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LHRSpotter
Posts: 57
Joined: Sat Nov 04, 2006 7:28 am

### RE: A380 Here To Stay-Great Bargain For Airlines!

 Quoting Areopagus (Reply 47):Quoting LHRspotter (Reply 44): A basic calculation shows that to return an investment of \$15 billion in a product with list price of \$200 million you need to sell 75 units. 75 units if you can get the full list price and it costs nothing to produce.

The full list price on an A380 is around \$300 million. Airbus can never get that from the launch customer (Etihad?) that gets the test frames as they are unique and thus more complex for mx.
With the compensations due after the three delays I've "shaved off" another \$100 million off the price of each of the next 70 frames - hence the \$200 million price tag. Whether the R&D and production costs amount of \$15 billion is correct or not I have no idea - I used a figure from this very forum and it should be reliable.

LHRSpotter
Posts: 57
Joined: Sat Nov 04, 2006 7:28 am

### RE: A380 Here To Stay-Great Bargain For Airlines!

 Quoting 474218 (Reply 49):Quoting LHRspotter (Reply 44): I kindly disagree. A basic calculation shows that to return an investment of \$15 billion in a product with list price of \$200 million you need to sell 75 units. How much does it cost to produce those 75 A380's you sold for \$200 million each? The best return any airframe manufacture could hope for is 10% so each A380 cost \$180 million to produce leaving \$20 million profit. Now you have to sell 750 A380's not 75, to cover that \$15 billion investment.

You got something wrong. My name is not John Leahy. I haven't sold a single Airbus in my life. And I'm not planning to. I saw a figure quoted somewhere above: \$15 billion. A made an (obviously wrong) assumption that this was the full outlay including R&D and production costs. I took a calculator and divided this by what I expect Airbus to be able to get for it's first frames (see above).
I have read that the break-even point for the A380 was calculated to be around 280 frames, currently 400 and probably rising. Unfortunately no two sources can ever come up with the same figures so I rely on info here.

EnviroTO
Posts: 723
Joined: Sat Aug 07, 2004 12:11 pm

### RE: A380 Here To Stay-Great Bargain For Airlines!

 Quoting RedFlyer (Reply 45): If you say so. Now I know why Airbus' market projections were so rosey.

What?? You mean there are ongoing costs beyond the initial investment and penalties? Why didn't you tell me? How do you expect me to be CFO if you are keeping this information from me? This is seriously going to impact my projections.

LHRSpotter
Posts: 57
Joined: Sat Nov 04, 2006 7:28 am

### RE: A380 Here To Stay-Great Bargain For Airlines!

 Quoting EnviroTO (Reply 52):What?? You mean there are ongoing costs beyond the initial investment and penalties? Why didn't you tell me? How do you expect me to be CFO if you are keeping this information from me? This is seriously going to impact my projections.

OK, for the third time: my fault entirely, production costs were not included, Airbus needs to sell several hundreds whalejets to break even.

The question in the topic from the start was CAN THEY?

 Quoting Dambuster (Reply 46):Quoting LHRspotter (Reply 44): And if there is no market for the product the european governments will help making it. I can see BA, LH, IB and AF order A380s rather than 748s. And with the Russians entering the picture the market may just become right. Agreed, however there are other important airlines such as KL that won't necessarily go for the 380...

The parent company of KLM is FRENCH and is called AirFrance-KLM S.A. with none other that the French government holding almost 19%. Will they choose the A380 over 748? Quite possibly...

bringiton
Posts: 763
Joined: Thu Sep 28, 2006 10:24 am

### RE: A380 Here To Stay-Great Bargain For Airlines!

 Quoting LHRspotter (Reply 51):I have read that the break-even point for the A380 was calculated to be around 280 frames, currently 400 and probably rising. Unfortunately no two sources can ever come up with the same figures so I rely on info here.

The original Break even no. was somewhere at around 270-280 however that was before the first of the Cost escalations . The eventual no. that Airbus has released is something in the vicinity of 420 Airframes however what needs further clarification here is that 420 airframes over how long as you cannot sell 420 airframes over 30 years and still break even as you have a production line that is running under capacity , Loans earning Interest etc etc . Some members said that Airbus needs to sell the 420 odd in 10 years to get a Break even and start getting a Profit however that would require a nearly 30-40 Aircraft per annum sales no which looks highly unlikely over a decade in a cyclican industry. What was more shocking was that IF ( And A big IF) Airbus manages to sell 750 A-380's the IRR will be 13% which is very disapointing compared to what Airbus thought of the IRR to be (close to 20%)

manni
Posts: 4049
Joined: Thu Nov 08, 2001 1:48 am

### RE: A380 Here To Stay-Great Bargain For Airlines!

 Quoting 474218 (Reply 49):The best return any airframe manufacture could hope for is 10% so each A380 cost \$180 million to produce leaving \$20 million profit.

Recently there was a report that said that the production cost of an A380 is around 40% of the listprice. A US\$300 million aircraft (note that the official listprice is slightly more) would cost US\$120 million to produce. 4 engines might need to be added to this cost, as it was not clear wether they would be included in this 40%. FWIW, the listprice for 4 engines would be around US\$45 million.

