Qantas secures Airbus discounts
---------------------------------

Qantas has secured walk-away clauses and a 40 per cent discount from Airbus Industrie for its $3.07 billion contract for 12 A380 super jumbo jets, according to industry sources in France and Australia.

The European aircraft builder has apparently agreed to Qantas being able to cancel the orders up to 12 months before delivery with minimal penalty.

It is also understood that Qantas only paid $US500,000 (AUD$909,000) deposit for each of the aircraft and paid just $US141 million for each aircraft, 40 per cent below the list price of $US235 million. Engine maker Rolls Royce is understood to have agreed to a 90 per cent discount on the engines, which normally cost $10 million each.

A Boeing 747-400 costs $US180 million.

Qantas would not confirm or deny that they had secured the walk-away clauses. "It is our policy not to discuss contracts," said an airline spokesman.

Qantas earlier confirmed that they had secured a walk-away clause if the aircraft did not meet new stringent noise standards at London's Heathrow Airport.

Airbus has apparently offered similar financial deals to other airlines, such as Singapore Airlines that ordered the aircraft, say analysts. So far, Airbus has booked 66 orders from nine airlines
and leasing companies for the super jumbo.

The walk-away clauses are not new and were pioneered by McDonnell Douglas in the early 1980s when the company was trying to get American Airlines to buy its 150-seat MD80 aircraft.

However, the MD80 was a popular aircraft and thus there was minimal risk.

But for Airbus the risks are enormous.

The A380 will not fly till 2004 and the development costs are put as high as $27 billion.

And worse, new customers for the super jumbo are not going to be happy about paying 40 per cent more for the aircraft than their competitors, says Mr Paul Nesbit of New York's JSA Research.

Analysts such as Mr Piere Chao of Credit Suisse First Boston in New York claims there is a question mark over the program's viability and that Airbus is over-optimistic about the size of the market.

In another blow to Airbus, British Airways has said that it has decided against the A380 because it says there are too few routes that require that size of aircraft.

BA's head of fleet planning, Mr Dick Wyatt, said the A380s were not viable for the airline's route structure.

"We believe that markets will continue to fragment," he said.

It shouldn't be a big surprise the launch customers got huge discounts. Doing anything like this is a massive risk, the numbers are very big, of course Airbus has to attract custom by offering especially good deals when the risks to the customer are especially high.

It's old hat, exactly what the US did with the jumbo in the 1970's, they offered foreign airlines loans at 6% (the going rate was 12%), to help the Jumbo along.

Airlines always get discounts on the list price of an airliner.

"The A380 will not fly till 2004 and the development costs are put as high as $27 billion."

$27 billion?  

"In another blow to Airbus, British Airways has said..."

Strange, lately I've heard of blows to Boeing only...

Nice article...  

Best regards
the WorldTraveller

WorldTraveller:

Read carefully. It's AUS$27b.

Ryanair:

Discount for launch customers is common indeed. But 40% discount is on the high side. The A380 will not be selling like the A320 or the B737. Then, it is extremely high risk for Airbus. If the airlines placed the orders because they are fully convinced to have a need for the A380, then it might not be too bad. OTOH, if the airlines placed the orders because the deals were so irrisistable, then Airbus will not be able to sell the A380 as briskly as they have in the past few months.

Aha, %40 off on the planes and %90 off on the engines. Terrible.

Whats terrible about that? Qantas is looking out for their interests, not Boeing or Airbus. If a manufacturer offers a very lucrative deal, they would be stupid not to take it.

In the near-term, it's hard for these airlines to ignore the cost advantage that they might gain by buying the A380s with heavy discounts. OTOH, if the A380 turns out to be much less successful than Airbus has hoped for and results in heavy losses, then Airbus might become less competitive. If this happens, airlines and air travelers will lose, too.

Any airline that thinks the A380 might fit in their plans 3-6 years down the line would not be acting in the best interest of their shareholders if they did not order this plane, considering the terms that Airbus reportedly offered. $500K down, can cancel or delay if you later reconsider, can acquire this plane for less than the 744? What a deal. The A380 will be a fantastic plane and profitable one too if you have the route structure to make it work.

Having said that, considering the terms currently being offered, the fact that BA, LH, UA,JL and NW did not order this plane yet says more about the potential market than the airlines who did. If Airbus could not interest them with these terms, will they ever be able to? Airbus was determined to launch the A3XX at any price. Now we know the price.

For those who ordered the A380, they better hope they can economically make it work. Because the secondary market for a used A380 will be nil. If a new A380 goes for less than a 744,what will a used one go for, assuming you can find a buyer?

