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Airbus Lands Big A380 Fish But Discounting is a Worry

Friday 29/09/2017 - Source: Gulf Times


Snaring a prestige customer like British Airways will boost Airbus' credibility, but possible discounting won't help it reach the break-even point on the delayed and over-budget A380 project, according to observers.

As part of a major renewal of its long-haul fleet, BA said on Thursday it's buying 12 double-decker A380s with options for seven more as well as 24 smaller 787s from Boeing Co with options for an extra 18.
In a significant victory for Airbus, BA chose the A380 ahead of Boeing's four-engined 747-8 Intercontinental - the new version of its popular 747-400 jumbo that the UK carrier currently operates.

With competition fierce among the two plane makers for BA's business, the A380 jets were likely to have been "heavily" discounted with a lesser reduction on the 787s, said Collins Stewart analyst Andrew Fitchie in a note. He estimates that BA may have secured about a 25% discount on its firm order for the A380s and 787s plus engines, which are valued at $8.2bn at list prices.

BA chief executive Willie Walsh declined to comment on what discounts his airline received but acknowledged that plane makers do often mark down their prices for important clients.

Boeing and Airbus - a unit of European Aeronautic Defence & Space Co - never disclose the actual price airlines pay for their aircraft.

Howard Wheeldon, senior strategist with BGC Partners in London, said he believes BA may have negotiated a 40% discount on the A380s, which doesn't bode well for the overall airplane project. Discounts "mean there's a larger gap before Airbus reaches break-even on the A380," he said.

Prior to the BA deal, Airbus had booked 165 firm orders but is still way off the envisaged break-even level for the $12bn A380 development project, which is almost two years behind schedule and roughly 50% over budget. Late last year, Eads disclosed that the break-even sales target for the A380 project had climbed to 420 aircraft, compared with the originally envisaged 270, but early this year said it won't now be updating its target number going forward.
Eads chief executive Louis Gallois, however, did admit in May - when he was joint Eads CEO and Airbus CEO - that the break-even target had risen due to recent difficulties. Some observers believe Airbus may need to sell well over 500 to break even on the airplane programme.

Airbus officials contend that they always sell planes at a profit and that any discounts won't weigh markedly on Eads' future earnings.
A380 production was hit by electrical wiring problems that forced Airbus to delay deliveries, a move that is set to wipe 4.8bn euros in Eads' operating profits over a four-year period.
With aircraft sold in dollars, the strong euro continues to affect the profitability of each airplane Airbus sells, although it has an extensive currency-hedging programme.
The A380 programme hit another major snag when key customers United Parcel Service and FedEx Corp pulled orders for the planned freighter version of the aircraft, forcing Airbus to mothball development the freighter.

The first A380 plane is due to be delivered to launch customer Singapore Airlines next month.
Although having BA on board is a marketing plus, it is unlikely to immediately prompt orders from other A380 buyers, say analysts.

Airbus expects to secure a handful of new buyers each year and analysts point out that many large potential buyers in North America still don't have the financial muscle to buy them. Although existing customers have pledged to buy more A380s over the past year or so, BA is the first brand-new customer for the plane in about two years.


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