To get an A380 for US\$200 million you need a discount of 35%. (ie.BA reportedly seeks a discount of 20%, for their upcoming order, 748i or A380).

A cost of US\$120 million for the frame and a cost of US\$45 million for the engines (assuming no discount here), would bring the total to US\$165 million.

A US\$300 million aircraft 20% discounted would cost US\$240 million.

The margins on a A380 will likely be higher then 10%. Certainly for any future airframes sold. Provided the numbers in my example are correct (most likely they are incorrect, but close enough), a 20% discounted aircraft would give Airbus a margin of 25% (not included general overhead costs and engines at listprice). A 35% discounted aircraft (given the report on the discount BA is seeking, it's very unlikely that any aircraft will be sold with such a discount) would give airbus a margin of 12%.

Both examples give an average discount of 27,5% and a margin of 18,5%, or a respectable US\$ 54,5 million (again, note that the general overhead costs need to be deducted).

Areopagus
Posts: 1337
Joined: Thu Sep 20, 2001 12:31 pm

### RE: A380 Here To Stay-Great Bargain For Airlines!

 Quoting Manni (Reply 55):Recently there was a report that said that the production cost of an A380 is around 40% of the listprice.

At an electronics manufacturer where I used to work, the rule of thumb was said to be that you could divide the list price by pi to get the marginal manufacturing cost. But of course, the firm didn't make out like a bandit as that figure suggests, because the marginal cost doesn't include the fixed costs of the factory, nor the costs of ongoing engineering, sales and legal departments, etc.

bringiton
Posts: 763
Joined: Thu Sep 28, 2006 10:24 am

### RE: A380 Here To Stay-Great Bargain For Airlines!

 Quoting Manni (Reply 55):Recently there was a report that said that the production cost of an A380 is around 40% of the listprice

Usually whats flying around is that launch customers often get 40% off on list price . Did you confuse the 2 no.s or is there any source that actually said that there is a 60% profit on Sticker price ?

 Quoting Manni (Reply 55):The margins on a A380 will likely be higher then 10%

10% is where airbus wants to be overall (NB and WB's combined), their flagship and most expensive Aircraft should most ideally be in the 12-14% range IMO.

 Quoting Manni (Reply 55):To get an A380 for US\$200 million you need a discount of 35%. (ie.BA reportedly seeks a discount of 20%, for their upcoming order, 748i or A380). A cost of US\$120 million for the frame and a cost of US\$45 million for the engines (assuming no discount here), would bring the total to US\$165 million. A US\$300 million aircraft 20% discounted would cost US\$240 million.

Although I am not certain about the 40% needed to produce figure etc however Lets assume it is correct and Airbus A380 ( with the engines) costs to produce 165 million \$ US. Now if a customer averages a 20% discount the Profit per frame comes out to be 75 million a peice . Now the developmental cost of the A380 is 12-13 billion \$ U.S. . If we assume a 75 million dollar profit per frame and devide it by the 12 billion (taking the lower value) you'll get a value of around 160 airframes to break even however this is clearly not the case according to airbus's own admission ( even according to their break even no. of 270-280) . If you use your 40% figure and try to calculate what the profit per frame is then it will come out to be something like 28 million dollars per airframe for a total average from the first airframe to the 420th airframe (obviously the Per batch profit will vary) which is like 16% still (if they manage to sell that many airframes) . The IRR which is basically defined as the -

the return that a company would earn if they expanded or invested in themselves, rather than investing that money abroad

is stated to be at 13% although I am not a student of economics so Would not be able to calculate wether the IRR is pre tax and interest or post tax and interest.

Yellowstone
Posts: 2821
Joined: Wed Aug 16, 2006 3:32 am

### RE: A380 Here To Stay-Great Bargain For Airlines!

While we can debate all day long over how many frames Airbus should/will/needs to sell, the simple fact is that the development costs they have already paid for are irrelevant at this point. They can't get that money back no matter what they do. It is a sunk cost. As long as they can sell an A380 for more than their variable production costs (including the opportunity costs of not dedicating those resources to the A350), they should do so.
Hydrogen is an odorless, colorless gas which, given enough time, turns into people.

JayinKitsap
Posts: 2299
Joined: Sat Nov 26, 2005 9:55 am

### RE: A380 Here To Stay-Great Bargain For Airlines!

The extensive added costs and the delays in production have significantly increased A's investment in the program and a growing accrued interest to repay. The amount owed will continue to frame 65. Frame 65 is like 3 years away. The interest on \$15B @ 8% is 1.2B the first year. By the 3rd year accrued interest will be approaching \$4b. Interest per year on \$19B is \$1.5B, on 40 planes per year is \$37.5M/plane. So if production costs are \$150M per plane incl engines including overheads, the plane needs to sell for nearly \$190M per plane to stay even. These numbers are assumed but the trend is what is important. Before the delays and overruns the interest/year was \$15B x 8% = 1.2B /40 = \$30M per plane, so the delay interest costs have eaten up 4% additional cost of each plane.

