetliner."

http://www.unionrecord.com/biz/display.php?ID=386

And by the more recent Gellman Report:-

"The study says Airbus could realistically have expected to sell just 496 of the large aircraft in the first 20 years of the programme. To date, the authors say, the A380 has been sold for $130m-$145m, compared with the $199m building cost.

"Between 2006, the year of the first commercial flight, and 2025, the programme will produce a “net negative cashflow of $8.1 billion” the study concludes. As state-aid payments are judged over 17 years, the report also looked at the financial position between 2000 and 2017. It was judged to produce losses of $6.9 billion. Gellman said yesterday: “The project produces a cashflow that is absolutely enormous, and I think it bears some comparison with the Channel tunnel.”


http://www.timesonline.co.uk/article/0,,2095-1572218,00.html

As far as I know, Airbus has not challenged any of the figures.
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lnglive1011yyz
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 12:37 pm

Quoting DfwRevolution (Reply 19):
China has taken a grand total of five A380-800 to be delivered in time for the 2008 Olympics. Does that sound like legitimate demand for a large airplane, or showing-off when the world is looking at China? I don't see how another 40 A380 from the Chinese airlines seems reasonable at all....

Chinese families are travelling at a more furious pace than ever.
Never mind the huge numbers of travellers who are increasingly travelling to China as well.

I think the need WILL be there.

Everyone forgets. The world said we didn't need the 747. There were just as many people who said we didn't need it back in the 60's, and now, we're seeing it here again.

The capacity will be there.

NO manufacturer is going to build ANYTHING that there won't be a demand for.

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DfwRevolution
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 12:53 pm

Quoting Lnglive1011yyz (Reply 22):
Chinese families are travelling at a more furious pace than ever. Never mind the huge numbers of travellers who are increasingly travelling to China as well.

I think the need WILL be there.

But that is in no way a prerequisite for super-large airplanes. India has 1 billion people and they have yet to order the A380 and went for the 777/787 in their recent fleet review.

Airlines have a certain amount of money with which they can buy airplanes. Everything from the E190 to the A388 competes for that money, and the aircraft that stands to generate the best return per dollar invested will be the first priority. Explain the incongruity in the fact that India placed midsized aircraft over large aircraft? Now, explain the incongruity in the fact that China has ordered five A380 and sixty 787?

"Hmmm" I wondered quietly to myself

Quoting Lnglive1011yyz (Reply 22):
Everyone forgets. The world said we didn't need the 747. There were just as many people who said we didn't need it back in the 60's, and now, we're seeing it here again.

The size of long-ranged airplanes has been steadily decreasing since the 1980s, and given the volume with which 787-sized airplanes sell, that gap will only continue to alienate the A380.

Quoting Lnglive1011yyz (Reply 22):
NO manufacturer is going to build ANYTHING that there won't be a demand for.

Two points:
1. Concorde
2. The words "pride project"

It has happened before...
 
United Airline
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 1:05 pm

Quoting Lnglive1011yyz (Reply 22):
Chinese families are travelling at a more furious pace than ever.
Never mind the huge numbers of travellers who are increasingly travelling to China as well.

For now people still seem to overestimate the total number of chinese travelling around the world. It is increasing rapidly but still not that many compare to western countries.

Can Airbus sell 500?
 
Confuscius
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 1:07 pm

It won't be so bad for Airbus because they don't have to repay the "government loans" until the A380 becomes profitable.
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 1:12 pm

Quoting JMJAirways (Reply 7):
They will have sold a total of around 300 in 5 years !

Is 60 Aircraft a Year the Production rate.
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mariner
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 1:13 pm

Quoting DfwRevolution (Reply 23):
Now, explain the incongruity in the fact that China has ordered five A380 and sixty 787?

"Hmmm" I wondered quietly to myself

Why is that incongruous? The A380 is for extremely high density routes - which may be limited in number but which certainly exist.

The B787 is for less high dense routes, which are certainly more in number.

The fantasy is that the B787 and the A380 compete for the same market.

Weird.

Do you not find it incongruous that the 737 has sold more, in number, than the 747-400?