Rgds,
Joe

Precisely CPDC10-30

If airlines dont realize the value in the deal they are getting early on, then woe to those who wait and lose later on. Airbus is taking the risk on themselves and if they lose, then fine, they get massive egg on their face. If not, and the pump is primed as it very might will in later years this decade, all the better.

Personally, I laugh at the forecasts of gloom and doom over the A380. Many believe the entire friggin' planet operates on the US deregulation model (which it DOES NOT!), if one were to move to Asia, or Europe, the Middle East or South Asia, one will realize that it isnt. The reality of life the way it is outside of the US market is an amazing concept isnt it? Some people dont understand that. The world doesnt revolve around how the US operates. Imagine Japanese aviation regulators allowing "Air Do" (an upstart Japan based 767-300 operator) an unlimited operating schedule out of Haneda, Kansai or Narita. Ha! What a freaking joke that would be! It would never happen. But still, some think an airline can pop up there and pump unlimited numbers of airplanes into an airport in that environment, with complete disregard into how things -Really Happen- in terms of real-politik and the business environment there, completely disregarding the reality of how things are done. Why...they operate "just like they do in the States"! ..."It is done just like Southwest does"

Ahem....-Wrong-! It's completely opposite the US model -en toto-.

Anyway, launch discounts happen on any programme, and quite frankly, -Who Cares What Airbus Offers!!-. It's on -their- shoulders and at worst, the European taxpayer if it works or does not.

If the people of Europe want to build and support Airbus, it is not for any outsiders to comment nor 'moralize' on their choices anyway. There's no conspiracy nor crime at all entailed. Airbus is doing what it wants to do to get their product launched. Like their competitors did before decades ago and still do to this day. There's no story here at all!

Regards
MAC

Avery poorly written article. The people who invest in the first aircraft are risktaking, and so they warrant a discount, subsequent customers have no right to moan about it, they waited to let another airline test the water. Also, the 27 billion dollar development costs, well that's even better...............

LH, UAL and others didn't order the A380 yet, but they didn't order the B747X either. They still have plenty of time to order, what will be flying after 2006.

Regards
Gerardo

What I have in mind is all typed out... but I still think Airbus is really taking a huge risk. Let's pray it won't fail.

alvin

Don't forget the huge number of airlines that ordered Concorde.... and cancelled!

Ceilidh,

Or the even huger number of airlines that ordered 747 and bought them as well!

Ceildh

Concorde's cancellations were due mainly to 2 reasons: the petrol crisis of the mid 70' and the ban of a certain country for supersonic flights. I don't see it happening again with the A380, well I hope so. Concorde's supersonic flights were an expensive luxury option for airlines, but the A380 is a requirement for the future to avoid overcrowded skies.

My favourite ad here in the US says `` sometimes the
biggest risk is not to take one''. Well, sometimes it is
, sometimes it is not. We will see what it is in this case.

BTW, what people do not realize IMHO, that not only
Airbus is the one taking huge risk in this game. If the
A380 is success that will be a big blow to Boeing. That
could be the way how the number one becomes number
two.

Janos

Now, is this good business? Maybe. Desperation? Now that's something!

40%. Hmmm. A bit steep as they wanted customers but I think it was alright. I think SIA / QF were leaning towards A380 anyway.

A blow for Airbus that BA didn't order any A380s. Not in my opinion. I would think they would have bought only 5 or in that region anyway. As they say , they are "restructuring".

A blow for Boeing. Likely. I don't think they're out the race but they've got a lot of catching up to do and also to convince 744 Airlines like Singapore Airlines to buy the 747X as a replacement for the 744.

I agree it's a huge risk for Airbus, like the 707 and 747 were for Boeing - it's no secret they bet the company on the 747. That's air transport for ya, the numbers are huge and margins are little!

It's worth pointing out, Airbus has many risk sharing partners, if it all goes wrong not all the $27bl egg will hit them.

I think there are some important questions that really ought to be asked here:

If Airbus really is offering such substantial discounts on the A380, why haven't they actually sold *more* of them. Especially with walk-away clauses that are quite advantageous to the airlines. Half a million dollars seems to me to be VERY cheap on an aircraft that lists for well over $200 million. If I were running a large international carrier and I were convinced that the VLA market would be huge in, say, 2010, wouldn't it make sense to order at least 50 or so discounted A380's with delivery dates extending from, say 2006 to 2011? Even more so given that I could walk away for only half a million per plane.

To me, that says that either the report is inaccurate (but why would an Australian news source be partial to either Boeing or Airbus) or that there really are some serious concerns about the viability of the A380 program. I actually believe the latter for a number of reasons.