The mismanagement on the A380 has deflated the glamour factor the 380 once had with many in the media and industry. It has also distracted Airbus and made customers much more cautious with any large order.

I would guess the first 80 frame orders for passenger 380s won't be cancelled , because they probably had very good pricing. Options that came with these early orders probably also have great prices in today light, these are likely to be exercised. Current orders beyond 80 will mostly stay in the fold, but options on those will have many not exercised. New sales at \$300 less 25% or \$225M will really be a hard sell in any kind of volume until the plane has proved itself.

However, the delays have pushed out this performance in the market period. It may be 2009 before the industry really sees this performance. How will a few quiet order years for the 380 affect perception.

Airbus was planning for 48 per year at peak production, can they now sell 48 per year sufficient to have a 2 year backlog. If production falls to more like 30 per year to match orders the interest per plane rises to \$50M making it so much harder to pay down the investment.

Technically, I'd like to see the 380 flying and making their number. However, it will be quite elusive for Airbus to have a financial success with it.

bringiton
Posts: 763
Joined: Thu Sep 28, 2006 10:24 am

### RE: A380 Here To Stay-Great Bargain For Airlines!

MANI -

I did a bit of online research and found this interesting PDF

http://www.transportation.northweste...llman040606/Gellman-AirbusA380.ppt

If you scroll down to the 13th slide it shows that the cost of producing PAX varient of the A380 in 2006 comes out to be somewhere int he vicinity of 194-195 million a pop (It states that its including delivery so I'll assume that the engines come within that price range) however the cost is in 2001 Dollars ( compare the Euro-Dollar relationship between then and now aswell as the Inflation and the effect (increase or not) the inflation has had on Airbus aircraft prices over that time period) . If Airbus sells it at a 20% discount then the First A-380 (actually A380 1-13) will create a profit of 23% or 45 million @ which rate they would break even at 266 aircraft (very close to the original target of 270-280)

I believe that this PDF presentation is more representative of the actual delivery and cost schedule for the A380 and airbus however what happened with the delays was that the profit for the first 150 or so A-380 which would have ammounted to close to 6.7 billion dollars (2001) got eroded by 2 factors -

* Heavier discounts give to launch and bulk customers
* Losses incurred due to delays,penalties,compensations and bloating of budget due to the redesign of various wiring components

The reason I believe this is the case is that if you look at the original Airbus 280 break even requirment it comes mighty close to the 266 that we back calculated at the start of my post ( the profit of 14 airframes can probably be attributed to greater discounts) therefore if you take the 150 or so of the initial orders and add 266 to it you get something like 416 which is very close to the 420 no. that airbus is giving us now .

Hope this helps!

Regards!

474218
Posts: 4510
Joined: Mon Oct 10, 2005 12:27 pm

### RE: A380 Here To Stay-Great Bargain For Airlines!

 Quoting Bringiton (Reply 57):10% is where airbus wants to be overall (NB and WB's combined), their flagship and most expensive Aircraft should most ideally be in the 12-14% range IMO.

I could only find Airbus data from the 1st half of 2005 (a good year for them). They had sales of 11.26 billion Euros and a profit of 816 million Euros. That makes their profit margin (profit divided by sales) of 7.25%.

bringiton
Posts: 763
Joined: Thu Sep 28, 2006 10:24 am

### RE: A380 Here To Stay-Great Bargain For Airlines!

 Quoting 474218 (Reply 61): could only find Airbus data from the 1st half of 2005 (a good year for them). They had sales of 11.26 billion Euros and a profit of 816 million Euros. That makes their profit margin (profit divided by sales) of 7.25%.

Could you provide a source ? Because the many sources that have been posted here is that for airbus a 10% profit margin is ideal !! However what is also to be noted that you have probably taken the entire years profit and therefore this includes R and D cost on aircraft/aircrafts such as A-380 and A-350 which wont be recovered until much later therefore you see a slight dip in profit . The profit is probably less because some of the revenue got used in funding R and D for the future etc However when we say 10% its usually Gross and a measure of Per average airframe sold

bringiton
Posts: 763
Joined: Thu Sep 28, 2006 10:24 am

### RE: A380 Here To Stay-Great Bargain For Airlines!

-UNABLE TO EDIT POST EVEN A MINUTE AFTER POSTING -

Let me give you an example -

This quarter airbus delivered X no. of aircrafts however they posted a net loss this quarter however this doesnt mean that they sold those airframe at a loss just that their EXTRA COSTS such as compensations for A380 customers , cost over runs etc etc brought them to the red!

474218
Posts: 4510
Joined: Mon Oct 10, 2005 12:27 pm

### RE: A380 Here To Stay-Great Bargain For Airlines!

 Quoting Bringiton (Reply 62):Could you provide a source ?

Yes.