Weird.

cheers

mariner
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a380900
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 1:27 pm

Quoting N844AA (Reply 3):
The Economist is consistently one of the best-informed publications I read and, more often than not, on-target. Are you disputing their accuracy, or the accuracy of the financial/business press in general?

The economist is the "truth revealed" for the business elite around the world. This veneration is somewhat ridiculous. It may be less crappy than most other news media but it is still very crappy and biased. It asked Bill Clinton to resign during Lewinski and it defended the Iraq war among other blunders.

[Edited 2005-04-29 07:00:24]
 
ContinentalFan
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 1:44 pm

Quoting A380900 (Reply 28):
The economist is the "truth revealed" for the business elite around the world. This veneration is a somewhat ridiculous. It may be less crappy than most other news media but it is still very crappy and biased. It asked Bill Clinton to resign during Lewinski and it defended the Iraq war among other blunders.

That doesn't answer the legitimate question about the A380's business case. I think the responses in this thread make it clear that concerns expressed are at least reasonable and legitimate, regardless of who the messenger is (what if the messenger had been some Continental publication, like Der Spiegel), and I haven't seen any responses that indicate otherwise. It's not like they are saying "RA! RA! USA! Boeing!" without any basis in fact. These are legitimate concerns, if I was investing my money, I would certainly want it to give me a positive return, especially if I were investing in something this risky, otherwise there are far safer investments that can be made.
 
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mariner
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 1:58 pm

Quoting ContinentalFan (Reply 29):
That doesn't answer the legitimate question about the A380's business case.

But it has been addressed. The issue is in the use of the words "reasonable return."

To an economist, the words "reasonable return" do not mean "break even" or "profitable".

They mean what the investor thinks is a "reasonable return" on his investment.

But no one knows what "reasonable return" is until the investor defines it.

In Europe, a "reasonable return" on an investment in bonds might be 3%. Interest rates in Europe have, historically, been low.

Interest rates in Australia and New Zealand have, historically, been high, so that same money, similarly invested, might earn 8%.

The downside for the Aussies and Kiwis is that they will be paying a high interest rate for mortgages, the Europeans will not.

Now, we can pretty much guess what The Economist means by "reasonable return" - it is a rabidly capitalist magazine.

But it is probably different from what a lot of others think is "reasonable" - or over what time frame they think it.

Moreover, it isolates the A380 from the rest of EADS. You cannot buy shares in the A380. You can buy shares in EADS, and those shares represent the entire Airbus family, not just one plane.

So that also affects the "reasonable return".

cheers

mariner
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Jet-lagged
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 2:04 pm

Thanks for some thoughtful posts folks.

Opinions seem to very whether the Economist is respectible or lamentable. I'll admit that I lean towards the former.

What is interesting is that it chooses the term 'return', which is very different from 'breakeven' as some posts have pointed out. Of course when Airbus talk about 'breakeven' then could mean 'breakeven based on an expected rate of return calculated to increase shareholder value at a rate that exceeds industry average". Somehow I doubt it. If so, and Economist is close to the truth revealed, that means something less than 500 (not 250 or 300 or 320) will be commercial underperformance. So 500 would be the real Number.

It would be nice to know how Airbus defines 'breakeven'.
 
NAV20
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 2:44 pm

There would appear to be no prospect of the A380 generating any kind of positive return for some years to come. And, given that the development costs have already been incurred, production costs are mounting, and a high proportion of the orders received will generate only 'launch customer' prices, the figures must look even worse in discounted cash flow terms.

The stock market doesn't seem to be under any illusions, anyway. EADS shares dropped sharply again yesterday - they've fallen from about E24.00 to E22.00 over the last couple of weeks.
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mariner
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 2:49 pm

NAV20:

I would doubt - very much - that the stock market reaction has anything to do with the present - quite stirring - news about the A380.

If what you claim were to be true, the stock market would have known this for some time.

I would suggest - only sugggest - that the stock market reaction is due to the two big orders that Boeing received. Until the market understands what the EADS response will be, the share price will be wobbly.

cheers

mariner
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NAV20
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 3:21 pm

Sure, mariner, combination of factors. But it's an odd situation - from the viewpoint of investors, there are only two big airframe manufacturing firms in the picture, worldwide.

