The people who wrote the report are:
Aaron Gillman. Professor, Northwestern University Transportation Center
Full Professor of Management and Strategy at Kellog (one of the most respected schools of business in the states).
Hans Weber - Head of a airline consultancy, sits on the FAA subcommittee for airplane safety.
George Hamlin - "Before that he was Director, Strategic Planning for six years at Airbus Industrie, North America, where he was responsible for company planning; analysis of market requirements; integration of North American forecasting with worldwide product development requirements; market research; and acting as liaison with the financial, aircraft trading and appraisal communities."
Richard L. Aboulafia - Analyst for the Teal Group and Janes.
The claims of the paper are as follows
- In violation of the 1992 bilateral, Airbus never did a Critical Project assessment which would have ruled out any government investing in the A380.
- State aid is provided for development ("launch") only, and must be repaid in percentage of each plane delivered.
- The launch price was 40% of list price (which makes sense. The Boeing 737s recently sold to RyanAir were at 60% of list, but that was a stable well known platform.
- In general, Airbus required 10% down on each firm order.
- Without any offset from development cost, each plane could cost as much as $194 million (I doubt this number, I think it's a bit lower).
- Between the launch aid and partner commitments, Airbus is only on the hook for about 3 billion out of the 10 billion total development cost.
- Airbus has to pay back approximately 9 million per plane for government costs.
- The authors believe that the first 120 planes were sold at launch prices.
Their assumptions are
- Inflation would have no result because it would affect revenue and cost streams identically.
- None of the new technology or engines would have any problems during certification
- The A380 would come in on time and in budget (this assumption has been blown since the report was written)
- Engine price would stay constant, and not increase along the lines of the 777 engine increases.
- None of Airbus's contracts with risk sharing partners require Airbus to make compensation of lack of demand.
The authors also warn that:
- Boeing's new competitiveness has brought down the A320 margins considerably impacting Airbus's ability to cover mandatory payments from the A380.
- Airbus sells in dollars but pays in Euros. This leaves them on the hook for currency valuation issues. Basically because the dollar purchases much less (10-45%) euros, the ongoing development cost goes up by a similar percentage.
- This risk share partners apparently have trimmed the money down, leaving Airbus requiring more State Aid. State Aid needs to be repaid on a plane by plane basis.
- The highest premium load passengers are moving more and more to corporate private jets or time shares. This impacts the high margin customers that made intercontinental flights profitable on the 747.
A couple of interesting things from my point of view:
- The number of seats available for replacement spiked dramatically around 2019. The market demand for new seats is about 1/2 of that number until 2019. Because this is seat demand, bigger planes take more seat capacity.
- If you assume a 30 yr lifecycle instead of a 20yr lifecycle, that number starts to spike around 2019, but really comes into it's own on 2021. This is the big reason that Boeing isn't sweating bullets here. Even if the A380 does become a success, they have plenty of time to come up with a next generation vehicle in the VLA space.
- The vast majority of the orders that need replacing around 2020 are small body planes. (737/747NG). Lots of little planes at a little margin. The A380 is tackling the few large planes, big margin market. So far the margins are not there.
- Developing a next generation vehicle right now will likely not bring in the kind of revenues that Boeing and Airbus want them to right now.
- Since 1990 the number of Atlantic international flights being flown with large aircraft has remained relatively static (trending towards a decrease over the entire decade). Both small widebodies and medium widebodies have grown considerably. It's not that the market is not there. It's that the market is static.
- There has been a increase of 30% of direct non-stop flights to and from the US from Europe. Since the number of large widebodies has stayed static, it's a safe bet that these are mostly flown on smaller aircraft.
- JFK/MCO/LHR has _lost_ direct flights. Not gained them. Yet the overall direct non-stops have grown considerably. This appears to be directly contributable to market fragmentation.
- The larger the market, the faster it shrinks in terms of non-stop destinations or the slower it grows.
- Pacifc (US<->ASIA) flights have grown more then Atlantic flights.
- A similar fragmentation has been occurring in the Pacific markets, however lack of long range aircraft has effectively limited these routes to 747/A340/777.
- Similar trends appear in the Asia to Europe market. There has been growth VLA wise, but the growth on small widebodies dominates it.
- 747 orders were cyclical in nature. If you look at the A380, it should slightly offset that trend but continue it. Orders may then drop for a substantial period of time, but kick back up in 10 years.
- Airbus probably does have enough cash right now to develop a new A350 with moderate launch aid from Europe. They can probably do it without launch aid as well, but it will be much much riskier.
- Airbus has to repay government aid on a plane by plane basis. That means that Airbus will almost certainly be taking a loss on the first fifty planes. The second set of fifty will probably be break even. The last 50 may be fairly positive. (At least if Airbus followed their earliest business plans. More recent reports that Airbus is still discounting severely will not help things).