Ken777
Posts: 10146
Joined: Thu Mar 11, 2004 5:39 am

### RE: A380 Here To Stay-Great Bargain For Airlines!

 Quoting RedFlyer (Reply 40):"10 or 20 years" is too far into the future to invest ~\$15 billion on.

Only for a low volume, higher risk program. When you move to smaller planes that have far higher sales levels (and risks) then the investments become more rational and acceptable - even to us on the board.

In terms of pricing and discounts - I think that the first thing these days will be how reasonable the airlines consider the published price. Hell, Airbus could have said that the list price was \$400 mil, but everyone gets a 33.3% discount if they clip the Discount Coupon from the Yellow Pages and bring it to signing.

The next factor will be how reasonable the discounted price is, regardless of the discount percentage. Airlines have some very nice computer based financial models that can crunch the numbers in a variety of ways. They can easily determine a reasonable (or viable) purchase price for their specific situation, independent of list price and discounts.

The problem both A & B have in selling their VLAs is the fact that the airlines can vigorously compare wither the 748i or the 380 with against other and also against other options, like the 777 and 787.

The changing market has probably laid to rest the initial projections of per unit profitability for the 380. Now Airbus is going to need to compete with a new 748i and the smaller wide bodies in order to get significant sales and they are (unfortunately) going to need to be very aggressive in order to get reasonable volumes.

redflyer
Posts: 3905
Joined: Thu Feb 24, 2005 3:30 am

### RE: A380 Here To Stay-Great Bargain For Airlines!

 Quoting Ken777 (Reply 65):Only for a low volume, higher risk program. When you move to smaller planes that have far higher sales levels (and risks) then the investments become more rational and acceptable

That's because usually -- but not always -- the smaller planes that have the higher sales levels also have lower capital investment. So the overall risk is less and relatively more acceptable. Even then, projecting 20 years out is a big risk; however, your ROI (think break-even) is more easily attainable because of less capital investment so if the market starts to shift under your feet, at least you have a better chance of recouping your investment.

When you sink billions more into a herculean project such as the WhaleJet, which is by any measure a much smaller market, there is not only the risk of the market changing before ROI, but the risk that technology will change (advance) rendering the project obsolete before ROI.

So let's say Airbus called it right and the market finally matures in 20 years -- I'll even be generous and say 20 years from 2000 when the project was launched. That is an entire generation in airplane terms (come to think of it, it is a generation in human terms as well). If the market finally comes to exist in 2020 as Airbus predicted then Boeing will launch a competing product using technology that is 20 years more advanced. It's a no-win situation for the A380.
A government big enough to take away a constitutionally guaranteed right is a government big enough to take away any guaranteed right. A government big enough to give you everything you need is a government big enough to take away everything you have.

ikramerica
Posts: 15100
Joined: Mon May 23, 2005 9:33 am

### RE: A380 Here To Stay-Great Bargain For Airlines!

 Quoting Areopagus (Reply 56):At an electronics manufacturer where I used to work, the rule of thumb was said to be that you could divide the list price by pi to get the marginal manufacturing cost.

Ah, electrical engineers...

Now, were there any rules of thumb that involve dividing by i ? That would be impressive...

 Quoting Bringiton (Reply 60):Hope this helps!

It explains very clearly what some of us had tried to explain when the 420 number first came out a while back.

Just to add to your 266 number. Airbus had stated (long ago, no link) that it would have taken until frame 5 to start selling frames at a per unit profit, so add those 4 to 266 and you get the 270 breakeven Airbus originally projected so many years ago.

Long and short: Airbus has not changed their projections at all, just written off the first 150 as a complete wash due to the delays. Thus 270+150=420=new breakeven number. But since they can't miraculously project sales to increase to 750+150=900 over the investment life, the ROI decreases to (330/480)*19%=13%. And lo and behold, the new ROI is projected by Airbus to be 13% on 750 frames sold.

To me, it shows Airbus is unwilling to alter it's projections at all despite new market realities, and any potential investors in the A350X better beware, as that's not very professional financial analysis for such an expensive gamble...
Of all the things to worry about... the Wookie has no pants.

miamix707
Posts: 3848
Joined: Tue Oct 21, 2003 2:22 pm

### RE: A380 Here To Stay-Great Bargain For Airlines!

 Quoting Stitch (Reply 43):One should note that this "bull market" has been mostly in large regional jets, narrowbodies and, to a lesser extent, particular models of widebodies (A332, 773ER, 787-8). It has not been a general increase across all markets.

You pretty much mentioned all markets right there   I think it's been across all jet sizes except 747 size and above. The Embraer family has been selling well too as of late.

Is it possible this bullish market doesn't have much more left? During this year the A350/A330/A340 sales have stalled, the order for narrowbodies has slowed some, as well as for the 787. It has been the Embraer's, 747Fs and a resurgence of 777 orders.

bringiton
Posts: 763
Joined: Thu Sep 28, 2006 10:24 am

### RE: A380 Here To Stay-Great Bargain For Airlines!

 Quoting Ikramerica (Reply 67): Airbus originally projected so many years ago.

Actually the no.s were projected as the break even point even at farnborough this year.