Sure enough, Boeing shares have gone from $57.00 to $59.60 over the same period - in a falling Wall Street market. So possibly people are making a straight swap, selling EADS and buying Boeing?

If I played the stock market (which I don't) I might do the same. Well, no - on second thoughts I'd probably go for Rolls Royce, who make most of the engines for ALL the rival aeroplanes!

[Edited 2005-04-29 08:22:33]
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mariner
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 3:30 pm

Quoting NAV20 (Reply 34):
So possibly people are making a straight swap, selling EADS and buying Boeing?

I would very much doubt that. Most Boeing investors are US based. The shares have gone up some because the news from Boeing has been very good this past week or so - if you ignore the Q1 profit figures.

EADS shares (Airbus) are traded in Europe, I don't think you can buy them on a US stock exchange - I'm not sure there is even an ADR - so the investors are almost certainly mostly European.

And I wouldn't pay a lot of attention to falling markets - or rising ones - when airlines and aircraft manufactuirers are involved.

Airline stocks are more likely to react to the price of oil, and aircraft manufacturers are almost immune to market forces.

Boeing, for example, was an awful stock to own during the last great bull market run, and Southwest - the most successful airline in this country - has been a tread water stock for two or three years.

cheers

mariner

[Edited 2005-04-29 08:45:10]

[Edited 2005-04-29 08:45:52]
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leelaw
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 3:51 pm

Quoting Jet-lagged (Reply 31):
t would be nice to know how Airbus defines 'breakeven'.

I'm not sure about Airbus, but economists, managerial (cost) accountants, and financial analysts would define breakeven point as:

PX = VX + F,

where P = Unit Sales Price, X = Volume, V = Unit Variable Expense, F = Total Fixed Expenses.

or

300 A388s (as per Airbus) = Total Variable Expenses + Total Fixed Expenses (including $12B Development Costs)

The inherent weakness of using this method (breakeven/cost-volume-profit analysis) to evaluate the financial performance of a long-term project is that it doesn't consider the "time value" of the cash flows involved.
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kl662
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 4:11 pm

Quoting PlaneSmart (Reply 6):
Also takes no account of transfer pricing applied to derivatives, as B are so skillfully doing with 787 pricing.

Can you explain this, please? Are you speaking of financial derivatives, or plane model derivatives?
 
Planesmart
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 8:37 pm

Plane model derivatives.
 
EmmenezMoi
Posts: 68
Joined: Wed Apr 27, 2005 6:31 am

RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 9:33 pm

Quoting N844AA (Reply 3):
The Economist is consistently one of the best-informed publications I read and, more often than not, on-target. Are you disputing their accuracy, or the accuracy of the financial/business press in general?

It is also very partial. I consider each and every article in there to be an op/ed piece (rather than factual news).

Quoting NAV20 (Reply 32):
There would appear to be no prospect of the A380 generating any kind of positive return for some years to come

I don't think that is true. Airbus will reach a "positive" return (getting more money back than they invested) as soon as they go beyond break-even (250-300 planes). The prospect for that is quite good.

To get what the Economist calls a "real return" (probably around 10% annual in their minds) they need to sell more than that (500 planes according to the Economist).
PNC aux portes!
 
leelaw
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RE: Airbus Needs To Sell Around 500

Fri Apr 29, 2005 11:45 pm

Quoting EmmenezMoi (Reply 39):

Quoting NAV20 (Reply 32):
There would appear to be no prospect of the A380 generating any kind of positive return for some years to come

I don't think that is true. Airbus will reach a "positive" return (getting more money back than they invested) as soon as they go beyond break-even (250-300 planes). The prospect for that is quite good.

NAV20's observation is not without some historical merit. The 747 had approximately 150 orders booked at the time of its first flight, as does the A380. It took Boeing 8 years to deliver 300 741/742/74SP. Sometimes it takes time for "cash cows" to yield any cream.
Lex Ancilla Justitiae
 
airbazar
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RE: Airbus Needs To Sell Around 500

Sat Apr 30, 2005 12:04 am

You guys have to look way beyond the purchasing price. There are other value added benefits for the company associated with selling an aircraft. There are maintenance contracts, parts (anyone who owns a car knows that manufactures make their money on parts and not on the car itself). There's customer loyalty and the possibility of future orders for this and other aircraft types. Also there's increased market share, higher stock prices. The list just goes on, and on. My point is, evaluating the exact break-even number is not as simple a math problem as many seem to think.
 