I believe Airbus' predictions on market size are overly optimistic. Why? Boeing has offered several models of the 747 for 35 years, and yet they have only garnered orders for 1340 - in a market that was essentially theirs alone. That works out to 38 orders per year - yet Airbus predicts a run rate of 50 per year for the 20 years after introduction (and a market size of 1000-2000). Not to mention that Airbus won't have the market to themselves if the 747X program is indeed launched. While the A380 would still be the largest aircraft in the skies, the 747X would offer attractive commonality (to 747 operators), reduced seat-mile costs (compared to the 744, but higher than the A380), and lower acquisition cost at typical discounts. For some routes that would require more capacity than a 747-400, a 747X would be a better fit (i.e. if you only need to carry 500 pax instead of 550).

Also note that Boeing received 180 orders for the original 747 before the first deliveries (1966-1969) - and even with that, the 747 nearly brought the company down in the early 1970's (as orders slowed dramatically for several years). Will Airbus get many more pre-launch orders? They've already sold to many of the airlines that were considered likely to buy into the program. Most or all of the US carriers are uninterested (and while the world does not revolve around the USA, it is one of the largest aviation markets and will continue to be so). In addition, many 747 orders were for the range it offered - longer than any other commercial aircraft until recently. With the range of the 777-200/300ER and the A340-500/600, the 747 doesn't hold that crown anymore.

I believe that the world aviation market will continue to fragment. The new Inchon airport in South Korea, I believe, is an excellent example of this (a new airport designed for 100 million annual passengers - a hub that could eclipse NRT in the long term), as are services like CO and UA's non-stops from EWR/JFK to HKG, or CO's service from EWR to London-Stansted. The Japanese government also has a long-term commitment to building three runways at NRT - and the second runway is finally in the works - helping to increase capacity there. The need is for flying between congested hubs - but it's not clear to me that this is even a 500 aircraft market.

As for this being a blow to Boeing - well in all honesty, with Airbus building a VLA, it would be mutual economic suicide for both unless the most wildly optimistic predictions were true. Splitting a limited market that *might* be profitable for one manufacturer would be disastrous for two. Look at what happened to Lockheed and McDonnell-Douglas with the L1011 and DC-10.

European governments will never let Airbus fail - there are too many jobs at stake - so even if they are "betting the company" with the A380, there's no risk of loss. I haven't even said a word about subsidies otherwise.

Can *anyone* formulate a *reasonable* argument against this aside from things along the lines of - "Americans aren't always right about everything; They should build it just because it's cool; Boeing's forecasters are wrong and Airbus's are right; Boeing sucks; Boeing gets unfair subsidies too; America sucks etc."

Hmmm. I don't think you can really compare the 747 and the A380. Not to discount the great speech you gave. I thought it was good however:

THe A380 isn't really competing against the 744 in a way. It's too big. It's in a niche, high density market. The 744 is a more broader aircraft offering less seats but is more "economical". Take this. If yer highest density route had 400pax. The 744 is much more suited than the A380 offering 550 pax, plus bars and jacuzzis.

See what I mean? I ho[e thta's clear. Mayvb noe

ScottB,
Very well put. I, too, wondered why more airlines haven't signed on for A380 with the inclusion of walk-away clause. And yes, $500,000 downpayment is nothing for an airline that's seriously seeking VLA service 10 years down the road. Maybe Airbus is no longer offering the walk-away clause and the $500,000 downpayment, but I'm sure Airbus is willing to extend such offer for LH or BA.
Seeing how DL, CO and AA have done quite well without 747s in their fleet and soft economic times that loom ahead, I wouldn't be surprised if we don't see much more orders for a long, long time.

A primary difference between the Concorde and the A380 (in my opinion) is the immediate need. I see an immediate need for a couple of hundred A380's and future need for maybe a couple of hundred more. The Concorde didn't have the same type of immediate need. Supersonic travel is nice, but immediate need of it is for a select few (relatively). If the economics are really right, there would be a use for a supersonic aircraft. Until then, practical solutions are the only ones which will apply. The A380 is inherently practical in quite a few instances.

Scott

Some nice points, however with regards to NRT, the second runway in question can only handle "767 and below" sized aircraft. While it will relieve a modest amount of congestion for those sized aircraft, its similarly a modest at best relief for larger widebodies that more frequently use this airport.

The overwhelming percentage of traffic using NRT are aircraft that need the larger existing runway, the sole existence of which has been the source of the tight environment there.

The third runway has been planned for many years, I believe this si the one that is planned to be parallel to the newer terminal on the northern side of the airport. The families that own the property where this third runway is projected are refusing to be swayed by the offers of money and buyouts.