 Quoting Ikramerica (Reply 67):But since they can't miraculously project sales to increase to 750+150=900 over the investment life, the ROI decreases to (330/480)*19%=13%. And lo and behold, the new ROI is projected by Airbus to be 13% on 750 frames sold.

And that is the sticking point IMO . In a nutshell if the A389 doesnt find TAKERS the A380 will be disasterous for Airbus as I dont see them selling anything close to 400-500 Frames over the Life of the A388 even if they invest into newer engines and what not !! IMO the fate of the A380 making a profit , a loss or a negligible ROI rests on wether the A389 finds takers and wether Boeing Build the Y3 or not .

bringiton
Posts: 763
Joined: Thu Sep 28, 2006 10:24 am

### RE: A380 Here To Stay-Great Bargain For Airlines!

 Quoting MIAMIx707 (Reply 68):the order for narrowbodies has slowed some, as well as for the 787. It has been the Embraer's, 747Fs and a resurgence of 777 orders.

You have to look at the reasons why the NB orders have slowed down - Only the Manufacterers know the crux because for all we know the same level of orders might not be forthcomming due to unavailability of slots . Boeing will come very close to reaching the 1000 mark this year ( I think if they convert all pending orders they will reach a NET of around 960) and rest assured if airbus launch the A350XWB they will surely firm up close to 50-100 orders for the jet if not more so they wont be far behind aswell ( between 750-900) so As far as a year it has been a tremendous year for airliners . Boeing will most likely beat its Best 737NG year (which was last year) so the NB sales are definately not slowing down . The 340/330 might not be selling like hot cakes but the 777 has 25 firm ( with 20+4+10+15 to go) and the 787 has 140 plus . The 787 can probably sell a lot more if there are any slots available however the production is sold out till nearly 2013 so even if the market wants more they cant get them !!

 Quoting MIAMIx707 (Reply 68):Is it possible this bullish market doesn't have much more left?

I suspect one more round of WB orders from China , AA is expected to announce a huge WB order in the comming 6-12 months , BA has the 10 billion dollar order due shortly , EMIRATES is expected to choose close to 20 billion dollar worth of orders between 350 and 787 , QR is supposed to make a sizable WB order for 350 or 787 , LH will be choosing their long haul fleet , Aeroflot is yet to decide etc etc etc There is a long list of airlines waiting to give out some serious orders particularly in the WB sector and most of the US airlines havent started buying yet so the Bull run will continue .

manni
Posts: 4049
Joined: Thu Nov 08, 2001 1:48 am

### RE: A380 Here To Stay-Great Bargain For Airlines!

 Quoting Bringiton (Reply 57):Did you confuse the 2 no.s or is there any source that actually said that there is a 60% profit on Sticker price ?

No, I'm not confused. A recent report showed indeed the numbers I mentioned. There have been a few posts recently reffering to this report, in the forums.

Also note that there's more than airframe and engines costs that need to be covered with the sales of an A380.

A 60% margin is far to otimistic. However a US15 billion invesment isn't small. Huge investments (often risks) come, often, with huge profits when succesfull..

 Quoting Bringiton (Reply 57):Although I am not certain about the 40% needed to produce figure etc however Lets assume it is correct and Airbus A380 ( with the engines) costs to produce 165 million \$ US. Now if a customer averages a 20% discount the Profit per frame comes out to be 75 million a peice . Now the developmental cost of the A380 is 12-13 billion \$ U.S. . If we assume a 75 million dollar profit per frame and devide it by the 12 billion (taking the lower value) you'll get a value of around 160 airframes to break even however this is clearly not the case according to airbus's own admission ( even according to their break even no. of 270-280) .

My numbers are based on a listprice of US\$300 million. For the majority of the A380 orders placed, negotations started when the listprice was far lower than US\$300 million. Most of these orders will have also been made with a launch discount given, or a bulk discount in the case of Emirates. That could explain the higher number needed to break even.

It's future A380 sales that might become highly profitable for Airbus, if discounts are limited to the 20% range.

 Quoting Bringiton (Reply 57):If you use your 40% figure and try to calculate what the profit per frame is then it will come out to be something like 28 million dollars per airframe for a total average from the first airframe to the 420th airframe (obviously the Per batch profit will vary) which is like 16% still (if they manage to sell that many airframes) .

IIRC the total cost is US\$15 billion. That would make an average of US\$ 35.7 million or roughly 12% margin. This average includes the launch discounts and penalty payements for late deliveries, it also includes the overhead costs. Launch discounts and penaltys for late deliveries should not be given for future sales (ideally), so the average of 12% will certainly be pushed up once the 420th aircraft is ordered.

 Quoting Bringiton (Reply 60): I did a bit of online research and found this interesting PDF

Thanks for that. However the Gellman report is outdated and biased. I suggest a search in the forums on 'Gellman report'. Some of the members have done a good job explaining why you shouldn't belief the Gellman report.