DLPMMM
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RE: Airbus Needs To Sell Around 500

Sat Apr 30, 2005 12:09 am

Given the factual information given in this thread alone regarding launch pricing, development costs.... and disregarding the emotional and biased blather from both sides, it is apparent to me (and my little finance degree) that the Economist article is probably very close to the right number with 500.

The internal rate of return used in the calculation is most likely less than the 10% Internal Rate of Return EmmenezMoi suggests (more like 3 to 6% I would think) given the high development costs that are being carried for years (6% of $12B is $720 million per year, $200 million cost to produce each plane, $250M list sales price = $50M profit per plane with no sales discount means that the the first 15 planes off the assembly line each year will be needed to just pay the interest on the development costs. After that, the development cost will need to be amortized down. If the production rate was at 60 units per year and there were no launch discounts and no sales discounts (which we know there were), it would take some 5 years to pay down the debt (over 300 planes). I don't think Airbus is planning on producing 300 planes in the first 5 years, when their own forecast is for a market of ~750 planes over 20+ years. A more realistic rate of production is 30 per year which would give us around a 500 unit breakeven in 16.6 years.

It is a workable program, provided that Airbus can sell 500 units at list price over the next 16 years and there is no cost inflation that cannot be passed on in the list price.

After doing this exercise I am not very hopeful of Airbus recouping it's development expenses on this program, but it will not kill Airbus by any stretch.
 
EmmenezMoi
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RE: Airbus Needs To Sell Around 500

Sat Apr 30, 2005 12:36 am

Quoting Leelaw (Reply 40):
NAV20's observation is not without some historical merit. The 747 had approximately 150 orders booked at the time of its first flight, as does the A380. It took Boeing 8 years to deliver 300 741/742/74SP. Sometimes it takes time for "cash cows" to yield any cream.

Valid point. I guess it all depends on one's definition of "some years"...
PNC aux portes!
 
IADBGO
Posts: 202
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RE: Airbus Needs To Sell Around 500

Sat Apr 30, 2005 1:57 am

We might also want to ask what a "real' return means? Obviously a one Euro profit isn't going to matter much to Airbus...but a 100 million Euro profit, that might/will be something else. So before critizing the Economist as a magazine we might want to consider the context of the words.

Congrats though to Airbus on the A380,

IADBGO
 
teamregal
Posts: 110
Joined: Thu Feb 10, 2005 5:57 am

RE: Airbus Needs To Sell Around 500

Sat Apr 30, 2005 2:05 am

Quoting Lnglive1011yyz (Reply 22):
NO manufacturer is going to build ANYTHING that there won't be a demand for.

Not true.

Boeing: 736, 764
Airbus A318, A342

However, I do agree that there is a demand for the A380 excluding the 900 variant.


REGAL

[Edited 2005-04-29 19:07:05]
You would dare to challenge me? .........Insanity!
 
B2707SST
Posts: 1258
Joined: Wed Apr 23, 2003 5:25 am

RE: Airbus Needs To Sell Around 500

Sat Apr 30, 2005 2:25 am

Quoting ScottB (Reply 20):
What the article is getting at (and as Sllevin explains) is that having the A380 project only reach break-even or be slightly profitable means that it was a failure as an investment -- if Airbus operated like most publicly traded companies. You have to consider the opportunity cost of the capital investment made in the program; i.e. if Airbus had invested 10 billion euros in some other project or even in financial instruments, would they have achieved a better rate of return? Could they have invested in other ways relevant to their business that would have given them better margins? If the answer to that question is "yes," the A380 is a failure in terms of return on investment.

I'd take that a step further -- the key issue is not just pure return, but risk-adjusted return. The A380 should not just provide a comparable return to other airplane programs or standard financial investments, it should provide a significantly higher return to compensate Airbus for the risk it's taking. The A380 is clearly a more speculative project than, say, the 787 or an A320 upgrade/replacement. I'm not an actuary, but in the current environment and with some back-of-the-envelope math, I would expect at least an 8% internal rate of return (about 4% over the risk-free rate on government bonds). Anything less and Airbus is taking too much risk for the potential return the A380 will generate.