Still, the number of slots at this airport remain quite tightly controlled, new runway or not.

The Japanese have been quietly seething at the encroachment of what they feel are -their- slots, it is their airport afterall, coupled with the growing competitive abilities to hub at NRT by UAL and NWA.

Their 1950s era aviation pact with the US has been under a great deal of strain in recent years. Some are calling for it's complete withdrawal there. That would make for quite an interesting "monkey-wrenched" scene if it happened.

JAL's chairman was quite blunt about his views regarding this in an Airways Magazine article covering the carrier a few years ago, ergo, you cant go very far to realize that there must be pressure placed upon the authorities who have control over slots to at least protect for their hometown carriers. The same would probably happen here if say a Japanese carrier was allowed carte blanche authority to hub at say SFO or LAX. That's the hypothetical 'flip side of the coin' of course, but hopefully if seen from that vantage point you contemplate the views they might have.

BTW, The new airport at Inchon, S. Korea has several gates for the A380. They and other airport operators in the region realize that this is going to be part of the air transportation matrix in the near future.

I believe a mixture of the finer points in the philosophies espoused by Airbus and Boeing are what will happen. The two airframe makers are going to be proven more correct in various parts of the world due to the operating and regulatory environments that exist there. Nothing is going to be universally correct. Airbus's strategy is pegged towards Europe to Asia and the Middle East developing as a major hub between the two, (just look at the success of the A380 and A330-200 amongst several MidEast carriers to date, coupled with SIA and QF's large purchase which will possibly force other large carriers to do the same) while Boeing seems more pegged to the US and Trans Atlantic market, and now some moves into Trans Pacific/Polar flights (The 777 and 767 with many US carriers and conversely the 777's success at BA), where they are doing quite well with the major carriers and have the complete environment that says "it works here" for them.

Regards
MAC

ScottB, you wrote

>>
If Airbus really is offering such substantial discounts on the A380, why haven't they actually sold *more* of them.
Especially with walk-away clauses that are quite advantageous to the airlines. Half a million dollars seems to me to
be VERY cheap on an aircraft that lists for well over $200 million. If I were running a large international carrier and were convinced that the VLA market would be huge in, say, 2010, wouldn't it make sense to order at least 50 or so
discounted A380's with delivery dates extending from, say 2006 to 2011? Even more so given that I could walk away
for only half a million per plane
<<

why are you so sure that Airbus offering this kind of deal
to everyone? Don't forget Qantas and SIA are very respected
airlines and I bet both get very special treatment from both
manufacturers (deals which may be unavailable for others).
Also, Qantas was ordering airbus the first time in their
history, therefore, soring their relationship with Boeing slightly.
I think this also was involved into the deal, Airbus had to
pay for making Qantas a ``traitor''.

Also, we do not hear anything about what kind of deal AF
got. How do you know that the French Gov. not just
told them what would be their future need and had to pay
the full list price of the A380s? Everybody on this list
knows that AF makes favours for Airbus time to times.

Janos

PS: BTW, nice post, you actually demonstrated that you
think before you post, a rare feature on this list!

You're absolutely right about the fact that the new runway will only be able to handle 767-sized aircraft and smaller; however, I believe many of the currently pending slot requests are in markets for which that size of aircraft would be appropriate. And moving some of the international traffic which currently uses the 4000 meter runway to the new runway would indeed free up slots - even if they are all pretty much spoken-for at this point.

Again - my belief is that the lack of slots at capacity-constrained airports (like LHR and NRT) will more likely result in airlines overflying these airports instead. For example, routes like SJC-TPE or SEA-SEL. And that just makes sense - those airports ought to be focused on O&D traffic (as LGA and DCA in the US are).

The *largest* order for the A380 was 12 units from Qantas. It's significant, but I'm not sure I'd call it a large order (aside from dollar value). There aren't many more than 20-25 airlines worldwide for whom an A380 makes sense (in terms of passenger counts/routes) and it's awfully hard to get to 500 or 1000 units 8 or 10 or 12 at a time.

I won't jump into this argument directly since I've discussed my views ad nauseum, but I still have a "simple" question. If the analysts are correct and the 380 price tag jumps to $18B, let's say, who covers the additional $6B in overruns? Is it just the risk-sharing partners with Airbus or do the four gov'ts fork over an additional 1/3 ($2B) as well to help out?

I am NOT being facetious. Just curious.

Magyar:

To answer your question of how do we know if airlines other than Singapore and Qantas received these special launch prices, we know by deduction that Virgin Atlantic did as well. VS is 49% owned by Singapore.

Rgds,
Joe