 Quoting Areopagus (Reply 56):At an electronics manufacturer where I used to work, the rule of thumb was said to be that you could divide the list price by pi to get the marginal manufacturing cost. But of course, the firm didn't make out like a bandit as that figure suggests, because the marginal cost doesn't include the fixed costs of the factory, nor the costs of ongoing engineering, sales and legal departments, etc.

I did specifically mention that the figure 'might' excludes overhead costs.

 Quoting 474218 (Reply 61):I could only find Airbus data from the 1st half of 2005 (a good year for them).

Here's a link covering the full year.

Scroll down to divisions,

astuteman
Posts: 7184
Joined: Mon Jan 24, 2005 7:50 pm

### RE: A380 Here To Stay-Great Bargain For Airlines!

 Quoting OU812 (Reply 17):It will only be relevant after the 420th delivered A380

I'll let you into a secret....

 Quoting Yellowstone (Reply 58):the simple fact is that the development costs they have already paid for are irrelevant at this point

. The ONLY thing that's relevant for Airbus right now is how much cashflow/profit the A380 can provide to support the development of the A350XWB. The (possibly) \$4Bn of operating profit that would appear to remain in the existing orders is FAR more significant than whether or not the programme eventually reaches break-even.

 Quoting OU812 (Reply 17):If I offended you by comparing you to Noel Forgeard in the other thread . I apologize .

a) I wasn't aware you had
b) Why would you do that?????????
c) You can rest assured that who you might or might not feel inclined to compare me to means nothing to me...

 Quoting C680 (Reply 23):Bottom line: Airbus should have never started A380.

Unfortunately, the delays have clouded whether this is true or not. It's very easy to make a case that, if the delays had not occurred, the A380 programme would be sitting quite nicely at the moment, thankyou.

 Quoting Timboflier215 (Reply 25):Its Airbus' v v v poor managment of the whole program which has dealt it such a severe blow

This is definitely true

Good post all round, Ikramerica.

 Quoting Ken777 (Reply 36):The problem that Airbus has during this period is the lower R&D costs that the 748i carries. Boeing can make the pricing on the 748i exceptionally competitive

I'm still waiting for this to manifest itself. It's possible that this may not be as easy for Boeing as some might think.

Good post all round, Manni

 Quoting Bringiton (Reply 60):I believe that this PDF presentation is more representative of the actual delivery and cost schedule for the A380

The Gellman Report? More representative?

Take it away - You know more about the Build Strategy for HMS Astute than Gellman knows about what it costs to build an A380.
If you want a damned good laugh, read the whole report, rather than a summary presentation.

Regards

bringiton
Posts: 763
Joined: Thu Sep 28, 2006 10:24 am

### RE: A380 Here To Stay-Great Bargain For Airlines!

 Quoting Astuteman (Reply 72):Take it away - You know more about the Build Strategy for HMS Astute than Gellman knows about what it costs to build an A380. If you want a damned good laugh, read the whole report, rather than a summary presentation.

Lets throw away all aspects of yhe G report however I really dont see anything wrong with the 194 million per aircraft production cost which if used independently of the rest of the info available in the presentation leads us to the 266 and 416 no. So even if all of his market projections etc etc are B.S (which they can be and I am willing to trust you and MANNI more then him) I really havent used any of it instead just picked up the 194 million and compared it to the sticker price and factored in a simple orderwide discount of 20% which MANNI an Myself had assumed .

The fact that the 6.6 billion Dollar profit refers to the first 150 aircraft and that the 266 added to that 150 comes damn close to the 420 that airbus now claims I am pretty sure that the 194 million is more of an accurate cost of producing (everything included) as compared to 165 Million . However with MANNI's figure of 145 million we would have to assume a lower Quotes Sticker price to the customers which isnt all that hard to imagine ( is the case) therefore the 20 % discount wont be on 300 million but maybe on around 270 million . However if the former figures are to be beleived then IMO an average profit over a 20% discounted airframe for airbus is around 45 million dollars a pop which is a huge 23% and leaves a wide gap for further discounts .

The reason I say 45 million an airframe is simply because if you devide 12-13 billion dollars by 45 million you get something like 266-290 which is mightly close to what airbus had predicted originally as their break even no.
However Now with all the delays,compensations and launch discounts they will simply not make anything for the first 150 airframes and would still need around 266 to breakeven which takes the new no. to 416-420 !!

astuteman
Posts: 7184
Joined: Mon Jan 24, 2005 7:50 pm

### RE: A380 Here To Stay-Great Bargain For Airlines!

Thanks for the reply, Bringiton. I (think I) understood it.

FWIW it's ONLY the production cost bit of the Gellman Report which I am pretty certain (as opposed to guessing) is wide of the mark.
Aboulaifa penned the market analysis which I am not qualified to comment on, (but he is...) and the sections on contract conditions and discounts is another I have no experience of (but they may well have). so whilst I might have views on them, I wouldn't go out on a limb and challenge them per se.