The "repayable loans" shift some of this risk from Airbus and its creditors to European taxpayers, but if Airbus defaults on these loans, the private capital markets will punish it severely, not to mention the political consequences of such a move.

Quoting Lnglive1011yyz (Reply 22):
I think the need WILL be there.

Absolutely true, but future sales are much less valuable than present sales because of the time value of money. Applying an 8% discount rate, a $280 million A380 sale in 2015 is only worth $130 million in present value terms. The more A380 sales occur in the future as opposed to the present, the lower the project's internal rate of return becomes and the less worthwhile the entire effort will be. That's why the argument that Airbus can "wait out the market" is problematic: waiting costs money, and the riskier the project and the higher the risk-adjusted discount rate, the more expensive it gets in terms of forgone opportunities for invested capital.

--B2707SST
Keynes is dead and we are living in his long run.
 
teamregal
Posts: 110
Joined: Thu Feb 10, 2005 5:57 am

RE: Airbus Needs To Sell Around 500

Sat Apr 30, 2005 2:44 am

Quoting Leelaw (Reply 40):
NAV20's observation is not without some historical merit. The 747 had approximately 150 orders booked at the time of its first flight, as does the A380. It took Boeing 8 years to deliver 300 741/742/74SP. Sometimes it takes time for "cash cows" to yield any cream.

Yes, but one cannot make accurate judgements by comparing past (especially 30yr.-old) scenarios with present. Now realize that I am not arguing against the 380's case but I am arguing against the 747-timed platform that the 380's future is being based on. Times have drastically changed...commercial air travel is now divided into 2 markets: hub-n-spoke and point-to-point. Oil prices headline the news media daily...Airlines desperately need more fuel efficient planes...Domestic widebody service only exist in the high-density markets (Pacific Rim)...Narrowbodies are deployed daily across the pond...LCC's are bonified competitors...Legacies are charging for food...Boeing and Airbus are the main competitors/suppliers...Technology...etc!

My point is that it while enthusiasts (armchair experts) and analysts (so-called experts) may tend to compare the effects of the A380 against those of the 747, it would be inaccurate to do so due to substantial differences in timeframe and therefore, environment of market. And with the advent of rapidly developed technology, designs and systems are becoming obsolete before they leave the paper. Suffice it to say that both epxerts as well as enthusiasts would agree that the market is much more sensitive today than it was 30 years ago so with regards to the A380, we will all just have to wait and see.
Another   



REGAL

[Edited 2005-04-29 19:48:19]
You would dare to challenge me? .........Insanity!
 
FCKC
Posts: 1631
Joined: Sun Nov 21, 2004 9:39 pm

RE: Airbus Needs To Sell Around 500

Sat Apr 30, 2005 3:16 am

One more time a wrong information coming from the USA..............
Where did this newspaper find this 500 number ?
Can we speak seriously and with some kind of intelligence.

It's the same kind of information that the journalist (do not remember his name) payed by Boeing to defame Airbus , and that has been called "imbecile" by Forgeard at the first flight day of the A380.

The same Forgeard said in "Les Echos" , highly reliable economic newspaper , that the break even point is 270 , instead of 250 , due to the low US$.
He added that this point will be achieved in 2008 , meaning in 2008 Airbus will have sold at LEAST 270 units of the A380.
He also added that in 2009 , the A380 will be around 29% of the total Airbus sale a year.
He also stated that Airbus this year is negociating with 4 airlines to sell A380s , that's no meaning these 4 airlines will buy the plane this year , could be next year.
He also said "No comment" about Japanese negociations.The door is not closed........

Stay intelligent !!!!!!!!!
 
backfire
Posts: 3467
Joined: Fri Oct 06, 2006 8:01 am

RE: Airbus Needs To Sell Around 500

Sat Apr 30, 2005 3:29 am

Quoting KL911 (Reply 1):
Since when does the economist know anything about running a company like Boeing or Airbus? It's a magazine, and they are always wrong...

A bit like A.net then Big grin

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