I do know the production cost model basis used by Gellman for is so seriously flawed as to be dangerous. Production Cost just doesn't work that way (and production cost IS my area of expertise   )
I don't KNOW what the production cost of an A380 is for certain, but I do interact with some fairly senior production engineers from Airbus UK from time-to-time, and they tell me that the Morgan Stanley production cost figures are much more representative (i.e c\$120-125M ex engines).

The difficulty, I think with the \$194m in the Gellman report is the fact that he states that, because of discounts, the realised selling prices start at \$145m, and NEVER GET TO \$194m through the life of the programme.
i.e. no frame will EVER make an operating profit, no matter how many Airbus sell - clearly a ridiculous notion.

From the vast array of comments and information produced on Airliners.net, I can only deduce that the Gellman report statements on realised selling prices is nearer the truth than his modelled production cost.

Therefore I believe your assumption of 20% average discount to list to be optimistic in favour of Airbus. I think the discounts have been higher than that, and by a fair bit.
(FWIW, Morgan Stanley believe the level of discount from list to have started at 45%, and reduced to c35% for the frames sold to date).

And YET, I'm entirely happy with your analysis which shows that the margin on the bulk of the frames sold to date had to have been of the order of \$45m per frame, BEFORE the major delays hit the programme.
If EADS regulatory statement is to be believed, the 65 frames carried over from pre-2010 to post 2010 because of the delays, still have E2Bn operating profit embedded in them (i.e. E33M, or c. \$40m per frame - still....)
Which sort of supports an original c \$45m margin.

So in summary, I'm inclined to believe the Morgan Stanley realised price figures (particularly as they pretty much correspond to the Gellman ones    ).
Therefore, to make the operating profit which would originally secure break-even at 270 frames, and will now make (apparrently) break-even at 420 frames, the production cost HAS to be a lot lower than Gellman calculated, and be in the \$160m - \$165m ballpark with engines.

Of course, the difficulty with "production cost" is that it is an amalgam of all sorts of things, including overheads, which are inflenced by throughput on other programmes in the year in which they're calculated too. Therefore, I don't think there is such a thing as a definitive "production cost" for any aircraft from any manufacturer, except for that one which is tracked by the business's ERP system, and which will change slightly every day until the day the frame is delivered.

Hope that helps.

Regards

atmx2000
Posts: 4301
Joined: Wed Oct 13, 2004 4:24 pm

### RE: A380 Here To Stay-Great Bargain For Airlines!

 Quoting Ikramerica (Reply 67):Now, were there any rules of thumb that involve dividing by i ? That would be impressive...

Uhm, I think you mean j. We electrical engineers like using i for current.
ConcordeBoy is a twin supremacist!! He supports quadicide!!

Stitch
Posts: 27316
Joined: Wed Jul 06, 2005 4:26 am

### RE: A380 Here To Stay-Great Bargain For Airlines!

 Quoting MIAMIx707 (Reply 68):Is it possible this bullish market doesn't have much more left?

The current one might be winding down (BA and LH are about what's left), but about five years from now I expect the US majors will start the second wave of replacement orders with a few hundred frames between them.

bringiton
Posts: 763
Joined: Thu Sep 28, 2006 10:24 am

### RE: A380 Here To Stay-Great Bargain For Airlines!

 Quoting Astuteman (Reply 74):Thanks for the reply, Bringiton. I (think I) understood it. FWIW it's ONLY the production cost bit of the Gellman Report which I am pretty certain (as opposed to guessing) is wide of the mark. Aboulaifa penned the market analysis which I am not qualified to comment on, (but he is...) and the sections on contract conditions and discounts is another I have no experience of (but they may well have). so whilst I might have views on them, I wouldn't go out on a limb and challenge them per se. I do know the production cost model basis used by Gellman for is so seriously flawed as to be dangerous. Production Cost just doesn't work that way (and production cost IS my area of expertise ) I don't KNOW what the production cost of an A380 is for certain, but I do interact with some fairly senior production engineers from Airbus UK from time-to-time, and they tell me that the Morgan Stanley production cost figures are much more representative (i.e c\$120-125M ex engines). The difficulty, I think with the \$194m in the Gellman report is the fact that he states that, because of discounts, the realised selling prices start at \$145m, and NEVER GET TO \$194m through the life of the programme. i.e. no frame will EVER make an operating profit, no matter how many Airbus sell - clearly a ridiculous notion. From the vast array of comments and information produced on Airliners.net, I can only deduce that the Gellman report statements on realised selling prices is nearer the truth than his modelled production cost. Therefore I believe your assumption of 20% average discount to list to be optimistic in favour of Airbus. I think the discounts have been higher than that, and by a fair bit. (FWIW, Morgan Stanley believe the level of discount from list to have started at 45%, and reduced to c35% for the frames sold to date). And YET, I'm entirely happy with your analysis which shows that the margin on the bulk of the frames sold to date had to have been of the order of \$45m per frame, BEFORE the major delays hit the programme. If EADS regulatory statement is to be believed, the 65 frames carried over from pre-2010 to post 2010 because of the delays, still have E2Bn operating profit embedded in them (i.e. E33M, or c. \$40m per frame - still....) Which sort of supports an original c \$45m margin. So in summary, I'm inclined to believe the Morgan Stanley realised price figures (particularly as they pretty much correspond to the Gellman ones ). Therefore, to make the operating profit which would originally secure break-even at 270 frames, and will now make (apparrently) break-even at 420 frames, the production cost HAS to be a lot lower than Gellman calculated, and be in the \$160m - \$165m ballpark with engines. Of course, the difficulty with "production cost" is that it is an amalgam of all sorts of things, including overheads, which are inflenced by throughput on other programmes in the year in which they're calculated too. Therefore, I don't think there is such a thing as a definitive "production cost" for any aircraft from any manufacturer, except for that one which is tracked by the business's ERP system, and which will change slightly every day until the day the frame is delivered. Hope that helps. Regards

Nice bit of work there !! Its all such a complex situation to comprehend if you dont have the right information available , But assuming that the production cost is in the 160-165 million dollar mark and that the Discounts were from 45% to 35% for the first 150 or so frames brings us pretty much back to the same figure (because I assumed 20% discounts) so in reality both of us pretty much came out to the same conclusion having taken different ways to get there !!

ikramerica
Posts: 15100
Joined: Mon May 23, 2005 9:33 am

### RE: A380 Here To Stay-Great Bargain For Airlines!

 Quoting Manni (Reply 71):Thanks for that. However the Gellman report is outdated and biased

All Airbus A380 projections are outdated.

As for biased, say what you want, but if you can read the Gellman report and come up with 270 as the break-even (originally) and have Airbus confirm that same number of 270 (before upping it to 420 recently), then the Gellman report can't be dismissed.

Is a report "biased" because it doesn't project a rosy outcome?

Please define you definition of bias so we can understand your reasoning. Do you consider yourself biased in any way?

 Quoting Atmx2000 (Reply 75):We electrical engineers like using i for current.

I know, which would make dividing by i to reach a sales axiom really difficult to comprehend. Unless you are an EE.

 Quoting Stitch (Reply 76):The current one might be winding down (BA and LH are about what's left), but about five years from now I expect the US majors will start the second wave of replacement orders with a few hundred frames between them.

Widebody orders that must be placed soon (Y/E 2008): 650+ widebodies minimum

USA
AA-767/A306 replacement (110 widebodies)
DL-763 replacement + expansion (80 widebodies)
UA-744/763 replacement (65 widebodies)
US-A350 decision and follow-on order (20 widebodies)

Europe
BA widebody fleet replacement (75 widebodies)
LH widebody replacement (744s. A300s. Early A340s. 50+ frames)
AF widebody replacement and expansion (remaining 744s replaced by 10x more A380s, A343s replaced by 20x A350/777s)

Asia
KE widebody fleet decision (20+ frames)
China widebody order (100+ frames)
EK midsize widebody fleet decision (100 frames)
CX 744 replacement (20 frames)

I'm sure I missed a bunch of smaller orders here and surely some big carriers I neglected. Not to mention the QR 60 A350X question.

After these next two years of heavy widebody activity, one can expect the 797 and A320NG to be on offer, and a huge round of narrowbody orders will come around, as well as continued trickling in of follow-on and option conversions on widebody fleets.

And in a few years, the first round of 777s need replacing right in time for the 787-10/11 and A350X-900/1000.
Of all the things to worry about... the Wookie has no pants.

astuteman
Posts: 7184
Joined: Mon Jan 24, 2005 7:50 pm

### RE: A380 Here To Stay-Great Bargain For Airlines!

 Quoting Ikramerica (Reply 78):As for biased, say what you want, but if you can read the Gellman report and come up with 270 as the break-even (originally) and have Airbus confirm that same number of 270 (before upping it to 420 recently), then the Gellman report can't be dismissed

But you can't do that. The Gellman report clearly states that EVERY A380, no matter how many are built, will be sold below cost.
As far as the Gellman report is concerned, Break-even on the A380 is "Infinity" - i.e. It could NEVER happen, even if they sell 3000 of them.

For that reason, and that reason alone it would be complete rubbish as an analysis, but when you look at the methodology used to calculate the production costs, it becomes apparrent just how poor an analysis it really is.

It renders the entire report utterly nonsensical.
Which is a shame, in a way, because there's actually a decent bit of Market analysis by Aboulaifa in the middle of it that is completely wasted as a result.

It's not even that the report's biased - I could live with that if it had been done properly. But it wasn't.
Gellman report - duly dismissed!

 Quoting Bringiton (Reply 77):so in reality both of us pretty much came out to the same conclusion having taken different ways to get there !!

Indeed

But the subtle difference is that by having a "Real" production cost that is much closer to reality than that "embarrasssment" contained in the Gellman report, you can actually reconcile a) the obviously high levels of discounts given, and b) the clear understanding that Airbus originally expected to make \$40m - \$45m operating profit on at least the majority of the frames sold so far, level of discounts notwithstanding.
It's impossible to make that reconciliation using the Gellman report.
Of course, events have overtaken Airbus's expectation to some degree.

Regards
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